Wednesday, May 28, 2014

Pfizer, Astra-Zeneca, and corporate inversions

I was in China for the past few weeks, where (and various other Google sites) are blocked, but I did write an answer in* about the tax implications of the proposed Pfizer-Astra-Zeneca merger (now scuttled). 

Pfizer reportedly wants to acquire AstraZeneca to reincorporate overseas to pay a low tax rate. How does that work? Why does the company have to acquire AstraZeneca to do it?

* is a questions-and-answers site started by one of my classmates from the California Institute of Technology.

Monday, April 7, 2014

Tax Break for Debt of Volunteer Fire Departments

There is no federal income tax on interest from tax-exempt bonds, which are bonds normally issued by state and local governments.  A very special rule provides that tax-exempt bonds can also be issued by volunteer fire departments.

The special tax-exempt bond rule for volunteer fire departments was created in 1981, as a somewhat belated response to the landmark 1962 case of Seagrave Corp. v. Commissioner.  The Tax Court concluded that interest on the debts of volunteer fire departments were not tax-exempt because the debts were not issued by a state or local government.

The volunteer fire departments were just a bunch of guys running around in a firetruck, and they were not under control of any government or created by the government.  The departments made money from membership fees, by charging non-members for putting out fires, and by selling lottery cards and beer at the clubhouse.

New rules were enacted in 1981, to apply to debts of volunteer fire departments issued after December 31, 1980.  The new rules also applied to debts issued between 1970 and 1980 that were held by the First Bank and Trust Company of Indianapolis, Indiana (and no one else!). 

Under the new rules, Internal Revenue Code section 150(e) (formerly section 103(i)) provides that debts of volunteer fire departments can be tax-exempt bonds.  But in order to prevent volunteer fire departments from being the newest tax shelter, several stringent rules were imposed:

1.  95% or more of the debt proceeds must be used to acquire or improve a firehouse or firetruck used by the department.

2.  The volunteer fire department must have a written agreement with the government to actually provide firefighting services.

3. The volunteer fire department must be operating in an area without other firefighting services.  But Congress anticipated that this tax rule might create a "Gangs of New York"-style firefighter-fighting bloodbath [clip], and the existence of other volunteer fire departments is okay under this rule as long as the rival fire departments have been continuously providing firefighting services to the area since January 1, 1981.

Wednesday, April 2, 2014

Tax Break for Lobbying Local Governments and Indian Tribes

Political contributions and lobbying expenses have not been deductible under the Internal Revenue Code since 1915.  This prohibition applies even if the expenses would otherwise be deductible business expenses, such as amounts spent by beer dealers to urge voters to vote against anti-liquor legislation that would have put the dealers out of business

In a remarkable feat of meta-lobbying, a very special exception provides that lobbying expenses are deductible for lobbying in local councils and similar governing bodies.  A similar body specifically includes an Indian tribal government. 

The Internal Revenue Code provides a helpful list of examples of deductible lobbying expenses, which include traveling expenses, cost of preparing testimony, and other business expenses for appearing before local council committees or sending communications to the committees or their individual members. The lobbying has to be for issues "of direct interest" to the taxpayer. 

Political contributions to local council members are not deductible, just like political contributions to all other types of politicians.  In addition, expenditures for "grass-roots lobbying" are never deductible.

The special local lobbying exception was created by the Revenue Reconciliation Act of 1993.  From 1962 to 1993, certain lobbying expenses were deductible for all levels of government, but limited to local government after 1993. 

President Bill Clinton explained that the lobbying deductions were cut back because “The deduction for lobbying expenses inappropriately subsidizes corporations and special interest groups for intervening in the legislative process.”  But he did not explain why the lobbying subsidy continues for local governments and Indian tribes

Monday, March 17, 2014

Sales Tax on Strip Club Fake Money (aka Beaver Bucks)

No sales tax is charged when a person buys a gift card.  Sales tax is imposed later when the gift card is used to buy a taxable good or service, but no tax if the card bought groceries or other tax-exempt goods.

In the landmark case of Petition of HDV Manhattan LLC [pdf], the Hustler Club in New York City (located at 51st Street and 12th Avenue) sold to patrons 'scrip' known as Beaver Bucks.  Beaver Bucks was used for certain purchases within the Club, such as admission to private rooms, lap dances, and tips. 

A 20% surcharge is imposed on each purchase of Beaver Bucks.  For example, $100 of Beaver Bucks would require a $120 charge to the patron's credit card, from a company called Reading to Blind African Children LLC or a similar name.

Club employees would redeem their Beaver Bucks at the end of each work day, with different redemption rates for different employees. The Club sells around $1 million Beaver Bucks each month.

Unfortunately for the Club, its management could not prove how much of the Beaver Bucks was used for sales-taxable services such as lap dancing, and how much was used for sales-tax-exempt purchases.  The court therefore concluded that all $24 million of Beaver Bucks sold in 2006-2008 should have been subject to the 8.875% New York sales tax.

The obvious solution is for the Club to provide all of its entertainers and hosts with sales tax calculators and receipt generators, so that each private dance purchase for $120 (according to the Internet) would require an extra $10.65 in Beaver Bucks for taxes.

Wednesday, March 5, 2014

Tax Break for Policemen, Firemen, and Paramedics Retiring in Their Early 50s

Normally, a person who withdraws money from his or her 401(k) plan or pension plan before turning 59.5 years old has to pay a 10% penalty on the premature withdrawal.  There are a few other exceptions that allow penalty-free withdrawals, including retirement plan distributions to an employee who stops working for the plan's employer after turning 55 years old (Internal Revenue Code section 72(t)(2)(A)(v)).

So someone who retires at age 53 must wait until age 59.5 before taking retirement withdrawals, while someone who retires at age 56 can take withdrawals immediately from the former employer's retirement plan (but not from other plans).  In fact, the former employer can come back to work, for example at age 57, and continue to make penalty-free plan withdrawals.

For absolutely no reason whatsoever, the retirement-at-age-55 exception applies only to 401(k) plans and other employer retirement plans, but not to IRAs, even if funds from a 401(k) plan had been rolled over into the IRA.

In order to make the above simple rules more complicated, a further exception (section 72(t)(10)) provides that the retirement-at-age-55 exception becomes the retirement-at-age-50 exception for certain "public safety employees" making withdrawals from their government defined benefit pension plans.  Public safety employees include state or local government workers whose principal duties require specialized training in the area of police protection, firefighting services, or emergency medical services. 

So a police officer can retire at age 50 and immediately start collecting a penalty-free pension, while the DMV clerk must wait until retirement at age 55.

The retirement-at-age-50 exception-to-the-exception for public safety employees was added by the Pension Protection Act of 2006, when Congress recognized that "public safety employees often retire earlier than workers in other professions."  Congress did not note that public safety employees also often retire with bigger pensions than other employees, and some hard workers are able to find second jobs in their sprightly early 50s. 

Monday, February 24, 2014

Tax Break for South Dakotans Building Airplanes Out of Kits

On February 20, 2014, South Dakota Governor Dennis Daugaard signed landmark legislation to help South Dakotan residents who build airplanes from kits. 

Under S.B. 80, South Dakotans who build their own planes are effectively exempt from South Dakotan sales taxes paid on plane parts or components.  Technically, they first pay the sales taxes and then claim a credit for all of the sales taxes when they pay a fee to register the finished "homebuilt" airplane with the state government.  The credit is capped at around 4% of the plane's value. 

South Dakotans build about 10 airplanes from scratch each year, according to Mr Doug Schinkel, director of the business tax division of the South Dakota Department of Revenue.  He does not expect any significant impact on the state's tax revenues.

The tax credit is allowed only for plane components purchased in the five years before the plane's registration, in order for the tax credit to not get out of hand.

Monday, February 17, 2014

Tax Break for Unusual Work Clothing

The Swedish musical group Abba recently admitted that they wore outlandish clothing in the 1970s in order to benefit from a Swedish tax deduction for clothes not used for daily wear, such as spangles and sparkles. For any aspiring Agnethas, Bjorns, Bennys, and Anni-Frids in the United States, American tax law has a similar rule for work-related clothing. 

In Donnelly v. Commissioner, the court concluded that the handicapped taxpayer could not deduct $65 of expenses on work clothes and aprons that he wore in his plastics polisher job, because the clothes must meet all three of the following requirements in order to be tax deductible:
1.  the clothing is of a type specifically required as a condition of employment,
2. it is not adaptable to general usage as ordinary clothing, and
3. it is not so worn.

So an American musician can develop a persona where unusual clothing is required as part of her act, the clothing cannot be worn normally on the streets, and she does not wear them normally on the streets.  In the landmark case of Donald Victor Teschner v. Commissioner, a part-time backup guitar player for Rod Stewart was able to deduct the costs of some of his "flashy" and "loud" items, but not his underwear. 

Friday, February 7, 2014

Proposed Tax Break for Olympic Medalists

US President Barack H. Obama II and US Senator Marco Rubio agree on many things, one of which is that a certain group of persecuted Americans have long suffered from high tax rates -- Olympic medalists.

The United States income tax is, by definition, imposed on a person's income, derived in whatever form.  A winning Olympic athlete receives medals and cash prizes, such as $25,000 from the US Olympics Committee for winning gold, which are treated as taxable income.

Marco Rubio knew a problem when he saw it, and he proposed in 2012 the Olympic Tax Elimination Act to eliminate any taxes on "the value of any prize or award won by the taxpayer in athletic competition in the Olympic Games."

While winning Olympic medalists are undoubtedly in need of much public assistance to avoid living in poverty, it is unclear why Mr Rubio limited his athletic tax break to only the Olympic Games, and not to include the Paralympic Games, the Special Olympics, or the World Tenpin Bowling Championship.

Barack Obama instantly saw the merit in helping winning Olympic medalists, and he agreed to sign the bill if it comes across his desk.

Thursday, January 23, 2014

Tax Break for Songwriters and Musicians

Writers and artists who sell their own works pay taxes on their income of up to 40% (plus the 15% self-employment tax).  But songwriters and musicians who sell their own musical works or copyrights pay taxes of only 15% to 20%, by recognizing capital gains instead of ordinary income.  The songwriters and musicians also do not have to pay the self-employment tax on their capital gains.

Thanks to lobbying from the Nashville Songwriters Association International, the songwriter-musician capital gains tax break was added to the Internal Revenue Code on May 17, 2006, but initially only for a period of 5 years.  A mere 6 months later, the tax break was made permanent by the Tax Relief and Health Care Act of 2006, in order to help the health of songwriters and musicians everywhere.
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If the songwriter or musician loses money on a project, he or she may recognize an ordinary loss (instead of a capital loss) that provides further tax savings.  Songwriters and musicians therefore have the best of all tax worlds compared to all other artists, as long as their work is sufficiently "musical" to qualify for the tax break. There is no authority as to whether One Direction is considered music for tax purposes.

Tuesday, January 14, 2014

What is a Sandwich

In 2006, Qdoba Mexican Grill and Panera Bread were involved in a heated lawsuit over the definition of "sandwich" in a real estate lease.  The court ultimately concluded that a burrito is not a sandwich, because one tortilla is not the same as two slices of bread.

The Massachusetts Superior Court judge obviously did not consult New York State Department of Taxation and Finance Bulletin ST-835, which helpfully explains that some examples of "taxable sandwiches" include:
1. burritos;
2. bagel sandwiches;
3. gyros;
4. hamburgers on buns, rolls, etc.;
5. heroes, hoagies, torpedoes, grinders, submarines, and other such sandwiches; 
6. hot dogs and sausages on buns, rolls, etc; and
7. wraps and pita sandwiches.

The purpose of the bulletin is to make a distinction between grocery food (not subject to sales tax) and take-out food (subject to sales tax).  Thus, a bag of bagels is considered grocery food not subject to sales tax, but a sliced and filled bagel "sandwich" is obviously take-out food subject to sales tax. 

While the New York state government is justified in applying the sales tax to hot dogs, burritos, and other take-out foods, it is not obvious why it had to expand the definition of "sandwich" in order to do so. Who can forget all the sandwich-eating records set by Takeru Kobayashi and Joey Chestnut at Coney Island. 

The use of a common term to mean something else is a too-frequent phenomenon in tax law.  Internal Revenue Code section 168(h)(1)(E) contains this gem:

Section 168(h)(1)(E).  Nonresidential real property defined. For purposes of this paragraph, the term “nonresidential real property” includes residential rental property.

Could Congress used instead in section 168(h)(1)(E) a more general term like "real property"?  Of course not.