Archive | Taxes

IRS Will Recongize Same-Sex Marriages Regardless of Where Couples Reside

Today the Treasury department announced that it will recognize all same-sex marriages valid in the “place of celebration” regardless of where the couple now lives. This is particularly noteworthy because it seems like a policy change. It had generally been thought that the IRS deals with other questions of marital validity by looking to residence. That’s what the Tax Court thought in Von Tersch v. Comm’r (1967) (“For the purpose of establishing eligibility to file a joint Federal income tax return, the marital status of the two individuals is to be determined under the laws of the State of their residence.”); that’s what Patricia Cain thought in DOMA and the Internal Revenue Code (2009) (pp. 513-514) (“Although the rule is not clearly and completely stated in the Internal Revenue Code, or in the regulations, it is generally assumed that for tax purposes, a couple will be considered as married if they are legally married in the state of domicile.”); and it’s what I assumed too.

The new Revenue Ruling argues, however, that the new rule is consistent with its past practice:

For over half a century, for Federal income tax purposes, the Service has recognized marriages based on the laws of the state in which they were entered into, without regard to subsequent changes in domicile, to achieve uniformity, stability, and efficiency in the application and administration of the Code.

I don’t know who is right here, although I assume that Treasury knows what it is talking about. (If there were an unacknowledged change, the ruling would be vulnerable.)

A few thoughts:

1. At this point, it seems pretty clear that the administration is trying to implement a place-of-celebration rule as broadly as it lawfully can, and that the Social Security decision a few weeks ago is likely to [...]

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Did the Taxman Make Howard a Rocket?

All-Star Center Dwight Howard accepted less money to sign with the Houston Rockets than he could have earned had he remained on the Los Angeles Lakers, yet it appears he actually increased his after-tax income.  According to analyses rounded up by Paul Caron at TaxProfBlog, Howard stands to make more money with the smaller contract.  Texas doesn’t have a state income tax while the top marginal income tax rate in California  is 13.3%. As a consequence, the smaller contract is actually a better deal.  It also doesn’t hurt that Houston could be a legitimate title contender next year. [...]

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Congressional Inquiry of IRS Targeting of Israel Groups

Congress’s inquiry into IRS abuses has now expanded beyond the hounding of domestic-policy conservative groups to Israel related ones. In a letter today the Chairman and minority leader of the Ways and Means Committee demand information on whether the agency “undertook special reviews of organizations whose missions involve Israel” and whose activities “contradict or are inconsistent with the Administration’s policies.” Will this be within the scope of the Justice Department investigation?

Again, if the IRS did so, it was only doing what the New York Times (and Peace Now and J Street) told it to.

The Acting Commissioner appears for a hearing on Friday (after the Jewish holiday of Shavuot). [...]

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The Media Push for IRS Action Against Pro-Israel Groups

In addition to the IRS’s particular interest in right-wing groups focussed on domestic policy, it has taken an unusual interest in right-wing pro-Israel groups. (I am friends with the leader of the group written about in the link.)

One major question raised by the IRS scandal is where these ideas came from. At least as far as Jewish groups go, the IRS scrutiny is not a fluke. That is not to suggest it was ordered by the White House – that is highly unlikely. At the same time, it certainly does not come out of the blue. The past several years have seen a concerted campaign in the mainstream liberal press to bring the IRS down upon certain pro-Israel groups, particularly those that support activities in the West Bank (or the Territories Formerly Occupied By Jordan).

For example, in 2009 David Ignatius had a story in the Washington Post, A Tax Break Fuels Middle East Friction. “Critics of Israeli settlements question why American taxpayers are supporting indirectly, through the exempt contributions, a process that the government condemns,” he wrote. The Guardian in 2009 also had a piece calling for IRS action.

In 2010, the New York Times continued the theme with a massive, expose-style front page story, which concluded that while such tax breaks do not seem to be exactly illegal, it creates :a surprising juxtaposition: As the American government seeks to end the four-decade Jewish settlement enterprise and foster a Palestinian state in the West Bank, the American Treasury helps sustain the settlements through tax breaks on donations to support them.” The article then tried to raise questions about whether such groups really satisfied U.S. tax-deductible requirements, suggesting the IRS should look into them. The activities the supported, the Times article suggests, were illegal and extremist.

Picking [...]

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Is citizen control of taxes and spending unconstitutional?

Colorado’s Constitution (Art. X, sect. 20) is the Taxpayer’s Bill of Rights. Like similar provisions in other states, Colorado’s TABOR requires voter approval for tax increases, and for most spending increases that exceed inflation plus population growth. Several state legislators have filed suit in federal court to have TABOR declared unconstitutional. Allegedly, requiring voter approval for tax or spending increases violates Article IV, sect. 4 of the U.S. Constitution, which provides: “The United States shall guarantee to every State a Republican Form of Government. . . .”

In federal district court, the Colorado Attorney General filed a motion to dismiss Kerr v. Hickenlooper, based on the argument that RFOG claims are non-justiciable. That motion was denied, and the case is currently on interlocutory appeal to the 10th Circuit.

On Friday, I filed an amicus brief on behalf of the Independence Institute and the Cato Institute. The brief draws heavily from Rob Natelson’s article, A Republic, Not a Democracy? Initiative, Referendum, and the Constitution’s Guarantee Clause. 80 Texas Law Review 807 (2002). Natelson shows that the Founders consistently used the words “republic” or “republican” to refer to governments which had direct democracy. As the brief summarizes an analysis of every known Founding-Era dictionary: “Not one of these sixteen definitions from nine different Founding-Era definitions contained the least suggestion that a republic had to be purely representative.”

Moreover, the Supreme Court, in Luther v. Borden and Minor v. Happersett, has stated that the admission of a State into the Union is a conclusive determination that the State, at the time of admission, had a Republican Form of Government. Significantly:

In 1907, Congress admitted Oklahoma into the Union, although Oklahoma’s Constitution contained very strong provisions for initiative and referendum (Okla. Const., art. V, §§1-7) and provided for a mandatory

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Tax Rates and Political Ignorance

Many polls show that large majorities of the public want to raise tax rates on people earning over $250,000 per year. But in an interesting recent post on the Democrats’ approach to tax policy, Megan McArdle cites an interesting 2012 poll of likely voters conducted for The Hill, which shows that the vast majority of Americans prefer rates that are much lower than those that existed even before the the recent fiscal cliff deal:

Three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates, according to a new poll for The Hill.

The big majority opted for a lower tax bill when asked to choose specific rates; precisely 75 percent said the right level for top earners was 30 percent or below.

The current rate for top earners is 35 percent [the rate that existed before the fiscal cliff deal – IS]. Only 4 percent thought it was appropriate to take 40 percent, which is approximately the level that President Obama is seeking from January 2013 onward…

The new data seem to run counter to several polls that have found support for raising taxes on high-income earners….

But The Hill poll found that a dramatically different picture emerges when voters are asked to specify the “most appropriate” rates.

Support for relatively low tax rates was not limited to Republicans or high-income earners. Indeed, low tax rates for the wealthy got their highest level of support from relatively low-income survey respondents, and their lowest level from the wealthy themselves:

Republicans were more likely than Democrats to support lower tax rates for the wealthy, but voters in both parties solidly supported lower rates compared to current law. Eighty-one percent of Republicans favored tax rates below current levels, compared to 70 percent of Democrats.


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Will the Mortgage Interest Deduction Sacred Cow Finally Get Slaughtered?

The Washington Post reports that Congress and the president are considering abolishing the mortgage interest deduction as part of a deal to avoid the “fiscal cliff”:

Of all the deductions woven into the sprawling U.S. tax code, few have been more fiercely guarded than the enormous tax break that lets homeowners deduct the interest they pay on their mortgages.

But as Congress and the White House negotiate the first major rewrite of tax laws in decades, changing the generations-old mortgage-interest deduction — which costs the government roughly $100 billion a year — has gone from far-off possibility to part of the conversation….

Current law allows homeowners to deduct the interest paid on mortgage balances up to $1 million, including on second homes, as well as on $100,000 worth of home-equity loans. The deduction overwhelmingly benefits wealthier families, partly because they tend to have larger mortgages and pay more interest, and partly because most low- and middle-income Americans do not itemize deductions on their tax returns.

Most economists and property law scholars have long been critical of the deduction for reasons I summarized here. The deduction incentivizes overinvestment in land as opposed to other parts of the economy, and it skews people’s decisions towards homeownership and away from renting. Although homeownership has some benefits, it also has significant costs. On balance, government should be neutral between owning and renting, not try to favor one over the other.

As the Post points out, the deduction also overwhelmingly benefits the wealthy. The story quotes USC law professor Edward Kleinbard, as follows:

Edward Kleinbard, a tax expert and law professor at the University of Southern California, said the mortgage-interest deduction represents the kind of government “extravagance” that the country no longer can justify, given its fiscal troubles.

“We simply cannot afford wasteful

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Over 30% of President Obama’s 2009-2011 Gross Income Came From Foreign Sources

I find it strange that the Obama campaign would be making so much of Romney’s income from foreign sources when Obama’s foreign source income appears to be a much bigger percentage of his income over the last few years. Of course, one can’t tell for sure because Mitt Romney has not released his 2009 tax return.

Yet in the three tax years in which Barack Obama has been President (2009, 2010, and 2011), fully 30.1% of the Obamas’ gross income has come from foreign sources: ($2,711,340 out of a 3-year total gross income of $8,993,449).  In 2009, 26.5% of the Obamas’ gross income came from foreign sources. In 2010 it was a whopping 41.4%, and in 2010 it was 30.2%.

The salary that we taxpayers pay him as President (just under $1.2 million over the 3 years) accounted for less than 13% of the Obamas’ income, a share dwarfed by their 30% from foreign sources over the same period.

From 2009 through 2011, the Obamas paid $87,429 in foreign taxes, which they applied toward a credit to reduce their U.S. tax bill.  The amounts I examined are reported on Form 1116, of which there are two filed along with their 1040 when they had both general and passive foreign income.

Their returns do not disclose which foreign countries are responsible for paying the Obamas the $2.7 million in foreign source income, but the overwhelming bulk of it must come from payments resulting directly or indirectly from book sales.  Nonetheless, the Obamas did report a total of $3,611 in foreign passive income in 2009 and 2010, a type of income that most often results from investments in foreign countries.  Like some of the foreign investments for which Romney has been pilloried, this Obama passive foreign income might [...]

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Chief Justice Roberts and the window tax

In NFIB v. Sebelius, Chief Justice Roberts imagined a hypothetical federal tax on windows, in order to bolster his point that the Court should treat the individual mandate as a “tax,” even though the Obamacare statute calls it a “penalty.”

Suppose Congress enacted a statute providing that every taxpayer who owns a house without energy efficient windows must pay $50 to the IRS. The amount due is adjusted based on factors such as taxable income and joint filing status, and is paid along with the taxpayer’s income tax return. Those whose income is below the filing threshold need not pay. The required payment is not called a “tax,”a “penalty,” or anything else. No one would doubt that this law imposed a tax, and was within Congress’s power to tax. That conclusion should not change simply because Congress used the word “penalty” to describe the payment. Interpreting such a law to be a tax would hardly “[i]mpos[e] a tax through judicial legislation.” Post, at 25. Rather, it would give practical effect to the Legislature’s enactment.

The above language is a plausible argument for the Chief Justice’s tax/penalty analysis. But by discussing a window tax, the Roberts opinion provides one more reminder why the individual mandate, if it is a tax, is a direct tax, not an indirect tax. Direct taxes must be apportioned by state population. Art. I, sect. 9, cl. 4. If the individual mandate is a direct tax, then it is unconstitutional, because it is not apportioned by state population.

Pursuant to the 16th Amendment, direct taxes on income need not be apportioned, but neither the individual mandate nor the hypothetical window tax are taxes on income. Constitutionally, “income” subject to the federal income tax must be  “undeniable accessions to wealth.” Commissioner v. Glenshaw Glass Co., 348 U.S. [...]

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Of Silver Linings and Clouds

Today’s USA Today quotes me on the individual mandate decision as follows:

“You can look for silver linings in the cloud, but it’s still a cloud,” said George Mason University law professor Ilya Somin, who wrote a brief opposing the health law. He said the decision offers Congress a road map to enact similar laws by crafting them as taxes instead of mandates.

The quote is accurate. I do think the ruling is a cloud over the Constitution, and I do believe that Chief Justice John Roberts’ opinion allows Congress to mandate almost anything it wants, so long as the mandate is structured as a so-called “tax” similar to the individual health insurance mandate. In addition, the ruling upholds a major unconstitutional statute. Although the law might be repealed, there is also a good chance it will not be. Relative to a decision striking down the mandate that might have been and almost was, this result is a disappointment.

Some might wonder whether the above is consistent with other statements I have made to the effect that the decision also offers supporters of limits on federal power cause for optimism. Part of the explanation is that I spoke with the USA Today reporter less than an hour after I got the decision, and I have since had more time to study it closely, as well as read commentary by both supporters and opponents of the mandate who believe the Court’s decision gave a lot of ground to the latter.

But, ultimately, I don’t think there is any great inconsistency in my view. The decision is a disappointment relative to one that actually invalidated the mandate, and also dangerously expands Congress’ tax power. I fully acknowledge that. But at the same time it endorses important constraints on Congress’ powers under [...]

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Next step: Repeal the individual mandate because it is unconstitutional

McCulloch v. Maryland had a very good day at the Supreme Court yesterday, with NFIB relying on and applying McCulloch‘s rules for when an enactment violates the Necessary and Proper Clause. What happened after the McCulloch decision also shows the next steps in battle over the individual mandate, as I suggest in an essay this morning for National Review Online.

In refusing to hold the Second Bank of the United States unconstitutional, the McCulloch Court gave Congress broad latitude in Congress’s own evaluation of whether the Bank was “necessary” in a constitutional sense. Relying on and quoting McCulloch, President Andrew Jackson made his own judgment of constitutional necessity when he vetoed the recharter of the Bank in 1832. After a titanic political struggle, the Bank was gone, and a new term created by Jackson, “equal protection,” had become part of what the American People were coming to believe the Constitution was supposed to mean.

President Jackson dealt the Bank a fatal blow by withdrawing federal deposits from the Bank, and moving them to state banks. President Romney can follow Jackson’s lead on his first day in office, instructing the Acting Secretary of Health and Human Services to use the waiver powers in the ACA statute to issue waivers to everyone for the individual mandate. Because the individual mandate is (supposedly) a tax, it can then be repealed through the budget reconciliation process, which cannot be filibustered.

I predict that the individual mandate will never mandate anyone. Yet the mandate will be long remembered as one of the most consequential laws enacted by a Congress. The result of the “bank battle” was that even though a central bank was judicially permissible, central banking was politically toxic for the rest of the century. The “mandate battle” may have the [...]

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Neal Katyal on the Federal Government’s “Pyrrhic Victory” in the Health Care Decisions

Georgetown law professor Neal Katyal is a highly respected liberal constitutional law scholar. He also argued several of the individual mandate cases for the Obama administration in the lower courts. In this recent New York Times op ed, he suggests that the result may well have been a “Pyrrhic victory” for federal power:

The obvious victor in the Supreme Court’s health care decision was President Obama, who risked vast amounts of political capital to pass the Affordable Care Act….

But there was a subtle loser too, and that is the federal government. By opening new avenues for the courts to rewrite the law, the federal government may have won the battle but lost the war….

The health care decision also contains the seeds for a potential restructuring of federal-state relations. For example, until now, it had been understood that when the federal government gave money to a state in exchange for the state’s doing something, the federal government was free to do so as long as a reasonable relationship existed between the federal funds and the act the federal government wanted the state to perform.

In potentially ominous language, the decision says, for the first time, that such a threat is coercive and that the states cannot be penalized for not expanding their Medicaid coverage after receiving funds….

This was the first significant loss for the federal government’s spending power in decades….

Of equal concern is the court’s analysis of the constitutionality of the individual mandate. While the court upheld the mandate, it did so by rejecting the federal government’s claim that it was regulating commerce.

Obviously, Katyal and I disagree on the merits of the two cases. For example, I think he is wrong to suggest that “until now, it had been understood that when the federal government [...]

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Do the Court’s Commerce Clause and Necessary and Proper Clause Rulings in the Individual Mandate Case Matter?

As I pointed out yesterday, five justices, including Chief Justice Roberts, accepted all the plaintiffs’ major arguments against the individual mandate with respect to the Commerce and Necessary and Proper Clauses. But how much does that conclusion actually matter? My tentative view is that it will have little immediate effect, but may well be significant in the future.

One possible reason to dismiss the importance of the Court’s treatment of these issues is that it might have been mere dictum. After all, the Court upheld the mandate based on the Tax Clause, so the other two issues were not essential to the outcome. However, as co-blogger Jonathan Adler points out, Chief Justice Roberts’ controlling opinion explicitly holds that this analysis was essential to the outcome:

[T]hese analyses form an essential predicate to his ultimate conclusion that the mandate could be upheld as a tax. As the entire Court accepts, the most natural reading of the minimum coverage provision is as an economic mandate adopted pursuant to the Commerce Clause. It is only after rejecting the possibility that the mandate could be justified in this manner that the Chief returns to the text to see if it is susceptible to an alternative construction. Thus, the only reason the Chief Justice even considers whether the mandate could be considered a tax, the statutory text notwithstanding, is because of his prior conclusion on the Commerce and Necessary and Proper Clauses. Thus this decision provides five firm votes for meaningful limits on the most expansive of Congress’ powers.

One can still argue that the Commerce and Necessary and Proper analysis was dictum on the grounds that it was not seen as essential by the other four justices who voted to uphold the mandate. But to the extent that the Chief Justice’s [...]

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Where Richard Friedman and I Agree

Note the close parallels between my statements in this CBS News report and on the mandate decision, and those of University of Michigan law professor Richard Friedman, a well-known liberal legal scholar. It’s almost as if we coordinated our remarks in advance. But in truth I had no idea what he said until I read the article afterwards:

Although his liberal allies found that the commerce clause is a justifiable means to invoke the mandate, Roberts found it does not give Congress that authority. However, the court determined the mandate is constitutional under Congress’ power to “lay and collect taxes.”

Ilya Somin, law professor at George Mason University who wrote an amicus brief opposing the mandate, said he is “more surprised” that the court upheld it under the tax provision.

It was “the federal government’s weakest argument,” he said.

Richard Friedman, law professor at the University of Michigan, also said he was surprised that Roberts backed the tax argument, which he also called “the weaker argument….”

The University of Michigan’s Friedman attributed Roberts’ position to the weight of the case. “He was reluctant to see his court be the first one in 75 years to throw out a significant piece of legislation.”

Somin, who opposed the mandate agreed, saying, “It is generally rare for a court to strike down major legislation that has the support of the president and his party,”

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My SCOTUSblog Discussion of the Individual Mandate Decision

SCOTUSblog has just posted a detailed analysis of today’s decision that I did for them. It’s much more thorough than anything I have been able to put up elsewhere. Here is an excerpt:

Today’s 5-4 Supreme Court decision upholding the individual health insurance mandate is an extremely frustrating result for those of us who argued that the mandate is unconstitutional. One might even call it taxing. The plaintiffs came about as close as one can to winning a major constitutional case without actually winning it. It is the legal equivalent of losing the World Series after leading in the bottom of the ninth inning in the seventh game. It is not a happy day for supporters of limited government.

Yet the Court also offers us a measure of hope and vindication. A majority of the justices rejected claims that the mandate is authorized by the Commerce Clause and Necessary and Proper Clause. That has little immediate impact, but bodes well for the future. The numerous pundits who claimed that this case was a slam dunk for the federal government turned out to be spectacularly wrong. The struggle over the constitutional limits on federal power is far from over….

In his discussion of the Commerce Clause, Roberts ruled that the Constitution denies Congress the power to “bring countless decisions an individual could potentially make within the scope of federal regulation and … empower Congress to make those decisions for him.” Yet, having closed the front door of the Commerce Clause, the Chief Justice has now “empowered” Congress to make those same decisions for us through the tax power…

Today’s decision is unlikely to be the last word on the constitutional limits of federal power. As the close 5-4 division in the Court shows, the justices remain deeply divided on federalism issues….

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