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How Much of S-Corp Income is Labor Income and Hence Subject to Medicare Taxes?

September 7th, 2013 No comments

Here are a couple of comments I posted at Taxprof:

T.C. Summary Opinion 2013-62 (McAlary, http://www.ustaxcourt.gov/InOpHistoric/McAlary.SUM.WPD.pdf) is amazing. Professor Schwidetzky has it absolutely right. Suppose Dr. Roe earns high labor income some years, low in others. He becomes an S-corporation, with zero capital. That’s not supposed to change his tax situation, right? But in deciding his S-corporation labor income for tax purposes, the court didn’t use that tax principle, even though it’s Tax Court. Instead, it used the corporation law principle of something like the business judgement rule— how low a salary wouldn’t be ridiculous for that industry? So it calls for expert witnesses to tell the court how much other doctors make in labor income, even though it knows exactly how much *this* doctor made.
If Dr. Roe puts in some capital for office expenses, that only makes things a little harder. It’s actually far far easier for an expert witness to accurately estimate a cost of capital than someone’s market wage. But we can put in a simple safe harbor for tax purposes. Just require the taxpayer to keep track of how much capital he puts in and give it a return of 5% over the IRS late-payment rate each year.
For a safe harbor, we need a notice-and-comment regulation or an IRS declaration of enforcement policy. Otherwise, even just a court ruling would be OK. This decision is a S(mall) one though, so it can’t be appealed. Even if it could be, the taxpayer would be well advised not to appeal it, because the IRS was extremely modest in its tax demand, and amici following the ideas here would ask the court to more than double it. (Can a court do that in a tax case?)

I found a history of this tax issue at

http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

which shows, I think, that an old IRS revenue ruling is the source of the problem, by saying that “reasonable compensation” had to be paid by the corporation rather than trying to define which part of a corporation’s profit was return to labor rather than return to capital. Another way to put this is that the IRS didn’t require that *capital* was limited to a “reasonable return”. Of course, using words like “reasonable” gives wiggle room so that a taxpayer could say that of his corporation’s $500,000 profit, $100,000 was a reasonable salary, $50,000 was a reasonable return to capital, and the rest was a gift from heaven and shouldn’t be taxed at all.
I didn’t look at the Glass Blocks case at http://rothcpa.com/2013/08/tax-court-even-if-you-lose-money-your-s-corporation-needs-to-pay-reasonable-compensation/ , but it seems the IRS has accomplished the Immigration feat of being both incredibly lax with most people and incredibly picky with a few. The poor taxpayer’s labor income was clearly negative, but the IRS “reasonable compensation” method doesn’t let people have negative labor income. The simple method of saying everything is labor income except for an estimated return to capital would have avoided making him pay.
(One caveat is that this involves Medicare and Social Security. It seems to me that a negative-income taxpayer should be treated as making no dollar contributions to the funds for purposes of his later eligibility, but as having put in those quarters of work,which was the way charitable work was treated, It hink, back when my mother kept track of her hours as secretary of the civic symphony).

Categories: a.research, taxes Tags:

Anti-Injunction Act and Obamacare

September 5th, 2013 No comments

For future reference on the latest Anti-Injunction Act caselaw: Agreeing on one thing: The Anti-Injunction Act does not apply
The following contribution to our post-decision symposium on the health care cases is written by Alan Morrison, Associate Dean for Public Interest, George Washington Law School. There’s been a lot of action in the appeals courts too— see Mersino and Hobby Lobby.

Categories: taxes Tags:

The Meaning of “Value” for Gift and Estate Tax Donee Limitation in Tax Code 26 U.S.C. § 6324(B): An Amicus Brief for Marshall v. Commissioner

August 14th, 2013 No comments

I’ve posted a new draft of The Meaning of “Value” for Gift and Estate Tax Donee Limitation in Tax Code 26 U.S.C. § 6324(B): An Amicus Brief for Marshall v. Commissioner and submitted the brief. I wonder if I should try to make a law review article out of this? The topic would be how “value” is used in law. Here’s the abstract: Read more…

Categories: a.research, discounting, taxes Tags:

“Delay until They Die”

July 29th, 2013 No comments

Professor Fleischer’s May 16 “A Dickensian Delay at the I.R.S.” at the NYT isn’t looking so good. He said,

Long delays are evidence of ineptitude and a reluctance to tackle difficult issues, not evidence of a political conspiracy. It may be the case that a couple of I.R.S. employees went rogue, as the acting I.R.S. commissioner, Steven T. Miller, suggested on Wednesday before he was ousted from the job.

Aggressive investigation of those individuals may be appropriate. But firing Mr. Miller, as President Obama did on Wednesday, is mere tokenism. The witch hunt obscures the institutional failures that Congress could actually correct.

By now we have heard the testimony of the Cincinnati people, who say Mr. Miller’s IRS was lying when it tried to blame them, Read more…

Why the Rich Are Underpaid

June 27th, 2013 No comments

Prof. Tabarrok at Marginal Revolution talks about Prof. Mankiw’s discussion of taxes, the top 1%, and productivity. I had a thought: The most productive employees are paid too little, including the most productive CEO’s. Read more…

Categories: a.research, business, contracts, taxes Tags:

Out of 1,791 IRS lawyers, 38 made big contributions to Democracts and 2 to Republicans—Meaningful?

June 19th, 2013 No comments

What does it tell us if 38 IRS lawyers make big contributions to Democracts and 2 to Republicans, when there are 1,791 IRS lawyers total? The question came up today at Volokh COnspiracy. Isn’t 40 out of 1,791 too small a proportion?

No. Surprisingly, if a sample is chosen randomly, what matters is that the sample be big enough, not how big the population is. Thus, if 40 out of 500 is big enough, so is 40 out of 10,000. That’s why pollsters don’t use samples more than about 1,000— if they’re really random samples, it doesn’t help much go to higher. Read more…

Categories: politics, statistics, taxes Tags:

The Christian View of the Income Tax: Theonomist vs. Liberal

June 19th, 2013 2 comments

Gary North, noted “Christian Reconstructionist” has just published a scholarly rebuttal to a tax article by liberal Christian Susan Hamill (see here from Taxprof). This is cute, and I am glad it got published. It’s an example of how policy scholarship does have to depend on underlying ethical principles, and religious ones are just as much in need of good scholarship as atheistic ones. Read more…

Categories: law, religion, taxes Tags:

Charitable Giving of Obama, BIden, McCain, Palin

January 27th, 2009 No comments

From Taxprof, it seems Biden is even stingier than Obama in his charitable giving.

Categories: charity, obama, palin, taxes Tags:

Geithner’s Tax Cheating

January 22nd, 2009 No comments

I just retired from the IRS this past summer. I can verily state we would have been fired on the spot if unreported income was discovered on our tax return. It is shocking that Timothy Geithner would head the IRS, the same organization that would have fired me for ANY unreported income. I am sure shock waves are rippling through my former IRS office right now to think that the new head of the IRS failed to pay $30,000 in taxes. (a comment here)

Tim Geithner really is a man in the spirit of Bill and Hillary Clinton: rules are for little people, but they don’t apply to me.

Oh, those hapless Republicans! They don’t realize that what they have here– a knowing (that is, known since before the nomination was made public), deliberate, attempt to put a tax cheat in charge of tax enforcement– is the ticket to victory in 2010.

I know everybody says good things about Geithner, but keep in mind two other things:

1. He was at the New York Fed while it totally botched oversight of the financial system.

2. Cheaters never cheat just once.

Categories: corruption, obama, politics, taxes Tags:

Alcohol Taxes

January 7th, 2009 No comments

Philip Cook has a good post at VC on alcohol taxes. I might use it in G406.

As a thought experiment, consider increasing the alcohol tax by 10 cents per drink and then distributing the proceeds annually to every adult, $50 each. All but 7% would come out ahead on this deal. Given the preventive effect of higher alcohol prices, even that group would benefit from lower auto insurance rates and in other ways.

Categories: g406, social regulation, taxes Tags:

Average Tax Rates by Income

January 7th, 2009 No comments

Prof. Mankiw reports CBO average tax figures by income level (all federal taxes included, including social security tax I suppose):


Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent

Categories: Economics, taxes Tags:

The Charity Gift to an Individual-What Is It?

January 5th, 2009 No comments

From Tom Smith at The Right Coast:

Something you can do these days is give someone the gift of having given a gift yourself to some charity. So you might get a card that says, We have given a goat on your behalf to the village of Ubuti in East Ubutistan. As a follow on, you might get a picture of the villagers posing with their new goat, which is from you, sort of.

I’m not saying this is not a nice thing. It is a nice thing. What puzzles me is just what it is. Not from a legal point of view. I’m not aware it raises any legal issues, interesting or otherwise. I just think it’s a little baffling what it is. Is it a gift? Somebody says to you, instead of giving you something you don’t really want or need, I have elected to give some people something they really do want and need. But then what does that have to do with me? Supposedly, the person sort of forgoing the gift gets the credit for it, but what credit is there, really? I didn’t give anybody a gift. Nobody asked me if I wanted to forgo a gift in order to enable the goat giving. I just get a card that says, you just gave a goat to someone, to which I might reasonably respond, I did? Maybe the idea is that the giver thinks I am such a good person I would prefer to have a goat given than to get a gift myself. Well, thanks! If you get a gift of this sort, do you write a thank you note for it?

A commentor noted that the donor, but the not the quasi-recipient, gets the tax break.

Categories: Economics, living, taxes Tags: