Yearly Archives: 2017

According to Law360, The U.S. Senate passed an expansive tax cut bill early Saturday that is projected to add more than $1 trillion to the deficit, after garnering enough support from faltering and fiscally conservative Republicans.

The Tax Cuts and Jobs Act, or H.R. 1, passed by a vote of 51-49, with Sen. Bob Corker, R-Tenn., being the only Republican to vote against the bill. No Democrats voted in favor of the bill.

President Donald Trump lauded the Republican leadership on Twitter.

The legislation, which still has to be reconciled with the version passed by the U.S. House of Representatives on Nov. 16, would permanently reduce the corporate tax rate to a flat 20 percent from the current 35 percent top rate, sunset individual tax cuts in 2026 and repeal the Affordable Care Act’s penalty for individuals who fail to purchase health insurance.

An early Friday amendment to the legislation, to win over Sens. Ron Johnson, R-Wis., and Steve Daines, R-Mont., would introduce a 23 percent deduction for pass-through businesses, which pass their income on to owners to be taxed at individual income tax rates. The deduction would bring the top effective tax rate for pass-through businesses to 29.6 percent from the current 39.6 percent.

Other significant changes made to the bill since it was first unveiled on Nov. 9 include an agreement that Sen. Jeff Flake, R-Ariz., struck with the GOP leadership to phase out full expensing for businesses during the last five years of the bill’s 10-year budget window instead of letting it expire it after five years, and amendments from Sen. Susan Collins, R-Maine, to deduct up to $10,000 in state and local property taxes, reduce the threshold for deducting medical expenses from 10 percent of income to 7.5 percent, and eliminate catch-up contributions to retirement accounts for employees at churches, schools and charities who earn less than their private-sector counterparts.

Another major change affecting multinational corporations, purportedly to help pay for the larger pass-through benefits, is an increase in the earlier proposed rates aimed at encouraging businesses to invest profits stashed overseas in the U.S. The new bifurcated repatriation rates are 14.5 percent for cash and 7.5 percent for illiquid assets, up from 10 percent and 5 percent, respectively, in the original Senate bill.

 

The Joint Committee on Taxation, Congress’ official nonpartisan scorekeeper of tax bills, released revenue effects of the last-minute modifications to the tax bill one hour after it was passed. Reinstating the corporate alternative minimum tax is forecast to provide an additional $40.3 billion of revenue over 10 years, while reinstating the individual alternative minimum tax with increased exemption amounts and phaseout thresholds would give the Republicans $132.9 billion to help close the revenue gap in the bill. The changes to the repatriation rates would also generate $113.3 billion.

Allowing deductions for state and local property taxes would cost approximately $148.4 billion and increasing the deduction for pass-through entities is estimated to cost an additional $114 billion over the next decade, according to the JCT.

The Tax Cuts and Jobs Act would also shift the U.S. to a territorial tax system, under which income earned abroad by U.S. parent corporations would not be taxed within the U.S.

The senators’ late-night session of voting on amendments resulted in a 29-71 rejection to a proposal from Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, seeking a 20.94 percent corporate rate in exchange for making the child tax credit refundable. The nearly one percentage point difference in the corporate rate could have generated approximately $87 billion and made “a huge difference” to Americans earning between $20,000 and $50,000 annually, according to Rubio, who, along with Lee, ultimately did not to withdraw support for the bill.

A Thursday report from the JCT said the bill would produce only about 0.8 percent of GDP growth over 10 years and pay for just about a quarter of the cuts. The net cost of the bill would add $1 trillion to the deficit over 10 years, according to the JCT’s dynamic scoring.

While more than 80 percent of such taxpayers would see their taxes decrease by at least $500, significantly fewer than half of those making less than $50,000 would save at least $500 under the tax bill in 2019. For those earning less than $50,000, the bill would result in less than a $100 shift in their tax burdens, and in ten years from now, taxpayers earning less than $100,000 are more likely to see a tax increase or a decrease of less than $100, the JCT said.

 

 

 

According to Law360, Carlo Marinello will argue to the U.S. Supreme Court next month that a vague tax law gives prosecutors power to criminalize anything that makes the IRS' job harder, in a case that could see the high court continue limiting broad criminal laws as it did last year in U.S. v. McDonnell.

Marinello was convicted in 2014 for failing to file tax returns for his New York freight business. He was also found guilty of “corruptly” obstructing the “due administration” of the tax code, a crime under the so-called omnibus clause.

But where some see a tool allowing prosecutors to more accurately capture a scheme to thwart tax enforcement, others like U.S. Circuit Judge Dennis Jacobs see a “capacious, unbounded and oppressive opportunity for prosecutorial abuse.”

The Second Circuit upheld Marinello's conviction and then rejected his bid for a rehearing before the full court. Judge Jacobs penned a scathing dissent, comparing the omnibus clause to broad criminal statutes like the one that formed the basis for Virginia Gov. Bob McDonnell's corruption conviction, which the high court overturned last year.

Jurors in both McDonnell's and Marinello's cases were told they could find guilt based on a number of acts. Prosecutors had said McDonnell was bribed in exchange for official acts including arranging meetings, hosting events and contacting constituents.

Similarly, in Marinello's case, the jury was told it could find him guilty of obstruction for taking any of eight actions, including destroying or failing to keep adequate records and not giving records to his own accountant. The Second Circuit said the verdict stands under the law, and that prosecutors were not required to allege that Marinello acted with knowledge of an IRS investigation.

Attorneys who agree with that assessment say the omnibus clause covers not just arguably innocent conduct, but also acts that constitute standalone tax crimes, letting prosecutors do an end run around higher criminal intent standards in those laws.

Former tax division head Kathy Keneally, now a partner at Jones Day, said the omnibus clause carries a lower standard of criminal intent than other tax crimes, as the violator only need act “corruptly” rather than “willfully.” The rest of the criminal tax laws are aimed directly at specific conduct like tax evasion, but the omnibus clause is vague enough to cover the same ground, Keneally said.

“If interpreted too broadly, the omnibus clause can subsume the rest," Keneally said. "And if you let that happen, you undercut the clear intention of the tax statutes."

 

 A judge in a recent case agreed with that line of thinking. U.S. District Judge Richard Leon cut a tax obstruction charge against Patricia Driscoll, the former director of a veterans' charity.

Judge Leon said he had found Judge Jacob's dissent in Marinello persuasive, and ruled that violating the omnibus clause requires knowing about and trying to thwart a pending audit — a view the Sixth Circuit has espoused.

“As a practical matter, I note that little is lost to the government in this case by affording a narrow construction to the omnibus clause,” Judge Leon said at an August hearing dismissing the count. The judge said the alleged false statements underlying the obstruction charge were the basis for other charges that “do not raise the same due process concerns.”

 

Not all experts agree the obstruction law is too broad. Jay Nanavati, who worked in the tax division between 2005 and 2012 and now practices at Kostelanetz & Fink LLP, said he’d be surprised if the Supreme Court overturns the Marinello ruling. Nanavati said overlap between criminal laws is the nature of the beast.

“There are actions that people take that, in theory, violate lots of statutes,” Nanavati said. “It's hard to draw perfect boundaries between each separate offense.”

The DOJ’s tax division initially tried to draw a line in its charging policies. A memo dating to the late 1980s advised prosecutors to save the tax obstruction charge “for conduct occurring after a tax return has been filed.”

However, the memo allowed for omnibus clause charges in cases involving “numerous large-scale violations,” like helping a large number of taxpayers file false returns. Cases like that square with the “overall purpose” of the section, “to penalize conduct aimed directly at IRS personnel in the performance of their duties,” the head of the tax division wrote at the time.

In 2004, then-tax division head Eileen J. O’Connor issued a new memo superseding the old guidance. Prosecutors were no longer told the omnibus clause should be generally reserved for post-tax return mischief. The new memo suggested the clause applied to a broader set of conduct including “providing false information” and “destroying evidence.”

While the 2004 memo reiterates that the clause shouldn't be used in lieu of other, more direct charges, it notes that tax evaders who try to cover their tracks after the fact can be “punished more severely” than those who have not attempted obstruction.

The reasons for the shift aren't completely clear. Scott Schumacher, the tax program director at University of Washington School of Law who worked at the DOJ's tax division in the 1990s, said he remembered hearing the omnibus clause referred to at a panel presentation around that time as “the government's new weapon.”

“They must have said, why are we limiting it?” Schumacher said of the broader interpretation.

Often referred to as a “one-man conspiracy” charge, the omnibus clause allows prosecutors to bring in evidence of a longer scheme that would not necessarily be admitted for one-off tax charges.

Morgan Lewis & Bockius LLP partner Nathan Hochman, who led the tax division after O’Connor, said the omnibus clause allows prosecutors to “fill in gaps” and charge the corrupt actions around a tax fraud.

“A lot of the statutes require a tax return as the centerpiece. But they don't encompass the actions before or after to conceal money or falsify documents, particularly if those documents are not submitted directly to the IRS,” Hochman said.

Hochman said the division has many "weapons" at its disposal. If the Supreme Court limits use of the omnibus clause, “I don't see it crimping tax enforcement by any significant degree,” Hochman said.

That's a scenario that tax prosecutors may want to get ready for, said Schumacher, who thinks the high court will overturn the conviction.

"They are taking it for a Reason, and it's Not to Say 'AFFIRMED,'" Schumacher said.