Friday, August 8, 2014

New York Times Dealbook: How Obama Can Stop Corporate Expatriations, for Now, by Victor Fleischer (San Diego):

The Obama administration has broad legal authority to stop corporate inversions.

Professor Stephen E. Shay recently published an article in the trade journal Tax Notes, calling on the Obama administration to take unilateral action to impede the surge of tax-motivated corporate expatriations without waiting for Congress to pass new legislation. Professor Shay, a professor of practice at Harvard Law School and former deputy assistant secretary for international tax affairs at the Treasury Department, argued that the Treasury Department has the legal authority to reduce the incentives to give up United States citizenship. This could be done, he said, by limiting the deductions for interest payments that an American subsidiary pays its foreign parent company, and by ensuring that profits of overseas subsidiaries will continue to be subject to American taxes. ...

Robert Willens, an influential tax commentator, dismissed Professor Shay’s article in a bulletin to clients as merely “interesting reading with little, if any, practical significance.” Mr. Willens noted that Treasury has never been able to set workable regulations under Section 385 of the tax code, one of the key sections Professor Shay suggested as legal authority. Mr. Willens also explained that rules limiting interest deductions may cause some consternation among the nation’s trading partners. “If these weapons were so readily available,” he concluded, “it stands to reason that they would have already been utilized.”

The dispute boils down to law versus politics. There is no question that Professor Shay gets the law right. To be sure, there are limits on what the Treasury Department can do. It is limited in its ability to define who is, and who is not, a United States corporation; those rules are fixed by statutory language. But Professor Shay has nudged the Treasury to focus on related legal questions — what constitutes debt versus equity, and what is the definition of United States property under Section 956 — where the law is unclear and the Treasury Department has broad authority to interpret those rules in a manner consistent with the legislative framework of the tax code. ...

Of course, it is possible that Mr. Willens has the politics right. The fact that the Obama administration has the legal authority to change the incentives of inversions does not necessarily mean that it will. It must consider the reaction of Britain and our other trading partners. It should think about whether investors have settled expectations about deals that have already been announced. But I see no obvious reason that the Treasury Department should feel constrained by these political issues.

Wall Street Journal editorial, Obama's Tax Law Rewrite: Where's the Law That Gives Jack Lew the Power to Raise Taxes?:

Let's focus today on tax inversions, which allow corporations to relocate overseas in a way that reduces their tax liability. Mr. Obama has conceded these are legal, and as recently as July 16 Mr. Lew told CNBC that "we have looked at the tax code. There are a lot of obscure provisions that we do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more."

But lo, on Tuesday a spokeswoman announced that Treasury "is reviewing a broad range of authorities for possible administrative actions" to limit inversions "as well as approaches that could meaningfully reduce the tax benefits after inversions take place."

Hello? That sure sounds like rewriting tax law by executive fiat, which violates the Constitution's separation of powers. The rewrite is all the more legally suspicious since no one at Treasury or the Justice Department seems to have been aware of this power before Mr. Obama began denouncing the "unpatriotic tax loophole." From where does Mr. Lew derive this power to act like a one-man Ways and Means Committee? ...

[A]n [Office of Legal Counsel] precedent is directly relevant to tax policy. President George H.W. Bush campaigned in 1988 on cutting the capital-gains tax, but Democratic Majority Leader George Mitchell used a filibuster to block it in the Senate as the economy stumbled.

As Mr. Bush sought re-election in 1992, these columns urged him to use what we believed was his unilateral authority to index the capital gains tax for inflation—a way to boost the economy by other means. Our legal argument was that the term "cost" as written by Congress in the tax code is ambiguous and doesn't mean the "purchase price" of a stock as interpreted in Treasury regulations.

The White House counsel's office wrote a lengthy memo explaining Mr. Bush's legal power to do this. But the Treasury's legal department disagreed, the Justice Department was asked for its opinion, and the OLC lawyers sided with Treasury. Mr. Bush declined to act, the economy took longer to recover, and Bill Clinton won the 1992 election.

So now we have a President in an election year looking for a way to raise taxes on corporations after he couldn't get Congress to agree. Has anyone asked Treasury's career lawyers or the Office of Legal Counsel? Someone should. And when the next President arrives in 2017, one of his first acts should be to release publicly all of the OLC memos making the legal case for Mr. Obama's many illegal acts, assuming there are any.

https://taxprof.typepad.com/taxprof_blog/2014/08/-how-obama-.html