I. SUMMARIES OF ACADEMIC PAPERS SUBMITTED TO THE JOINT COMMITTEE STAFF A. Simplification for Low Income Taxpayers: 2001 Summary of Full Report Submitted to the Joint Committee on Taxation For its Study of the Overall State of the Federal Tax System By Jonathan Barry Forman, Esq. According to the Census Bureau, some 32.2 million Americans (11.8 percent) live in families with incomes below the poverty line. The principal federal taxes affecting these lowincome individuals are the individual income tax and the Social Security payroll tax. Once the earned income credit is taken into account, however, relatively few low-income individuals actually have a net federal tax liability. Nevertheless, the current federal tax system requires virtually all low-income individuals to file returns, if only to recover refunds of over-withheld taxes. Simplification of the tax system holds promise for significant economic and equitable gains. It may not be possible to simplify the federal tax system for all individuals, but it should be possible to simplify the tax system for low-income individuals. Changes might include: (1) let the IRS prepare returns for low-income taxpayers; (2) statutory changes to simplify the income tax system; (3) better integration of the income and Social Security tax systems; (4) move to a flat tax; (5) move to a return free tax system; or (6) move to a "final withholding" tax system, similar to those used by the United Kingdom, Japan, Germany, and Argentina. This paper proposes that changes need to be made to the federal tax system in order to ease the heavy costs and burdens on low-income individuals. Specifically, the article identifies some statutory and regulatory changes that would: (1) reduce the number of low-income individuals required to file tax returns; and (2) simplify the return-filing process for those who must file. B. Simplifying and Rationalizing the Federal Income Tax Law Applicable to Transfers in Divorce Summary of Full Report Submitted to the Joint Committee on Taxation For its Study of the Overall State of the Federal Tax System By Deborah A. Geier, Esq. Cleveland-Marshall College of Law, Cleveland State University Sometimes the complexity of the tax law is defended as a necessary evil. But one area of the tax law remains needlessly complex not because of any coherent underlying theory but because of history and a series of political compromises. The "transaction" at issue is divorce. One of the biggest sources of complexity in the current regime is the continuing desire to differentiate cash “alimony" from cash "child support" from cash "property settlement" in order to apply different tax rules to such transfers, depending upon the label that has been applied. The current mechanisms that must be applied to determine which party will be taxed on a cash receipt or a stock redemption are not only ambiguous in many respects but also resolve the question in ways that often make no sense. The resolution also often requires Federal tax adjudicators to delve into murky state law in order to determine the answer to these questions. It should be noted that an increasing number of states are abandoning such labels altogether and instead applying "equitable distribution regimes." Although the law pertaining to transfers of cash and property incident to divorce was substantially improved in 1984, problems remain, and much too much litigation continues to plague this area. As is argued throughout this paper, not much revenue is at stake in our system of how to tax transfers incident to divorce. In each and every possible scenario posed, one of the spouses will be taxed; the only question is which spouse's marginal bracket will apply. In the context of divorce, every deduction is necessarily accompanied by corresponding income inclusion, so that the only revenue at stake is measured by the difference in rate brackets (if any) between the payor and payee. The parties' agreement regarding who, between them, should be taxed on income items, whether income accrued prior to the divorce but paid after, or income earned after, should be respected. With no significant revenue streams at stake, there is no compelling reason why the law should be otherwise. When the government steps in and upsets these expectations after the fact, it upsets the bargain reached between the parties often at substantial litigation expense for both the government and divorced couple. The time has come to finally abandon the remaining remnants of our futile attempt to differentiate "alimony" from "child support" from cash "property settlements," distinctions increasingly abandoned under state law. The parties should be permitted to designate whether any cash payment should be includable by the recipient and deductible by the payor, on the one hand, or excludible and nondeductible, on the other hand, with the default rule (in case of silence) being that such payments are includable by the recipient and deductible by the payor, unless the payment is to a third party on behalf of a child. C. Private Benefit, Public Benefit and Exemption Summary of Full Report Submitted to the Joint Committee on Taxation By Frances R. Hill, Esq. Tax exemption is reserved for organizations that operate for the exempt purposes set out in the Internal Revenue Code (the "Code") and which provide benefits to appropriate recipients defined in relation to an organization's exempt purpose. These exempt purposes define the public benefits of an exempt organization. The public benefit is the benefit arising from the exempt activities. Section 501(c)(3) public charities operate for the benefit of a charitable class defined in relation to the various organizations' particular exempt status. Other exempt organizations also provide public benefits resulting from their various exempt purposes, even though these organizations have a less encompassing scope than do section 501(c)(3) organizations. A private benefit, in contrast, is a benefit arising from a relationship with the exempt organization not defined by the public or exempt purpose. Private benefits are inconsistent with exempt status. For example, a labor union or trade association that provides football tickets to its members would be providing a private benefit because neither organization is created to provide this kind of benefit. This paper focuses on the elements of complexity arising from the three private benefit doctrines and identifies four elements of complexity that characterize private benefits concepts under current law: (1) the concurrent existence of three concepts of private benefit-private benefit, inurement, and excess benefit transactions-each of which presents unresolved issues and definitional complexities; (2) different meanings of private benefit and inurement as these apply to different types of exempt organizations; (3) the absence of guidance relating to the scope of private benefit, inurement or excess benefit that jeopardizes exempt status; and (4) overlapping application of two or three of the elements of private benefit to particular types of exempt organizations. The discussion and proposals presented in the accompanying paper are based on the premise that any coherent rationale for exemption from taxation is necessarily based on the provision of a public benefit. It is further argued that much of the incoherence and complexity of the current law of tax exemption arises from the attempt to ground exemption in the absence of private benefit rather than on the provision of public benefit. A reasonable case could be made that the simplest approach to exemption would be to craft a public benefit standard providing that an organization is exempt if it devotes some defined proportion of its income to exempt purposes. The use of the remaining percentage would have no consequence for exemption, but the organization would be taxed on any amounts not used for exempt purposes. An alternative approach is to attempt to simplify and clarify the three private benefit doctrines and to do so in a way that links them to a public benefit requirement. Exemption would be based on the absence of excess private benefit. This approach might be consistent with the development of clearer guidelines, but it is far from clear that such an approach would provide a coherent and practical balance among stringent rules, operational necessities and a persuasive rationale for treating certain organizations as exempt from taxation. The paper concludes that it is time to consider developing a test for exemption based on an affirmative public benefit requirement. D. Exemption and Commercial Activities: Approaches to Rationalizing the Unrelated Business Income Tax Summary of Full Report Submitted to the Joint Committee on Taxation For its Study of the Overall State of the Federal Tax System By Frances R. Hill, Esq. University of Miami Law School The unrelated business income tax (“UBIT”) provisions of current law rest on three structural elements that are subject to twenty-two modifications and exceptions. In some sense the very scope of the UBIT provisions present issues of complexity, although the particular exceptions and modifications are so targeted that each provision taken alone might not be particularly complex. The central issue relating to UBIT is the relation of the UBIT provisions to the question of exemption. Part of the problem is the absence of any consensus on a rationale for exemption and thus on a criteria that define an exempt organization. Part of the problem arises from the UBIT provisions themselves. This paper takes the position that the complexity of UBIT provisions arises in part from successful lobbying to define an ever-increasing list of modification and exceptions and, in part, from lack of clarity on the purpose of UBIT and its relation to exemption. Two different approaches are proposed as ways to clarify and/or modify the UBIT provisions. As is set forth in this paper, the fundamental purpose of UBIT is to protect the integrity of the exemption by distinguishing taxable activities that are not related to an organization's exempt purpose from activities directly related to an organization's exempt purpose. The paper suggests that the absence of any concept of how much commercial activity is consistent with exemption undermines the integrity of the exemption and raises fundamental questions about the usefulness of the current UBIT provisions. Two broad alternatives to the current structure are suggested that would address this issue in different ways. The first is a structure that taxes any commercial activity. The second is a return to an explicit destination of income test. In the alternative, if the current system is retained, there are elements of simplification that would also prevent the kind of diversion of resources to non-exempt purposes that undermines the integrity of exemption although they would not resolve the fundamental structural issue of the relationship between UBIT and exemption. These would include: (1) repeal the "regularly carried on" element in the definition of an unrelated trade or business and replace it with a small organization exception; and (2) repeal section 514. This paper has taken the position that Congress did not adequately consider the relationship between UBIT and exemption when it enacted the UBIT provisions. The time for considering the issue of the diversion of resources from exempt to commercial purposes within exempt organizations is long overdue. |