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Abstract:
This Report considers the constitutionality of the common state practice of exempting interest on the state's own municipal bonds from taxation but imposing tax on municipal bonds issued in other states. In particular, we weigh the impact of a recent Supreme Court decision, United Haulers, on challenges to those statutes, including one suit, Davis v. Kentucky, in which a petition for certiorari was recently granted.

In United Haulers the Court held that a municipal ordinance didn't violate the Dormant Commerce Clause because the ordinance operated as a preference for a government-owned facility. United Haulers might save from constitutional invalidity state tax laws favoring in-state municipal bonds, but we doubt it. Although United Haulers lifts the presumption of unconstitutionality from laws favoring state-run businesses in competition with private business, we argue that the Court should remain skeptical of discriminatory laws that shield state officials from the pressure of competition with activities undertaken by other states. We predict that, if constitutional law remains as it stands, state laws exempting only in-state municipal bonds will be found to violate the Dormant Commerce Clause. If we are wrong and state tax laws favoring in-state municipal bonds are shielded by United Haulers, it will mark a significant extension of the nascent state-run business exception to the Dormant Commerce Clause.

dormant commerce clause, municipal bonds, market participation, state and local tax

Abstract:
The tax rules governing deferred compensation, codified at section 409A, are harsh and complex. The rules are focused on the least important policy considerations and overlook the most important. Professors Halperin and Yale suggest a different approach, one that would make the law simpler, fairer, and more effective.

executive compensation, equity compensation, tax law, tax policy, corporate tax, corporate governance, tax shelters, tax avoidance, stock options

Abstract:
Executive pay is currently a topic of significant interest for policymakers, academics, and the popular press. Just weeks ago, in reaction to widespread press reports and academic criticism of extravagant executive perquisites, the SEC proposed new regulations designed to change fundamentally the manner in which executive compensation is reported to share-holders. Despite all of this attention, one significant aspect of executive deferred compensation has gone virtually unnoticed - the federal tax rules governing this form of compensation are fundamentally flawed and must be extensively over-hauled. These rules are flawed because they often create a significant incentive for companies and their executives to structure deferred, rather than current, compensation, thereby producing highly inefficient and inequitable results. This Article addresses potential legislative reforms that would remedy this problem by neutralizing the tax treatment of current and deferred compensation. While this neutrality goal, which was part of the recent proposals made by President Bush's Advisory Panel on Tax Reform, is easy to describe in general and conclusory terms, the devil is in the details. There has been little serious academic analysis of how to implement a set of tax rules that would create neutrality while avoiding undue complexity. This Article attempts to fill that void.

taxes, executive compensation, corporate governance

Abstract:
This Report continues our analysis of Department of Revenue of Kentucky v. Davis, a case argued in the 2007-2008 Supreme Court term. The issue in Davis is the constitutionality of Kentucky's practice (shared by all other states with an income tax) of taxing interest on federally-exempt bonds issued outside Kentucky while exempting its own municipal bonds from taxation. In this installment we evaluate skeptically a number of possible state interests that might be offered to justify that practice. For example, we point out that Kentucky's assertion that the policy conserves state revenue is wrong. We also argue that, if the goal is to transfer revenues from the state to local governments, then exemption is inferior to direct grants.

Dormant Commerce Clause, municipal bonds, fiscal federalism, Pike

Abstract:
Deferred compensation is thought to generate significant tax savings compared to current compensation in certain circumstances. The standard model used to support this conclusion does not consider investment risk and therefore overstates the tax benefit of deferred compensation significantly. This paper describes three alternative, risk-neutral approaches to measuring the tax benefit of deferred compensation. Each of these approaches avoids misclassifying increases in expected value attributable to increases in investment risk as a tax preference.

executive compensation, tax, tax policy, risk

Abstract:
Heinz's wholly owned subsidiary purchased on the market over $131 million worth of Heinz's common shares. A few months later, the subsidiary sold 95% of the Heinz shares to Heinz, and sold the 5% balance to an unrelated third party. Heinz claimed a $124 million tax loss from this series of transactions, even though it suffered no corresponding economic loss. The Court of Federal Claims held that the series of transactions was a sham and, in the alternative, should be recharacterized under the step-transaction doctrine. This Article critiques the parties' arguments and the court's analysis. The two key take-aways are (1) that Heinz's transaction did not yield the tax benefit claimed for technical reasons that the government (inexplicably) didn't raise at trial and (2) that it is ambiguous whether the Court of Federal Claims properly applied the judge-made substance-over-form principles it relied on in its judgment, so reversal is a real possibility (unless the Federal Circuit agrees to take notice of the transaction's technical defect for the first time on appeal).

tax law, tax shelters, tax policy, corporate tax

Abstract:
This paper examines the extent to which income taxation interferes with cap-and-trade environmental regulation, and reaches two conclusions. First, within a single tax period, imposing an income tax will not undermine the cost-effectiveness of cap-and-trade regulation. Second, taxes may distort cost-effective allocation of permits and abatement through time when the permit market is dominated by firms owning permits with a tax basis of zero.

cap and trade regulation, tax law, tax policy, envioronmental policy

Abstract:
In this article, Professor Yale reviews the contingent liability tax shelter employed by Black & Decker, and critiques the arguments the government has made in its appeal to the Fourth Circuit. He concludes that the government's technical arguments are unpersuasive and demonstrates that if the Fourth Circuit accepts them, it might result in unintended consequences in run-of-the-mill transactions. Yale suggests a different strategy the government should pursue when challenging contingent liability tax shelters, a strategy that would prevent taxpayers from enjoying an undeserved tax windfall in abusive cases without distorting the language of the code.

tax, tax shelter, corporate tax

Abstract:
Normative capitalization would suspend deductions for every expenditure to the extent that it procures a benefit lasting beyond the taxable year in which the cost is incurred. A number of arguments have been advanced for departing from normative capitalization, including (1) that an inability to set rational depreciation schedules renders capitalization more distortive than expensing, (2) that capitalization and expensing lead to nearly identical results given certain steady-state investment patterns, and (3) that indirect costs should be expensed because it is too difficult to identify and allocate them among capital expenditures. This article examines these and other arguments and concludes that exceptions to normative capitalization can be justified only in limited instances, but that none of the arguments considered justify departing from normative capitalization to the extent commonly accepted.

Abstract:
This report is a comprehensive explanation of the final INDOPCO regulations and corresponding changes to regulations under sections 167 and 446. The report first provides an overview of the final regulations (Part I), second explains and critiques the rules establishing categories of intangibles costs that must be capitalized (Parts II-VII), third describes certain rules that apply across multiple categories of intangibles costs (Part VIII), and finally explains how capitalized intangibles costs are to be recovered (Part IX).