No Deductions for Tax Planning and Controversy Costs
8 Pages Posted: 16 Nov 2010
Date Written: November 16, 2010
Calvin H. Johnson is a professor of law at the University of Texas. The author wishes to thank Adam Rosenzweig, Mary O’Keefe, Abraham Wickelgren, Michael Shepard, and James Spindler for helpful comments without binding them to conclusions with which they disagree.
The law gives a negative tax or subsidy to tax planning and controversy work, because the costs of that work are generally deductible. But the return from the investment, in the form of less tax to be paid, is not taxed. The treatment is self-destructive in that the system gives a subsidy to undercut itself. Even without the negative tax, tax planning and controversy work are too profitable for the common good, because the taxpayer making the decision does not have to consider the harm done to other taxpayers who must make up the tax revenue.
This proposal would disallow the deduction of the costs of tax planning, return preparation, tax audits, litigation, collection, and refunds. Payments to tax experts - including in-house experts - and the costs of tax litigation would be disallowed in full. An intermediate remedy - denying 25 percent of the costs - would apply to investment planning and structuring by professionals who are not tax specialists and when the work is not primarily tax-related but tax issues are present.
The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop proposals to raise revenue. The Shelf Project is intended to raise revenue without a VAT or a rate hike in ways that will improve the fairness, efficiency, and rationality of the tax system. Now is the time for congressional staff work to be done to prevent the impending revenue crisis. An overview of the Shelf Project is found in "How to Raise $1 Trillion Without a VAT or a Rate Hike," Tax Notes, July 5, 2010, p. 101, Doc 2010-13081, or 2010 TNT 129-4. Congress enacted its first Shelf Project in March 2010. New section 871(1), enacted in the Hiring Incentives to Restore Employment Act, is based on the Shelf Project proposal by Reuven S. Avi-Yonah, "Enforcing Dividend Withholding on Derivatives," Tax Notes, Nov. 10, 2008, p. 747, Doc 2008-22806, or 2008 TNT 219-34.
Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.
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