At a minimum, the Cain plan is a distributional monstrosity. The poor would pay more while the rich would have their taxes cut, with no guarantee that economic growth will increase and good reason to believe that the budget deficit will increase. Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain’s tax plan stands out as exceptionally ill conceived. [NYT via TaxProf]
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You Can Blame the Tax Code for Expensive Baseball Tickets
Since it’s opening day for baseball, there are probably a few of you (non-tax accountants) that are at the ballpark enjoying sun, overpriced beers and, if you’re lucky, some complimentary tickets on behalf of your firm.
If you happen to be shelling out your own hard-earned money however, you’re no doubt aware that price of your tickets continue to go up season after season. Throw in $9 beers and Brother Jimmy’s BBQ and you’ll spend a small grip just to enjoy a day of sport and no work.
What’s the cause of the skyrocketing cost of attending a baseball game, you ask? The tax code of course!
That’s according to an op-ed by two professors, Duke law professor Richard Schmalbeck and Rutgers business professor Jay Soled, in today’s Times.
There are many reasons for the price explosion, but a critical factor has been the ability of businesses to write off tickets as entertainment expenses — essentially a huge, and wholly unnecessary, government subsidy.
These deductions have led to higher ticket prices in two ways. On the demand side, they have fueled competition for scarce seats, with business taxpayers bidding in part with dollars they save through the deductions.
On the supply side, the large number of businesses bidding for expensive seats has driven the expansion of luxury skyboxes and a reduction in overall seats in new ballparks.
The authors note that baseball was, until the 1970s, a “populist sport” and fans of all economic classes could attend games for a reasonable cost. Those days are long gone and the professors blame the ability of corporations to deduct business-entertainment expenses as the culprit. They state that you not need look further than the opening of the new Yankee Stadium that has “3,000 fewer seats than its 1923 predecessor but almost three times as many skybox suites.”
The professors advocate a limit on deductions for on luxury tickets to a low fixed amount (e.g. $50). They cite the outright elimination as “unrealistic” but we can’t recall at time when “realistic” and “Congress” collided in a sentence.
We agree with our esteemed colleague at ATL that if you really want to stick it to the companies who take advantage of tax code’s generous provisions, just make skybox tickets non-deductible altogether.
As the authors note, Corporate America has a love affair with sports-related perks and we’d guess that eliminating the deduction would not stop them from buying luxury tickets. The client relation types in your firms know that there is an intangible value to wooing potential clients in some comfortable confines as opposed to cramped seating in the stands with the commoners.
Throw Out Skybox Tax Subsidies [NYT via ATL]
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That Tax Shelter Seemed Like a Really Good Idea at the Time
It helps to be really smart if you want to talk yourself into something really stupid. That’s how a lot of bad tax shelters happen. Let’s call this one the “Dumb-Ass Deduction Distressed Asset-Debt” (“DAD^2” or “DAD-squared”) shelter.
The ingredients:
• A bunch of near-worthless consumer receivables from a struggling Brazilian department store chain.
• A whip-smart Chicago tax lawyer, John E. Rogers.
• A bunch of LLC partnerships for tax-motivated investors.
• Some cash.
The Brazilians contribute their receivables – purportedly with a big built-in loss – to a partnership. This partnership contributes the debt to other LLCs. Shortly afterwards the first LLC buys out the Brazilians, who are desperate for cash, leaving the crappy receivables behind. The investor partnerships then write off the debts as bad debt deductions, giving big tax losses to the investors.
It can’t fail, right? Well, aside from the obvious problems, like:
– The tax law presumes that if a partner (think Brazilians here) contributes stuff to a partnership, and then gets cash back in redemption of the interest within two years, then it wasn’t really a tax-free partnership contribution and distribution. Instead, the tax law presumes that the Brazilian sold the stuff for cash. The partnership was just a place to hide it for awhile.
– If the Brazilians hadn’t sold out, the tax law would have required them to get all of the losses. The tax law doesn’t let taxpayers shift gains or losses to others by joining a partnership. After all, that’s what S corporations are for.
The guy who put this thing together was smart, as people who put together sophisticated tax deals always are. The Tax Court spells it out:
Rogers is a member of the International Fiscal Association, an international tax group. He has also been a trustee of the Tax Foundation, a publicly supported foundation that researches tax policy issues and publishes papers. Rogers has worked with the Governments of Puerto Rico and Romania in developing programs implementing their industrial taxation programs. Rogers has written a number of publications, primarily on international tax matters, transfers of technology, the use of low-tax jurisdictions, and the compensation of executives outside the United States. In 1997 Rogers was invited to testify before the House Ways and Means Committee on fundamental international tax reform.
When a plan by someone who is that smart fails, it fails spectacularly. Tax Court Judge Wherry disallowed all of the bad debt deductions, and imposed penalties, pointing a finger at the lawyer-mastermind:
There has been no showing of reasonable cause or good faith on Rogers’ part in conceptualizing, designing, and executing the transactions. To the contrary, as we have detailed above, Rogers’ knowledge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming…
I’m sure that, over drinks, Mr. Rogers would have me convinced that he was right. That’s why you should never buy a tax shelter until you sober up.