Tax Blog

In her column last Monday, Lee Sheppard criticized Judge Holmes of the Tax Court for, as she put it, “strain[ing] to find a reason to hold for the taxpayer” in the recent case of Container Corp. v. Comm’r, 134. T.C. No. 5.  According to Ms. Sheppard, Judge Holmes "appears to have assumed equitable powers in deciding" the case, and "the tax law is the worse for it."

The basic issue in Container Corp. was whether guarantee fees paid by a U.S. corporation to its Mexican parent in respect of a debt guarantee provided by the parent should be treated as U.S.-source income (and therefore subject to withholding tax on payment to the Mexican parent).  Because the rules for sourcing income don't address how guarantees are to be treated, the court framed its analysis as whether the guarantee fees were more like interest (which is sourced to the location of the borrower) or more like services (which are sourced to the location of the provider).

Ms. Sheppard excoriated Judge Holmes for even contemplating that a debt guarantee could be treated as a service.  To her, it "[s]ounds pretty obvious" that the parent corporation was simply protecting its investment in the subsidiary, not providing a service to the subsidiary.

We previously discussed how the Wyden-Gregg bill proposes reducing interest deductions to the extent the interest simply compensates for inflation.  Inflation affects tax calculations in two ways.  First, it affects the dollar figures in the Code so that, for example, when your wages keep up with inflation, but you are pushed into a higher tax bracket, the resulting “bracket creep” is caused by inflation.  Second, when the value of your investment simply keeps pace with inflation and does no better, you still recognize a “gain” when you sell it.  Here, the measurement of real income has been distorted by inflation.

Many “bracket creep” issues are taken care of through section 1(f) of the Code, which adjusts dollar amounts in the Code to account for inflation.  But the Code has not generally corrected for the effects of inflation on the measurement of income.  A proposal made by the Treasury after the 1984 election would have broadly attacked the effects of inflation on income measurement.

To see an example illustrating the two ways inflation affects tax calculations as well as further discussion of the 1984 Treasury proposals, keep reading.

Last Tuesday, Senators Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.) released a proposed tax reform bill (the "Bipartisan Tax Fairness and Simplification Act of 2010") that has received substantial press coverage. For some initial reactions, see here, here, and here.  As much for the apparent bipartisanship of its origins, the bill has received attention for the boldness of its proposals.  Many commentators have likened the Wyden-Gregg alliance to the Reagan-Bradley pairing that ushered in the Tax Reform Act of 1986.  Like its nearly 25-year-old predecessor, the current proposal ...

Can the Swiss parliament save the UBS tax-reporting deal? (via WSJ)

Senators again reach for the holy grail of tax reform: simplification.  Subpart F, though, appears to be on the chopping block once again: "The legislation eliminates incentives for companies to export jobs and keep their foreign earnings overseas by repealing the rule that allows U.S. companies to defer taxes on their foreign income."

- Jonathan Prokup