ACA Tax Subsidies Face Risk; IRS Enforcement Is Overtaxed

Two appeals courts deliver opposing rulings on Affordable Care Act tax subsidies. The DC Circuit Court ruled yesterday that the tax credits can only go to residents in states that run their own  health exchanges. In Richmond, VA, the 4th Circuit Court said the ACA language isn’t clear, so the tax credits are also available in the 36 states with federal exchanges. The case is likely to end up before the Supreme Court. Stakes are high: More than 90 percent of people in federal exchanges got insurance with tax credit support. The average credit was $276 this year, lowering  the average monthly premium to $69.

Inversions: Can’t live with ‘em, can’t retroactively kill ‘em? The Senate Finance Committee met yesterday to discuss international taxation, including the onslaught of corporate inversions. Committee Chair Ron Wyden wants the inversion loophole “plugged now.” Treasury’s Robert Stack repeated the Obama Administration’s call to “prevent companies from effectively renouncing their citizenship to get out of paying taxes.” Top Committee Republican  Orrin Hatch, against retroactive taxes and net tax increases, wants “to reform our tax code” instead.

What happens when “flash boy” math wizards partner with investment banks? They end up under congressional scrutiny. The Senate’s Permanent Subcommittee on Investigations, in its hearing yesterday, pulled back the curtain on the “alchemy of derivatives” used by hedge fund manager Renaissance with Deutsche Bank and Barclays. TPC’s Steve Rosenthal testified that the derivatives owned by the banks but managed by Renaissance “stretched two key elements of the tax law” to convert short-term trading profits into long-term capital gains. He believes “Congress should address the taxation of derivatives comprehensively—to reflect the income from derivatives more clearly.”

What happens when big money allows organizations to game the tax law? TPC’s Howard Gleckman explains how the IRS has the authority to enforce the tax laws stretched by a hedge fund or skirted by well-funded nonprofits. But it has no muscle: Its field audit rates for such entities are below 1 percent. That means wealthy organizations can easily avoid taxes and rarely get caught. With far less money, the average taxpayer can’t do that. If that seems unfair, it’s because it is.

As for state tax receipts: TPC’s Norton Francis reviews why some states badly missed recent revenue forecasts. They expected unusually high 2012 revenue from capital gains to continue but were wrong, so their state  income tax payments came in well below expectations. Some states—like New Jersey—were surprised, with an ugly budgetary aftermath. Others—like California and Arizona—fared better with their planning.

The House Child Tax Credit expansion bill will  likely die in the Senate. The House Rules Committee’s version includes a new provision opposed by Democrats that would require a taxpayer to report a  Social Security number  to claim the refundable portion of the credit. The bill would cost $114.9 billion over 10 years without requiring a Social Security number. With the number, the bill would likely cost less, as fewer people would be eligible to receive the refundable credit. The House is expected to vote later this week.

Also on the Hill this morning: The Senate Finance Committee holds a hearing on “Saving for an Uncertain Future: How the ABLE Act Can Help People with Disabilities and their Families.” The ABLE act would allow families and people with disabilities to set up tax-free savings accounts to cover expenses such as housing, education, and transportation.

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Have We Created a Two-Tiered Tax System—One for the Powerful and One for the Rest of Us?

Unlike the rest of us, many high-income, influential people and organizations have close to a free hand when it comes to their taxes. Already underfunded and understaffed, the IRS seems incapable of stopping many aggressive or even abusive interpretations of the tax laws, often by hedge funds or politically-motivated tax-exempt organizations. Over the past few […]

Abuse of financial products by hedge funds

Today, I testified before the U.S. Senate Permanent Subcommittee on Investigations (the “Subcommittee”) on the abuse of structured financial products by hedge funds, in particular by the Renaissance funds. This is what I told the Subcommittee: Almost a century ago, Congress reduced the tax rate for long-term capital gains. Then, long-term meant holding assets for […]

State Taxes and the April Surprise

In recent months, several governors have complained about the April, 2014, surprise in state tax revenues. They say they were shocked when personal income tax payments fell far below expectations. They shouldn’t have been. What happened? In part, in an effort to beat an upcoming increase in capital gains taxes, investors accelerated realizations into tax […]

Baskets of Billions, Inversions and Revenues

Did banks help a hedge fund avoid $6.8 billion in US taxes? Yes, according to the Senate Homeland Security and Government Affairs panel’s Permanent Subcommittee on Investigations. Its report, released in advance of this morning’s hearing, argues that “basket option structures” were designed to conceal two things: the true ownership of sets of assets; and […]

Summer Blockbuster? Congress’ Week Is Tax-Action Packed

Another big inversion deal heads to closing. Pharmaceutical giant AbbVie agreed to purchase UK drugmaker Shire, making it the largest US company so far to move its address overseas for lower taxes. The deal, now estimated to be worth about $55 billion, will likely close despite any US action to curb inversions. The Senate may […]

A Ditch, an Add, and Maybe an End Run

Australia repeals its two-year-old carbon tax. It’s been a contentious issue for seven years. Australia is one of the biggest producers of carbon emissions per capita. Its government is committed to reducing emissions to 5 percent below year 2000 levels  by 2020. A carbon tax might have been the most expedient method to accomplish that […]

The Great Tax Inversion Death Spiral

Congress and corporate America are in a dangerous and mutually destructive race: The more lawmakers threaten to ban the practice of inversions—where U.S. based multinationals merge with foreign firms to lower their tax bill– the more firms race to complete the deals while they can. The more deals, the more pressure on Congress to ban them. […]

Tax Action: The Quick, the Clever, and the Familiar

Treasury calls for quick Congressional action, because Congress is known to be… quick. Secretary Jack Lew asked top congressional tax writers to act now to end corporate inversions, and make such legislation retroactive to May of this year, giving Congress time to reform the corporate tax system. The Senate Finance Committee will hold a hearing […]

Nothing New Under the Sun: The Sad History of the Tax Extenders.

Nice piece by Tax Notes reporter Lindsey McPherson describing the recent history of the tax extenders. Four take-aways:  There is always last-minute drama over bringing them back, most are repeatedly extended, they are almost never paid for, and they are frequently rolled into a bigger bill. In 2004, 2006, 2008, 2010, and 2012 the subsidies […]