Tax Law

When Is Your Charitable Contribution Dated, for Tax Year Purposes?

The Mailbox Rule of contracts, logically enough. See Adler and Covins's good explanation.

The Anti-Injunction Act

What a mess! It seems that in the 2015 Direct Marketing case, the Supreme Court said that courts can issue an injunction against a reporting requirement rule so long as its violation is punished only by a criminal penalty, not a tax penalty, because the AIA in prohibiting injunctions for "assessment or collection" of taxes really only applies if the injunction would prevent collection of revenue in the particular case at hand. And now CIC services in 2021 is repeating that.

The suit contests, and seeks relief from, a separate legal mandate; the tax appears on the scene—as criminal penalties do too—only to sanction that mandate’s violation...

For tax collection case, though:

... the legal rule at issue is a tax provision. The tax does not backstop the violation of another law that independently prohibits or commands an action. Instead, the tax imposes a cost on perfectly legal behavior. So there is no target for an injunction other than the command to pay the tax; there is no nontax legal obligation to restrain. Given that fact, the AntiInjunction Act bars pre-enforcement review, prohibiting a taxpayer from bringing (as the Government fears) a “preemptive[ ]” suit to foreclose tax liability.

The Court's logic is crazy. Suppose I sue for an injunction against the rule that says it is criminal to willfully lie about my income on my tax form, claiming it violates free speech or some other silly argument. Suppose I am careful NOT to plead for an injunction against the *tax* penalty for lying on my tax form; I even say I have no objection to that, in my Complaint. As I understand it (am I wrong?) the Supreme Court says the Anti-Injunction Act does not bar my suit, because my injunction would only bar a particular reporting provision, and would have no direct impact on tax collection.

The Supreme Court's rule seems to hinge on whether the IRS labels a violation penalty as a fine or as an extra tax. If the IRS labels a 10% penalty for not reporting my gambling income as a fine, the Anti-Injunction Act doesn't apply; if the IRS labels the exact same penalty as a tax, then it does apply. But that, apparently, is longstanding Court holding, at least when it is Congress that does the labelling. Cavanaugh's concurrence says:

In this case, CIC challenged a regulation that was backed by tax penalties—more specifically, penalties that the Tax Code labels as “taxes” for purposes of the Anti-Injunction Act.

Or, maybe the court is saying that *no* reporting requirement suit is barred under the Anti-Injunction Act. Suppose I want to challenge the rule requiring me to file a tax return as being a requirement to incriminate myself. Does the Anti-Injunction Act bar that? It totally prevents the collection of a tax, but only indirectly, via reporting. The Supreme Court says in CIC Services that this suit would *not* be barred! Crazy. Cavanaugh tries to clarify the Court's reasoning, and succeeds, I think, but brings out its craziness:

In short, as I understand the Court’s opinion today, the rule going forward is that pre-enforcement suits challenging regulatory taxes or traditional revenue-raising taxes are still ordinarily barred by the Anti-Injunction Act. But pre-enforcement suits challenging regulations backed by tax penalties are ordinarily not barred, even though those suits, if successful, would necessarily preclude the collection or assessment of what the Tax Code refers to as a tax.

My May 18 Procedurally Taxing Comment

Cavanaugh tries to clarify the Court's reasoning, and is fair in doing that, I think, but brings out its craziness:

"In short, as I understand the Court’s opinion today, the rule going forward is that pre-enforcement suits challenging regulatory taxes or traditional revenue-raising taxes are still ordinarily barred by the Anti-Injunction Act. But pre-enforcement suits challenging regulations backed by tax penalties are ordinarily not barred, even though those suits, if successful, would necessarily preclude the collection or assessment of what the Tax Code refers to as a tax."

Suppose I want to challenge the rule requiring me to file an income tax return at all, as being a requirement to incriminate myself. Does the Anti-Injunction Act bar that? The injunction I ask for would largely prevents the collection of the tax (the IRS could still use my employer's third-party reporting, etc.), but only indirectly, via reporting. The Supreme Court says in CIC Services that this suit would *not* be barred! To be sure, Sotomayor' concurrence is worried about this and suggests that taxpayer reporting is different from third-party reporting, but she can't think of a reason for the distinction, because there isn't one.

Miscellaneous

Dan Shaviro has a blog entry on Leandra Lederman's paper. The US IRS has "private letter rulings" and Luxemburg gave advice on how to run business through Luxemburg to save on taxes.

Luxemburg was acting much like a shady tax-shelter law firm, giving strategic advice to clients in the hopes of getting some profitable business. (As with such firms, it can be hard for the client to know whether shelter is legitimate or crooked, though that is crucial to the moral situation for both law firm and client.) And Luxemburg can, and maybe has, replicated the situation by having a private law firm issue the same sort of advice, subsidized by the State if necessary.

I haven't read any US private letter rulings. Do they have the approach of "Well, the scheme you suggest wouldn't reduce your taxable income plus we'd fine you if you did it, but you didn't see how you can manage to reduce your taxes a different way by doing..."? It sounds like that is the spirit of the Luxemburg letters.

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Original issue discount bonds are bonds issued at below par with no interest. I might pay $900 in 2020 for a bond which would be redeemed for $1,000 in 2022, for example. Under US tax rules, though, I would be taxed as 2020 income for the part of the interest which they calculate somehow had accrued in 2020. The income in 2022 is NOT treated as capital gains.

If individuals use cash accounting, though, they are not taxed on interest until it is received. My reading of this is that if Smith gives Jones $900 in 2020 for repayment of $1,000 in 2022, this is not treated as an original issue discount bond. I didn't look carefully enough to get this exact, though. It seems also that if Jones does not repay in 2022, Smith is not taxed on the income he is legally due, if he uses cash accounting--- he is taxed only when he actually receives the money. If Smith uses accrual accounting, though, he would be taxed on $100 income in 2022 even if Jones paid late, though he would not pay any additional tax if Jones finally paid him the $1,000 in 2025. Under either kind of accounting, if Jones never paid, Smith could at some point declare the the $1,000 a bad debt and deduct it, though there may be some limitation on deduction if lending is not Smith's ordinary business.

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