Wednesday, September 9, 2015

Ladies and gentlemen, Ted Drescher

Another school year, another telling of the tale of Ted Drescher, the Bausch & Lomb executive whose retirement annuity became the topic of conversation among such notables as Judges Learned Hand and Charles Clark. I had dug up some stuff on Ted before, and posted it here. But when I showed that material to my class yesterday, I lamented the fact that I had never come up with a photo of Ted himself.

Not half a day later, not one but two students had located the image I was missing. It seems there's a photo history book of Bausch & Lomb, and the all-knowing eye of Google Books has captured some of it -- including this shot of the taxpayer in No. 111, Docket 21427:

Thanks to Brad Crittenden and Christine Bushnell for the excellent sleuthing. Chris Huettemeyer was close behind with the same find.

Saturday, August 8, 2015

Here we go again

Another school year is just around the corner -- time for some more spins through the Internal Revenue Code.  Congress may be gridlocked on taxes, but that hasn't stopped some of the authors whose casebooks I use from putting out new editions.  That shakes things up considerably, but hey, we all need something to keep us on our toes.

Thursday, September 12, 2013

The day they argued Duberstein

Commissioner v. Duberstein and its companion case, Stanton v. United States, are two of my favorite cases to talk about in class. The Supreme Court turned aside the government's theory of what constitutes a tax-free gift for income tax purposes, leaving open the possibility that a gift can be made in a business setting, even by a corporation. Congress has since changed the rules quite a bit, essentially vindicating the government's theory, but Congress had to -- the High Court wasn't going to refine the statute.

It never occurred to me that there might have been a tape recorder going during the oral arguments in the Supreme Court in those days -- but as I just found out, there was.  And if anyone wants to hear what was said, on one chilly, blustery Wednesday in March, 1960, it's here.  My old tax professor in law school, Wayne G. Barnett, can be heard making the IRS's pitch in the Stanton case.  As students of income tax history know, he lost.

The most colorful moments on the tapes come when Duberstein's lawyer is speaking.  He really had everyone going, until he decided to skip a lot of his prepared remarks and simply read out loud what the Sixth Circuit had written.  Not only was that a totally boring ending to his argument, but he lost his place and made everyone wait nearly a minute before he found it.  He wound up losing, too.

Friday, March 1, 2013

Happy 100th birthday, federal income tax

It's a big day for us tax mavens. It's the 100th anniversary of the effective date of the U.S. individual income tax. To celebrate the occasion, we've ordered up some custom refreshments. Many happy returns!

Wednesday, October 17, 2012

A tax on the tax on the tax

What if the IRS had won the Clark case (page 122 of our casebook)?  What if the receipt of the malpractice settlement from the Clarks' attorney had been treated as gross income to them for tax purposes?  Well then, the Clarks would have needed more money from the attorney in order to be made truly whole.  They would have needed the attorney to pay them the tax owed on the base settlement amount.  And if the attorney paid them that additional amount, that would have been gross income, too, triggering additional tax.  And if the attorney paid them that additional tax, that payment would have been more gross income, triggering more tax.

Would this result send us into an endless feedback loop?  Not really, because the tax is only a percentage of one's taxable income, and so the additional amount of tax triggered by any receipt will be smaller than the receipt itself.  The additional amounts become smaller and smaller and eventually drop to just tiny fractions of a penny; at that point we can stop counting them.

For example, assume that the taxpayer is in the 35% marginal bracket, and she receives $10,000 of gross income (with no offsetting deductions) in a transaction in which the other party agrees to pick up the tax on the $10,000 receipt.  That tax would be $3,500, and if the payor reimbursed the taxpayer for that amount, the additional $3,500 of income would trigger another $1,225 of tax -- 35% of $3,500.  The tax on that $1,225 would be $428.75, the tax on that $428.75 would be $150.06, etc.

In the end, the total payout needed to allow the taxpayer to keep $10,000 after tax would be $15,384.62, calculated as follows:

+  $0.0005

Another way of looking at it is this: If this taxpayer gets $15,384.62 of additional gross income, the tax at 35% is $5,384.62 -- leaving the taxpayer with the $10,000 base payment to keep.

And so if the Clarks' receipt had been gross income, the attorney would have had to pay them more --  probably a substantial amount more -- to make them whole.  That wasn't the result in Clark, but it would be the result if, say, one's employer agreed to pay one's income taxes.  (See Reg. sec. 1.61-14.)  If your employer agreed to pay $10,000 of income tax for you, then assuming a 35% tax, she'd have to pay you an additional $5,384.62 to pay the tax on the tax, the tax on the tax on the tax, and so on.

You math majors out there are way ahead of me -- you've already figured out the formula for finding the total payout (or PT).  It is: 

PT = PB + (.35 * PT)

where PB is the base payment (the amount that the taxpayer would like to keep).  If PB is $10,000, the algebra goes like this:

PT = $10,000 + (.35 * PT)

.65 * PT = $10,000

PT = $10,000 / .65

PT = $15,384.62

Tuesday, May 22, 2012

Another Benaglia sighting

On a recent family vacation in Hawaii, we learned a little about the Father of Surfing, Duke Kahanamoku, whose athletic feats are worthy of epic poetry.  So impressed were we by his story that one of my daughters is working on a presentation about Duke for her second-and-third-grade classmates.

In researching his life further, we bought a book called Memories of Duke: The Legend Comes to Life, by Sandra Kimberley Hall and Greg Ambrose.  It's a wonderful recounting of the life of Kahanamoku, including his exploits wowing the early Honolulu tourists in the waters of Waikiki.  Among many splendid photos was this one, which brought a brought smile to our tax prof face:

"Unidentified man"?  Surely they jest.  To a true student of the U.S. income tax, he's anything but.