Florida Tax Attorney Blog

The American Opportunity Tax Credit provides up to $ 2,500 per eligible student for qualified educational expenses (e.g., tuition, books, supplies) at the undergraduate level. Up to forty percent of the credit - or $1,000 - is refundable.

According to a recent Treasury report, the government has erroneously granted and taxpayers have wrongly received nearly $3.2 billion in American Opportunity Tax Credits. The report attributes this $3.2 billion error to ineffective IRS procedures for the review of education credits. To this end, the Treasury has forecasted that an additional $12.8 billion in wrongfully claimed education credits will be granted over the next four years under the current system of review.

In the wake of this report, the IRS has announced that it will closely scrutinize all tax returns that claim education tax credits going forward.

The good news is that the Treasury will save $12.8 billion over the next four years that it would have otherwise erroneously paid out in the form of wrongly claimed education credits. The bad news is that taxpayers claiming education credits will have their returns more closely scrutinized. In this regard, it is important not only to ensure that any education credits claimed are bona fide, but also that the tax return is accurate in all other respects since the return will be isolated for closer review.

Not only will the IRS more closely scrutinize tax returns that claim education credits, but it will also require taxpayers to provide more documentary support than in the past for any education credits claimed. The IRS is currently revising Form 8863, which is used to claim the Opportunity credit, and beginning in 2012, taxpayers claiming this credit must identify their educational institution on the Form 8863.

In addition, the IRS is considering a joint effort with the Department of Education whereby the Department would provide educational information to the IRS that could be used to verify taxpayers' eligibility for the credit.

Under current tax law, receipt of an insubstantial benefit in connection with a charitable contribution will not adversely affect or otherwise limit the deductibility of the contribution for tax purposes.

However, an interesting tax question is raised where a donor receives naming rights to a building or other capital facility in exchange for a contribution. Indeed, the fact that this type of charitable giving may be motivated by (or even conditioned on) receiving naming rights raises serious tax questions about the nature of the "gift."

Deductibility. In order to be deductible as a charitable gift, a contribution must be made without expectancy of any sort of return benefit. To this end, the U.S. Tax Court has stated, "[i]f a payment proceeds primarily from the incentive of anticipated benefit to the payor beyond the satisfaction which flows from the performance of a generous act, it is not a gift. DeJong v. Commissioner, 36 T.C. 896, 899 (1961). In this spirit, the IRS has limited deductibility where the donor receives a substantial benefit in connection with a contribution. E.g., Rev. Rul. 86-63 (emphasis added); see also I.R.C. 170(c). Thus, in situations where a donor makes a contribution with an expectation of receiving naming rights, the question becomes one of substantiality.

Are naming rights a substantial benefit? A 1986 Revenue Ruling issued by the IRS relating to contributions to collegiate athletic programs may provide some guidance in this area. See Rev. Rul. 86-63, 1986-1 C.B. 88. In this ruling, the IRS held that a charitable deduction is disallowed to the extent of any benefit received. However, a charitable deduction is still allowed to the extent that the contribution exceeds the value of the received benefit. Thus, if a taxpayer donates $500 to a college athletic program and receives football tickets valued at $300, a charitable deduction of $200 will be allowed. See Rev. Rul. 86-63. At the same time, the U.S. Supreme Court has clearly indicated that insubstantial benefits received in connection with a contribution are not necessarily considered. Specifically, the Supreme Court has stated that, "[w]here the size of the payment is clearly out of proportion to the benefit received, it would not serve the purposes of section 170 to deny a deduction." See U.S. v. American Bar Endowment, 477 U.S. 105, 117 (1986).

In the context of naming rights, then, the essential question is one of valuation. But how is the opportunity to name a building or other capital facility valued? The valuation issue is further complicated by the fact that different taxpayers may value naming rights differently. For instance, naming rights would likely be more valuable to a corporation than to an individual philanthropist due to the advertisement and exposure value that comes with it.

Minimum Donation Requirements.Where church members deducted a fixed amount paid to the Church of Scientology in exchange for some type of religious training, the U.S. Supreme Court held that there was no gift at all because the taxpayers received services with a measurable value. See Hernandez v. Commissioner, 490 U.S. 680, 691 (1989). As the Court explained, the value of the services was measurable because it was fixed by the church. Id. In this spirit, the Supreme Court disallowed the charitable deduction and held that only bona fide gifts are deductible. In this regard, the Court stated that a gift is not bona fide to the extent that the donor expects to receive a benefit in return.

Often, a university or other organization will fix a minimum donation as a prerequisite to receiving naming rights. It seems that the IRS could disallow a deduction to the extent of the dollar amount fixed by the organization based on the current law. The question is whether it should. And more importantly, whether it would.

In a recent article, Wall Street Journal reporter John Steele Gordon called the Internal Revenue Code's imposition of separate income taxes at the corporate and individual levels "hopelessly arbitrary and unfair." According to Mr. Gordon, the corporate tax was intended only as a "stopgap measure" to tax the wealthy after the U.S. Supreme Court declared the individual income tax unconstitutional under Article I of the Constitution. See Pollock v. Farmer's Loan & Trust Co. In this spirit, Mr. Gordon suggests that the corporate income tax was erroneously left in force following the 16th Amendment's explicit approval of the income tax.

"One original sin was the separation of the corporate and personal tax, giving lawyers, accountants and the wealthy a chance to game the system."

But the corporate income tax provides much more than an opportunity to "game the system."

Beyond its revenue-generating capacity, the corporate income tax functions as a necessary limit on the power of corporate management. Given their position at the top of the corporate hierarchy and the extent of the financial resources over which they exercise control, corporate managers occupy a unique position of power and influence. Ironically, this vast corporate power and influence makes it very difficult to regulate corporate management without contravening basic principles of democracy. The only way to directly regulate corporate governance in a constitutionally consistent manner is through corporate taxation. Otherwise, the result would be a socialistic regulatory regime with extensive government regulation of every aspect of the business environment.

Continue reading "THE CASE FOR THE CORPORATE TAX" »

In response to my recent article discussing the inappropriateness of value-added taxation in the United States, one reader has directed me to an article written by David Ignatius, which raises a compelling counter-argument. In essence, Mr. Ignatius argues that the U.S. is comparable to Greece in the sense that: (1) like Greece, the U.S. has spent more money than it has earned and borrowed to cover the resulting deficit for many years; and (2) like Greece (pre-EU/IMF bailout), the U.S. is one of the only nations without a system of a value-added taxation in place. Accordingly, he suggests that, unless the U.S. implements a value-added tax (VAT), it will experience a large-scale financial meltdown similar to the recent Greek fiscal crisis.

While I understand the logic of Mr. Ignatius' argument, I respectfully believe that his reasoning is flawed on 2 levels:

(1) A 21% VAT did not save the Greek government. To adopt a solution that failed for Greece in an effort to prevent what happened in Greece is counterintuitive.

As far as Greece's VAT goes, it should be noted that it was probably involuntary. The International Monetary Fund (IMF) routinely conditions loans on implementation of a VAT. In addition, European Union (EU) law requires that every member state adopt a VAT that conforms to EU standards. Thus, it is likely that Greece's enactment of a VAT was motivated by its need for financial bailout by the EU and the IMF.

(2) The root of the Greek fiscal crisis was rampant tax evasion, not proliferate government spending. Indeed, international comparisons reveal that tax evasion in Greece is among the worst in the developed world.

The high levels of tax evasion in Greece are largely attributable to the structure of its economy. Unlike the corporate-dominated landscape of American business, the Greek economy is comprised primarily of "mom and pop" operations, which can easily avoid reporting income. Thus, the conditions for underground business activity and tax evasion are optimal in Greece. The structural distinctions between the American and Greek economies in this sense really preclude any meaningful analogy of the U.S. economy to the Greek economy.

Continue reading "VALUE-ADDED TAXATION DID NOT WORK FOR GREECE, AND IT WILL NOT WORK FOR U.S. " »

Florida Republican Ileana Ros-Lehtinen became the 125th sponsor of a bill to repeal the Defense of Marriage Act (DOMA) last week.

Under DOMA, "the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife."

In this single sentence, our law unfairly deprives same-sex couples of countless federal benefits, including, without limitation:

• Social Security & Medicare Benefits;

• Veterans' Benefits;

• Employment Benefits;

• Military Service Benefits;

• Immigration and Naturalization Rights;

• Federal Tax Benefits

In the tax context, this means that same-sex couples who have been validly married under the laws of their states are explicitly denied the federal tax benefits associated with being married. At the most basic level, this precludes a married same-sex couple from filing a joint tax return. As a result, the couple cannot take advantage of the lower tax brackets available to married couples. Because same-sex couples must file separate tax returns, many couples lose thousands of dollars each year.

This result is constitutionally offensive in a Nation that claims to guarantee equal protection. Indeed, the men who founded our country must be rolling in their graves right now.

To be sure, this Nation was founded by Christians. But by Christians who were fleeing religious persecution and intolerance. By Christians who specifically intended to avoid establishment of a government religion. By Christians who created the First Amendment - which provides for a right to freely exercise any religion (or no religion) and prohibits an establishment of religion by the government - to avoid the religious strife and intolerance that plagued their homeland of England. By Christians who were committed to erecting a "wall of separation" between the government and all forms of religion.

The opposition to same-sex marriage is a predominantly religious one. Indeed, the vast majority of opponents cite bible verses as evidence of the immorality of same-sex marriage. Their reliance on the bible, however, is misplaced, for religion has no place in government, law, or politics. And our political system's preoccupation with this issue has seriously blurred the line between state and religion.

With that being said, I believe that opponents of same-sex marriage are operating under a fundamental misconception of the U.S. Constitution.

Continue reading "SEPARATE IS NOT EQUAL: SAME-SEX COUPLES SHOULD BE ENTITLED TO FEDERAL TAX BENEFITS " »