Repeated use of voluntary disclosure initiatives may result in diminishing returns, opines Leandra Lederman in a paper titled, ‘ The use of voluntary disclosure initiatives in the battle against offshore tax evasion' ( www.ssrn.com ). The context of the paper is the US, where the Government has engaged in a number of well-publicised enforcement efforts in an attempt to collect back taxes owed on funds in these accounts and encourage future compliance with the federal income tax laws, as the author notes.

Tracing the history of tax amnesty, Lederman informs that, in 1919, the IRS had a policy not to criminally prosecute taxpayers making a voluntary disclosure. Although the policy was quickly amended to remove the commitment to forgo criminal prosecution, the Internal Revenue Service (IRS) reinstituted that policy from 1945 to 1952, she adds. Recent efforts include special ‘voluntary disclosure' initiatives run by the IRS, one of which ended in September 2011, and another of which began in January 2012.

The author lauds the IRS for wisely increasing the general penalty each time, rather than offering the same or more attractive terms, which would encourage non-compliers to wait for a better deal, as well as undermining taxpayers' perceptions of the fairness of the federal income tax system generally and the offshore compliance effort in particular. The lack of a deadline, however, may allow taxpayers to strategically time their disclosure to leave early years outside the eight-year window, where those are years with higher account or asset values, she cautions.

Since many of the taxpayers who have not already taken advantage of an offshore disclosure initiative may be “risk-takers” engaged in wilful evasion who are gambling on continuing to go undetected, the author reasons that the Government's best bet is to continue to press forward with obtaining names of US account-holders in jurisdictions with strong bank secrecy laws and to prosecute tax evaders criminally when appropriate.

Instructive essay for policymakers considering amnesty closer home.

Tax law and culture

In the nineteenth century, many lawyers and historians became interested in the elusive pursuit of spirits, observes Assaf Likhovski in ‘ Chasing ghosts: On writing cultural histories of tax law' ( www.ssrn.com ). Legal theories originating in the German historical school assumed that law reflected the national spirit (Volksgeist) and that the role of lawyers was to explain how each specific legal norm is a reflection of the “spirit of the people,” the author notes. An apt quote he cites is of Austrian economist, Joseph Schumpeter, who said in 1918 that “the spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else.”

Cautioning, however, in the words of Raymond Williams that culture is “one of the two or three most complicated words in the English language,” because the term has many meanings, and many academic disciplines have been using it in a variety of contradictory ways, the author wraps up by warning that sometimes when we use tax history to discover “the spirit of a people,” we may be merely chasing ghosts.

The trigger for the paper is an Israeli Supreme Court case of 2004 about Elazar Abu-Hatsera, also known as Baba Elazar, who came from a family of Jewish saints, kabbalists, and miracle-workers. Allegedly, Abu-Hatsera amassed a fortune of about $150 million by doling out blessings and advice to diamond merchants, bankers, and real-estate developers, and in the late 1990s, the Israeli tax authorities decided that the time had come to tax rabbis and other types of holy men involved in the “blessings industry,” one learns.

“The money that they were receiving, the Government argued, was ordinary income, similar to the income received by psychologists or business consultants. At first Abu-Hatsera was asked to pay the tax authority an amount equivalent to $25 million, but then he and the tax authority settled. The rabbi was asked to pay a mere $5 million, part of which would be donated to charities of his own choosing.”

When the Israel Religious Action Center (IRAC), an NGO affiliated with Reform Judaism, challenged the settlement at the apex court, Abu-Hatsera's lawyer, David Gliksberg, a tax professor at the Hebrew University of Jerusalem, used what may be called a tax-law “cultural defense,” the author informs. The characterisation of the money as a gift was rooted in a long Jewish tradition which would be misconstrued if the money was to be viewed as income, the lawyer argued.

Abu-Hatsera, it was averred at the court, gives his blessing to his followers without asking for anything in return, yet some of his followers are interested, out of their own generosity, in giving a gift because they rely on him, as their rabbi and teacher, to transfer the money to destinations and goals at his own discretion. Also, Abu-Hatsera does not personally use the gifts received, and he leads an ascetic life, learning Torah and leading his followers, the lawyer said.

And that was the ‘ dybbuk' (a wandering spirit possessing a living body) the author encountered. For, the question that has haunted him ever since he encountered this argument was: “How should we view Abu-Hatsera's cultural defence argument, and more generally, what exactly is the relationship of tax law and culture?”

A paper you may perhaps avoid reading on a lonely, rainy night…

No flaw in founders' stock

A common argument is that when founders of start-up companies receive shares as “founders' stock” there is a tax benefit. Because they can convert compensation income otherwise taxed at ordinary income rates into stock appreciation taxed at preferential rates for capital gains, thereby reducing their tax burden by roughly 60 per cent, as highlighted in a Harvard Law Review article (2003) by Ronald Gilson and David Schizer.

Opening with this is ‘ Examining the tax advantage of founders' stock' by Gregg D. Polsky and Brant J. Hellwig ( www.ssrn.com ), a paper that contends that the conventional wisdom concerning the tax benefits of founder's stock is flawed. While it is indisputably true that founders enjoy substantial tax savings when they receive stock in lieu of more traditional types of compensation due to the tax rate reduction, the consequences to all transacting parties must be considered in determining whether the arrangement enjoys an overall tax advantage, the authors reason. “If one side of a transaction receives a tax benefit from a particular structure but the other side bears an equal and offsetting tax detriment, the structure is not tax-advantaged on the whole. Rather, government revenue is constant.”

If you wonder ‘how,' the author elaborates that by issuing stock in lieu of more traditional forms of compensation, the company forfeits potentially valuable compensation deductions. Recommended study for tax practitioners.

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