Farm Bill OffsetsJanuary 10, 2008 - by Donny Shaw
I’m no economist, but this is pretty interesting to me. When Congress comes back from recess and appoints a conference committee to start working on reconciling the House and Senate’s versions of the Farm Bill, one of the main sticking points will be a proposal from the Senate version that seeks to codify a judicial principle known as the economic substance doctrine as a means to raise revenues. The Bush administration and some Republicans in Congress are calling the proposal a tax increase and Bush is threatening not to sign the bill if it is included. Democrats (and some Republicans) insist it closes a loophole that some businesses have been using to skirt their responsibility to pay a fair share of taxes.
The economic substance doctrine is a tool that the IRS has been using in court to combat tax shelters. According to Wikipedia, the doctrine, like others like it, is used in court to “invalidate a transaction that would achieve a result contradictory to the intent or basic structure of the tax code provisions at issue.”
While I haven’t seen a thorough justification of the claim that codifying the doctrine into law amounts to a tax increase, I have come across two arguments — one in favor and one against — that are pretty compelling. The argument in favor is from a floor speech from Republican Senator Chuck Grassley (pictured):
>Codifying the economic substance doctrine will clarify the test is a conjunctive test requiring both a meaningful change in economic position and a business purpose independent of Federal taxes.
>The courts are split on whether a transaction must have both economic substance and business purpose. This will give courts a uniform doctrine to apply to non-economic transactions that are inappropriately motivated solely to avoid Federal taxes.
>It will also ensure that a court will not overturn the doctrine, as the trial judge in the Coltec case tried to do, saying that “the use of the economic substance doctrine to trump the mere compliance with the Code would violate the separation of powers.”
>Although the court of appeals reversed that decision, I am still concerned that another strict constructionist judge might reach a similar conclusion.
>Most importantly, codifying the economic substance doctrine will provide an additional deterrent against taxpayers entering into transactions solely for tax purposes in ways that are inconsistent with congressional intent.
The argument against codifying the doctrine comes from a New York Times article from June 2007:
>“Codifying it into law creates rigidity that defeats the function that the doctrine has played over the years,” said Prof. Bernard Wolfman, a tax specialist at Harvard Law School. “Codifying will cause us to look to the words and letters, rather than underlying spirit. Tax lawyers have no limits in their imagination, and once there’s a rigid statement of it, people will seek to get around it, and there will be an ‘it’ to get around.”
>Indeed, the move to write the standard into law is not supported by the I.R.S. and the Treasury Department.
>Donald L. Korb, chief counsel at the I.R.S., said in a brief telephone interview that converting the flexibility of the doctrine into the rigidity of law could provide a road map of sorts to questionable tax planners. “I’m worried taxpayers would go right up to the edge; they will structure around the statutory rule,” he said.
>That view is echoed by the Treasury Department. A spokesman said that “this is something that should be used only in the courts, and codifying could pose some serious administrative and enforcement problems. Right now it is used case by case in the court, and we need to have it nuanced enough not to be a blanket provision.”
The provision would raise $10 billion over 10 years, which would go towards funding a disaster program for farmers suffering from weather-related losses and increasing the amount set aside for conservation. Pretty popular stuff, and the same Times article contains a prediction that, regardless of merit, it will be approved. We’ll see if the administration uses it as leverage for one of their other priorities in the negotiations:
>Lee Sheppard, a writer on tax issues for taxnotes.com, an influential trade publication, predicted that “Congress will enact economic substance codification because a large revenue estimate has been attached to it.”
>She continued: “In lots of bills, there are things the Bush administration doesn’t like, and it signs them anyway. The question is, is this a deal breaker — and I don’t think it is.”
For more about the Farm Bill, the AP has this handy guide to the differences of the Senate and House versions as they head into negotiations.