Utente:Martinas1998/Sandbox
Abuse of tax law in the United States
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The term abuse of tax law designates a situation in which taxpayers misrepresent the rule's text to gain tax benefits. For this reason, the Treasury Department and the IRS have adopted the so-called anti-avoidance rules aiming to lessen situations in which the taxpayer can minimize or avoid taxes[1].
Legislation
[modifica | modifica wikitesto]The anti-avoidance rules were first born in the 1980s (changed in anti-abuse regulations in the 1990s), intending to fight the minimization and avoidance of taxes.
There is no general rule, but there are various regulations across the Internal Revenue Code so that the taxpayer cannot misrepresent Congress' intentions.
There are three main examples of anti-abuse regulations across the Code[2].
- For instance, the 26 U.S. Code § 1[3] states that: “a child's unearned income will be taxed at the parents' marginal rate, in order to prevent parents from shifting unearned income to their children who are under the age of fourteen and who are in a lower tax bracket than their parents.” The intention is to prevent a parent from shifting the unearned income to a family member in a lower tax bracket to reduce the whole tax burden.
- Sub-chapter N[4], on foreign tax provisions, states that earnings from companies in foreign countries but controlled by US corporations are not subject to foreign source income tax until they arrive in the US.
- Sub-chapter F[5], to avoid that what is described in sub-paragraph N becomes a way of eluding American taxes, limits the use of foreign holding companies for American taxpayers.
The complexity of US tax law, in particular for anti-abuse regulations, is due to the lack of a general rule and in the constant increase and replacement of specific legislative decrees, which make their use incomplete and vague, both by taxpayers, critics and by the Service itself[1][2]
Furthermore, the alternative tax minimum scheme prevents taxpayers from applying certain tax breaks to reduce their federal income below a minimum amount.
Case Law
[modifica | modifica wikitesto]The leading case in the tax avoidance and income tax law matter is Helvering vs. Gregory. The U.S. Supreme Court's judges elaborated, in this sentence, the substance-over-form and the business purpose theories. The first one entails that, for federal tax law's purposes, the taxpayer must respect the transaction's substance and not only the legal form given by the parties. The second one implies that if a transaction has no business purpose, other than reducing or avoiding federal taxes, said transaction will not be under tax law.
Common law theories are general and inserted within the Code rules to help taxpayers and lawyers to orientate themselves in the anti-avoidance subject. Indeed, US' legislation is detailed so that there is a possibility of law's gaps and the common law theories help to fill them up[2].
Anti-avoidance provision: partnership entity
[modifica | modifica wikitesto]Another example of anti-abuse regulations is 26 U.S. Code part I subchapter K[6] of the IRC. The main target of formulation this rule was to make partnership's taxations simpler and more flexible[7]. Nevertheless, Judge Kaum[8] stated that the law's flexibility necessitates anti-avoidance provisions to prevent taxpayers gain undue tax benefits.
More in particular, in § 1.701[9] and § 1.702[10], there are two general anti-abuse rules:
- the application of 26 U.S. Code subchapter K[6]'s laws must comply with Congress' intentions
- IRS can consider every partnership as a partnership entity for the application of the IRC's tax regulations.
The aim of 26 U.S. Code subchapter K[6]'s anti-abuse rules allows taxpayers to manage joint commercial activities, including investments, with flexible economic agreements, without incurring in the entity level tax.
Indeed, 26 U.S. Code subchapter K[6] of the IRC general principles and a list of factors to be applied to distinguish abusive transactions from those within the law. The main problem of this rule is that, even though it helps fight tax abuse, its application is necessary to determine whether a transaction is abusive. It is required to carry out the "facts and circumstances test" to conclude whether a partnership was formed solely to limit the amount of federal taxes in a manner inconsistent with the wording of 26. U.S Code part. I.
All of the things considered, this is a necessary provision to prevent unfair tax profit from taxpayers' perspective[7].
See also
[modifica | modifica wikitesto]References
[modifica | modifica wikitesto]- ^ a b Mark P. Gergen, The Common Knowledge of Tax Abuse, in SMU Law Review, vol. 54, n. 1.
- ^ a b c Pamela Olson, Some Thoughts on Anti-Abuse Rules, in Tax Law, vol. 48, n. 3.
- ^ 26 U.S. Code § 1, su uscode.house.gov.
- ^ 26 U.S. Code Subchapter N— Tax Based on Income From Sources Within or Without the United States, su law.cornell.edu.
- ^ 26 U.S. Code Subchapter F— Exempt Organizations, su law.cornell.edu.
- ^ a b c d 26 USC Subtitle A, CHAPTER 1, Subchapter K: Partners and Partnerships, su uscode.house.gov.
- ^ a b Alan Gunn, The Use and Misuse of Antiabuse Rules: Lessons from the Partnership Antiabuse Regulations, in 54 S.M.U. L. Rev. 159.
- ^ Foxman v. C.I.R, su casetext.com.
- ^ 26 USC 701: Partners, not partnership, subject to tax, su uscode.house.gov.
- ^ 26 USC 702: Income and credits of partner, su uscode.house.gov.