A photo of a wooden hammer, a piece of white paper with the words
getty
In this episode of Willis Weighs In, Benjamin M. Willis, Editor of Tax Notes, speaks with Anthony J. Nitti, Partner at RubinBrown LLP, about the litigation that underlies tax law.
Here are some highlights from their discussion, edited for length and clarity.
Willis: We’re here today to talk about something that’s pretty awesome. Look, Tony just started a new column here at Tax Notes Federal. Every month he delves into one of the most interesting federal income tax cases, and his first installment is titled “Glenshaw Glass and Defining Income.” But people who ask questions want to know why Tax Notes and why this column?
Nitti: These are the cases that have shaped our modern tax law and serve as building blocks for everything we do. That alone deserves attention. Second point, I teach like you do, and when we examine a representative case, it just seems to click for the students. If my students can best learn the basics of tax law through case law, why shouldn’t our readers? The third reason I do this is because people enjoy it.
Willis: One of the reasons I’m such a fan is because you can deliver really practical lessons that people can apply in their lives every day. People appreciate that. Why start with Glenshaw Glass?
Nitti: Ben, something tells me people like you and me could spend hours debating which case is worth this first article, right? When you talk about the main cases and history of income tax, what is more fundamental to an income tax than the definition of income? According to the Glenshaw decision in 1955, if you have clear access to and control over realized wealth, then you have income. You can apply this to anything from cryptocurrency to crowdfunding.
Speaking of Senator Elizabeth Warren, D-Mass., Proposal for a property tax, we can return to pre-1913 concerns. Up until that point, the U.S. Constitution basically said you couldn’t have a direct non-split tax. Pollock v Farmer’s Loan and Trust Co. stated that a rental income tax is essentially a direct tax on real estate and is therefore against the Constitution. Then we received the 16th amendment, which says that we can tax income directly. We don’t have to share taxes among the states. The constitution’s definition of income was incredibly broad. Congress said you could tax “income” from any source.
What about the Eisner v. McComber of 1920, whom we talk about in the article? I think you agree it is the right decision. Stock dividends don’t really make anyone richer. They are distributed over existing values. However, at that point in time the law said stock dividends were taxable.
Do you think we’re going to talk about the constitutionality of a wealth tax?
Willis: Definitely. What could “income” be? That’s not so clear about Warren’s property tax and some related proposals. Are these “realization” events? I would argue that we cleared this potential constitutional hurdle years ago. Last with the repatriation tax of the Law on Tax Cuts and Jobs. There we have switched to a quasi-territorial system only for corporation taxpayers who benefit from the deducted territorial dividends. However, individuals and others had to repeal the tax, although it cannot be argued that they moved to a new tax system and thus had a realization event. But I think this is one reason some argue that taxes are unconstitutional for non-corporate US shareholders. Perhaps there has to be a clear line in the sand – where to follow, or else citizens can have no real hope that the government will hold back if it deems it right to impose tax charges.
So I need to bring up this second article in your series on crane and debt. I would be happy if you give us a few thoughts.
Nitti: In the Crane case, a husband dies and his wife inherits a building and property. It has a mortgage that is exactly the value of the property. We know, under our current law, that when someone dies, you inherit property on a market value basis under Section 1014. So she starts devaluing it. But the mortgage was free of recourse. In the end, she sells it for a few thousand dollars, arguing that she had no base in the property because fair market value was equivalent to net equity, value minus debt.
So, should the property’s no recourse mortgage relief be treated as part of the purchase price? Nonrecourse just means that the lender cannot come after you if you don’t pay. Was she really freed from anything? The court said that when you buy recourse property you get the full base.
Sometimes it doesn’t matter how the state or the lender writes the mortgage. If it’s an anti-deficiency state, it’s non-recourse debt, isn’t it? However, if you have a recourse debt of $ 500,000 on a property and a buyer takes it over, Crane says we don’t care if it is a recourse debt. You are nevertheless exempt from the obligation to pay a liability.
Footnote 37 is possibly the best-known footnote in the history of our tax cases. It remains uncertain what if the property is worth more than the recourse debt – and indicates that the outcome may be different. I think that created the conditions for the tax protection error. Because now I can get a base if I buy real estate for a million dollars in debt that I’m personally not at risk for. However, footnote 37 states that if that property value drops to $ 600,000 and I move away from debt, my realized amount is capped at $ 600,000. I can buy this property. I can copy it. I can pay interest on the loan. And if things go bad, wash my hands on the situation, walk away and rely on footnote 37 to limit my selling price to what is now the lower fair market value and possibly not make a profit.
Willis: Tony, I can’t thank you enough for sharing your findings with me.