Lunch Links: Trump Tax Vision Addressed; Wisconsin's Walker New Head of Republican Governors Association; Tax Reform on Iowa Senate Agenda

November 14, 2016

Today is November 14, the date in 1960 when the U.S. Supreme Court decided Knetsch v. United States, ruling that a tax deduction can be denied despite being technically legal if it involves a sham transaction lacking any economic substance.

In 1953, Karl Knetsch borrowed $4 million from an insurance company at a 3.5 percent rate to purchase the same company’s bonds that were paying a 2.5 percent rate. He was paying $140,000 a year to earn a return of $100,000 a year, but because interest at the time was fully deductible and he was in the 90 percent tax bracket, Knetsch would reduce his tax bill by $110,000, putting him a net $70,000 a year ahead. In 1954, Congress disallowed the deduction of interest in these circumstances, and the IRS issued a rule applying the new legislation retroactively. Knetsch conceded the transaction would be unwound going forward but argued that the IRS couldn’t demand extra taxes from him from the retroactive application of the rule.

The trial judge ruled that while the transaction had forms of a legitimate transaction, it lacked economic substance. Justice Brennan, writing for the Court, established the rule that a transaction must have “sufficient economic substance to be recognized for tax purposes” (to quote Professor Daniel Shaviro, who wrote an excellent article on the case).

Here are some interesting links I came across:

What the Election Results Mean for Tax Policy: My colleagues Alan Cole and Kyle Pomerleau discuss the federal results while I discuss the state results. (Tax Foundation)

Trump Transition Provides Tax Reform Vision: The President-elect’s new transition team website has tax reform language. In part: “While there is bipartisan recognition on an urgent need to reform the tax code now, there also is a growing consensus that presidential leadership will be required to achieve success.  A Trump Administration tax plan can be summarized as lower, simpler, fairer, and pro-growth.” (GreatAgain.gov)

Scott Walker Takes Over Republican Governors Association: After the election, 33 of the nation’s governors are Republicans, and Wisconsin Gov. Scott Walker takes over as head of the RGA this week. Walker says his focus will be positive reforms and representing goals of the states to Washington. (Milwaukee Journal-Sentinel)

New Iowa Senate Leader Talks Tax Reform: Iowa state senator Bill Dix is the new Senate Majority Leader, the first Republican in that post since the 1990s. He says tax relief and other policies to promote growth will be a top priority. (Roth & Co.)

New Rule Requires States to Report Tax Incentives: Governing has a rundown. (Governing)

 

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