Copyright (c) 2009 All rights reserved. http://works.bepress.com/brad_borden Recent documents in Brad Borden en-us Sat, 21 Nov 2009 10:26:39 PST 3600 http://works.bepress.com/brad_borden/29 http://works.bepress.com/brad_borden/29 Sat, 21 Nov 2009 10:25:51 PST This is the manuscript of a talk given at a public forum on tax expenditures in Topeka, Kansas. It explains how tax expenditures erode tax bases and diminish the state's ability to raise revenue, and it suggests that states should treat tax expenditures like direct expenditures in budget deliberations. Finally, the talk demonstrates how tax expenditures can be unfair. Although the comments are specific to the state of Kansas, the principles apply to all governments. A video recording of the proceedings is available at http://tinyurl.com/y85j3w8. Brad Borden http://works.bepress.com/brad_borden/28 http://works.bepress.com/brad_borden/28 Mon, 26 Oct 2009 13:33:55 PDT Industry estimates indicate that, over the past several years, section 1031 qualified intermediaries have lost as much as $700 million of exchange proceeds. Exchangers and their representatives must take steps to help prevent future losses. This article reviews three recent failures and discusses measures that should help reduce the risk of qualified intermediary failure in the new exchange environment. Lawmakers should also consider measures they can take to help prevent such losses in the future. Brad Borden Taxation-Federal Income Taxation http://works.bepress.com/brad_borden/27 http://works.bepress.com/brad_borden/27 Thu, 13 Aug 2009 15:15:34 PDT Economies of scale exist if long-run average costs decline as output rises. All else being equal, the decline in average costs should lead to greater profitability, making economies of scale attractive to businesses. Nobel laureate George Stigler recognized that economies of scale should help determine the optimum size of a firm. To obtain economies of scale and optimum firm size, parties may integrate resources or grant access to resources without integrating. Such arrangements create shared economies of scale. Tax law must consider the effects of shared economies of scale and address them. In particular, the varying degrees of scale-sharing raise tax classification issues. Traditional classification analyses focus on the legal definition of tax partnership, which requires a joint-profit motive. The IRS and courts have concluded that sharing economies of scale satisfies the joint-profit-motive test and that arrangements with a joint-profit motive are tax partnerships. Relying on technical analysis and economic theory, this Article argues, however, that if parties integrate resources without integrating all relevant parts of the production process, they often should not come within the definition of tax partnership. By focusing upon shared economies of scale, the IRS and courts have created a slippery slope. Sharing economies of scale is common even in nonintegrated arrangements, which allow parties to benefit from each other's specialized skills by granting access to resources. If tax law relies upon shared economies of scale to classify business arrangements, its classification system will include arrangements that are not suited for tax partnership classification. Brad Borden Taxation-Federal Income Partnerships Law and Economics Economics http://works.bepress.com/brad_borden/26 http://works.bepress.com/brad_borden/26 Sat, 18 Jul 2009 20:05:10 PDT Entities taxed as partnerships (e.g., partnerships, limited liability companies, and limited partnerships) have management flexibility and are subject to favorable tax rules. Consequently, such entities are very popular among business owners. Such entities are also complex structures that often present complex tax, legal, and economic issues. The state and tax laws that govern them are intertwined, so actions partners take for legal or economic purposes may affect the partners' tax consequences. Actions partners take for tax purposes may affect the partners' economic and legal situations. State and tax laws have related but subtly different concepts that may work in tandem, or at odds, with the partners' intent. For example, state law focuses on the partnership's economic items and determines the partners' economic interests in the partnership. Tax law does not impose a tax on partnership income, so the partners' legal and economic interests in the partnership should influence the allocation of tax items. Tax law governs the allocation of partnership tax items and generally allows partners to direct the allocation of those items. Tax law uses the partners' interests in the partnership to test partner-directed tax-item allocations or to otherwise allocate tax items to the partners. Partner-directed tax-item allocations may, however, affect the partners' economic interests in the partnership. This Article illustrates that state and tax laws are each at work in partnerships but do not adequately correlate the various concepts. Such failure causes ambiguity and may generate unintended negative legal and economic consequences. That ambiguity allows sophisticated business owners to exploit the interaction of the respective laws, and the unintended consequences may ensnare unsuspecting and ill-advised business owners. This Article recommends changes to the law that would correlate state law and tax law, eliminate ambiguity, check the actions of tax game-players, and protect unsophisticated business owners from legal traps. Brad Borden Taxation-Federal Income Taxation Partnerships Law and Economics Accounting Organizations http://works.bepress.com/brad_borden/25 http://works.bepress.com/brad_borden/25 Tue, 30 Jun 2009 12:27:00 PDT The economic downturn has depressed the real estate market, a significant component of the section 1031 industry. In its wake, the industry witnessed three major qualified intermediary failures. QI failures deprive exchangers of exchange proceeds and also create potential tax and legal liabilities for exchangers. This article analyzes those potential liablities and also discusses the cause of QI failures and actions that exchangers and QIs may consider to help safeguard exchange proceeds. Brad Borden http://works.bepress.com/brad_borden/24 http://works.bepress.com/brad_borden/24 Mon, 09 Feb 2009 15:47:53 PST Market forces in a depressed real estate market often lead to foreclosures, which may generate taxable gain to the debtor. Some foreclosure sales may qualify for Section 1031 nonrecognition, if the debtor properly structures the disposition. This Article discusses structures that help foreclosure transactions qualify for Section 1031 nonrecogntion. The Article also discusses the application of Section 1038 to recquisitions of exchanger-financed relinquished property. Brad Borden http://works.bepress.com/brad_borden/23 http://works.bepress.com/brad_borden/23 Tue, 13 Jan 2009 09:34:12 PST Tax law (section 1031 in particular) has spawned a new investment vehicle--open tenancies in common. Tax law allows property owners to exchange into like-kind real property tax free, but finding suitable replacement property can be difficult. Real estate syndicators, recognizing a demand for ready-access replacement property, began offering undivided interests in large multi-million-dollar properties to individual investors exchanging out of smaller properties. Those offerings were the first open tenancies in common. Open tenancies in common are distinguished from traditional or close tenancies in common by the size of coowned property, the coowners' mutual lack of acquaintance, and the separation of ownership and management of the property. Open tenancies in common raise issues from several disciplines, including tax; property, business, contract, and, securities law; and economics. To provide the tax benefits investors seek, interests in open tenancies in common must be real property for federal tax purposes. That implicates the tax entity classification rules, which the IRS has addressed with published guidance. Numerous investors coowning a single property raises property law issues, such as rights of possession, rights to revenue, obligations for expenses, and rights to partition. The coowners' lack of acquaintance and disparate background raise business law issues. For example, the coowners may wish to restrict transferability of interests, have governance agreements, and create standards for third-parties who manage the property. Finally, open tenancies in common raise economic concerns and appear to come within the jurisdiction of the securities laws. This Article introduces open tenancies in common to the academic literature, analyzes them, and recommends modifications to the IRS guidance based on property law, business law, and economic and tax theory. Brad Borden http://works.bepress.com/brad_borden/22 http://works.bepress.com/brad_borden/22 Thu, 30 Oct 2008 14:02:32 PDT Over the last several years, reverse exchanges have become a fixture of section 1031. A fluid economy and a strained financial industry send a reminder that safe guarding exchange proceeds in reverse exchanges is paramount. This Article reviews reverse exchange structures, both safe harbor and non-safe harbor, and describes how such transactions must be financed to satisfy tax law requirements and safe guard exchange proceeds. The Article is adapted, with permission, from Chapter 5 of Tax-Free Like-Kind Exchanges. Brad Borden http://works.bepress.com/brad_borden/21 http://works.bepress.com/brad_borden/21 Mon, 25 Aug 2008 16:06:42 PDT Tax law classifies business arrangements as one of three general structures: (1) disregarded arrangements, (2) tax partnerships, or (3) tax corporations. Since the enactment of the income tax in 1913, tax law has struggled unsuccessfully to develop a good model for classifying business arrangements. The current model's sole virtue is its simplicity, derived from formalistic, elective attributes. Its greatest shortcoming may be that it disregards the reasons parties form business arrangements and their use of economic items to reduce rent-seeking behavior and agency costs. That disregard often allows business participants to choose their tax classification and minimize their taxes, which erodes the tax base and shifts tax burdens to others but does not alter the parties' economic relationships. This Article rejects the current model and presents a classification model based on the economic theory of the firm. Economic theory aids classification in three respects. First, it helps explain why parties form business arrangements. Second, it views business arrangements as nexuses of contracts composed of various parties. That view helps identify the economic aspects of business arrangements and the economic rights of business participants, irrespective of legal form. Third, it demonstrates that residual risk (the right to the residual assets of a business) measures the economic interests parties have in business arrangements. In particular, residual risk helps distinguish arrangements that can trace income from its source to the owner of the source or from allocations to the beneficiaries of those allocations from those arrangements that cannot. That knowledge clarifies the appropriate tax regime for all arrangements and leads to the residual-risk model for classifying business arrangements. Brad Borden Taxation http://works.bepress.com/brad_borden/20 http://works.bepress.com/brad_borden/20 Mon, 11 Aug 2008 14:33:38 PDT Profits-only partnership interests grant service-providing partners an interest in the profits of a partnership but not its capital. Such interests are a proverbial double-edged sword: they create economic arrangements needed in business, but provide opportunities for inequitable tax reductions. Business participants make economic decisions to use profits-only partnership interests to reduce agency costs and appropriable rents. The current law, however, empowers business participants to form partnerships that are equivalent to employment arrangements and use profits-only partnership interests to obtain long-term capital gains. Thus, with no economic consequences, they convert ordinary income (taxed at up to thirty-five percent) to long-term capital gain (taxed at fifteen percent). Commentators and lawmakers generally propose partnership disaggregation to eliminate the inequity. Partnership disaggregation changes the character of income (from capital gain to ordinary income) as it flows from the partnership to service-providing partners. It may enhance equity, but it ignores the nature of tax partnerships, threatens the partnership tax regime, and has other negative side effects. The Article suggests that partnership disregard is a better way to address the inequity profits-only partnership interests cause. Partnership disregard uses economic concepts to identify the policy-relevant differences between tax partnerships and disregarded arrangements, such as employment arrangements, leases, and loans. Partnership disregard distinguishes arrangements that should qualify for partnership tax treatment and those that should not. It eliminates inequity while preserving the integrity of partnership tax regime and other areas of the law. Brad Borden Taxation-Federal Income