Smeal College of Business Taxation and Management Decisions: ACCTG 550Pennsylvania State University Professor HuddartJudicial Doctrines and Tax Law Uncertainty1. Framework for the course• multilateral approach• importance of implicit (or “hidden”) taxes• importance of non-tax costs2. Basic relationshipsTotal taxes = my taxes + your taxes + hidden taxesPlanner’s view of costs = Total taxes + total non-tax costs3. Vocabulary3.1 Tax clienteles• Tax clienteles arise because of tax-favored assets and different tax rates.• Because assets bear different amounts of implicit and explicit tax andbecause marginal tax rates differ across taxpayers, certain taxpayers findit tax-advantageous to own particular assets. The taxpayers who standto benefit most from ownership of a particular class of assets are calledthe tax clientele for that asset.• The individuals attracted to holding a particular asset because of its taxcharacteristics and their tax situation form the clientele for that asset.• Taxpayers who face high marginal rates of explicit tax are the naturalclientele for assets that bear low explicit taxes.• Taxpayers who face low marginal rates of explicit tax are the naturalclientele for assets that bear high explicit taxes.cSteven Huddart, 1995–2005. All rights reserved. www.smeal.psu.edu/faculty/huddartACCTG 550 Doctrines and Uncertainty3.2 Tax arbitrage• Tax arbitrage transactions involve tax advantages, but no other financialconsequences for the taxpayer• The opportunity to reduce tax payments by buying one kind of assetand shorting another, differently-taxed asset.• For example, low tax-rate taxpayers effect tax arbitrage when they issueor sell short tax-favored assets and buy assets that are highly taxed.3.3 Explicit taxes• Checks written to the taxing authority.3.4 Implicit taxes• “Hidden” taxes paid to third parties as compensation for the right tobenefit from ownership of a tax-favored asset4. Tax planning strategies• Tax reduction can be achieved by exploiting differences in tax ratesacross– time– taxpayers–types of income• The mechanisms for doing this fall into three categories– converting income from one type to another– shifting income from one pocket to another– shifting income from one time period to anotherPage 2Doctrines and Uncertainty ACCTG 5505. Tax authority responses to tax planning• When the taxing authority decides to curtail a particular tax strategy,it has a number of methods of attack at its disposal. Specific instancesof these methods are– general anti-avoidance provisions (e.g., §482)– sham transaction doctrine (or substance over form)– business purpose doctrine–specific rule-making (e.g., thin capitalization rules that limit theamount of debt a corporation may issue)6. U.S. Legislative process• Ways and Means and Finance are powerful committees that draftlegislation.• The role of the conference committee is to iron out the differences in theHouse and Senate versions of the bill.• After passing through the conference committee, the revised bill is sentback to the House and Senate for another vote.• The president’s decision to veto a bill can be overturned by a2/3pluralityof the votes in both the Senate and the House.Page 3ACCTG 550 Doctrines and UncertaintyHOUSESENATEWAYS AND MEANSFINANCECONFERENCEPRESIDENTDIESFigure 1. This figure summarizes the legislative process for U.S.federal tax law.Page