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January 5, 2015
Year in Review: The 2014 Tax Person of the Year

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It may be a year or two or several before Congress actually passes tax reform legislation, but the plan released in 2014 by recently retired House Ways and Means Committee Chair Dave Camp, R-Mich., will help set the stage for the next tax code overhaul.

The tax community's anticipation and ongoing reaction -- both good and bad -- to Camp's plan has earned him the designation of Tax Notes' 2014 Person of the Year.

Camp fell short on some of his hopes for tax reform, including his plan to release a reform bill and have his committee mark it up in 2013. He did not release his draft until February 2014 and formally introduced it as legislation in December 2014, and he never had the committee mark it up, but he is still widely commended for having the fortitude to put out details on how to lower rates and broaden the base.

Some observers have called Camp's overall effort a fool's errand, but he disagrees with that assessment. "I know that the sort of conventional wisdom was don't ever put details out there because it makes a target for everybody, but with getting several years ago the dynamic score in our House rules, I knew that we'd have an opportunity to write a bill that would show something positive -- not just the sum of the individual provisions, but show overall what it would mean," Camp said in a recent interview with Tax Analysts. "So that, I thought, was significant."

Camp often touts the Joint Committee on Taxation's estimate that the plan would increase GDP by up to 20 percent and create up to 1.8 million new jobs.

Dave Camp, Tax Notes' 2014 Tax Person of the Year (Tax Analysts/Derek Squires)The Tax Reform Act of 2014 (H.R. 1) would cut the top individual and corporate tax rates to 25 percent, repeal the individual and corporate alternative minimum taxes, and nearly double the standard deduction. Camp proposed to eliminate several itemized deductions and exclusions, including the state and local tax deduction and deductions for medical and moving expenses. He proposed limiting the popular deductions for mortgage interest and charitable contributions.

Camp's plan would move away from the current international tax system in favor of a 95 percent dividend exemption upon distribution of foreign earnings. He proposed instituting a one-time transition tax on all previously untaxed foreign earnings and profits and dedicating the revenue from the tax to infrastructure spending.

Although Camp said he achieved the policy goals he set for his reform plan and that he still stands by them, most observers say he failed to reduce the top individual rate to 25 percent because his plan included a 10 percent surtax -- or an effective 35 percent bracket -- on modified adjusted gross income for individuals earning more than $400,000 and joint filers earning more than $450,000.

Camp's bill was the culmination of three-plus years of Ways and Means Committee hearings, stakeholder meetings, bipartisan working groups, and Republican member meetings -- a group effort that Camp said improved the final product. Although the bill was never marked up before the Ways and Means Committee, or debated on the House floor, Camp said he believes he did everything he could to advance the reform effort.

While Camp acknowledged that some members of the House GOP leadership did not want tax reform, he said he remained optimistic throughout the process that once he released the plan, its growth effects would change doubters' minds. That did not happen, but Camp still says the bill serves as a positive example of what tax reform can accomplish.

"You've got to start somewhere," Camp said. "This is a detailed plan that really jumps the issue forward, and hopefully others will take it up in the coming years and we'll be able to see tax reform." Future reformers may make different trade-offs but the bill shows that "it can be done," he added.

However, for many special interest groups that saw some of their coveted tax incentives cut or curbed in Camp's plan, the bill serves as a warning. It has led to increased lobbying because some fear that future reformers will reuse pieces of the Camp plan. That could be taken as a sign of the plan's success.

Several congressional staffers from both parties and both chambers have said they still get requests from interest groups wanting to talk about specific provisions in the Camp plan -- something that is likely to continue as a new set of GOP leaders attempt to put together their own reform plans.

Camp and the Ways and Means Republican staff probably received the brunt of the feedback on the bill. "It was like waves crashing on a beach," Camp said, adding, "There was a new critical issue literally once a week, and groups would all come in on that issue."

Despite criticism of individual provisions in the bill, Camp contends that overall reaction has been positive and that outside analysts showed that his plan could generate more growth than even he expected. But he said there's room for future reformers to make changes, especially if they use the $700 billion in revenue the JCT estimated his bill could generate from macroeconomic effects.

"Not every decision that was made has to be exactly the same because there is some room with the growth item," Camp said. "Do you lower rates further? Do you have different policies? Do you put that for debt reduction? What do you do with that extra, those extra savings?"

While Camp expects congressional Republicans will continue his work in the 114th Congress and answer some of those questions, he is emphatic that what's really needed to advance reform is a detailed proposal from the Obama administration.

"We need to have a countervailing proposal from those who would do something differently -- a detailed one that gets scored -- so then you can actually have a meaningful dialogue about what trade-offs are made," Camp said.

Ways and Means Republicans, who still speak proudly of the tax reform plan and the committee's work on reform, have echoed Camp's calls for the administration to provide a more detailed proposal. But the committee members say they plan to continue the work on reform regardless of the level of engagement from the White House.

Rep. Paul Ryan, R-Wis., Camp's successor as Ways and Means Committee chair, has said he doesn't necessarily see Camp's bill as a starting point. Instead, he called it a "marker."

Indeed Camp's bill sets a high-water mark in the ongoing tax reform saga. Time will tell if Ryan and other would-be tax reformers can surpass it.


*****

William Alexander

William Alexander (Tax Analysts/Derek Squires)In 2014 a major figure in the corporate tax world decided to make a move. After 24 years at the Service, IRS Associate Chief Counsel (Corporate) William Alexander will leave his post in early 2015 to join Skadden, Arps, Slate, Meagher & Flom LLP.

The challenging work environment at the IRS -- characterized by heightened scrutiny and strained resources -- has led many to depart for the private sector, but Alexander's decision came as a surprise to some of his closest colleagues who were convinced that he would finish out his career at the agency.

Alexander's combination of technical mastery and a practical appreciation of business realities enabled him to have a significant impact on the corporate tax world during the 13 years that he headed up the office. His success likely stems from his aptitude as an executive. His accessible and respectful management style pairs well with his ability to make timely decisions on difficult issues. Historically, corporate chief counsel attorneys were regularly poached by law and accounting firms, but Alexander inspired a surprising level of loyalty in his staff -- more than half the attorneys under him have been there since he first took the reins.

Some have criticized Alexander for being overly accommodating of taxpayers. His controversial practice of permitting taxpayers to rescind transactions completed in the same tax year was stopped by Treasury. His rulings on transactions involving a recapitalization into control were scrutinized and then suspended. With his departure, many wonder if the IRS will revert to its more traditional conservative posture on subchapter C issues.

Alexander embraced his public role more than his counterparts in other chief counsel offices, and practitioners regularly praised his inclination to be forthcoming. While a successor has yet to be named, there is speculation that his departure signals the end of an era -- one that practitioners will likely miss.


*****

Michael Danilack

Michael Danilack (Photo by Derek Squires)The July 2014 departure of Deputy Commissioner (International) Michael Danilack from the IRS's Large Business and International Division precipitated the resignations of several high-level international LB&I executives, causing some to worry that the agency's recent strategy for prioritizing international enforcement efforts may be short-lived.

Although Danilack's effect on the organization over his 4 1/2 years of service was far-reaching, the achievement that will likely define his legacy is the creation of the international matrix, which signaled a major shift in audit focus. Designed to mirror taxpayer planning and approach issues like a taxpayer would, the international matrix has been hailed as strategic, coherent, and practical. It identifies the IRS's enforcement priorities across eight business and eight individual risk areas and serves as a framework for revenue agents, some of whom had it emblazoned on their mouse pads for easy reference.

Danilack appreciated the ramifications of multinationals shifting their income to low-tax jurisdictions, and his enforcement model focused on high-risk, impactful international compliance issues, as opposed to the code section violations targeted by traditional audits. It remains to be seen whether the foundational changes that Danilack initiated will be long-lasting.

Known for his work ethic, Danilack was regularly in the office at least 12 hours a day. He was known as a change-agent, unafraid to butt up against existing IRS culture and traditional lines of authority. That characteristic is likely what led to his departure. But the United States is competing for tax base, and many practitioners consider Danilack's departure a loss.


*****

Sen. Carl Levin

Carl Levin (Tax Analysts/Derek Squires)Recently retired Sen. Carl Levin, D-Mich., who chaired the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI), is proud of his work on tax issues.

However, Levin is dissatisfied by the tax policy debate, which has "missed the point of distinguishing between tax loopholes that have an economic purpose, and those that have none, except to satisfy certain narrow special interests' . . . effort to avoid paying taxes," he said.

"He's been a pioneer in spotlighting some very major loopholes," said the senator's brother, Sander M. Levin, D-Mich., ranking minority member of the House Ways and Means Committee. Rep. Levin also praised his brother's scrutiny of U.S. multinationals' tax avoidance practices.

Sen. Levin said he hoped the PSI's bipartisan tradition, with majority and minority staffs collaborating closely, will allow his work to continue under a Republican Senate majority.

The PSI minority has significant powers "that no other minority that I know of on any other committee has," such as initiating an inquiry in the name of the subcommittee, Sen. Levin said. Those inquiries lack the subpoena power of a PSI chair's investigation, but still pack a punch, he added.

"We support each others' investigations. The tradition is that one in four investigations typically is at the request of the minority," Sen. Levin said. He added that additional revenue collected from closing corporate loopholes could be used for government functions, not reducing taxes, but he noted that corporate revenues are way down at a time when profits are way up.

Sen. Levin's aggressive pursuit of corporations garnered grumblings that he was running a miniature Finance Committee, but Rep. Levin said those critics should focus on the quality of his brother's effort to tackle major tax policy problems.

"And he's done so on behalf of taxpayers and citizens of this country, [with the] thinking that it undermines confidence in a tax code, and in government, when some people can easily do an end run while, for most taxpayers, they have to go right through the middle," said Rep. Levin.


*****

Brenda Zent

Brenda ZentFrom spring onward, inversions grabbed headlines, as U.S. companies sought relief from their domestic tax burden by merging with foreign competitors and re-domiciling abroad. On the heels of Treasury Secretary Jacob Lew acknowledging inversions as a threat to the U.S. tax base, Treasury issued one of the most newsworthy pieces of guidance of 2014, Notice 2014-52, 2014-42 IRB 712, which explains the government's intent to issue regulations reducing the benefits of corporate inversions. Brenda Zent, taxation specialist, Treasury Office of International Tax Counsel, played a key role in the development and release of the notice.

With Congress unable to agree on how to address the issue and the administration not content in waiting, Zent considered a wide range of actions to stanch the flow of inversions. The notice is complex and cites code sections for its authority, including sections 304, 367, 956, 7701, and 7874, as it attempts to limit the ability of U.S. companies to invert as well as hinder inverted companies' ability to repatriate offshore earnings without facing U.S. tax. Zent has sat on numerous panels and webinars since the issuance of the notice to explain it and its rationale to taxpayers and practitioners.

Zent has served as Treasury's taxation specialist for over four years, during which time she has focused on cross-border taxation guidance. Before joining Treasury, she worked as a tax managing director in the corporate group of KPMG LLP's Washington National Tax practice, where she specialized in cross-border taxation issues. A CPA, Zent earned a degree in accounting from the University of North Dakota and a master's in business taxation from the University of Minnesota.


*****

Stephen E. Shay

Stephen E. Shay (Tax Analysts/Derek Squires)Harvard Law School professor Stephen E. Shay played his own outsized role in steering the conversation on inversions. Two weeks after Lew publicly claimed on a CNBC interview that the administration could do nothing to curb inversions, even under the more obscure provisions of the tax code, Shay urged action under the authority of current law. In a July article that first appeared in Tax Notes (Tax Notes, July 28, 2014, p. 473) and was later referenced by mainstream outlets, including The Wall Street Journal, The New York Times, and Reuters, Shay said Treasury could limit inversions by limiting tax-deductible interest deductions and protecting deferred U.S. taxation on controlled foreign corporation earnings.

Shay's discourse became a focal point for practitioner debate surrounding inversion guidance. Although his proposals were not fully adopted by Treasury in Notice 2014-52, which failed to address earnings stripping, Treasury has hinted that further guidance may be coming that will limit interest deductions through a reclassification of debt as equity under section 385, as Shay suggested, or through stricter threshold limits on interest deductions under section 163(j). Shay has argued that until the United States addresses earnings stripping, a primary motivator for inversions will remain.

Between previous stints at Treasury, first with the Office of International Tax Counsel and then as deputy assistant secretary for international tax affairs, Shay was a partner with Ropes & Gray LLP. He graduated from Wesleyan University and received his JD and MBA from Columbia University.


*****

Ian Read

Ian Read (AP Photo/Pfizer Inc., Neil Selkirk)Corporate inversions emerged as a major national tax issue in 2014 and Pfizer Inc.'s CEO, Ian Read, became the face of the transactions.

Pfizer's search for an overseas restructuring partner was fruitless in 2014, but not for lack of effort. The company courted at least two possible targets. Read explained to reporters on a conference call in July that "there's no substantial advantage to being a U.S. company, to doing business in the U.S. We are at a tremendous competitive disadvantage."

Pfizer was rebuffed by British pharmaceutical company AstraZeneca PLC in May and it turned to talks with Irish company Actavis PLC. As Read made clear, tax is a motivation for Pfizer's overtures to foreign companies. However, Pfizer faces losing patent protection on some of its more profitable drugs and inverting would likely bolster its future finances by adding products to its portfolio.

In October, after Treasury released Notice 2014-52, Read said that Pfizer remained undeterred. "We still believe on a case-by-case basis there is meaningful value to be had from inversions and probably the most significant is the liberation of a substantial proportion of your future cash flows outside of the U.S. tax system into a territorial system," he said.

British-born and educated, but American now, Read has been with Pfizer since 1978. He performed a number of roles in Pfizer's Latin American operations and U.S. headquarters before becoming CEO in 2010.


*****

Kathryn Keneally

Kathryn KeneallyWhen Credit Suisse settled with the Justice Department for $2.6 billion, that became the largest payment in a tax case in the department's history; that was largely because of Kathryn Keneally's leadership and focus on offshore enforcement.

Keneally began her time as assistant attorney general for the Justice Department Tax Division in 2012 and left on June 5, 2014. While she was at the Justice Department, government officials and practitioners praised her for her accomplishments in offshore enforcement, tax shelters, and identity theft.

The Credit Suisse settlement was one of many under Keneally's leadership. Other successes include a guilty plea, marking the first time a foreign bank had been indicted on tax charges, and a $74 million payment from Switzerland's oldest private bank, Wegelin & Co., which then ceased operations following the guilty plea. Another bank, Bank Frey & Co. AG, closed its doors after run-ins with Keneally's group.

Regarding offshore enforcement and tax shelters, the Justice Department announced in 2013 a Swiss bank program that provides Swiss banks an opportunity to come forward, cooperate, disclose their illegal conduct, and be eligible for non-prosecution agreements -- or in egregious cases, deferred prosecution agreements. Keneally cited the program's success while she was in office.

Keneally was not only a pioneer in offshore enforcement but also a leader in diversity. She was the seventh woman to serve as the head of the Tax Division, and practitioners cited her getting younger lawyers involved in the Justice Department's courtesy calls with the American Bar Association Section of Taxation as an example of her leadership.

After leaving the Justice Department, Keneally returned to her home in New York and, in October, she joined DLA Piper as a partner in the firm's New York office.

Before joining the government, Keneally was a partner with Fulbright & Jaworski LLP. She has also clerked for Edward Neaher, U.S. district judge for the Eastern District of New York. She received her LLM in taxation from New York University School of Law and her JD from Fordham University School of Law.


*****

Martin R. Press

Martin R. PressMartin R. Press of Gunster, Yoakley & Stewart PA spent 2014 representing taxpayers in three of the year's more talked about tax cases. They included two taxpayer-favorable opinions, one of which came from the Supreme Court, and a loss on a foreign bank account report case.

The two taxpayer-favorable opinions, United States v. Clarke, 134 S. Ct. 2361 (2014), and Dynamo Holdings LP v. Commissioner, 143 T.C. No. 9, have wide-reaching holdings. Because of Press's advocacy, taxpayers now have a standard from the Supreme Court for requesting an evidentiary hearing for allegations of summons issued for improper purpose and the ability to use predictive coding in Tax Court discovery.

In April the Supreme Court heard arguments in Clarke, which sought to determine when it is appropriate to hold an evidentiary hearing based on a claim that a summons was issued for an improper purpose.

The Clarke Court, in a popular decision, held that taxpayers may get an evidentiary hearing in a summons enforcement case if they can provide specific -- even if only circumstantial -- evidence "plausibly raising an inference of bad faith" on the part of the IRS in issuing the summons, although "naked allegations of improper purpose are not enough."

In a Tax Court case arising out of the same litigation, Judge Ronald L. Buch held in Dynamo Holdings that taxpayers may use predictive coding to respond to IRS document requests. Predictive coding is a form of computer-assisted document review. The parties generally select a set of terms to help a computer program recognize patterns of responsiveness, and then the responding party will review the responsive documents for privileged information and relevance.

Many practitioners noted that the Dynamo Holdings decision should decrease the costs of litigation for taxpayers in a move that is welcomed by practitioners.

Not all of Press's litigation resulted in taxpayer-favorable decisions, however. In May a jury in the U.S. District Court for the Southern District of Florida in United States v. Zwerner, No. 1:13-cv-22082, upheld a $2.2 million penalty against Carl R. Zwerner of Miami for willful failure to file foreign bank account reports representing 50 percent of his account balance at the time of the violations in each of three consecutive years.

Many commentators have said that the jury instructions in Zwerner were wrong and created a lower standard of willfulness than should have been required.

Press said the second phase of the Zwerner trial would have addressed whether the penalty was excessive under the Eighth Amendment. But two days before the second phase commenced, Press got a call from the Justice Department with a settlement offer to concede the penalty for one of the years at issue. Zwerner, 87, agreed to settle to avoid being in litigation for the rest of his life, Press said.

Keneally warned taxpayers to use the facts of Zwerner to determine whether they acted with willful behavior before joining the IRS's streamlined compliance program.


*****

Jonathan H. Adler and Michael F. Cannon

Jonathan H. AdlerCritics of the Affordable Care Act will have another opportunity to discredit and possibly cripple President Obama's signature legislative achievement in 2015 after the Supreme Court announced that it would grant certiorari to the petitioners in King v. Burwell, 759 F.3d 358 (4th Cir. 2014).

The King petitioners are challenging the section 36B regs that provide premium tax credits to eligible individuals who purchase health insurance through a state or federal exchange. The petitioners argue that the credits are available only to individuals who have purchased health insurance through state-established exchanges.

Michael F. CannonLaw professor Jonathan H. Adler and Michael F. Cannon of the Cato Institute have been called the "founding fathers" of the section 36B litigation after coauthoring a law review article calling attention to section 36B and the accompanying regs. The article, "Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA," 23 Health Matrix 119 (2013), argues that the IRS lacks legal authority to extend the section 36B premium tax credits to individuals who purchase health insurance from federal exchanges.

While the article did not predate all litigation on the final section 36B regs, Adler and Cannon have remained active in the section 36B litigation by filing amicus briefs on behalf of the regs' challengers in King and Halbig v. Burwell, No. 14-5018 (D.C. Cir. 2014) (vacated). Adler and Cannon frequently speak on the legal issues in the section 36B litigation, and their analysis can be found in numerous publications.

The ACA will fundamentally change in 2015 if the Supreme Court agrees with the arguments presented by Adler and Cannon and sides with the King petitioners.

Adler is the Johan Verheij Memorial Professor of Law at the Case Western University School of Law, where he teaches courses in environmental, administrative, and constitutional law. He also serves as the director of the school's Center for Business Law and Regulation.

Adler previously worked for the Competitive Enterprise Institute and clerked for Judge David B. Sentelle of the U.S. Court of Appeals for the District of Columbia Circuit. He received his BA from Yale University and JD from George Mason University School of Law.

Cannon is the director of health policy studies at Cato and previously served as a domestic policy analyst for the U.S. Senate Republican Policy Committee. He received his BA from the University of Virginia, and an MA in economics and a JM in law and economics from George Mason University.

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