Related parties and the Xilinx case

The recent Xilinx case says:

“Purpose is paramount. The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer.”

On the surface, parity between deals involving related parties and deals involving unrelated parties can be achieved by ignoring the relationship.  That line of thinking would lead to the repeal the related party sales rules, because “If Dad cannot deduct his loss on the sale of closely held stock to Son, Dad does not have parity with an independent taxpayer.” But that repeal would not make sense.  Neither does that Xilinx result.

Whatever the Government’s regulations or litigating position may say, a low-taxed subsidiary is not in the position of a contract manufacturer in a world full of contract manufacturers.



Lists of ways to fix the Federal income tax

People know already how to fix the income tax.  For instance, an unofficial list of loopholes and fixes appears at  A broader list, a compilation of tax expenditures (not all of which need fixing) by the Joint Committee on Taxation of the U.S. Congress, appears at  There is plenty of tax learning to choose from if citizens want a better income tax.

VAT and worldwide unitary

A Value Added Tax avoids some problems of the income tax.  For instance, the income tax often can’t locate the income of a cross-border corporation (multinational enterprise).  That snipe hunt now requires folks to use the arm’s-length method of sourcing income.  That method was a joke, the last time I looked, but this useful option shows up in The Shelf Project :  “Tax the global income of all companies that do business in the United States on a consolidated basis with income allocated based upon sales, employment or other real world drivers, rather than relying upon transfer pricing regimes.”

If that option, a worldwide unitary income tax, makes sense but seems remote, a fallback is available: a Value Added Tax.  A VAT seems a little like a worldwide unitary income tax that uses sales as the sole factor for income allocation.

The VAT uses sales as its base;  single-factor sales unitary uses corporate income.   Using income for a base may seem fairer, but giveaways decimate the income tax base.  And multinationals’ income, if it can be found at all, is likely to be assigned to low-tax countries.  Compared to income, sales are easy to find and measure.

The VAT lacks progressivity, but U.S. corporate tax rates are not steeply progressive.

The VAT uses sales as a base, so it loses whatever advantage comes from two traditional unitary factors, property and payroll.  But those two factors may not be useful for unitary now.  Payroll and property are the targets in a race to the bottom among jurisdictions like my State, North Carolina, that give tax breaks to companies that bring them in – or maintain them.  Using them in the unitary method cuts against what jurisdictions want.  Moreover, using a property factor requires people to find intangibles and measure them, which puts us back in the soup.

Arguments against a single-factor sales method appear at

Regressivity and Federal Taxes

A Value Added Tax can be regressive, so it needs to be combined with progressive measures.

The Federal income tax is supposed to be progressive, and often it is.  But it has been often hijacked by the special interests to the point that it’s often palpably regressive.  It treats income that hedge fund guys earn for the work of managing investments as low-taxed capital gain and not high-taxed ordinary income.  The Senate can’t summon the will to call that income by its right name.

This issue is easy; see  And the Government needs the money.

Tax sodas? Or, don't let them eat cake. has this:

“Mayor Nutter [of Philadelphia] wants to treat the city’s weight and wallet problems in his 2010-11 budget with the same remedy: the nation’s highest tax on all sweetened beverages including soda, energy drinks, ice tea, even chocolate milk.  . . .

“The tax rate would be 2 cents per ounce, 40 cents on a 20-ounce bottle of soda. The levy would cover fountain-drink syrups and powders, based on the number of liquid ounces they produce. Diet drinks without added sugar and baby formula would be excluded.

“City officials said they could raise $77 million a year.”


I’m quick to say let’s tax sodas. And donuts and candy bars. (A friend says I make Marie Antoinette look compassionate: “Don’t let them eat cake.”)

A soda tax would be regressive, but maybe not so regressive as the payroll tax.

Diet sodas are trickier. I have a hunch that it’s not nice to fool Mother Nature, and that diet sodas, like margarine with its transfats, will turn out to be bad for you. And “some studies suggest that drinking soda of any type leads to obesity and other health problems.”

Setting up vending machines, some of which sell not just sweet and diet sodas but also water, to have two different prices, opponents will say, is just more than they can handle.  Sometimes I can’t get my computer to work, but I don’t think that programming task is beyond corporate America.

But I’m nervous about caffeinated cola drinks and that Tea Party in Boston Harbour, as we might still spell it if the British hadn’t overtaxed. Was it just the high-handedness of the British, or was there some problem with folks needing caffeine?

Chairman Rangel

Mr. Rangel is no paragon, and he should have acted and known better, but he was straight enough, when he became ranking Democrat and then Chairman of the Committee on Ways and Means, to keep at the top of the Committee staff two of the ablest and most dedicated public servants I knew when I worked on Capitol Hill, Janice Mays and John Buckley.

Massachusetts Legislative Hearing on a Marijuana Tax

The joint Judiciary Committee of the Commonwealth of Massachusetts let me speak March 2, 2010 at its hearing on S1801, An Act to Tax and Regulate the Cannabis Industry, in the Statehouse in Boston.  Chairman Eugene O’Flaherty and the Committee were respectful to all.

Here’s what I said, more or less:

Mr. Chairman and Members of the Committee,

Thank you for your patience.  My name is Pat Oglesby.  I’m a lawyer and founder of a nonprofit organization, the Center for the Examination of New Taxes, based in North Carolina.  On an airplane next to someone who talks too much, who won’t shut up, mentioning our website,,  is a . . . conversation . . . stopper.

Tax marijuana?  Or let criminals get richer?  I’m not arguing legalization, but the power to tax is the power to discourage, and if you are mad at marijuana, you can tax the heck out of it if you start with S 1801 and consider ten tighteners.

S 1801 does many things right:  here are three.

  1. Its tax starts high, with extra tax on potency.   I’m not advocating cheaper marijuana.  John Prine sang about the price:  “You may see me tonight with an illegal smile.  It don’t cost very much, but it lasts a long while.”  If you permit pot puffers to partake in peace, they’ll pay plenty.
  2. It does not exempt medical marijuana from tax.  We can treat marijuana like Penicillin or like Pabst Blue Ribbon, but not like both, without a lot of fussing [about who’s sick and who’s faking].
  3. The bill allows changes in the tax rate so as to fight bootlegging.  The alcohol bootlegger had the dignified image during Prohibition of mighty, respected kingpin.  Now he’s a toothless backwoodsman sneaking around in the dark.  Repeal of marijuana Prohibition can take away the drug lords’ mystique along with their money.

Ten possible tighteners would make the tax more bulletproof.

  1. Index for inflation.
  2. Add an alternative minimum tax based on retail price, as Europe does with tobacco.
  3. Start small with a pilot program in an eager City or Town, with all revenue coming to the
  4. Auction off licenses for producers and distributors.
  5. Don’t worry about protecting hemp.
  6. Charge consumers for a license like a hunting license.  Maybe base the fee on income.
  7. Allow sale of only items that bootleggers can’t copy:  maybe in cigarette paper that’s hard to counterfeit, or with genetic markers like the big seed companies use.
  8. Limit the exemption for home grown.
  9. Delay the effective date until the Federal Government winks, as it has with medical marijuana.
  10. Add a sunset date.

Tax marijuana?  Or let criminals get richer?   Why not tax the heck of it?  Thank you.   God bless the Commonwealth of Massachusetts.