Credit Suisse: Justice Department protects powerful, seeks to hide it by prosecuting less powerful

It is surely unconstitutional to make a decision to prosecute party B on the basis of the fact that it is politically undesirable to prosecute party A but politically necessary to prosecute somebody.

That's what seems to have happened in Credit Suisse's case. The prosecutors decided to go after a relatively small foreign bank while allowing major U.S. banks and major U.S. tax evaders to go untouched. That is no way to protect the U.S. tax system.

Was Credit Suisse actually legally guilty of a crime? We will never know; the "guilty plea" is nothing but a business decision resulting from a highly asymmetric negotiation. Presumably there is some law under which a non-U.S. entity has a duty to protect the U.S. tax system; maybe the law is constitutional; maybe Credit Suisse violated it. In any case, it has agreed to say that it did so.

The Credit Suisse prosecution is a laughably transparent attempt to mask the Justice Department's complete refusal to prosecute powerful American individuals and institutions for their various crimes, ranging from tax crimes through securities and mortgage fraud and lying to Congress. Attorney General Holder is quoted as saying that "no financial institution, no matter its size or global reach, is above the law." That is obvious nonsense, and will be until U.S. individuals and institutions with actual U.S. clout are prosecuted.

That clout must include "revolving door" clout. Not only must it prosecute major U.S. financial institutions; if wants to regain any credibility, the Department of Justice must prosecute defendants that employ former high-ranking members of the government.

Of course, it would be very hard to prove how the Justice Department decided which institution to prosecute. In any case, in agreeing to plead "guilty" Credit Suisse has given up its opportunity to argue the question. To portray that as a victory for the rule of law is absurd.

Warning for investors in film tax credits

Film tax credits are definitely big business. I doubt that they are very helpful to economies of the states that provide them, but they do probably help some otherwise commercially nonviable films get made.

Here's the warning: when investing in film tax credits, whether directly or by accepting them as security for loans, make sure your film and its business structure actually qualify. If the credit is disqualified because of an audit or other failure of paperwork, the taxpayer who received it will be the one to repay it.

There is no ambiguity in Bitcoin taxation.

Many people would like there to be ambiguity about Bitcoin taxation. That would be quite convenient, as many people would not like to pay taxes on their income from trading in Bitcoins. However, this is just one of the many subjects on which the tax law is already quite clear. If the IRS doesn't mess up enforcement (as it has done with equity carried interests), it has all the tools it needs.

Under U.S. tax law, most taxpayers have the U.S. dollar as their "functional currency." (It is possible to have a different functional currency, in which case that currency should be substituted for each mention of the "dollar" in this post.) If a taxpayer buys an asset for dollars, and later sells the asset for more or fewer dollars than it paid, it will have a gain or loss, respectively. It doesn't matter what the asset is: it can be as solid as an apartment building or as abstract as a fractional interest in the royalty stream from a musical recording. In fact, all currencies other than the taxpayer's functional currencies are such assets. Thus, it seems clear that a Bitcoin is such an asset.

It can be a bit tougher to track a Bitcoin than some other types of property. For example, if you sell stock, your broker will normally provide you (and the government) with a statement disclosing what you have done. Many, although far from all, other types of income, are subject to information reporting requirements. Even when no other party is required to report a transaction to the government, the taxpayer participating in the transaction is expected to report it. In an audit, the IRS will look at bank and other records to determine whether the taxpayer has failed to report any income. It does not seem any harder to find unreported income from selling Bitcoins than from selling, say, antique baseball cards.

That leaves only a "Hail Mary" argument against taxation of Bitcoin profits: that the Bitcoin is in fact the taxpayer's functional currency. That probably creates a definitional issue: the tax definition of "currency" probably excludes non-government issued assets. Furthermore, in the current state of the world economy, it is difficult to see how a taxpayer could carry on enough activities using Bitcoins to make them an actual functional currency. More to the point, the IRS shouldn't care: if your functional currency could somehow be Bitcoins you no longer would have taxable gain or loss when you disposed of Bitcoins, but you would have taxable gain or loss each time you disposed of dollars.

Another de facto tax haven eliminated

It appears that the nontaxable London pied a terre favored by many international oligarchs may no longer be available for tax-free wealth accumulation: nonresidents will pay capital gains tax on their U.K. real estate capital gains.

That certainly seems to be a reasonable quid pro quo for the benefits nonresident property owners enjoy when they acquire property one of the world's more desirable real estate markets. The opportunity to park immense amounts of wealth where it will be protected by a highly stable and nonconfiscatory government is certainly worth the small price of paying tax on increases in value; the fact that it is pleasant and convenient to visit adds further value.

The law change is an indication that the U.K. has realized it has some pricing power. There just aren't too many suitable places for the hugely rich to buy hugely expensive property.

Will this development drive the U.K. real estate market down? Probably not. The United States has had a similar regime in place for decades. California's recent "millionaire tax" tax increase may also be instructive: California raised its tax on very large incomes without experiencing a notable exodus of either wealthy taxpayers or businesses. Extremely desirable places to live can, and should, price themselves in accordance with demand.

Proposed 501(c)(4) "dark money" regulations fail to regulate.

Under the magnificently permissive regulations currently in effect, organizations formed and operated for political purposes have been enjoying the benefits of tax-exempt status under Internal Revenue Code section 501(c)(4). Notwithstanding the statutory requirement that the organizations operate "exclusively" for nonpolitical purposes, the Treasury decided that operating "primarily" for nonpolitical purposes means the same thing. That has given 501(c)(4) organizations carte blanche to devote 49.9% of their funds to the most blatantly political activities while remaining tax-exempt.

Now, the Treasury has proposed a new 501(c)(4) regulation to clarify the situation. Does the regulation address the "primarily" issue? No. The Treasury states only that it is "studying" that issue. Rather, the proposed regulation creates a specific set of definitions for what constitutes prohibited "candidate-related political activity." Regrettably, that definition excludes quite a lot of things any normal observer would consider candidate-related political activity. The result: an ill-intentioned 501(c)(4) organization can freely devote 49.9% of its funds to anything it wants, and can spend the other 50.1% on things most normal human beings would consider impermissible political activity.

Just to be clear: an organization that used to be limited to spending 49.9% of its money on evil will now be able to spend 100% of its money on evil. Nice job, Treasury.

I have a sense that the definitions in the regulations may be slanted in favor of the disguised-electioneering type of 501(c)(4) organization and against the actual public benefit type. I don't know enough about how those groups spend their money to have a credible opinion, but it is very interesting that a generally progressive-leaning group is objecting that the regulation could affect such nonpartisan activities as voter registration drives.

This is what the statute says an organization must be to qualify as a 501(c)(4) organization: "operated exclusively for the promotion of social welfare." The regulation should be short and easy to write.

Tax exemption for parsonage allowance held unconstitutional

Get ready for some entertainment. A U.S. District Court in Wisconsin has held, in Freedom From Religion Foundation, Inc. et al. v. Lew et al., that the tax exemption for parsonage allowances religious entities provide to their clergy is unconstitutional.

Parsonage benefits come in two flavors: actual housing provided to clergy and cash allowances for housing. The Freedom From Religion Foundation sued to have both types held taxable. They lost on the first, as the court found it to be comparable to housing "provided for the convenience of the employer," which is tax-free even for non-religious employees. That makes some sense: the parsonage allowance certainly has its historical roots in the days when a clergyman was expected to live on church premises in order to be accessible to the congregation.

On the cash allowance issue, however, the Freedom From Religion Foundation won. The court pointed out that the allowance was paid in cash and was no different from cash paid to any employee that the employee used to obtain housing. Furthermore, a clergyman who used it to buy a house would benefit both from appreciation of the house and from the federal tax deduction for home mortgage interest. Thus, the exemption was a clear and unconstitutional subsidy to religious organizations.

Commentary: it is difficult to imagine a clearer case of an unconstitutional subsidy to religion. Nevertheless it is surprising that the Freedom From Religion Foundation won. The courts, on average, are highly reluctant to disturb the prerogatives of mainstream religion. Usually when a court is faced with an obvious result that it doesn't like, it finds a procedural way out. The biggest surprise in the case, and the most likely ground for reversal, is that the court held that the plaintiffs had standing to sue.

The entertainment: this is exactly the type of decision that drives some television personalities wild. Furthermore, it is not purely a figment of their imagination: this is a genuine reduction in the advantages enjoyed by organized religion. Do not expect a moderate reaction.

Man bites dog: prosecutor punished (slightly) for misconduct

It is big news that in the case of In re Anderson, not only was the innocent defendant released after serving 25 years in prison but the prosecutor whose misconduct caused the conviction was punished. Not much of a punishment: 10 days in prison. Nevertheless, it's something.

Here is a link to an interesting article reminding us that if this type of misconduct is not the rule, it's not the exception either. Punishment for the prosecutor, however, is astonishing: one source states that this is the first time ever that a prosecutor has been punished for conduct leading to a wrongful conviction, and while I am not in a position to check that, I have certainly never heard of it before. The fact is that prosecutors can do pretty much anything they want without repercussion.

Furthermore, even prosecutors who do not themselves commit misconduct benefit from the misconduct of other prosecutors. A defense attorney, in evaluating a plea deal, must take into account the possibility that the prosecutor will cheat and get away with it: for example, a subtle threat to a defense witness might be enough to cause that witness to refuse to testify, dramatically altering the outcome of the case. Even if the prosecutor personally would not make that threat, (a) defense counsel cannot be sure of that and (b) the witness may realize that he had better refuse to testify even if the threat is unspoken. Thus, without ever personally doing anything wrong, the prosecutor derives an overwhelming negotiating advantage.

Is this a tax issue? Absolutely. In fact, it's more of an issue in a tax case than in a murder case such as Anderson. In a murder case there is often hard evidence, such as physical objects and DNA evidence, that can be used to prove innocence once they are found. That is, there is a legitimate possibility of demonstrating both innocence and prosecutorial conduct based on physical and perceptual evidence. Also, when such items are hidden, it is normally fairly clear: either the prosecution has shown an item of physical evidence to the defense or it has not. In a tax case, normally involving circumstantial evidence obtained under pressure from witnesses who are at risk for being named as coconspirators and therefore must act to protect the prosecution, there is no similar possibility.