Recently Introduced Bill Provides Data Breach Insurance Tax Credit

—by Adam Koulish

H.R. 6032, 114th Cong. (2016) (as referred to H.R. Comm. on Ways and Means, Sept. 14, 2016).

Cybersecurity Framework FAQs Framework Basics, Nat’l Inst. of Standards and Tech. (last visited Sept. 25, 2016),

William H. Latham, Does Your Company’s Data Breach Insurance Coverage Measure Up?, Lexology (Jan. 21, 2016),

Abstract: A bill, H.R. 6032, the Data Breach Insurance Act, has recently been introduced to the House Ways and Means Committee. If passed, the bill would allow businesses to claim a tax credit for the purchase of qualified data breach insurance.


As data breaches or “hacks” of businesses happen at an increasing rate, the purchase of data breach insurance has become a necessity for businesses of all sizes. In an effort to lessen the burden and incentivize such a purchase, a bill was assigned to the House Committee on Ways and Means on September 14, 2016 that would amend the Internal Revenue Code of 1986 to provide a tax credit to businesses that purchase data breach insurance. H.R. 6032, the Data Breach Insurance Act, would provide a credit amount equal to 15 percent of a business’ aggregate premiums paid or incurred during the taxable year for qualified data breach insurance. Being a recently introduced bill, there is a high likelihood of it being amended before it even reaches the House floor. There is also a distinct possibility that the bill will not be passed.

For the purposes of this bill, qualified data breach insurance is “coverage provided by an insurance company for expenses or losses in connection with the theft, loss, disclosure, inaccessibility, or manipulation of data.” Typically, there are two main types of claims associated with data breach insurance coverage. There are third-party claims such as legal defense if sued by a customer whose data was exposed, and there are first-party claims such as the various IT and public relations responses needed to mitigate the damage of a breach. Ideally, a data breach insurance policy would cover both types.

A business wishing to receive this credit must have adopted the Framework for Improving Critical Infrastructure Cybersecurity (FICIC) as set forth by the National Institute of Standards and Technology or any similar standard prescribed by the Secretary of Homeland Security and the Secretary of Commerce. Simply put, the FICIC is voluntary guidance that helps businesses manage and reduce their cybersecurity risk. It also establishes common terms used in cybersecurity risk management to facilitate easier communication between entities inside and outside the business.

In claiming a credit for qualified data breach insurance, the charge for such insurance should be separately stated from other types of insurance in the contract or specified on a separate statement. Also, the charge for qualified data breach insurance should not be unreasonably large in comparison to the rest of the insurance contract. The premiums paid for this insurance will only qualify for the tax credit “if such premiums are paid or incurred in the ordinary course of the taxpayer’s trade or business.” Although since data breaches can happen to almost any business, this should be an easy requirement to satisfy. Lastly, in its current form, the bill provides for credits claimed in the five years after its passage.

Taxing the Human Body

—by Kelly Pare

Perez v. Comm’r, 144 T.C. No. 4 (2015)


Advances in modern medicine have brought new meaning to the idea of selling one’s body. Surrogacy arrangements, egg and sperm donations, and even black market kidney transactions are commonplace in today’s society. From a tax perspective, these types of commercial transactions are very interesting.


Perez v. Comm’r, a 2015 United States Tax Court case, seems to raise more questions than it answers about the tax treatment of income derived from egg donations.  Nichelle Perez contracted with Donor Source, a for-profit California company, to donate eggs. See Perez v. Comm’r, 144 T.C. No. 4 (2015). Nichelle received $20,000 in 2009 for the pain, suffering, time, and inconvenience that the egg donation caused her. Id. Donor Source sent Nichelle a 1099 in the amount of $20,000. Id. Instead of reporting this income on her tax return, Nichelle concluded that the money was excluded from gross income under section 104(a) of the Tax Code. I.R.C. 104(a) (2014) (excluding from gross income damages received on account of personal physical injuries or physical illness).

The tax court rejected Nichelle’s argument, reasoning that the payments, although in compensation for physical pain and suffering, arose out of a consensual contract between Nichelle and Donor Source and did not merit exclusion from gross income. See Perez v. Comm’r, 144 T.C. No. 4 (2015).  Consequently, Nichelle had to pay income tax on the money she received by Donor Source. The court was adamant in addressing only the particular issue and facts before it, and expressly stated what the case was not about.  The court refrained from deciding whether human eggs are capital assets, figuring out how to allocate basis in the human body, determining the holding period for human body parts, or deciding the character of the gain from the sale of human body parts. Id. at 9.

The decision in Perez is narrowly confined to the facts of the case and decided only the tax liability of the particular individual at issue.  Moreover, current law is ambiguous as to the tax treatment of transfers in human body parts and the IRS offers little guidance. See Lisa Milot, What Are We—Laborers, Factories, or Spare Parts? The Tax Treatment of Transfers of Human Body Materials, 67 Wash. & Lee L. Rev. 1053, 1053 (2010).  This lack of clarity surrounding the taxability of transfers in human body parts makes tax planning and compliance difficult. Id. at 1108. Given the increasing volume of these types of transactions, perhaps the time is ripe for Congress to legislate in this area.

Unfortunately, the questions left unanswered by the court in Perez are more thought provoking and interesting from a tax standpoint than the questions on which the court focused.  Do human body parts properties constitute capital assets?  Is your basis in your body zero, or does it adjust upward and downward?  If for example, you sell a kidney that you have stored outside your body for more than a year, can the proceeds of that sale be characterized as a capital gain?  At the very least, the unanswered questions posed by the court in Perez would surely make for an interesting conversation at a bar, and the facts in Perez provide ideas for a great law school exam hypothetical.

For a more comprehensive overview of the taxation of transfers of human body parts and a framework of how these transactions should be taxed, see Lisa Milot, What Are We—Laborers, Factories, or Spare Parts? The Tax Treatment of Transfers of Human Body Materials, 67 Wash. & Lee L. Rev. 1053 (2010) and Bridget J. Crawford, Our Bodies, Our (Tax) Selves, 31 Va. Tax Rev. 695 (2012).

New York Court of Appeals: Hudson Valley Federal Credit Union v. New York State Department of Taxation and Finance

The issue before the Court of Appeals was whether mortgages issued by federal credit unions were subject to the New York state mortgage recording tax (“MRT”) under article 11 of the Tax Law.  The plaintiff, Hudson Valley Federal Credit Union (“Hudson Valley”), sought a declaratory judgment against the New York State Department of Taxation and Finance (“State”) claiming that Hudson Valley was not required to pay a MRT.  Hudson Valley offered two bases for its claim.  First, the Federal Credit Union Act (“FCUA”) exempts federal credit unions from state taxation.  Second, federal credit unions are instrumentalities of the United States and are immune from state taxation.  The supreme court granted the State’s motion to dismiss.  The appellate division affirmed.  The Court of Appeals held that federal credit unions are not exempt or immune.

First, the Court considered Hudson Valley’s claim that it was exempt from the MRT based on the language of the FCUA.  The Court considered the general rule that courts strictly construe federal tax exemptions of state taxing authority and decline to extend exemptions beyond express provisions.  The Court then looked to acts of Congress dealing with tax exemptions of mortgages.  It found that other acts explicitly stated that a tax on mortgages was exempt.  Here, the Court held that if Congress intended for mortgages to be included as an exemption, it would have explicitly included that language in the statute.  The absence of such language was held to show an intent that mortgages were not exempt from taxation.

The Court further stated that the term “property” does not include mortgages within its definition.  The Court looked at the legislative history of the FCUA, finding that when the act was created and amended, federal credit unions did not have the authority to issue mortgage loans.  Therefore, when federal credit unions were given the authority to issue mortgages, Congress would have amended the statute to include mortgages within the definition.

Hudson Valley further claimed that the MRT went against the purpose of the statute and will cause serious financial problems.  The Court rejected this argument and stated that the tax will not drive them out of business.  Further, the Court stated, Congress expanded the powers of credit unions so that they can offer more services and serve a larger area.  Contrary to Hudson Valley’s implication, the Court found that there has been growth in the number of federal credit unions rather than a decrease.

The Court also dismissed Hudson Valley’s second main claim that it is a federal instrumentality entitled to exemption because it is so closely connected to the government that they cannot be viewed as separate entities.  The Court rejected this argument by stating that the credit unions are private associations chartered under federal law that are wholly-owned and managed by their members.  The unions elect the board members and have a significant amount of autonomy in running the union.  The Court held that the credit union was not a federal instrumentality entitled to exemption.

The dissent rejected the majority’s interpretation of the FCUA statute, stating that the language of the statute provides federal credit unions with an exemption from all taxes except in two instances: real property and personal property.  In prior cases, the Court had determined that the MRT was an excise tax on the privilege of transferring title.   Therefore, the federal credit unions would be exempt from paying the MRT because they do not fall within the real or personal property exception.  The dissent examined case law, finding that “all taxation” meant “all direct taxation.”  Therefore, the dissent concluded, the credit union was exempt.

The dissent stated that, in examining the statute, if Congress had included mortgages, it would have created a third exception, rather than the two that are explicitly stated.  Since Congress did not include this term, the majority’s reasoning inferred an additional exception, which was not within the Court’s authority.  The dissent would find that Hudson Valley is required to pay the tax under the statute because the MRT does not fall under the real or personal property exception.

20 N.Y.3d 1, 980 N.E.2d 473, 956 N.Y.S.2d 425 (2012)

 View full decision on Westlaw

Note: Death and Taxes: (Over?)Reaction to Section 1706 of the Tax Reform Act

“If you’re reading this, you’re no doubt asking yourself, ‘[w]hy did this have to happen?’”[1]  Indeed, many people across the country asked this very question after the events that took place on February 18, 2010.  At approximately 9:40 that morning, after setting fire to his home in North Austin, Texas, a man climbed into his Piper Cherokee PA-28 aircraft at Georgetown Municipal Airport.[2]  Just sixteen minutes later, that same plane crashed into an office building at 9430 Research Boulevard—seven miles from the state capitol.[3]  As the building burned and smoke plumed, details began to emerge.  One person missing.[4]  Twelve injured.[5]  The smoldering building housed the local office of the Internal Revenue Service (IRS).[6]  There also surfaced a name: Andrew Joseph Stack III.

In the hours following the crash, those investigating the situation discovered an online posting signed by “Joe Stack.”[7]  It quickly became clear that the events of that day were no accident.  Part suicide note and part manifesto, Stack’s online post railed against God and government, placing primary blame on the latter for devouring his savings and ruining his life.[8]  In particular, Stack cited a specific provision of federal tax law (Section 1706 of the Tax Reform Act of 1986), insisting that it had stripped him of his livelihood.[9]  Stack’s solution?  The closing lines of his online posting not only answered that question, but also offered a disturbing explanation for the events of that day: “[w]ell, Mr. Big Brother IRS man, let’s try something different; take my pound of flesh and sleep well.”[10]  In his final act, Stack had boarded his single-engine plane and targeted the group that he perceived as his greatest maligners: the IRS.

In the days, weeks, and months following February 18, 2010, Stack’s actions produced a wide range of reaction.  While his tactics drew everything from condemnation to commendation in the political realm, one of the more heated debates swirled around Stack’s harsh commentary on Section 1706.[11]  Stack viewed that provision as the origin of his financial woes.[12]  According to his colorful interpretation, Section 1706 declared him “a criminal and non-citizen slave,” stripping him of the freedom to decide how he would make a living.[13]  While most serious commentators provided a more muted framing of the situation than Stack himself, a surprising number of them agreed with Stack’s underlying premise that Section 1706 placed an unfair burden on people in his situation.  Evoking images of a destroyed American dream and stifled technological creativity, critics of the section denounced Stack’s suicidal actions, but agreed with the proposition that “something had to give.”  According to these commentators, the burden Section 1706 placed on a particular group far outweighed any perceived benefits.  In their view, the “discrimination” against individuals in Stack’s position had to end.

Proponents of Section 1706 did not remain silent.  Responding to those criticizing the law as unfair, several commentators defended the necessity of Section 1706; without it, tax avoidance by those similar to Stack would produce huge shortfalls in IRS collections as a result of exploitation.  These advocates of Section 1706 viewed Stack’s opposition to the provision as a concomitant of pure self-interest.  He objected to the law because it prevented him from cheating the tax system.  In this way, supporters perceived Section 1706 as accomplishing its intended goal of foreclosing the attempts of people like Stack to circumvent paying their fair share of taxes.  In short, the section served to prevent unfairness, not engender it.

In this note I will analyze the arguments for and against Section 1706.  First, I will explain the fundamental differences between an independent contractor and an employee, as well as the confusion between the two that required Congress to act.  Next, I will detail the enactment of Section 530 of the Revenue Act of 1978 and its effect on the problem of worker classification, explaining both the immediate aftermath and the long-term implications for workers.  Then, I will discuss the origin of Section 1706, detailing its impact on federal taxation and the technological community.  Finally, I will turn to the heated debate that began in the aftermath of Stack’s violent actions and determine whether, despite his methods, that angry taxpayer had a valid point.  Given the combustible nature of the present national dialogue, it is important to know if people like Andrew Joseph Stack have some method underlying their madness.

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Steven Cunningham: J.D. Candidate, Syracuse University College of Law, 2012; B.A. & M.A., Classical Studies, magna cum laude, Boston University, 2009.

[1]. Suicide note of Andrew Joseph Stack III, N.Y. Times (Feb. 18, 2010),

[2]. Michael Brick, Man With Grudge Against Tax System Crashes Plane Into Texas I.R.S. Office, N.Y. Times, Feb. 19, 2010, at A14, available at

[3]. Id.

[4]. Michael Brick, For Texas Pilot, Rage Simmered With Few Hints, N.Y. Times, Feb. 20, 2010, at A1, available at

[5]. Id.

[6]. Brick, supra note 2.

[7]. Stack, supra note 1.

[8]. See id.

[9]. See id.

[10]. Id.

[11]. One of the more indelicate instances of the political commendation appeared on Facebook.  On that site, Syracuse conservative talk show host Jon Alvarez created a group praising Stack’s “sacrifice.”  Facebook removed the tribute within hours, citing its ban on hateful and threatening posts.  See Christina Boyle, Facebook Pulls Plug on Tax-icide Tribute to Joseph Stack, Pilot Who Crashed Plane into Austin Office, N.Y. Daily News (Feb. 20, 2010),; see also Dave Tobin, Facebook Shuts Down Radio Host’s Homage to Suicide Pilot, The Post-Standard, Feb. 20, 2010, at A3, available at

[12]. See Stack, supra note 1.

[13]. Id.

Note: Nights on the Museum: Should Free Housing Provided to Museum Directors Also be Tax-Free

The Metropolitan Museum of Art is, arguably, one of the great cultural institutions of our time.  Visitors come from all over the world to indulge in its timeless collection spanning five thousand years of art and history.  It carries with its name not only the sound of resonating prestige, but also a mission to “stimulate appreciation for and advance knowledge of works of art that collectively represent the broadest spectrum of human achievement at the highest level of quality, all in the service of the public and in accordance with the highest professional standards.”[1]  To accomplish this mission, it requires that its director reside in a $4 million co-op, across the street from the museum, for free.[2]

Mr. Thomas Campbell, the newest director of the museum, is not the only curator receiving this generous fringe benefit.  This surprising advantage to the promotion of art and culture is also welcomed by the directors of other prestigious New York City museums,[3] including the president of the American Museum of Natural History, and director of the Museum of Modern Art.[4]  These three museums serve not only as homes to priceless works of art, but they also serve to provide their directors with about $15 million worth of “home.”[5]  A combined fair rental value of about $400,000 per year is provided free of charge, and free of tax, by the museums.[6]  This means that each director, in signing his or her employment agreement, accepts the luxurious housing, in addition to a handsome salary, as compensation.  Compensation, as most Americans know, is taxed.  However, for these museum directors, though their cash salary is included on their yearly income tax return, the value of the housing is not.  It apparently does not count as compensation.

In some situations this tax-free arrangement is not surprising.  It may be essential that an employee, such as a hospital worker, be available for twenty-four hour emergency calls.[7]  Parks may also provide housing for their rangers if they are required to be around at all hours of the day and night.[8]  Alternatively, certain jobs require individuals to move to isolated locations, such as a construction worker employed at a project at a remote job site,[9] or a military official called to relocate to a camp.[10]  Each of these situations seems fair, since if the employees were not provided with housing, it would be unlikely that they would be able to properly perform their work.  Does this call for necessity resonate in a museum director’s profession?  Of course, one important function of a museum director is to solicit and charm donors to contribute works of art to the museum.  However, does a museum director’s need for extravagant housing in a metropolitan area parallel a construction worker’s requirements for housing after he relocates to a secluded job site in Alaska?

Perhaps the answer to this question is buried deep within the purposes and policies of our tax code.  Though the government must collect revenues, maybe relief should be given to certain individuals to lighten their load.  This Note will argue that a museum director, or other executive of a cultural institution, does not qualify as one of these burdened taxpayers, and should not be able to exclude from his gross income the value of housing provided for him by his museum employer.  Part I will provide a history of Section 119, the provision of the Internal Revenue Code (the “Code”) that these directors look to for excluding the value of housing from gross income.  This part will include a brief discussion of Section 119’s legislative history and the reasons behind its enactment in 1954.  Next, Part II will illustrate the three “elements” of Section 119, which must all be satisfied to qualify for the exclusion.  This part will include several examples of how regulations, rulings, and judicial decisions have interpreted each element, and the standards that have been applied.  Part III applies these interpretations to a museum director’s treatment of housing, and argues that based on current case law, the value of housing should be included income.  Finally, Part IV concludes that though Section 119 is a necessary provision designed to alleviate the burden on those in unique professions, it does not serve the purposes of the Section to exclude the value of housing from a museum director’s income.

Jane Zhao: Syracuse University College of Law, J.D. 2012.


[1]. IRS Form 990, Schedule O for the Metropolitan Museum of Art for 2008,, (last visited Nov. 9, 2011).  “The Internal Revenue Service (IRS) Form 990 is titled “Return of Organization Exempt From Income Tax.”  Form 990 returns are required to be filed annually by most tax-exempt organizations, except for church and government-affiliated organizations.  Form 990 is “the primary tool for gathering information about tax-exempt organizations, for educating organizations about tax law requirements and ensuring their compliance.  Organizations use it to inform the public about their programs.”  Form 990 Resources and Tools,,,,id=214479,00.html (last visited Nov. 21, 2011).

[2]. Kevin Flynn & Stephanie Strom, Plum Benefit to Cultural Post: Tax-Free Housing, N.Y. Times, Aug. 9, 2010, at A1, available at

[3]. Though this Note will mainly focus on examples of New York City museums, it should be mentioned that museums throughout the nation are inconsistent in whether the housing provided to their director is tax-free.  For example, in 2008, the Art Institute of Chicago, recognized the value of housing provided to its director as gross income.  See IRS Form 990, Schedule J for the Art Institute of Chicago for 2008,, (last visited Nov. 9, 2011).  The Smithsonian, in Washington, D.C., did not provide housing to any employees.  See IRS Form 990, Schedule J for the Smithsonian Institution for 2008,, (last visited Nov. 9, 2011).  The Museum of Fine Arts in Boston and the San Francisco Museum of Modern Art did provide housing to their directors but did not disclose whether such housing was treated as gross income on the directors’ tax returns.  See IRS Form 990, Schedule J for the Museum of Fine Arts for 2008,, (last visited Nov. 9, 2011); IRS Form 990, Schedule J for the San Francisco Museum of Modern Art for 2008,, (last visited Nov. 9, 2011).

[4]. Flynn, supra note 2.

[5]. Id.

[6]. Id.

[7]. See 4 C.B. 85, 1921 WL 50340 (1921).

[8]. See Coyner v. Bingler, 344 F.2d 736 (3d Cir. 1965).

[9]. See Treas. Reg. § 1.119-1(f), Example (7) (2010).

[10]. See infra note 28.