MauledAgain

According to several reports, some unpublished, but this one published, Representative Bill Thomas, Chair of the House Ways and Means committee, criticized American businesses for putting lobbyists to work trying to preserve "narrow tax breaks." He informed a group of executives at a Tax Executives Institute meeting that they probably had lost the chance for genuine tax reform of the corporate income tax.

Thomas "complained" that lobbyists and the people who hire them "pay only 'lip service' to the notion of lower corporate tax rates, "focusing instead on advocating special tax provisions with narrow application. Giving the research and development credit as an example, Thomas pointed out that these sorts of provisions also contribute to the tax law's complexity.

I'm confused. If Thomas and his legislative colleagues want to reform the corporate income tax, or the tax law generally, no one is stopping them from doing so. It's one thing for someone not in the Congress to criticize lobbyists and for putting their clients' interests ahead of those of the nation, but that's what lobbyists are paid to do. Special interest groups have a right to petition members of Congress, to argue for their pet tax breaks, and to hire lobbyists to do that work for them. Of course, when lobbyists move from trying to persuade legislators to trying to purchase legislators, that's an unacceptable boundary crossing.

Yet there is no requirement that Congress do or not do something because lobbyists are pushing for their favorite proposal. Members of Congress can say to lobbyists, "Thank you for the information, you argue well, but the needs of the nation surpass those of your client. Sometimes the good of the whole must transcend the desired privileges of the few." Congress can then reform the tax law. So for Bill Thomas to criticize the lobbyists as he has is to give them too much credit and too much responsibility. The ultimate responsibility for what gets enacted rests with 535 members of Congress, not with lobbyists.

Yes, lobbyists in effect do control Congress to some extent, for example, by drafting legislation and having it moved through the legislative process. But this situation exists because members of Congress have abdicated their responsibilities. Perhaps, as some argue, they do so in order to be elected and re-elected. If that is the case, it's up to voters to make it clear that they want members of Congress to act in the best interest of the nation and not in the best interest of the lowly-taxed individuals and businesses whose influence over elections has been shifting power from the electorate to those with sufficient wealth to make the rules.

My post last week about the proposed IRS regulations that would permit tax return preparers to sell taxpayer data to third parties so long as they obtain consent was just one of hundreds of articles appearing in traditional print press and on blogs and websites throughout the country and beyond. My comments brought this inquiry from Drew Edmundson, a CPA in Cary, North Carolina. Drew wrote:

I just read your article "Your Confidential Tax and Financial Information for Sale?" Wouldn't just including the contents of Notice 2005-93 in the regulations pretty much take care of the concerns?

The notice and the Proposed Regulations together seem very similar to the current requirements. If this really is a problem then hasn't existed for decades? Perhaps the media is a bit late to notice the issue. See for example current 301.7216-3(a)(2) which allows disclosure to third parties as the taxpayer directs as long as the signed consent meets the requirements of 301.7216-3(b). Why couldn't a tax preparer fit his disclosure into those rules and make the purpose to be to sell the return information to the named third party?

I'm glad Drew asked the question, because it inspired me to look more closely at the language. I responded:

I think the difference is in the language. The current regulations permit disclosure "to such third parties as the taxpayer may direct." That describes something originating with the taxpayer, or, if originating with the preparer, explained to the taxpayer so that the taxpayer may direct it. The proposed regulations simply says "a tax return preparer may not disclose or use a taxpayer's tax return information prior to obtaining a consent from the taxpayer." There is nothing about the process originating with the taxpayer or, if originating with the [preparer], being explained to the taxpayer so that the taxpayer may direct it. In other words, it's being turned into a blanket exemption.

I still don't understand why preparers need this ability. Why should or would they sell or disclose except for specific purposes outlined in other parts of the regulations?

Drew's reply in turn was informative, because it provided an example of when it would make sense for a taxpayer-initiated disclosure to occur:

Thanks for the reply. I agree that the "as directed by the taxpayer" language could be a difference. I just believe that an unscrupulous tax preparer bent upon selling the data would just put that as the purpose for the disclosure. So the tax preparer would just word the reason for disclosure similar to: "The purpose of disclosure is to provide tax return information for marketing financial products (mortgages, or whatever) to the taxpayer by XYZ company."

Is protection needed? It shouldn't be because we should all read things before we agree to them. Especially when a signature is required. But who hasn't just signed something after a brief explanation? I personally must have clicked on the agree button for software licenses hundreds of times without reading the agreement. So some protection is needed.

In practice signed consent under 301.7216-3 has allowed me to fax tax returns to lenders. It has also allowed me to explain the numbers to those same lenders. I have also used the consent to discuss a tax return with a prospective buyer of a business. I believe if 301.7216-3 is eliminated then I will have some unhappy clients. There needs to be some way for the client to allow the preparer to be able to discuss the returns with other service providers when requested by the taxpayer.

I then closed this particular dialogue as follows:

I think you're right: the unscrupulous will find a way to deceive their customers. But for what ethical folks such as yourself are doing, the old language should be sufficient.

I have no problems with tax return preparers disclosing tax return information on behalf of clients when clients request the disclosure. Perhaps there is a reason that the client cannot make a photocopy of the client's copy of the tax return to provide to a lender or a prospective buyer of a business. That's a far cry, though, from getting an advance "anything goes" waiver from a client, who probably isn't reading the fine print. Like Drew, I've not read many of the "fine print" software licenses and if something new and different is slipped into it by a developer I might end up regretting how I've set my time priorities. As for the unscrupulous preparers, all the regulations in the world won't make a difference. Only investigation, prosecution, and punishment will put a dent in those blemishes on the tax return preparation profession.

Another reader, who asked not to be identified, suggested another explanation:

I think the proposed regs are an end run around 6103 because the IRS (or other agencies) would then be able to purchase the data on the open market and thus it would not be "return information filed with or furnished to the Secretary by or on behalf of the taxpayer" under 6103(b)(3). The IRS (or Homeland Security) could then datamine it. Or, if taxpayers don't take to selling their data, the Service will probably have succeeded in cutting off several lines of business for tax return preparers. Either way it works out for the Service.

Something else that has not caught anyone's attention is the corresponding proposed change to Circular 230 § 10.51 that makes the improper disclosure or use of tax return information a sanctionable offense under Circular 230 to which the new monetary penalties can apply. This gives OPR incredible leverage to regulate practitioner relationships.

I'm embarrassed that I didn't live up to my alleged "see conspiracies everywhere" reputation and see these angles. Of course, everyone involved in generating the regulations would deny that any such purposes existed. Who knows?

It has also been pointed out that tax return preparers subject to separate regulation, such as attorneys and certified public accountants, would be barred from selling taxpayer information regardless of what the IRS regulations permit. The worry, though, isn't so much about attorneys and CPAs, but about the unregulated preparers. The scope of bad tax advice and counseling of fraud that has been reported with respect to some unregulated preparers not only has generated calls for some sort of national regulation of all tax return preparers but also leaves me wondering whether these preparers could pass up an opportunity to put a few more dollars in their pocket at the expense of clients whose best interests they've already shown have no meaning for them.

Yet another correspondent criticized recent proposals that would require listed companies to disclose their tax returns. The proposals were described as "disturbing."

I disagree. Unlike individuals, listed companies should not expect a level of privacy concomitant with that accorded a natural person. Corporations and LLCs are creations of the law, artificial persons that owe their existence to the willingness of natural persons to accept them. Listed companies already disclose financial data under SEC and other regulations. Thus, the tax returns of public companies should be available to shareholders, and thus to any member of the public who purchases a share. Requiring disclosure of their financial and financial positions is a reasonable price to ask them to pay for the privilege of existing.

The way I see it, the only reason a corporation would want to hide its tax information is if the tax return discloses some inconsistency with the financial information available to the public that suggests something on the tax return or in the financial reports is not quite right, or if the tax return demonstrates some fraud. Under existing tax law, financial accounting, and SEC regulations, there sometimes can be as many as three different ways to report a transaction. Perhaps corporations are unhappy about the prospect of explaining to the public why the tax return differs from the SEC reports and financial statements. The long-term solution, of course, is to harmonize all three so that disparities in treatment are removed. If it's not an expense for SEC or financial reporting purposes, it ought not be a tax deduction. That idea is destined for nowhere.

These issues are not going to go away. Every day brings more reports of corporate book cooking, officer mismanagement, improper spending by private foundations, bribery, corruption, padded expense accounts, and a long list of other abuses. Public acceptance of the status quo is beginning to morph into public indignation. The idea that those in power can be trusted has been killed by the inability of those in power to act in trustworthy ways. The ordinary taxpayer must stay alert to the introduction of even more inappropriate behaviors masked as actions taken for the betterment of the citizenry.

Michael Livingston, who teaches tax across the river at Rutgers-Camden, has shared a friend's his explanationfor why law professors are unhappy. His comments pre-suppose that law professors are unhappy, or at least as a group are less happy than are other professionals, and other practices within the legal profession.

A quick check into the question of whether law faculty are happy or unhappy generated this interesting survey result:

One of the other markers of satisfaction can be found in responses to the question whether a particular faculty member would choose an academic career again. Among full-time faculty, just over 94 percent of historians-second only to law faculty-said they would choose the same academic career path again; this assessment was consistent among history faculty at every rank except the instructor level.

So where's the evidence that law professors are unhappy? To be fair, Michael Livingston uses the phrase "persistently uneasy" rather than unhappy. No matter. Either term suggests dissatisfaction. That's not an attitude that I sense among law faculty generally, and aside from temporary periods of distress when relations with law school or university adminstration management get edgy and cast a pall of distress over a school's faculty, I've not seen or heard reports of long-term faculty malaise.

I'm not alone in my disbelief. Dave Hoffman disagrees with Livingston, suggesting that perhaps law professors are no more unhappy than "doctors, accountants, GM workers, or real lawyers." Suggesting that law professors are not real lawyers lumps the practice-focused faculty with the philosophically inclined, and perhaps provides a hint of why, if indeed law professors are somehow unhappy, there may be some unhappy law professors. Could it be the frustration of being practice-focused but pressured to teach and write in a philosophical way? Could it be the pressure of teaching and writing in a theoretical way and not getting much in the way of accolades beyond a defined segment of legal academia?

Livingston describes the unease as obsessive worry about "standing in the pecking order." He claims:

[T]hey behave in this manner because they are doomed to compete, without anyone else to share the responsbility, in an activity in which they can never know whether they have succeeded or even what succeeding might mean. Like musicians singing to an empty hall, or athletes playing in an abandoned stadium, they have only themselves and a few ephemeral signposts--a good law review cover, a visit at a nominally "prestige" law school, what have you--to signal that they are advancing in their quest. It is a bitter fate indeed, although presumably someone has to do it.

There's something peversely misdirected in the notion that happiness and freedom from worry requires an audience or a pat on the back. Applause is nice, but genuine satisfaction must come from within. Perhaps that's part of the problem, namely, the need for attention that permeates post-modern culture.

Livingston's friend attributes this assumed unease or unhappiness to a rare constellation of occupational factors. Being a member of a law faculty is an activity that is very competitive, individualistic rather than cooperative, and "almost entirely devoid of objective standards" for measuring success or failure. Allegedly, the law professoriate is competitive because law faculty are competitive individuals and must face issues of promotions, tenure, attempts to move to more highly ranked schools, and getting published. It's individualistic because law teaching and writing is almost always a solitary activity. It lacks objective evaluative standards because the quality of writing and teaching is not easily measured in an objective manner.

Yet being a member of a law faculty is not particularly competitive. As someone commented on Livingston's blog, it's tough to fire law faculty, and that what law faculty seek is confirmation that their work is valuable. So I'm not alone in seeing the issue as one that suggests deep-seated insecurity. I wonder whether some carefully designed study would demonstrate a greater need for this affirmation among those less connected with the practice world than among those more in tune with it.

Law teaching and legal writing need not be individualistic. There is something to be gained from team teaching courses and co-authoring articles. I've done both. All those involved benefit from bouncing ideas one off another, and from being willing to grow past the ruts into which many law faculty fall. It is true, though, that there is quite a bit of individual activity among law faculty, for reasons that I don't quite understand.

Whether there ever can be worthwhile objective measurements for subjective activities such as teaching and writing is debatable. As another person commented on Livingston's blog, the role of a law professor is to make other people's lives better. I agree. We do that by teaching students to go into a world that needs their ability to bring justice. We can write articles that help practitioners do their best assisting their clients and that help courts resolve tough questions faced by those practitioners who are compelled to litigate on behalf of their clients or to spur legislatures into taking action on matters needing resolution.

When Livingston suggests that the solution to this alleged persistent unease among law faculty is tenure as a countermeasure "to prevent the suffering from becoming still more pronounced," numerical rankings, and higher salaries, I must dissent. Money does not buy happiness. Tenure ought not buy happiness. Numerical rankings are about as useful as the seedings in the NCAA basketball tournament, very unpredictive of ultimate success.

Ultimately, all this talk about unhappy law professors escapes me. Most of my writing is directed to practitioners, although some of that scholarship has been cited and quoted by courts, perhaps to the surprise of those who think their definition of scholarship should rule the day. I teach for the future clients of my students. The only genuine measure of my success or failure in that regard is a difficult one to compute, for it requires tracking the professional careers of thousands of law school graduates who have sat in my classes. Indeed, the law practice world has given me sufficient accolades, and though I'd be no less satisfied without them, those awards and commendations, made publicly or delivered to me privately, surely are gratifying. The stuff that causes occasional annoyance, like colleagues who play politics, the occasional inept staffer, the now and then rude student, and the few dishonest students, is sufficiently outweighed by positive aspects of being a law professor.

Yes, basically, I'm happy. I wish that for everyone in their professions and careers. If my students and my readers can get something out of what I teach and write that helps them bring their clients closer to just results, then I suppose I've done something to contribute to someone else's happiness.

Law faculties and law professors across the country are struggling with the impact on classroom dynamics of students using laptop computers in their classrooms. I suppose the dilemma also presents itself to undergraduate and high school faculty. What’s the problem? It’s simply that classroom laptop computer use not only gives students the opportunity to take legible notes, view classroom graphics, access legal materials on-line, and use computational software, it also gives students a platform for playing games, visiting on-line stores, placing bets, sending instant messages, and engaging in other activities unrelated to the class activities.

The issue found national attention earlier this week when USA today reported a story about a law professor at the University of Memphis who banned laptop computers from her classroom because she thinks they are a distraction. She explained that her “main concern” was transcription by students of “every word” she was saying. She asserts that computers “interfere with making eye contact.”

The students collected signatures and filed a complaint with the American Bar Association, which dismissed the complaint. Though the story does not specifically say so, it appears that the law school administration left the decision in place as within the discretion of the faculty member. At least one student claimed that if the ban remains in place, he must leave because he cannot read his hand-written notes.

Students have been using laptop computers in my classes for at least five years. I’ve become accustomed to their presence, so my reaction to the story reflects more than a few discussions and a good deal of thought. Five things come to mind.

First, faculty have the academic freedom to ban laptops, just as they have the academic freedom to encourage their use or to be indifferent to their presence. Faculty have the academic freedom to use or not use Powerpoint slides. Academic freedom permits faculty to drone on in lecture mode without using any visual props. Faculty can use chalk to draw unending circles on blackboards. Faculty can call on students, wait for volunteers, select specific students in advance to be responsible for classroom discussions (leaving the other students “off the hook”), assign 5 pages of reading or 50 pages of reading for each class session, and make all sorts of other choices. Some faculty sit while teaching. Others stand. Some pace. Some are animated. The problem with requiring a faculty member to permit classroom laptop use is no different from the problem of prohibiting faculty from permitting their use: it interferes with the faculty member’s exercise of professional judgment on what is or is not appropriate for the course.

Second, faculty have a professional obligation to do what needs to be done so that their students learn and to avoid doing things that interfere with learning. Most institutions impose only the barest minimum of requirements. Faculty, even tenured faculty, can be dismissed for chronic unexcused absence or tardiness, for teaching while inebriated, and for demonstrating serious lack of knowledge of the subject matter. Aside from bad behavior, such as striking students or using inappropriate language, there are few, if any, disciplinary constraints on faculty teaching. Use of chalk or failure to use chalk, choosing to lecture or question students, deciding whether students are permitted to use laptops, or even prohibiting students from taking notes for the first part of each class (an experiment that a colleague of mine tried and that strongly tempted me) are all within the scope of the teacher’s professional discretion, and no matter which way the professor resolves the matter, it does not rise to a level justifying discipline or dismissal.

Third, as a general proposition, as long as students know what a particular faculty member requires and prohibits, they can choose to enroll in that professor’s course or avoid it. There are, however, several situations in which students don’t have that choice. One arises when a required course is taught only by one professor. Another exists if all faculty teaching a course share the same philosophy on matters such as laptop use. Yet another circumstance, and an important one, are first-year courses, to which students are assigned before they arrive without having a choice as to which section of a course they will take. Thus, although students can “vote with their feet” in many situations, in others they are at the mercy of faculty whose courses they cannot avoid. Whether the students’ plight as a “captive audience” ought to constrain faculty choice as a matter of common sense is debatable. Surely there is no enforceable principle that reduces faculty discretion in those situations. It appears from the story that the students who were told not to bring laptops to class are first-year students assigned to their course section, but that may not necessarily be the case.

Fourth, decisions with respect to the student use of laptops ought to be made after the issue is studied thoroughly. Professional educators have done studies on student laptop use and on techniques to minimize the disadvantages while maximizing the advantages. For many of the decisions that law professors must make when shaping their courses, they have their experiences as students, good or bad, on which to draw. They have experienced some things from both sides of the podium. They have been students in courses where they were called on by the professor and in classes where the faculty relied on volunteers. They have seen good and bad use of chalk on blackboard. They have heard droning lecturers, entertaining raconteurs, animated teachers, and motionless robots. But most law faculty have not sat in law school courses as students using laptops or viewing Powerpoint slides. Many have seen good and bad Powerpoint presentations. Good teaching requires understanding, and when possible, experiencing the student’s perspective. The story about the Memphis laptop ban doesn’t reveal whether any such exploration of the matter took place.

Fifth, many law faculty dislike technology. They shy away from using clickers, Powerpoint slides, Blackboard classrooms, and providing materials on-line in digital formats. The reasons vary. Some are afraid of appearing to be inept in front of their students if they try to use it. Some are unwilling to change because it requires work. Some consider themselves incapable of moving beyond where they are. Ironically, students appreciate faculty efforts to modernize and are very tolerant of shaky faculty technology learning curves. At least, that was my experience. Law faculty are bright and capable, and ought not fool themselves into thinking they cannot learn to use the technology. As for those avoiding the effort, this isn’t the time to launch into that topic.

When I put these five trains of thought together, I reach the conclusion that the decision to prohibit student use of laptops in the classroom isn’t about distraction, eye contact, and transcriptions but is about something else. Why? Because all three rationales fall apart when viewed against the backdrop of a pre-digital classroom.

Consider distraction. Yes, laptops can be distractions if they are being used in an inappropriate manner. Reports of students gambling on-line, shopping, using instant messengers, reading emails, and playing games have come in from every corner of the country. Yet how does this differ from the days when students played bingo, passed notes, did crossword puzzles, circulated sports betting pool sheets, and played cards? The standard response is that laptop use in the classroom interferes with other students because they can see what’s on the screen. Well, does the crossword puzzle contest or the bingo game disturb fewer students? What about the passing of notes? What does that do to the student sitting between the note communicators, as I was in a class years ago? One note, left open, commented on the size of an engagement ring newly worn by a classmate. Yes, it seems that engagement rings can be distracting. Should they be banned? What about the student who deliberately arrives, dressed in an attention-getting fashion, a few minutes after class begins? Should the doors be locked when class begins? It’s been done but the benefits pale in comparison to the disadvantages.

It ought not be difficult to understand that it’s not the laptop, it’s the inattentive, unprofessional, and immature students who cause distractions. There are ways of dealing with distractions generally without pretending that freezing one’s class in the 1970s somehow ends distraction. If the distraction is serious, faculty ought to intervene. I have done so. So, too, have many other law professors. Dealing with situations as they arise makes more sense than issuing blanket prohibitions that may be simple and easy to enforce but that in the long run are counterproductive. The laptop prohibition surely creates problems for students with learning challenges or other limitations that are accommodated by technology.

Consider the eye-contact issue. Sorry for this awful pun, but I just don’t see it. Students’ heads are above their laptops, so they can see the professor. Students without laptops can stare at their book, at other students, or out the window. There’s far more of an eye contact problem when students come in with the baseball caps pulled low over their foreheads. Why blame the laptop use for eye-contact issues that pre-date laptops?

Consider the transcripton concern. Long before there were laptops, some students tried to write down every word. Some succeeded. Years ago, a former court reporter showed me a verbatim transcript of one of my classes in which she had been enrolled. She knew it was not the best way to learn, but for her it was habit. Laptops may makes it easier to transcribe every word, though that is not a certainty, but laptops are not the reason students seek to transcribe every word.

There are ways to prevent student laptop use from causing distractions. Even though it would be nice if it didn’t need to be done, students can be told what constitutes appropriate use of laptops in the classroom and what the consequences will be for causing distractions. It might make sense to lower the grade of a student who causes a distraction because the student is not properly participating in the class. The consequences for two or three such incidents ought to send a powerful message. Some faculty have staff or research assistants make unannounced visits to patrol the classroom and identify students who are not doing class work. Some faculty walk around the room.

The key, though, is to keep the students so busy with the class that they don’t have time to play games or shop on-line during class. Calling on students at random, with penalties for lack of preparation or contribution, keeps students alert and attentive. Using clickers leaves students wondering when all of them will be put on the spot, especially if they don’t know that their response to a particular clicker question will count toward their grade until it is presented to them. Moving through the material at a brisk pace energizes the environment. Using visuals, such as pictures related to a case, keeps students focused.

If eye contact is desired, make it. I look at my students. They look at me. They look because they never know what’s going to happen next and they don’t want to miss it.

Breaking students of the transcription goal requires a teaching approach that proves to the students that transcription isn't worth the effort. Examinations that reward memorization and regurgitation will encourage transcription efforts. Examinations and semester exercises that reward original thinking and that discount the words spoken in the classroom discourage transcription, provided this is explained to the students in no uncertain terms at the beginning of the course and reinforced throughout the semester by quizzes, exercises, dialogue, and other teaching techniques that demonstrate the relative uselessness of repetition and the value of problem solving and problem prevention.

So, if the distraction, eye contact, and transcription rationales aren’t all that compelling, what is the dislike of laptops all about? I think it is about control. It’s tough to be in control of a classroom if the students are more experienced and familiar with using laptops in a classroom than the professor is. The desire to stay with what is comfortable and fear of the unknown can combine to block progress.

The issue isn’t laptops. It’s student inattention. In many instances, faculty contribute to the problem. A student who is in a course because it is required, or because it is on a bar examination, is more likely to let his or her mind wander or to play games unless some more compelling reason exists to pay attention. Thus, selecting several students to be responsible for discussion on a particular day invites other students to tune out. I’ve seen this when observing other professors’ classes. Summarizing the discussion after engaging in dialogue with a selected student merely makes it easier for the tuned out student to hit ALT-TAB, type in the “bottom line” and return to instant messaging, shopping, or game playing while the professor engages in dialogue with another selected students. Faculty whose courses lack liveliness, or follow the previous year’s notes, are tempting students to find other things to do during class time. I’m not saying that all student inattention can be attributed to ineffective teaching, but enough of it is so attributable that faculty who encounter substantial numbers of inattentive students ought ask themselves what they can do to change the classroom atmosphere. If it’s just one or two students, then it’s probably not the professor, but then it’s simply a matter of pulling those students aside privately and laying down the law (ouch, another bad one, sorry).

One goal of legal education is to teach future lawyers that professionals need to be responsible. Teaching law students to be responsible requires more than denying them the opportunity to be irresponsible. It requires guiding them around the tempting distractions. If law faculty become too controlling, how are the students going to fend for themselves after graduation when the faculty isn’t there to control things for them?

So long as there is a tax law that continues to change, the TaxChartGuy, Andrew Mitchell, will continue to develop and share his tax charts. This time, we are invited to peruse 18 section 367 charts and 6 section 954(e) charts:

Section 367 Examples:
1. Outbound B Reorganization: CFC to Non-CFC (Sec. 367(a) & (b) Overlap)
2. Liquidation into 90% Corporate-Owned Partnership Does Not Qualify under Sec. 332
3. CFC Inbound Section 332 Liquidation With 100% Ownership
4. CFC Inbound Section 332 Liquidation With 100% Ownership
5. CFC Inbound Section 332 Liquidation With 80% Ownership
6. CFC Inbound D Reorganization
7. Lower Tier CFC Inbound Merger
8. Inbound C Reorganization: <10% Shareholder - All E&P Election
9. Inbound C Reorganization: <10% Shareholder - 50K De Minimis Exception
10. Foreign to Foreign C Reorganization: CFC to Non-CFC
11. Foreign to Foreign C Reorganization: CFC to CFC
12. Foreign to Foreign Triangular C Reorganization: Section 367(a) & (b) Overlap
13. Foreign to Foreign Reverse Triangular Merger: Section 367(a) & (b) Overlap
14. Foreign to Foreign Forward Triangular Merger: Acquiror U.S. Controlled
15. Outbound C Reorg Triggers Sec. 1248 Amount Inclusion
16. Foreign to Foreign B Reorganization: Sec. 1248 Amount Inclusion is Not FPHCI
17. Outbound Spin-Off: Gain to "Distributing"
18. Outbound 332 Liquidation: Overall Loss Limitation

Section 954(e) (Foreign Base Company Services) Examples:
1. Installation & Maintenance
2. Substantial Assistance for Oil Well Drilling
3. No Substantial Assistance for Dam Construction
4. Performance Guarantee for Superhighway Construction
5. Contract Assignment for Superhighway Construction
6. Contract Assignment as a Performance Guarantee

There are three ways to access the overall chart collection:

By Topic
Alpha-numeric order
Date uploaded

If you haven't read my previous accolades for Andrew's charts (see here, here, here, here, here, here, here, and here), take a look. As those who have followed my endorsement of Andrew's tax law visualization efforts know, I and others (e.g.,here) hold them in high regard.

Indeed, that could happen unless you are VERY careful. And even if you are careful, you might still fail to avoid such an outcome.

When I saw the news, my first thought was “They must be kidding. This makes no sense.” That’s what passed through my mind when I saw the headline in Tuesday’s Philadelphia Inquirer. The story, titled “IRS plans to allow preparers to sell data,” is as frightening as its lead-in.

There are three particularly upsetting aspects to this story. The first is the idea that a person’s tax data could be sold by his or her tax return preparer. The second is that this change in the tax regulations flew under the radar. The third is that even when I read through the proposed regulations, I did not see anything that specifically referred to the sale of tax data.

The third troubling aspect could be a simple matter of my inability to understand the proposed regulations. I doubt it, though, because I think one reason that the second troubling aspect exists is that very few people picked up on what was going on in these proposed regulations.

Section 301.7216-3 of the proposed regulations addresses "Disclosure or use permitted only with the taxpayer’s consent." Paragraph (d) states:

A tax return preparer may disclose tax return information to third parties as the taxpayer directs so long as the taxpayer provides a consent to disclose tax return information that satisfies the requirements of this paragraph and as prescribed by the Commissioner by revenue procedure.

It takes a bit of contemplation before realizing that this provision indeed permits tax return preparers to sell or give away their customers’ tax data. How many people would read that provision and understand that it what it does? The proposal was published on December 8, it is now mid-March, and this potentially dangerous proposal is only now getting a spotlight trained on it. When the proposed regulations were issued, the IRS announced the news with this headline: IRS Issues Proposed Regulations to Safeguard Taxpayer Information.

But it’s the first upsetting aspect to the story that deserves attention. Can someone explain to me why a tax return preparer needs to sell, or give away, customer tax data? What other incentive or purpose could there be other than money? Note that where there is a legitimate purpose for disclosure, the regulations permit the disclosure, but these are limited instances for which there is a logical explanation. These sorts of disclosures, such as sharing the data with another preparer who assists in doing the return, make sense. Sale of the tax information does not. At least not to me, to a few people who emailed me asking me to comment (which I already had planned to do), and to a few people quoted in the story.

Yet the plan has its defenders. They point to the consent requirement. The problem with using customer consent as the protective device is that many customers will not understand it, some may be asked to sign it without adequate disclosure, many will be caught up in the anxiety and frenetic pace of the preparation process, and I daresay some eager mercenaries will even forge a signature or obtain it under duress.

What are the folks at Treasury and the IRS thinking? Have they not read all the news reports in recent years about the inadvertent and deliberate release of individuals’ information that not only breaches privacy but increases the risk of identity theft? Have they not been following the news stories about identity theft?

What happens to the data once it is purchased by a third party? What’s to prevent that purchaser from selling it abroad, from selling it to criminals disguising themselves as legitimate businesses, from posting it on the Internet, or from using it for other nefarious purposes? Whether the purchaser acts knowingly or is duped, it makes no difference to the taxpayer whose financial and tax life has now been exposed to the world.

Treasury and the IRS refer to the changes as "housekeeping" intended to bring existing regulations into sync with the digital world. That may be true for much of the proposal, but the “consent to sale of tax data” portion ought not be cloaked by the seeming innocuousness of the rest of the proposed regulations. Think again about the misleading nature of the headline: IRS Issues Proposed Regulations to Safeguard Taxpayer Information.

One can imagine taxpayers concerned about the release of their tax and financial data to third parties, not fully understanding the situation, balking at filing tax returns. What the tax protest movement does not need is Treasury and IRS decision making that plays into their hands.

At this point, it would not hurt to send a message to one’s Senators and Representative, asking that Congress enact a statute prohibiting the marketing of tax information. It also would not hurt to understand that the process of publishing regulations in proposed form and allowing a period for public comments is a valuable procedure that reduces the chances of idiotic ideas becoming the law of the land.

There are times I wonder whether the brain cells of Washington decision makers are fully engaged. This is one of those times. It’s not the only time, but that’s for another day.

Senator Evan Bayh of Indiana has introduced S. 2414, the "Simplification Through Additional Reporting Tax Act of 2006." This START Act of 2006 would require brokers who are otherwise required to file information returns under Code section 6045(a) to include in the Forms 1099 that they prepare some additional information. For each applicable security of a customer the broker must include the customer's adjusted basis in the security. An exception in the proposed legislation would permit the Treasury to waive the requirement if the broker does not have sufficient information to do the basis reporting. An example of such a situation arises when a customer transfers securities to a broker without providing the basis information. In contrast, if the securities are purchased through the broker, the broker should have the basis information. The new reporting rules would apply to tax returns due after 2008, for securities acquired after 2007. Nothing like letting the full impact wait until after elections.

Senators Obama, Carper, Kerry, and Levin are co-sponsoring the bill. The proposal is based on a recommendation made by the National Taxpayer Advocate. I mentioned this suggestion in passing when I reported on the National Taxpayer Advocate's report several weeks ago.

In his comments introducing the bill, Senator Bayh noted that the goal of the proposed legislation is to reduce the estimated $17 billion dollars of annually unreported capital gain income. That estimate is based on the IRS' 2001 estimate of $11 billion, increased in proportion to the increase in reported capital gains transactions. It represents approximately 3 percent of the tax gap, on which I last commented several weeks ago.

Here's what puzzles me. Even with a reduction of the income tax rate on capital gains to the special low 15% rate, there still are taxpayers unwilling to report capital gains. I can ask rhetorically, "how much lower must the rate be before these gains are properly reported?" I think the answer would be silence. If pressed, it would either be a request for a zero rate, or an explanation that the gains won't be reported no matter what is done with the rate.

Prof. Jay Soled of Rutgers-Newark Law School and Prof. Joe Dodge of Florida State School of Law have supported the legislative effort and have helped draft some of its terms. Jay points out:

While Senator Bayh's legislation, which would require mutual funds and brokerage firms to track and identify tax basis, may suffer from some minor blemishes, it is a crucial first step in having taxpayers accurately report the tax basis they have in their investments. Right now, when it comes to tax basis identification, it's the Wild West - where rough guesstimations substitute for accurate reporting. And, given the strength of the current opposition to tax increases, this measure would be one way in which legislation could be passed to decrease the tax gap (and also greatly simply the tax return filing process for those taxpayers who must prepare and submit Schedule Ds).

Jay continues:

Despite our work, the work of Senator Bayh's aides, and the critical contributions of Legislative Counsel and the Joint Committee on Taxation, the mutual fund and brokerage house lobbyists are already vehemently complaining about the (minor) administrative burdens associated with instituting this legislation. In the upcoming months it will be interesting to see who prevails: those of the American people or the well-entrenched lobbyists.

I think Jay makes some important points. I hasten to add: What happens if this bill is enacted and capital gains tax compliance fails to improve? Perhaps withholding income tax on broker transactions equal to five percent of the gross proceeds might be the compliance spark that some taxpayers appear to need.

Thanks to Mike McIntyre for alerting me to the fact that this proposal, which had come to my attention a few months ago when work was being done on the drafting and my input graciously had been solicited, had evolved into bill form. Now we can watch to see what happens. Yes, let's see if the lobbyists or the public interest prevails.

When I wrote the other day, in posting about the increase in bar examination failure rates, that "California's complex maze of legislation and regulations, almost matching the volume and depth of federal law, must be a contributing factor to its low 44 percent pass rate," I caught the attention of Greg Broiles, a tax attorney in San Jose. Greg shared some information that put the question into a more refined perspective:

The CA bar exam does not meaningfully test California law - a significant number of points needed to pass are from the same MBE taken by more or less every other aspiring attorney in the US, and the remainder of the points come from closed-universe "performance exams" where any needed precedents are supplied; and six essay questions, which are typically not California-specific, certainly not to the point that knowledege of administrative regs is needed.

In my reply to Greg I explained that my understanding of the California bar exam substantive content came from conversations with friends who had taken the examination, and whose experiences had been excellent performance on the multistate portion (MBE) and struggles with the essays because of the focus on California law.

Greg also suggested that the California pass rate takes on a different quality when the scores taken into account are limited to graduates of accredited law schools. Pointing me to the official California bar exam web site, he noted that graduates of accredited law schools typically put up pass rates closer to 70%. I had suspected as much (but hadn't looked at the official statistics), which is why I referred to state-specific examination content as ""a contributing factor" rather than as "the" reason. So I amend ""a contributing factor" to "a minor contributing factor."

Greg then shared an observation that I will quote, with his permission, in its entirety. Why? I told him that I wish I had said it myself. It's most instructive:

Ultimately, my impression is that there are three different bodies of law that one must learn in the transition from law student to practicing attorney - academic law (which puts a lot of emphasis on theory and history), bar exam law (which puts a lot of emphasis on memorization of oversimplified rules/doctrines), and real-world law, which has procedural and practical aspects previously glossed over, as well as tremendous depth within practice areas previously considered too esoteric or evanescent to consider seriously. It is possible for people to learn all three bodies of law, especially if they are willing to forget (or ignore) one in favor of the next; but people who want or need to believe that they can answer bar exam questions with academic law, or real world issues with bar exam questions are doomed to disappointment.

I think every law school should share Greg's observation with every incoming law student. And, by the way, with faculty.

Greg, a true tax lawyer, then added:

For better or for worse, I get the impression that tax may be an area where the disparity between academic law and real world law is comparatively minor - and since there are no tax questions on the multistate (nor on the CA bar exam), it's not necessary for tax practitioners to cope with that third, effectively useless, body of knowledge.

Ah, Greg, guess what? Tax is on the Pennsylvania bar exam. Fortunately, the bar examiners keep it restrained to basic concepts. Questions at the level of those principles that seem to have escaped the memories of some attorneys, including (gasp!) tax attorneys, as I noted earlier today.

One of my favorite aspects of tax filing season is that it generates all sorts of "new" deductions, such as the one for personal grooming, so that I have things to write about in this blog. OK, so I'm being a wee bit facetious. Seriously, what is it about tax filing season that makes people desperate for deductions? Sorry, still being sarcastic.

Here's another example. Someone I know asked about a taxpayer whose spouse is a physician. The physician has days on which he is on-call. A tax attorney told the physician that the costs of commuting to the hospital on days he is on-call are deductible. After hearing this seemingly great news, the physician's spouse decided to run it past me.

Perhaps to everyone's surprise, my response contained very few words of my own:

From Fillerup v. Commissioner, T.C. Memo 1988-103:

It is well established that a taxpayer's cost of commuting between his residence and his place of employment is a nondeductible personal expense. Sections 1.162-2(e),1.262-1(b)(5), Income Tax Regs.; see, e.g., Fausner v. Commissioner, 413 U.S. 838, 839 (1973); Commissioner v. Flowers, 326 U.S. 465, 473 (1946); McCabe v. Commissioner, 688 F.2d 102 (2d Cir. 1982), affg. 76 T.C. 876 (1981). This rule precludes the deduction by a physician of the cost of commuting to and from his residence when traveling to his medical office, a hospital or any other location integral to his business, even when the physician is required to travel from his residence on emergency calls. Sheldon v. Commissioner, 50 T.C. 24 (1968); Sapp v. Commissioner, 36 T.C. 852 (1961), affd. per curiam 309 F.2d 143 (5th Cir. 1962).

From Sheldon:

Amounts incurred in traveling to and from one's residence and regular place of employment are commuting expenses which are personal in nature and therefore not deductible as business expenses. Sec. 1.162-2(e), Income Tax Regs.; sec. 1.262-1(b)(5), Income Tax Regs.; and William L. Heuer, Jr., 32 T.C. 947, 951 (1959), affirmed per curiam 283 F. 2d 865 (C.A. 5, 1960), and the cases cited therein. Here the petitioner's automobile trips were between her home and her only place of employment. Her home was not used as an office and [**7] the hospital did not permit her to maintain an outside medical practice. Although the hospital allowed her to remain at home while on duty during weekdays because of her long hours, petitioner's decision to do so was purely for personal, not business, reasons. The sole concern of the hospital was that she be available on short notice; and it did not care whether she was at the hospital, her home or somewhere else when an emergency arose as long as she could be reached immediately.

In substance, the instant case is similar to Lenke Marot, 36 T.C. 238 (1961), where we rejected a claim by an electrocardiograph operator who was on 24-hour call and who sought to deduct expenses of getting to work from wherever she happened to be when called. Here, too, trips made by petitioner at night and on weekends when she was on call, whether for
scheduled operations or emergencies, do not qualify as ordinary and necessary business expenses.

In response came this observation:

I have to say, it is amazing to me how many people there are out there, who are "tax professionals" (like this attorney * * * ), but give the wrong advice. I understand that the tax law is complicated, but still, I think a little research never hurts.

Or, as I rejoined, research is good and so is having some knowledge of basic tax principles. The person also noted that an attorney had claimed that the cost of suits worn to work in a law office are deductible as an ordinary business expense. Hello? Are these attorneys taking the basic federal income tax course while in law school? Are they being taught basic principles of section 262? Are they paying attention? Are they "learning for the exam" and then dumping what they learned out of their memories? I believe in "learning for life" and not for an examination. I confess I don't remember all the twists and curls of the complex topics in the courses I took while in school and which covered areas to which I pay little attention, but I do remember the basic stuff. Why? Because it mattered to me, not for an examination, but because I have a relentless curiosity about so many things, including law, the primary area to which I devote professional efforts.

I think law is getting to be like medicine in this respect: It makes sense to get a second, and even a third, opinion. Even on the seemingly simple stuff.

A National Law Journal story reports that "Bar Exam Failures Are on the Rise." As a member of a law school faculty, I pay close attention to the question, because it is disappointing to learn that students who have graduated from the law school have failed the bar. According to the story, the national pass rate has fallen from 70 percent in 1995 to 65 percent in 2000, and to 64 percent in 2004. Perhaps it's not enough to be a trend, but it certainly warrants attention. Another perspective makes the situation more alarming. Despite an increase of only 6.4 percent between 1995 and 2004 in the number of people sitting for bar exams, there has been a 28 percent increase in the number of people who have failed. The situation is downright scary when one considers the reported suicide threats made by graduates who have failed the bar one or more times, the reports of nervous breakdowns, the conclusions that attending law school was a mistake,

The bar pass rate varies from state to state. In some states, the bar exam is more difficult than average. In other states, it is less challenging. That's not so much a matter of whim on the part of the examiners, but a reflection of the complexity of a state's law. California's complex maze of legislation and regulations, almost matching the volume and depth of federal law, must be a contributing factor to its low 44 percent pass rate.

The consequences of failing are severe. Jobs are on the line. When I was hired by the Chief Counsel to the Internal Revenue Service, I was told I had 14 months in which to pass a bar examination. At best, I would have had three tries. The National Law Journal reports that many employers are giving new hires only two tries, and if the graduate doesn't pass on the second try, he or she is shown the door. Considering the levels of debt carried by some graduates, this is more than a mere inconvenience.

Why is the percentage of failing scores increasing? Sometimes it's simply a bad day. I recall a very bright, accomplished graduate who failed the bar exam, to the surprise of everyone. When her story became known, it made sense. She and her husband attended law school at the same time. They had two young children. One became ill the night before the first day of the bar exam. Guess who stayed up with the baby? There's absolutely nothing that can be done about those sorts of situations. Fortunately, they're not too prevalent. But that means the explanation lies elsewhere.

Is it simply a matter of bar examiners raising the score required to pass? Is it caused by the switch from being required to score above a certain level for the exam as a whole to being required to score above a certain level on each part of the exam? The latter is more difficult to do, because it prevents a very high score on one part of the exam from offsetting low performance on another part. Perhaps this is a reason. But perhaps by raising the passing grade the bar examiners are making a statement about the need to reduced the number of ill-prepared lawyers hanging up their shingle and seeking clients.

Is the lower passing percentage caused by an increase in the number of students graduating from unaccredited law schools? During the past decade, several law schools have opened, and traditionally, new law schools attract students who can't get admitted to existing schools but who are willing to take the chance that the new law school will earn accreditation before they graduate. If this is the reason, surely statistics showing the pass rates for graduates of these schools would provide proof. The statistics do show that graduates of unaccredited law schools don't do as well on the bar exam as do graduates of accredited law schools, but it does not appear that removing all graduates of unaccredited law schools from the statistics would reverse the downward trend in the overall national pass rate.

There are some commentators who think that the reason bar pass rates are dropping is a deficiency in legal education. The fact that some law schools have added credit-earning bar review courses into their curricula is telling. But it ought not be necessary if the existing curriculum is properly taught and students are held to the appropriate performance standards.

My analysis is simple. Law schools are not holding students' feet to the fire when it comes to performance. Inflated grades send a message of inflated accomplishment. Students need to be held to the standards to which they will be held in practice. Can this be done?

Students get a taste of what practice (and the bar exam) demands when they are challenged in the same manner. Students claim that I am a very demanding teacher. I agree. Why am I that way? Because, as I tell my students, their employers, their clients, and the judges in front of whom they appear will be even more demanding. If students do the work that is required, they succeed. If they ignore their responsibilities, their grades will fall.

Fortunately, at least at this law school, there is a plan to assist students whose grades are low even in a grade-inflated environment. An excellent academic support program has been established. When students avail themselves of its services, they improve. The principal obstacle is that it is not possible to compel a student to accept the assistance or to follow the advice that is given.

There is no substitute for hard work. Students who "got by" with minimum effort in high school and college, even earning high grades, discover that law school is much more challenging, even if the faculty is less demanding than faculties were several decades ago. I tell my students that they are in graduate school, matriculated in a doctoral program, and preparing to enter professional practice. What is expected of them exceeds what was expected in college, by at least an order of magnitude. Some get the message. Some don't.

When the envelope arrives from the bar examiners, every recipient gets the message. But then, unfortunately, for some of them, it's too late. That is why I think it is better to dish out the bad news, namely, low grades, earlier in the process, if those low grades are deserved. Then, perhaps, more students will take advantage of academic support programs and take steps to change their study patterns and the priority to which they give their academic responsibilities.

So, aside from good students who have bad days, I'm not ready to lament increasing bar exam failure rates or to put blame on bar examiners. The clients-to-be of law school graduates in training deserve the best.

It looks so inviting. To the untrained eye and uninformed mind, that is. What is it? It's one of those messages designed to appeal to human greed, sent by someone thoroughly bereft of integrity, fair play, and respect for law. Here's what it says:

After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $63.80. Please submit the tax refund request and allow us 6-9 days in order to process it.

A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline.

To access the form for your tax refund, please click here

Regards,
Internal Revenue Service

To someone not familiar with how the IRS operates and not attuned to the antics of phishers, this message, wrapped in imitation graphics and thus looking "official," surely will lure some people into its trap. Even if only one-half of one percent of the recipients falls for the deception, that's one-half of one percent of tens of millions of people. Under those circumstances, or any circumstances, that's one-half of one percent too much.

A person who knows how the IRS operates knows that it does not send these sorts of emails. A person who has the good sense to refer all tax correspondence to their tax advisor hopefully has retained a tax advisor who knows that this email is fraudulent. A person who does not know if the IRS sends these sorts of emails but who understands what phishing involves would look more closely, search the Internet for information and warnings on the specific message, and avoid problems. Someone with some fair amount of understanding with respect to sentence structure, grammar, and vocabulary would recognize the content of the email as something even a raw bureaucrat probably would not write.

Unfortunately, not everyone knows to do these things. Not everyone knows how to protect themselves. Not every tax advisor is up-to-speed with tax practice in the twenty-first century, which includes the ability to spot the digital version of con games.

What's particularly galling is that the criminals behind this particular scam are messing with tax. They have a history of impersonating banks, credit card companies, life insurance companies, utilities, hospitals, and just about every other sort of organization. Their chances aren't quite as high with those entities because not everyone banks at Bank X or buys water from Water Company Y. But almost everyone deals with the IRS. And at this time of the year, people are focused on taxes, distressed by taxes, worried about taxes, and eager to get good tax news. In step the criminals.

So what to do?

The first thing to do is to spread the word. Educate the public. Pass along the URL to this posting. Tell your friends and family to ignore this message that is NOT from the IRS.

The second thing to do is to improve the ability of people generally to spot and ignore these phishing attempts. It's popular to point the finger at software companies or some other "other" and expect them to protect people or design something that does so. Ultimately, though, the best protection is for each of us to be informed, educated, and alert.

The third thing to do is to act in ways consistent with the devaluation of human greed. Too many phishers and other digital crime perpetrators find their efforts easier to pursue and more likely to succeed because greedy people make easy marks.

This time, we can't blame the educational system, because phishing didn't exist when most people were in school. Yet for those now in school, it makes sense for them to have instruction in the recognition of digital fraud schemes, just as they presumably get instructions on rejecting offers of candy from strangers. Hmm. In some ways, the fraudulent IRS refund impersonation scheme isn't all that different from the offering of candy to someone the schemer hopes is gullible.

But what about all the people no longer in school? Some would propose huge government programs to deal with the problem. Others would suggest some sort of tax deduction or tax credit for doing things to prevent or avoid falling for the fraud. Nonsense. This situation is a wonderful example of how people can help themselves and each other. Simply spread the word, and put pressure on prosecutors to find and bring charges against the perpetrators.

Lest anyone fall for the "we can't find them" excuse, rest assured that most of these digital con artists can be found. The question is whether government is willing to invest time and money to do so. That issue involves a broader policy question of how the government should allocate resources devoted to protecting its citizens. Even though at least some of the perpetrators are physically beyond the United States, there is no reason that this nation does not have in place treaties that impose on the host nation an obligation to arrest, prosecute, and even hand over to the United States those of its citizens who are engaged in attempts to commit crimes in the United States against United States citizens. For all we know, the process of identifying and prosecuting phishing perpetrators, including those operating in foreign territory, would yield benefits in the planning and implementation of procedures to identify and neutralize the efforts of other criminals to perform other sorts of digital crimes, such as hacking, taking over computer systems, and bringing down the Internet.

Perhaps to get this started, each person who receives these Fake IRS Refund Phishing Scams (FIRPS?) should forward it, with the question, "Is this REALLY a fake as alleged by Jim Maule?" to their federal Senator and Representative, state governor, and state legislators. I wonder how long it would take legislatures to act, to direct executive branch officials to step up enforcement efforts, and to stiffen the penalties that courts can and should impose on those convicted of engaging in these scams.

Sometimes tax practitioners can learn from the experiences of people working in other industries who handle client financial information. Sometimes what appears to be good news for someone is more valuable as a warning than as a sigh of relief.

Last month, a federal district court in Minnesota dismissed with prejudice a complaint brought by a student loan borrower against a student loan servicing company. in Guin v. Brazos Higher Education Service Corporation, Inc., Civ. No. 05-668 (RHK/JSM) (D. Minn. 7 Feb 2006), the borrower sued after receiving notice from the company that the borrower's personal financial information might have been on a laptop computer stolen from the home of one of the company's employees. As I read the case, I kept thinking, "This could be about the theft of a laptop from the home of a tax practitioner's employee, an accounting firm's employee, or a law firm's employee." Thus, it is important to review the facts before exploring the court's reasoning and decision.

The loan servicing company, Brazos Higher Education Service Corporation, originates and services student loans. Among its 300-plus employees was a fellow named John Wright, who did financial analysis, principally analyzing loan portfolios, including the purchase of loans from other lenders and selling bonds financed by student loan interest payments. He worked out of his home, receiving financial data by electronic transmission from Brazos' finance department in Texas. Some of Wright's work requires him to have loan information such as the borrower's financial information. During a September 24, 2004, burglary at Wright’s home, the laptop on which he did his work was taken. Even though police were notified, neither the perpetrator(s) nor the laptop could be found. A private firm hired by Brazos also was unsuccessful in its efforts to recover the laptop.

Federal Trade Commission (FTC) guidelines regulating the student loan service industry recommend that when "deciding if notification [to customers of an identity theft threat] is warranted, [a company should] consider the nature of the compromise, the type of information taken, the likelihood of misuse, and the potential damage arising from misuse." California has a rule that requires such notification rather than leaving the decision to the discretion of the company.

Accordingly, Brazos tried to identify the borrower information that would have been on the hard drive of the stolen laptop and whether the thief or some other person could access it. Brazos determined that Wright had received seven data downloads before the laptop was stolen, but Wright did not track which databases were saved to the hard drive and which were not. Brazos concluded that it could not identify the borrowers whose data was on the laptop, so it sent a letter to all of its roughly 550,000 customers. The letter explained that "some personal information associated with your student loan, including your name, address, social security number and loan balance, may have been inappropriately accessed by the third party." and recommended borrowers put "a free 90-day security alert" on their credit bureau files and review consumer assistance materials published by the FTC. Brazos also set up a call center to answer borrowers' questions and to track reports of identity theft.

The plaintiff, Stacy Guin, who had taken out a student loan through Brazos several years earlier, received a copy of the letter. Guin contacted the Brazos call center to ask followup questions, and ordered and reviewed copies of his credit reports from the three credit agencies listed in the letter. Guin did not find any indication that a third party had accessed his personal information and, as of the time of the court's decision, had not experienced any identity theft or any other type of fraud involving his personal information. Brazos informed the court that to the best of its knowledge, none of its borrowers had experienced identify theft or other problems because of the laptop theft.

Guin sued Brazos, resting his case on three claims, breach of contract, breach of fiduciary duty, and negligence. Subsequently, Guin voluntarily dismissed his breach of contract and breach of fiduciary duty claims. Guin brought the negligence claim on behalf of "all other Brazos customers whose confidential information was inappropriately accessed by a third party."

Guin alleged that "[Brazos] owe[d] him a duty to secure [his] private personal information and not put it in peril of loss, theft, or tampering,” and that "[Brazos’s] delegation or release of [Guin’s] personal information to others over whom it lacked adequate control, supervision or authority was a result of [Brazos’s] negligence . . . ." Guin asserted that this conduct caused Guin to suffer "out-of-pocket loss, emotional distress, fear and anxiety, consequential and incidental damages."

After reviewing Minnesota law, which requires the plaintiff in a negligence action to prove the existence of a duty of care, a breach of that duty, an injury, and that the breach of the duty was the proximate cause of the injury, the court considered Brazos' response. Brazos argued that it did not breach any duty owed to Guin, that Guin did not sustain an injury, and that Guin could not establish proximate cause.

With respect to breach of duty, the court explained that the duty can be established by the traditional reasonable person of ordinary prudence standard or by statute. Guin's argument that the Gramm-Leach-Bliley Act (GLB Act), establishes a statutory-based duty for Brazos "to protect the security and confidentiality of customers’ nonpublic personal information" was rejected. The court pointed out that the GLB Act requires financial institutions to "[d]evelop, implement, and maintain a comprehensive written information security program that is written in one or more readily accessible parts and contains administrative, technical, and physical safeguards that are appropriate to your size and complexity, the nature and scope of your activities, and the sensitivity of any customer information at issue; [i]dentify reasonably foreseeable internal and external risks to the security, confidentiality, and integrity of customer information that could result in the unauthorized disclosure, misuse, alteration, destruction or other compromise of such information, and assess the sufficiency of any safeguards in place to control these risks; and [d]esign and implement information safeguards to control the risks you identify through risk assessment, and regularly test or otherwise monitor the effectiveness of the safeguards’ key controls, systems, and procedures. Guin's contention that Brazos violated the GLB Act by "providing Wright with [personal information] that he did not need for the task at hand," by "permitting Wright to continue keeping [personal information] in an unattended, insecure personal residence," and by "allowing Wright to keep [personal information] on his laptop unencrypted." was countered by Brazos with an assertion that Guin did not have sufficient evidence to prove Brazos breached a duty by violating the GLB Act. The court noted that nothing in the GLB Act addresses the FTC routine warning to businesses to provide secure data transmission through encryption, and that FTC regulations do not address, let alone require, encryption of data stored on a hard drive. The court concluded that at the time of the theft Brazos did have in place "written security policies, current risk assessment reports, and proper safeguards for its customers’ personal information as required by the GLB Act." Wright's access to the data, according to the court, was within the scope of the business duties that he had. Nothing in the GLB Act, according to the court, prohibits "someone from working with sensitive data on a laptop computer in a home office." Failure to encrypt the data, according to the court, does not violate the GLB Act.

Guin also argued that Brazos failed to comply with the self-imposed reasonable duty of care in its privacy policy, namely, that Brazos will “restrict access to nonpublic personal information to authorized persons who need to know such information.” Brazos conceded that under this policy, it owed Guin a duty of reasonable care, but argued that it acted with reasonable care in handling Guin’s personal information. The court concluded that because Brazos had policies in place, trained Wright about those policies, and followed those policies when transmitting data to Wright, it had complied with the policies. The court treated Wright's inability to foresee and deter the burglary and loss of the laptop as not a breach of duty.

With respect to injury, the court explained that "The threat of future harm, not yet realized, will not satisfy the damage requirement." Guin's assertion that he had been injured by identity theft was rejected because he could not prove anyone had stolen his identity. The court relied on an Arizona case (Stollenwerk v. Tri-West Healthcare Alliance, No. Civ. 03-0185, 2005 WL 2465906 (D. Ariz. Sept. 6, 2005). in which customers sued a corporation after computer hard drives containing customer financial information were stolen from the corporation's office. Testimony of an expert, who claimed that the plaintiffs' injury was "“an increased risk of experiencing identity fraud for the next seven years" was rejected because the expert did not quantify any increase in risk of identity theft because of the burglary. Guin had a similar expert's affidavit to offer, but the court treated it as similarly flawed.

With respect to causation, the court held that Guin could not show proximate cause because "the criminal act of a third party is 'an intervening efficient cause sufficient to break the chain of causation,' provided that the criminal act was not foreseeable and there was no special relationship between the parties." This question should go to a jury only if there is a reasonable difference of opinion, which the court decided did not exist. Even though Guin argued that leaving information unencrypted on a hard drive increases the risk that the information would be stolen, and even though Guin claimed that thefts of laptops and hard drives are occurring more frequently during an era of escalating identity theft problems, the court concluded that the theft of the laptop from Wright's home was not reasonably foreseeable by Brazos. According to the court, the facts that Wright lived in a relatively low-crime neighborhood, was unaware of any previous burglaries in his immediate neighborhood, and took reasonable precautions to secure his home made inapplicable the principle that high crime and a history of similar offenses can establish foreseeability.

So what does this have to do with tax practitioners, accountants, and law firms? Simple. These professionals maintain client information on their computer systems. Although they are not subject to the GLB Act, negligence can be proven in other ways if that information falls into the wrong hands. Even though the court analyzed all three defenses raised by Brazos, what made the case easy was the fact that Guin had not suffered identity theft. But Guin's good fortune in this respect is no assurance that a tax practitioner's client will similarly escape after his or her information is stolen or otherwise obtained from the tax practitioner's office.

It is not unreasonable to disagree with the court's analysis of the foreseeability and causation issues. Thefts of computers and digital information is common-place. Identity theft is an epidemic. Thieves who in pre-digital days could not be bothered with removing file cabinets of paper know that in a digital world a piece of equipment one-ten-thousandth the size of a file cabinet can hold thousands of file cabinets's worth of very valuable information.

Although some might read Guin, coupled with the inapplicability of the GLB Act to lawyers, as a comforting protection of tax practitioners against lawsuits brought by clients whose information is stolen, I read it as a word of warning. Guin illustrates the need for tax practitioners to understand what digital information is, how it is stored, how it can be accessed, why encryption is no less important than locking the office door, and why employees must not only be taught but required to follow data protection practices. It's not only theft of laptops from the practitioner's office or the employee's home that poses the risk. It's the data inadvertently sent in an email. It's the information hidden in a word processing or other file, as I discussed a little more than a month ago. It's the bad habit of leaving passwords written on post-it notes stuck onto the computer monitor. It's the employee who walks away from his or her desk without blocking access by logging out or locking the system. It's the lack of supervision of outsiders who enter into work areas. It pretty much is the failure to bring digital security experts in to analyze the operation, recommend a plan, and establish employee training programs for present and future use.

There are data protection failure cases waiting in the wings. Guin does not preclude a finding of liability in any of those cases if identity theft does occur. Do you want your client to be the named plaintiff in the case that proves Guin is not a blanket dispensation of tax practitioners from the ill effects of data protection mismanagement? I surely hope not.

Last month National Taxpayer Advocate Nina Olson presented a written statement addressing the federal tax gap. Considering that the tax gap, after taking into account IRS efforts to chase down unreported and unpaid taxes, is somewhere between $250 to $300 billion, the explanations and solutions provided by the report deserve careful attention. When the Taxpayer Advocate points out that an average of $2,000 per year is paid by compliant taxpayers to offset the tax gap, everyone should be listening. At least, I am.

The tax gap fascinates me and frustrates me. I discussed it several months ago when the data for 2003 was released. That data, computed from different sources, and two years more recent that what Nina Olson used, makes my fascination and frustration even sharper. I'm both fascinated and frustrated by the willingness of people to avoid their legal responsibilities. Of course, that fascination and frustration is not limited to tax avoidance devotees but also the behavior of those who violate a variety of rules and regulations.

I also visited the tax gap almost a year ago when the data used in Nina Olson's report was released. As I re-read my two posts I started to think that I had landed in a deja vu world, or perhaps a parallel universe. And that's without getting into a visit to the same topic about TWO years ago. If I were a magazine I might need to start publishing "The Annual Tax Gap Issue." Somehow I doubt it would get the attention Sports Illustrated gets with its "not quite on topic" annual issue.

Nina Olson's report points out that when taxable transactions are properly reported to the IRS, the rate of tax collection exceeds 90 percent, but when payments are not reported compliance drops to a range of 20 to 68 percent, depending on the type of transaction. Sometimes reporting does not occur because people are noncompliant. Sometimes reporting does not occur because it is not required. Though it may be a surprise to many, not all taxable transactions must be reported to the IRS. Olson estimates that about one-third of the tax gap arises from unreported transactions. What accounts for the rest of the tax gap? Olson doesn't get into this, but I would offer candidates such as improperly claimed deductions and credits, reported but unpaid tax liabilities, impermissible tax shelters, and similar devices that move transactions out of the reportable category.

Olson recommends expanding the list of transactions that must be reported. This is the sort of suggestion that makes one wonder why it wasn't done decades ago. The answer is easy. As Olson points out, tax revenues would climb if every taxable transaction was subject to reporting requirements. That, however, would be an onerous burden. Olson suggests that the nation could not tolerate reporting every payment to a cab driver, every payment to a lawn mowing neighborhood teen, and every payment to an independent contractor who comes to the home to make a repair.

I add that compliance is enhanced when withholding takes place, because withholding shifts the tax payment and not just information to the Treasury. A tale from the past explains why resistance to additional reporting requirements is likely to be no less strenuous as it was when additional withholding requirements were imposed. Some years ago, when the Congress enacted a law requiring banks and corporations to report interest and dividend payments, there was a huge outcry from banks and corporations, even though data processing made such reporting far easier than it would be for taxi riders to report their payments. Congress backed down after banks included flyers in their monthly statement mailings, accusing the IRS of enacting a new tax. The f word on this one for me wasn't frustrated or fascinated; it was furious. After all, compliance with respect to the reporting by RECIPIENTS of dividends and interests was, and to a great extent, still is, significantly less than compliance with respect to wages; in other words, mere reporting by the payor did not guarantee reporting by the payee though in recent years IRS computer matching has been digging out the recalcitrant taxpayers. Eventually, a "compromise" was adopted that installed a system of backup withholding, triggered with respect to specific taxpayers after they were identified as noncompliant. When filling out a form that asks, "Has the IRS notified you that you are subject to backup withholding?" is the noncompliant taxpayer likely to switch gears and be honest when answering?

Olson's report does not identify all of the candidates for admission to the reporting club. It suggests a process of studying each type of transaction to determine whether reporting for those types of transactions would be cost-beneficial. It provides, though, some examples, such as extending the reporting requirements applicable to payments to sole proprietors to payments to certain corporations. I ask, why not all corporations? The report also refers to the proposal to require brokers and dealers to report their customers' bases in stocks and other financial instruments.

An interesting idea floated in the report is encouraging taxpayers to schedule monthly estimated tax payments through automatic debits to their checking accounts. That idea flows from another one, quarterly reminders mailed by the IRS to taxpayers subject to estimated tax filing. Putting tax paying for self-employed individuals on a path similar to that applicable to employed individuals makes sense. My reaction to this proposal is "why not?" but my instinct is that it would not do much to bring the deliberately noncompliant into the fold. At best, it would reduce the risk that a taxpayer who made insufficient estimated tax payments and finds herself in a cash flow bind would try to escape the consequences by contributing to the tax gap.

The report proposes that the IRS be permitted to enter into voluntary withholding agreements under section 3402(p)(3) with industries or trades that have established payor-payee mechanisms, such as the travel industry, and hair stylists. The IRS, it is suggested, could provide safe-harbor worker classification if such an agreement is reached. The report suggests that self-employed individuals who establish a track record of noncompliance be compelled to have taxes withdrawn by automatic debit. My question is simply, "What about the noncompliant individuals who do not use banks?" Overall, this is the sort of process I figured already would have been in place. Backup withholding, even as enacted in the "compromise" that let corporations and banks off the withholding hook, is itself too limited.

The report recommends regulation of tax return preparers who are not subject to oversight under existing licensing of attorneys, CPAs, and enrolled agents. The report suggests that these unenrolled preparers be required to register, take a basic examination on substance and ethics, and participate in ongoing education. How, though, will the IRS identify the least compliant of these preparers if they are not signing the returns? The report admits that "The IRS does not know how many unenrolled return preparers are actively preparing returns for a fee in the United States." But it's worth a try, as much as I dislike government regulation. What I would like to see are tax courses in the nation's high schools and technical schools so that taxpayers are more likely to spot inept preparers (and more likely to demand tax reform).

Olson's report suggests that the IRS use more data from state and local governments. It appears that the IRS has access to this information but is using "very few" of the available resources. Why? Does it really require action by Congress to make this happen? No, but there is other information, such as gross receipts filings, that the IRS presently does not access, and perhaps the assistance or approval of Congress is required to open up these information exchanges. I say exchanges because state and local governments surely will seek data from the IRS for their efforts to increase compliance. Surely there are state and local tax gaps.

Finally, the report points out a need to research the reasons for noncompliance. Identifying approaches to reducing the tax gap would be enhanced if the reasons were understood. I'll get this started by sharing what I wrote several months ago:

One must wonder what motivates noncompliance. Perhaps some psychologists will conduct surveys to determine if it simply greed, or a growing rebellion in which people are "voting with their feet" by appropriating unto themselves their own special tax break that they cannot get through the Congress because they lack the clout of the lobbyists who have managed to reduce the tax on capital gains to extremely low levels. How much of the noncompliance is simple ignorance, stupidity, carelessness, or confusion? How much of the gap arises from people trying to hide information about the activities generating the income?

I provided one possible reason almost a year ago:

Most complexity in the tax law arises from the insane flurry of legislation enacted during the past 15 years that reflects the "I'm special" (or "my project is special") bleatings of the lobbyists and their clients. The "it would be nice/just/fair/smart/wise/sensible/good/ to create this special rule" argument too often is "it would be expedient to enact this special rule because it gets us votes" politics. Taxpayers know this, and thus feel justified in creating for themselves
the equivalent of the exception for which they did not have the money or connections to get for themselves directly.

Thus, I think that noncompliance increases in direct correlation to the extent taxpayers perceive the tax law as unfair. The more disproportionate a tax law's complexity is to the complexity of the context in which the law applies, the more unfairness will be perceived by more taxpayers.

And I agree, the answer is not simply a matter of changing the type of tax. It's a matter of changing the mentality that spawns the tax law.

I'm a tax teacher. I'm supposed to have the ability to change people's tax mentalities. I'm working on it.

I'm still working on it. Here's hoping that Nina Olson's report inspires more people to find themselves working on it.

But perhaps it can be put to rest.

Two weeks ago I followed up on my previous analysis of the National Association of Enrolled Agents' letter in which it presented and analyzed several hypotheticals illustrating problems with the new rules concerning the dependency exemption deduction,
with a reformulation of my thoughts about one of the NAEA hypotheticals.

Recall the hypothetical:

Mom, dad, Alice (14), and Joe (22) live in the family house. Mom and dad file a joint return with an AGI of $400,000. Since Alice is a qualifying child of mom and dad, they could claim her as a dependent but would receive no tax benefit as their personal exemptions are phased out and the child tax credit would not be available to them. Joe is not a full-time student and his only income is a W-2 with $15,000 in wages. Under §152, Alice is a qualifying child of Joe, so he claims her as a dependent and thus gets the child tax credit and yes, even the earned income tax credit. Assuming Joe had no tax withheld, he goes from a balance due of $683 to a refund of $3,158.

I concluded that Alice is the qualifying child of Mom and Dad, because (1) she is their child, (2) she has the same principal place of abode as they do, (3) she is under 19, and (4) she does not provide more than half of her own support. I also concluded that Alice is the qualifying child of Joe because (1) she is his sibling, (2) she has the same principal place of abode as he does, (3) she is under 19, and (4) she does not provide more than half of her own support. Because a person can be claimed as a dependent by only one taxpayer, the question is whether Mom and Dad can choose to omit Alice from their return, letting Joe take the deduction. I had initially applied the tie-breaking rule in the Code that would have made Alice the dependent of her parents. The NAEA interpreted the phrase "and is claimed" in section 152(c)(4)(A) as permitting Mom and Dad to stay out of the tie-breaker, letting Joe win by default. After pondering the NAEA position and analyzing analogous situations in the tax law, I concluded that:

there is something to be said for the NAEA's interpretation of the "and is claimed" language. After all, to reach the sensible policy and practical application result, Congress should, and could, have used the phrase "and could otherwise be claimed" in lieu of "and is claimed." Congress did not do so. Thus, to the extent the NAEA is asking for clarification, it is a problem that should be mentioned, even though I'd be reluctant to advise Alice's brother to take the dependency exemption deduction and would insist he make his decision after listening to, or reading, a full explanation of the issue and the risks involved in making a yes or no decision.

But now news from the IRS, in the form of Volunteer Quality Alert 2006-04 – Guidance for Determining a Qualifying Child, Qualifying Relative, and Qualifying Person (March 2, 2006), the IRS makes it clear that the tie-breaking rules won't apply unless Alice is claimed on both the joint return of Mom and Dad and the return filed by Joe:

Sometimes a child meets the tests to be a qualifying child of more than one person. However, only one person can treat the child as a qualifying child. If the taxpayers have the same qualifying child, they may decide among themselves who will claim the child. If they cannot agree, and more than one taxpayer files a return using the same child, the IRS will use the tie-breaker rules...

Thus, as I explained in the reformulation post:

First, taxpayers in the situation that Alice's parents and brother find themselves are left to work out a suitable tax-favorable arrangement. Only one "claims" the child in question and the others fail to "claim" the child.

And to my question "Is the tie-breaker intended only as a remedial tool for the IRS to use when multiple taxpayers with "claims" to the child fail to settle on one claimant?" the IRS has said, "Yes."

However, to my question "Why the difference?" which I asked after contrasting the rule that prohibits parental failure to claim an otherwise allowable dependency exemption for a child from letting that child claim a full personal exemption, the IRS gave no answer. How could it? How could it possible divine the presumed intent of a Congress that said nothing to reveal the inner workings of the minds of those drafting the provision. Of course, "Why the difference?" is a question of greater concern for the policy maker than for the tax return preparer trying to provide the best service to his or her clients.

It is just downright disappointing that something as simple as the dependency exemption deduction can be so confusing and trigger so much commentary. No wonder when the tax world turns to things such as partnership taxation or subpart F that the complexity becomes agonizing. The patient is screaming in pain, and Dr. Congress thinks a little more morphine is the cure.