MauledAgain

The debate over CCA 200911007 not only raises the substantive points mapped out by Pat Cain in criticism of the issuance and by Marty McMahon in his defense of the position taken by Chief Counsel, but also focuses attention on administrative, procedural, and resource issues symptomatic of a growing crisis in the tax law.

The issue is a simple one to explain. The $1,000,000 limitation in section 163(h) on the amount of acquisition indebtedness with respect to which interest is deductible applies either per taxpayer or per residence. If it applies per taxpayer, then two unmarried individuals who co-own a principal residence would each have a $1,000,000 limitation though the Chief Counsel rejected that conclusion in CCA 200911007. So, too, would two married individuals, though the provision in section 163(h)(3)(B)(ii) cutting the limitation down to $500,000 for each spouse if the couple files separate returns strongly implies that if they file a joint return the limitation is $1,000,000 and not $2,000,000. Reinforcing this implication is the provision in section 163(h)(4)(A)(ii)(I) that treats a married couple filing separate returns as one taxpayer for purposes of identifying the qualifying residences, presumably to prevent them from claiming interest deductions with respect to mortgages on four residences.

It has been suggested that the problem lies with the drafters of section 163(h) and its amendments. Specifically, it has been proposed that the drafters assumed that married individuals filing jointly become one taxpayer for federal income tax purposes. That, of course, is not the case. The suggestion that the drafters made this erroneous assumption rests on the experience of someone who discovered similar problems in section 121, and who tracked down the member of the Staff of the Joint Committee on Taxation who drafted that provision. That person admitted that he assumed that when a married couple files a joint return, they are treated as one taxpayer. Though shocked to discover he was wrong, he admitted the mistake. That, however, does not change the statute. The inference is that the same misconception afflicted the drafters of section 163(h).

This report reveals a serious problem in the tax legislative process. Years ago, in the late 90s, a student of mine did a directed research project that turned out to be so extensive that it never reached the stage where it could be published. It was an empirical study seeking correlations between the number of technical corrections required for each enacted tax bill and the years of tax practice experience of the Joint Committee staff. The focus was on technical corrections, and that was to keep the project manageable for a 2-credit directed research. The research would not pick up drafting problems or underlying erroneous assumptions unless they had been corrected in a technical corrections provision. The information that the student gathered pointed to a strong correlation. As the staff became younger from an experiential perspective, mistakes increased. There is nothing surprising about this discovery but it is distressing.

The problem, illustrated by the defect in section 163(h) as highlighed by CCA 200911007 and reinforced by the empirical research, is pervasive. It compels the following question. How can someone on the Joint Committee staff not know the basic tax concept that a husband and wife are two taxpayers who when filing a joint return merely join together on that return but do not become one taxpayer by doing so? Many years ago, I was told that the Joint Committee wasn't interested in me, or anyone else similarly situated, until we had acquired quite a bit of tax practice experience. Somewhere along the line, that standard has changed. Did the drafters who created and later amended section 163(h), and they were not the same individuals, not take a basic tax course? Did they attend a law school whose basic tax course did not cover this principle? Did they somehow not grasp the principle even though it was taught and yet earned high grades? Were they brought onto the staff despite not having outstanding tax grades and sufficient tax practice experience? Every student in my basic tax class learns this principle when we explore section 151 and they learn that there are two personal exemptions on a joint return, one for each taxpayer, that spouses cannot be dependents of each other, and that spouses can have a personal exemption for the other spouse but only under limited circumstances that cause the other spouse not to need or use the exemption. In basic tax courses that are restricted to issues of economic theory, social policy concerns, and conceptual exploration, this issue very well slips away. I pose those questions not because I want the answer with respect to specific individuals but because I want to obtain a sense of how much tax expertise the staff of the Joint Committee brings to the drafting table. It's not just the Joint Committee staff. I have had conversations with people in Treasury, Chief Counsel, and the IRS that have made me aware of how much they did not know or understand, and in many instances I ended up educating them. How does this happen?

I think one problem is that the workload imposed on the people writing and administering the nation's tax load has increased tremendously while Congress fails to match the increase when it is time to allocate resources. I suspect that throughout these organizations, from Joint Committee to Treasury, Chief Counsel, and the IRS, there aren't enough people to provide thorough review of each other's work. Add to this the pressure to crank out legislation at the midnight hour, to issue overwhelming amounts of guidance in the short period between legislative enactment and effective date, if there even is any such period of time, and to get responses back to employees "in the field" who need help dealing with the tax consequences of a particular transaction. The IRS itself admits that the difference between salaries in the private sector and those paid to its employees leaves it in a disadvantageous position when litigating tax issues, and it's not unlikely that similar constraints afflict its guidance and administrative functions. Perhaps the current economic downturn will cause that difference to narrow. These compensation and resource constraints make it increasingly difficult to hire people with tax practice experience of any sort, and make it more likely that those hired are coming right out of school. Law schools, however, are not trying to prepare their J.D. graduates to step into these positions ready to do what is demanded of them, in part because law faculty continue to think that government agencies will do the training that needs to be done. But just as this guidance and review at law firms is disappearing, to the point where some law firms choose to hire only lawyers with several years of post-law-school training acquired at someone else's expense and risk, so, too, the amount of guidance and review in government agencies, including Treasury and the IRS, is diminishing. All of this is topped off with the continuous replacement of high-level management and those in policy-making positions, putting the agencies and the subordinate employees in a world of constant turmoil, riled even more by continuous tinkering with the tax law by the Congress.

The people who were confused by the status of married individuals and concluded that they are one taxpayer probably were confused by the tax policy concept underlying section 1041 nonrecognition, the marital deduction, and similar provisions that are justified on the notion that transfers between spouses ought not be taxed. Some justify these provisions on a theory that the married couple is one person, a concept that was touted during the 1980s and again during this decade by those who saw the tax law as a mechanism to bolster traditional family structures, at least in terms of how its advocates interpreted traditional in that context. The provisions also can be justified, and more sensibly, by viewing spousal transfers as an inappropriate and administratively unwise time to impose taxation, in a manner similar to the justification for not taxing increases in the value of property until a realization event occurs.

Yet understanding the difference between a fundamental doctrinal principle of tax and a jurisprudential justification for a much less fundamental principle is a core lawyering skill. Someone without that skill ought not be working on matters that affect not only one client but tens of millions of clients. The American people are the clients of the government, for the government exists to serve the American people and to that their interests and rights are protected. The more people who rely on a product or service, the more that product or service must be properly designed and implemented. That's not an approach limited to application in the government sector, for it surely explains the dangers of inadequate products or services globally or nationally marketed by private sector enterprises, and it's not necessary, is it, to name names?

It wasn't long after I shared these views that a response appeared. Nicely and smartly titled, "Perfection is not available at this time. Try again later," it advised me that my expectations about perfection are "way too high for human beings and real world." I was reminded that "drafting is very very hard."

In my reply, I explained that my standard isn't perfection. It's "good enough." Every semester I reassure my students that it is possible to earn an A without attaining perfect scores on all of the semester exercises and the examination. If perfection were the standard, no student ever would have earned an A in any of my courses. They often earn perfect scores on individual semester exercises and specific examination questions. They do this working alone, with no one reviewing the work that they submit for a grade or score. In fact, one can earn an A by attaining roughly 75 percent of perfection. In the practice world, the standard must be raised, and one way of doing so is to have the benefit of careful review and, where feasible and appropriate, team efforts. If the chances of a person making an error are 10 percent, the chances of two people making the same error drop, and with a reviewer in the mix, the chances of an error drop below 1 percent. Unfortunately, having one's work reviewed is becoming more of a luxury than a routine process, because we live in a world of increasingly reduced time and money resources, a world filled with a desire for instantaneous results. Had the Congress and its various staffs invested a little more time by having brains attached to other eyeballs think through the ramifications and issues implicated in the bonus taxation legislation, far fewer resources would have been wasted in the ensuing flap over the matter.

What matters, I continued, is the nature of mistakes. Mistakes will be made. Mistakes that are harmless easily are tolerated by the tax system. Thus, the misspelling of "mortgage" as "morgage" in a tax statute doesn't impede the administration of the tax law. Mistakes that compound mistakes are the worst type, and that is what the section 163(h) issue has become. The failure of Congress to think through the question of co-ownership of principal residences, the application of a tax doctrine that does not exist, and the flaws in CCA 200911007 described more fully in the previously cited postings coalesce to form a perfect storm of a mess. In some ways, it's the difference between the mistake made by someone who knows that a hammer is required and knows how to use one, but misses the nail, and the mistake made by someone who doesn't even know a hammer exists and thus tries to accomplish the task using a blowtorch.

Yes, drafting is hard. So, too, is interpreting statutes. So, too, is taking into account the hundreds of variables that must be considered when engaging in estate or business or tax planning on behalf of a client. The opportunity for error is high, and can be reduced through the use of teamwork and review, which requires adequate resources. It's not enough to toss off these crucial deficiencies in the tax law by falling back on the imperfection of humanity. Unlike teachers who think, as I have been told, that a C minus sends the message that the work is a failure or that an A is deserved by someone who did his or her best, I think that there are times when our best isn't good enough. That's why we need teamwork and review. That's why, when the margin for error is slim, preparation and practice must be given due attention. The resources devoted to preventing an error in a document affecting tens of millions of people ought to be far more than those dedicated to a document that carries less weight and affects one person.

It was then pointed out to me that the drafting sessions of several decades ago, when two dozen people would be in one room helping the principal drafter craft the statute, have gone out of style. It was suggested that this was not unintentional, for those who dislike tax rarely try to do a good job drafting its legislative text. Even though this might appear to ring of conspiracy and ulterior motives, I think it is quite plausible. What better way to destroy the tax system than to pay little attention to the care in its drafting? To paraphrase recent statements about the President, are there not those who, when pressed, would confess, "I would like to see the tax law fail"? Indeed there are. What better way to destroy the income tax than to riddle it with badly drafted language, unwise provisions, and unjustifiable complexity, while claiming that what is being done is for the sake of simplicity and with a goal of public service? Does this pattern not encourage noncompliance and make it more difficult for those who want to comply to do so?

To this there is made the argument that laws aren't, and presumably, cannot be, perfect, and that the relevant agency, in this case Treasury and the IRS, must accept responsibility for dealing with the problem. That might work if the error is one of omission that generates an ambiguity that must be interpreted. It doesn't work well if the mistake is one that cannot be fixed without legislative technical or other correction. When one person consistently fixes the errors of another, the first person is enabling the second person's inadequacies and so long as the second person does not undertake responsibility to avoid and repair mistakes, the mistakes will continue.

Even when it is possible and appropriate for the Treasury and the IRS to deal with statutory flaws, it needs to do so using a process that permits comment, reflection, and deliberative consideration of the issues. That process needs to be transparent. Yet in recent years, the trend is for increasingly reduced guidance, leaving practitioners with fewer regulations and revenue rulings so that they grasp at CCAs and PLRs. More and more guidance shows up in Notices that look like regulations but have not been through a vetting process, and press releases. Yes, press releases. This is no way to govern a nation or to administer the tax law.

My view on this score also brought an objection. Such a process would not permit the agency to get its work finished. There is a need, and this is a valid point, to get guidance published before too many people go astray trying to file returns or plan their transactions. PLRs and CCRs, it is noted, are not intended to be public guidance but simply advice to a taxpayer or an IRS employee dealing with a specific situation. But because these documents are public, those who write them think that they carry the weight of regulations and they begin using them in lieu of regulations and revenue rulings. Put together, this person explained, a first-year docket attorney and a bored reviewer who doesn't think about the implications of the document, and the errors are compounded.

In response, ought not the comment, reflection, and deliberative consideration of tax issues be the work, or at least part of the work, that the agency must do? If the agency cannot do all if its work, thus causing a proliferation of CCAs and PLRs that stand alone as guidance on an issue, the reason is lack of resources. That lack of resources is a problem brought to us by the same people who have contributed to the undermining of the tax law. The ultimate responsibility rests with the Congress. That ought not be a surprise to anyone who knows my view of how Congress operates and how it has failed the nation.

Yes, it falls back on the Congress. Congress doubles the number of Internal Revenue Code provisions but doesn't double Treasury and IRS resources to issue the requisite regulations and other formal guidance, to staff help desks, or to audit returns to encourage compliance. The inability of humans to attain perfection ought not be an excuse to give up trying to get as close to it as is good enough. When an issue generates the sort of dispute that CCA 200911007 has triggered, there is de facto proof that the statute is not good enough. The inability of a basketball player to shoot 100 percent is not good reason to stop practicing shooting or to focus when trying to make a basket. And if the person's best isn't good enough, the person may end up not making the team or playing in the game.

Will Congress ever get its act together and revamp the way it does business so that it generates legislation of sufficient quality? Perhaps if the tax system collapses as did the financial sector, Congress will understand the problem, because it's as deaf to the warnings about the state of tax administration as the "wizards" on Wall Street were to those who had been criticizing its culture long before they spewed out those derivatives that broke the back of the economy.

It won't require perfection to fix the tax law. But it will require something far more than we've been seeing and getting.

Thanks to Paul Caron's TaxProf Blog posting, I was directed to a series of articles addressing that seemingly critical question, "Is Legal Scholarship Dead?" Paul nicely quotes from each of the articles, and does so in a way that leads up to the suggestion on which I cannot refrain from commenting.

First comes this quotation from Pierre Schlag, Spam Jurisprudence, Air Law, and the Rank Anxiety of Nothing Happening (A Report on the State of the Art), 97 Geo. L.J. 803 (2009):

American legal scholarship today is dead—totally dead, deader than at any time in the past thirty years. It is more dead, vastly and exponentially more dead, than critical legal studies was ever dead during its most dead period. ...

Now it’s true that we’re producing at a vastly faster rate than ever before. More papers. More conferences. More panels. More symposia. More blogs. And faster and faster too. More and faster. Over seven thousand American legal academics—and all of them cranking out those talks and papers as fast as possible. The speed of legal scholarship is just off the charts right now.

And yet, nothing’s happening.

How could this possibly be? The short answer is that, all around us, there is more, vastly more, of nothing happening than ever before.

To this responded Daniel R. Ortiz in Get a Life?, 97 Geo. L.J. 837 (2009):

What a depressing prospect! Many years short of retirement, I’m condemned, Schlag says, to generate necessarily (but, I hope, excellently) mediocre “legally cognizable material” at an ever-increasing pace. Like a hamster spinning on a wheel, my only hope is that my audience—and that’s probably only my dean—will applaud my display of energy as I move ever more quickly nowhere.

And to that lament came Richard Posner's proposed remedy, in The State of Legal Scholarship Today (A Comment on Schlag), 97 Geo. L.J. 845 (2009):

Might it not be a good idea for law schools, just as they have separate clinical departments, with clinical faculty whose credentials, job descriptions, and career tracks differ substantially from those of the “regular” faculty, to have a department of legal analysis? The members would be legal doctrinalists, and their salaries would probably exceed those of the other professors in the law school (because lucrative private practice would be a close substitute for what they would be doing in law school, which is not the case for more “academic” law professors), but they would have somewhat higher teaching loads and the school would have different and lower expectations with regard to their scholarly publication. The practice of law has become a team effort—so has medicine— so why not legal education? Already regular law professors and clinical law professors work side by side in general amity. Why not have a third group of specialists, the legal analysts, working alongside them?

Posner's suggestion deserves attention, not only because it presupposes some conditions that are questionable but also because it raises serious questions that need to be addressed. His suggestion deserves attention because, as Mike Livingston points out in his comment to Paul Caron's posting, law schools seem to be heading in that direction, but haphazardly and not deliberatively, creating an arrangement different in critical respects from the one envisioned by Posner.

The first concern is Posner's assertion that "law schools … have separate clinical departments, with clinical faculty whose credentials, job descriptions, and career tracks differ substantially from those of the 'regular' faculty," which may be true at some institutions but certainly isn't the case at all institutions. That fact proves the axiom that it need not be the case at any institution. Faculty at my law school are treated in the same way regardless of whether they are teaching a clinic or not. The hiring process may focus a bit more on certain credentials, namely, practice experience in a clinic's substantive area, but clinic faculty are not relegated to some "second class" membership in the faculty. They vote, they are subject to the same tenure review standards, they are not on a different pay scale, etc. There are faculty who teach both a clinic and a "regular" course, which would compound the many problems that would arise from separating clinicians from non-clinicians. Posner's point, though, survives despite the seeming universality of his assertion. His point is that separating law faculty into two (or more) groups would solve a problem.

My second concern is the idea that creating another "class" of law faculty is, in some way, a solution to the problem that threatens to transform law schools, and to do so in ways beyond the schools' control if their administration and faculty don't start focusing on the realities of the current recession and its long-term impact on legal education, as I discussed in How A Transformative Recession Affects Law Practice and Legal Education. It's not just the creation of a separate class of faculty that is disturbing. It's the proposed disparity in treatment, and, worse, the economic justification for the proposed dichotomy.

Posner suggests a "department of legal analysis" that would hire or take over "legal doctrinalists." Presumably, these would be the faculty who teach legal doctrine to law students. Law students, however, need more than legal doctrine. They need the ability to interview clients and dig out relevant facts. They need to learn how to negotiate and bargain. They need to learn compliance and planning techniques. They need to learn how to write, how to teach themselves, how to organize their thoughts, and how to express their reasoning and conclusions. They need to learn how to react to ever-changing legal landscapes. Posner describes what these faculty would be doing as something for which "lucrative private practice would be a close substitute." Yet not all great practitioners are in lucrative practices, because some great practitioners toil in public service organizations, in prosecutors' offices, or in government agencies, serving well their constitutencies and clients and yet not becoming the second coming of Midas. Ideally structured, most law faculty would be teaching clinics and other courses, making the divide between clinician and non-clinician a thing of the past. But that issue distracts from the chief problem with Posner's idea.

Posner suggests that the legal doctrinalists would earn higher salaries than the "'academic' law professors" and would have higher teaching loads than would the "academic law professors." This could mean two things. It could mean that legal doctrinalists would teach, for example, 16 credits during the year, and earn, let's say, $140,000, whereas the academic law professor would teach 8 credits during the year, and earn $70,000. Presumably, that would give the academic faculty more "free time" to devote to "legal scholarship." But it also could mean that that legal doctrinalists would teach, for example, 16 credits during the year, and earn, let's say, $140,000, whereas the academic law professor would teach 8 credits during the year, and earn $125,000. The former interpretation means that academic faculty would be compensated economically for their scholarship only if they found someone willing to pay for it, a proposition extremely unlikely to materialize. The latter interpretation means that law student subsidization of legal scholarship would continue. If that is what Posner envisions, I disagree with his proposal.

To ask the critical question is to ask why law students should subsidize legal scholarship. The replies from the defenders of this practice are interesting. They argue that the legal scholarship done by faculty at Law School A enhance the reputation of that school and thus enhance the employment prospects of its graduates. Yet graduates of law schools that have generated significant increases in "scholarly output" by their faculties haven't gained in the marketplace because those increases in scholarly output haven't diminished the employment prospects of Law School A's graduates. Advocates of student subsidization of legal scholarship also argue that the scholarship contributes to the development of the law, in the legislative arena, through administrative pronouncements, and in judicial decision making. Yet that is far more the exception than the rule. Members of Congress rarely, if ever, read the academic journals. Administrative agencies rely on those practicing in front of them or submitting comments, and rarely does a law review article turn up as an agency submission. Judges turn to the law reviews with ever-decreasing frequency. Practitioners subscribe to services that keep them current in the law, which means that their subscriptions to academic journals has withered away to de minimis numbers. It may be sad from the wider perspective of legal philosophy, but clients pay for what solves and prevents their problems today, and aren't all that interested in how things would turn out for them if Professor X were the czar of the legal world.

How did this come to pass? Years ago, the Supreme Court, in Griswold v. Connecticut, 381 U.S. 479 (1965), cited a law review article written by a law school professor and dean, Erwin N. Griswold, The Right to be Let Alone, 55 Nw. U. L. Rev. (1960). No, I don't think the two Griswolds were related, at least not in terms of considering themselves members of the same family. The appeal of being cited by the Supreme Court resonated with the egos of many a law school faculty member and many more wanting to be law school faculty. And so the race was on to pen the definitive analysis that would lift its author, and the author's school, into prominence when it was cited by the Supreme Court. The irony is that Erwin N. Griswold tackled a practical problem and dealt with it in practical ways that made it useful to the court. So much of today's "dead" legal scholarship plays upon a theoretical landscape offering impractical ideas that it's no wonder the judiciary finds less and less value in the pages of the academic journals. In contrast, practical writing that guides lawyers as they seek to assist their clients also gives judges a good road map to working through a case. When I do write what is considered "true legal scholarship," and I do that from time to time, I focus on practical problems and address a question that has come up in practice and that is near or already in litigation. My practical writing, which is what principally author, ends up being cited with some regularity, particularly in judicial briefs. I doubt the Supreme Court ever will cite me, and yet that in no way diminishes my conclusion that I've been helpful with my writing. My point is that one can both teach and write, in ways that are harmonious, without needing to wander into the places legal scholarship has taken itself during the past twenty or thirty years, apparently, according to some, to places where it will die or already has died.

And that brings us to yet another argument made by those who support the idea that law faculty should be cranking out scholarly article after scholarly article. They claim that these articles will contribute to the betterment of society, by influencing the development of law in a beneficial direction. Yet, as I've pointed out, they're more likely to achieve this result if they focus on practical problems in practical ways rather than trying to justify positions on abstract conceptualizations. Not long ago, a professor from another school came here to present a paper. The issue was important, the analysis was interesting, but for me the paper ended too soon. I asked the author if the goal was to produce something to guide legislatures in framing a statutory solution, to help judges decide the seemingly inevitable case, or to provide practitioners with arguments and planning approaches to use in litigation and planning work. The answer floored me. "I'm not writing for them. I'm writing for other scholars." I bit my tongue. I wanted to ask, "On whose dime?" Why should law students undertake debt in order to fund this sort of production? The answer, of course, is that they are easy targets, riding on a bubble of education debt that made it a no-brainer to increase law school tuition every year to fund more and more faculty scholarship as average teaching loads declined, made possible by expanding the size of law school faculties.

Mike Livingston, in his his comment to Paul Caron's posting, notes that law schools already are "substituting non-tenure track (and primarily nonscholarly) faculty for the more traditional variety" and he characterizes that as a ruse. Indeed it is. These non-tenure track faculty, cost law schools far less than do "regular" faculty and yet their increasing presence doesn't yield tuition discounts or rebates for law students. Why? Because more and more regular faculty demand reduced teaching loads, in order to generate legal scholarship, law schools end up needing to hire non-tenure track faculty, and even adjuncts, to teach courses, including core courses. Here's the catch. These non-tenure track faculty and adjuncts earn less, not more, than the "academic law professor." Law schools have it backwards. They're slip-sliding into an inversion of Posner's suggestion. They will end up, if the trend continues, as institutions paying high salaries to academicians writing legal scholarship and lower salaries to faculty doing the teaching. And law students will continue to borrow money to pay for this experience, why?

What law schools, and their parent universities, need to do is to become honest. The law school is a school. Its tuition should fund teaching, and by teaching I mean not only doctrinal pedagogy but also clinical and other experiential classes, planning courses, practical writing exercises, and all of the other skills that lawyers need. The university, if it so chooses, can establish institutes, or think tanks, that hire people who want to ponder and engage in discourse on topics of interest, to themselves, to the university, to the institute, to whomever, as the university chooses to support. Funding? Consult the think tanks and learn how they obtain money. Think tanks aren't charging tuition. A person who wants to teach and write could be given the opportunity to take a part-time appointment in the law school and a part-time appointment in the think tank, with salary set accordingly. A person who wants to write, and there are law faculty who would invest all their time writing if they could and who view teaching as a necessary distraction, could seek an appointment in the institute. A person who wants to teach, and who doesn't want to engage in the academic scholarship game, could seek an appointment in the law school. None of this would prevent the law school faculty member from writing practical material. None of this would prevent the law school and the institute from collaborating on programs of interest to law students and the practice world, though I predict there would be much experimentation before these organizations figured out how to do it in a way that works.

If law schools don't make these adjustments, they will continue on the slip-slide until the day the faculty wakes up, realizes students are heading for those much less expensive educational organizations established by the practice world, a possibility I suggest in How A Transformative Recession Affects Law Practice and Legal Education, and notices that the revenue required for their incomes has shrunk considerably. The law school will have become the institute, after dismissing most of the faculty, its building will be taken over by the university, to be rented to the new law teaching organization, in some sort of cooperative venture with the practicing bar and perhaps the state judicial system. The outcome will be far less pleasant than the one that can be obtained by a careful and deliberative process of reforming and re-forming legal education. The post-2010-recession economy will not be hospitable to the current arrangement. It truly is a simple choice. What will happen to it?

With all the turmoil concerning the taxation of those AIG, and similar, bonus payments, as discussed in Taxing Bonuses, it's time for a change of pace. There's only so much critical analysis a person can usefully pursue, such as the one in Tax Concept Spawns Tax Details, before concluding that it makes sense to wait and see how the legislation fares in the Senate and whether it survives the President's veto pen.

A different perspective on the challenges of tax administration highlights a similar problem. The problem in this instance is the inability of state, local, and national governments, and even international agencies, to curtail or even eliminate the "tax phishing" that infects life in this digital age. It's a problem for the people who fall victim. It's a problem for the IRS, because it must shift resources to dealing with the problem and helping victims. It's a problem for the robustness of the internet, because the backlash against these outlaws could end up restricting innocent internet users. Why is this problem similar to the bonus taxation problem? In both instances governments struggle to find ways to deter in appropriate behavior, and to fix the consequences of that behavior, without affecting adversely those who are not among those who think law is nothing more than a distraction to their unflinching pursuit of money in total disregard of what is right and wrong.

There is a difference, though, between the two problems. In one case, the arrangements were crafted carefully, and the ability of fact finders to ascertain the truth was impeded by cunningly disguised implementation. In the other case, the sloppiness betrays the incompetence of the money chasers, even though there are, unfortunately, people who don't know enough to recognize the obvious and almost comical attempt to prosper through greed.

So here's a chance to experience what it's like to face a quiz, or more accurately, a semester exercise, in a tax course. You can pretend to be an associate in a law firm who is asked by a partner whether an email received by a client should be ignored or given a response. If that thought is too disturbing, pretend that a relative or friend has approached you to ask how they should react to this email. Your task is easier than it could be, because I will tell you the first part of your response. You would tell the partner to tell the client to ignore the email, just as you would tell the relative or friend to delete it and move on. Your responsibility is to identify the clues in the email that suggest it's not the IRS message it claims to be.

Here's the email, which is a verbatim replication of one that I received very recently:

*******************************************************************
From: Department of The Treasury [mailto:message157@legalnotice.org]
Sent: Friday, February 27, 2009 8:48 AM
Subject: Tax return (Message ID: JN34534362)

After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund under section 501(c) (3) of the Internal Revenue Code. Tax refund value is $189.60.

Please submit the tax refund request and allow us 6-9 days in order to IWP the data received. If u don't receive your refund within 9 business days from the original IRS mailing date shown, you can start a refund trace online.

If you distribute funds to other organization, your records must show wether they are exempt under section 497 (c) (15). In cases where the recipient org. is not exempt under section 497 (c) (15), you must have evidence the funds will be used for section 497 (c) (15) purposes.

If you distribute fund to individuals, you should keep case histories showing the recipient's name and address; the purpose of the award; the maner of section; and the realtionship of the recipient to any of your officers, directors, trustees, members, or major contributors.

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

This notification has been sent by the Internal Revenue Service, a bureau of the Department of the Treasury.

Sincerely Yours,

John Stewart
Director, Exempt. Organization
Rulings and Agreements Letter
Internal Revenue Service
********************************************************************************

Don't read further in this post until you try to identify the clues. Some are very obvious, and you should be able to collect enough of them to earn a decent grade. Some take a bit more thought, and finding those can bring the grade up to a very good level. A few of the clues are a bit oblique, but they provide a chance for the A students to stand out.

So don't peek at the list that follows. So to push those clues further down the page I will provide two more bits of information.

First, it would not be surprising to discover that you have identified a clue that I don't identify. The outcome of collective effort on client problems usually exceeds the output of a single attorney. That's why professionals work as teams. The tax lawyer sometimes brings in one or more other tax experts, and when the matter warrants, an accountant, an appraiser, an actuary, an engineer, or some other professional who brings a special expertise.

Second, here's how in my "score against a standard" grading approach you would do with this problem (roughly, because there are insufficient total points to generate a course grade and cut-offs are adjusted to prevent one point from making a difference in a course grade):

16 to 20 clues: A
15 clues: A-
14 clues: B+
12 or 13 clues: B
11 clues: B-
9 or 10 clues: C+
7 or 8 clues: C
6 clues: C-
4 or 5 clues: D
3 or fewer clues: F

Ready for the clues? Here they are, in the order they appear in the phishing email

1. The email address associated with the Department of the Treasury is not from a Department of the Treasury internet domain.

2. Tax refunds are not issued under section 501(c)(3). Section 501(c)(3) is the definition of organizations that are tax-exempt on account of being organized and operated for religious, charitable, scientific, and other specific purposes.

3. If a tax refund has been determined, there ought be no need to request it.

4. The acronym IWP makes no sense in the context of the message, and even if one could come up with words that would fit those letters, it is highly unlikely that a message with respect to a tax refund would use the term as an infinitive form of a verb.

5. It is patently absurd to think that a government message sent by email would be written using text messaging shortcuts, as is the case with "If u don't receive."

6. There is no "IRS mailing date shown."

7. The email is purportedly sent by the Department of the Treasury, and thus one would expect a reference to "the original Department of the Treasury mailing date"?

8. The grammar in "If you distribute funds to other organization" suggests that the message writer does not use English as a primary language, and is the sort of error that would not persist in a form letter of the sort that goes through multiple levels of review.

9. Even more incorrect grammar shows up in "If you distribute funds to other organization" because either organization should be in the plural or the word other should be another.

10. The misspelling of "wether" corroborates the thought that this email originates with someone who does not use English as a primary language, and is yet another type of error that would have been caught, as described in #8, above.

11. There is no section 497, so there surely is no section 497(c)(15) and there are no such things as section 497(c)(15) purposes.

12. Yet another misuse of the English language shows up in the phrase "If you distribute fund to individuals."

13. The meaning of the phrase "the maner of section" can be guessed only by making the assumption that the word "selection" was intended but ended up as "section."

14. The word "maner" must come from the same dictionary as does the word "wether" and corroborates the point made in #10, above.

15. If "maner" and "wether" aren't enough to raise suspicions, perhaps "realtionship" does.

16. The URL that shows up under "click here" surely is not a Department of the Treasury or IRS web site.

17. If the notification was sent by the Internal Revenue Service, why is it packaged as a message from the Department of the Treasury?

18. The IRS does not appoint people to be the Director of a Letter.

19. The placement of a period after the word Exempt is yet another grammatical error demonstrating that the email is a deception.

20. Anyone who reads the paper knows that the IRS does not use email to initiate contact with a taxpayer concerning refunds.

Sadly, somewhere someone has clicked on the link in hopes of getting a few dollars, and ended up providing a criminal with sufficient information to permit the criminal to steal the person's identity or to use some other nefarious technique to acquire funds to which the criminal is not entitled. Is it not time to being teaching high school students how to identify phishing emails? Surely that is as important a life skill as are most of the others that are taught in our school systems? Hoping that someone's common sense would be sufficient is asking too much.

So how many clues did you identify?

Perhaps one of the most frustrating aspects of tax practice is that most clients can understand tax concepts but get lost when they encounter the details. One of the most frustrating aspects of being a tax student is learning how to shift from a concept to the specific provisions implementing that concept. A concept, standing alone, isn't worth much. Without a roadmap for applying it to a specific situation, it remains an abstract idea without force. In all fairness, were it not for the demands of dealing with details, tax practitioners would have fewer clients needing their services, and tax students would have even dimmer prospects of finding a market willing to compensate them for their learning.

An excellent example of concept-turned-statute is H.R. 1586, which passed the House of Representatives on Thursday. This is the legislation that imposes income tax on bonuses at a 90% rate. That's the concept. "Tax those AIG bonuses" was a cry heard throughout the land, even though, as I pointed out in Taxing Bonuses, the tax would do nothing to undo the economic mess created in part by the bonus recipients. The tax passed by the House isn't the 100% tax that was being touted, but a tax scaled back to 90%, presumably to avoid constitutional challenges.

Setting aside the wisdom and efficacy of the tax, what needs to be done to implement the concept of imposing a tax on the bonuses? Let's look at H.R. 1586.

One must begin by identifying those to be taxed. Section 1(a) of the bill applies the tax to any "employee or former employee of a covered TARP recipient." This requires a definition of that phrase. Section 1(c)(1) of the bill defines a "covered TARP recipient" as anyone that fits within one of four possible descriptions. The first is any person who, after December 31, 2007, received "capital infusions under the Emergency Economic Stabilization Act of 2008 which, in the aggregate, exceed $5,000,000,000." The second is the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The third is any person "who is a member of the same affiliated group" as a person in either of the first two descriptions. The fourth is any partnership "if more than 50 per cent of the capital or profits interests of such partnership are owned directly or indirectly by one or more persons in any of the first three descriptions. In the usual game of defining terms in a definition, the provision defines "affiliated group" as it is "defined in section 1504 …, determined without regard to paragraphs (2) and (3) of subsection (b)." For terms such as employee, former employee, partnership, capital interest, profits interest, and others that are used elsewhere in the Internal Revenue Code, section 1(d) of the bill provides that they are to be given the same meaning they have when used elsewhere in the Code. I haven't checked, but there are more than a few terms in the Internal Revenue Code that have different meanings for different purposes, so there may be more analysis that must be done before one can determine if the tax would apply.

As written, section 1(a) would apply even if the TARP recipient repaid to the government an amount of money equal to the amount used for the bonus. Considering the purpose of the provision, that would not make sense. Accordingly, section 1(c)(2) of the bill provides for an exception with respect to repayments. It tells us that a person "shall be treated as described in paragraph (1)(A)," that is, subject to the tax, "only if the excess of the aggregate amount of capital infusions described in paragraph (1)(A) with respect to such person over the amounts repaid by such person to the Federal Government with respect to such capital infusions, exceeds $5,000,000,000." In other words, the test isn't whether the capital infusions exceed $5 billion, but whether the NET capital infusions exceed $5 billion. As a practical matter, this means that the bonus recipient does not know whether or not the bonus is taxable at 90 percent until and unless the employer makes a determination that the employee cannot make, namely, the amount of the net capital infusions, and shares that information with the employee. That, of course, is true for determining the tax status of all sorts of benefits provided by employers to employees.

Having identified those who are to be taxed, the next step is to provide for the taxation of the bonus. But before the bonus can be taxed, it needs to be defined. That seems to be a simple proposition, but hang on, it's not. Section 1(b) of the bill begins with a general rule. It defines a TARP bonus for any taxable year, which is what section 1(a) taxes, as the lesser of two amounts. The first amount is the "aggregate disqualified bonus payments received from covered TARP recipients during such taxable year." The second amount is the excess of the taxpayer's adjusted gross income over $250,000, or $125,000 for a married individual filing a separate return. This has the effect of sparing taxpayers with adjusted gross incomes of $250,000 (or $125,000) from being taxed on the bonus at a 90 percent rate. It also has the effect of limiting the portion of the bonus taxed at 90 percent for taxpayers whose adjusted gross income exceeds $250,000 (or $125,000) by a relatively small amount. This makes little sense, and it presupposes that adjusted gross income is a good measure of the taxpayer's relative economic position. That presupposition is questionable because the people receiving these bonuses include people who manipulated financial instruments in ways that suggest they very well may have manipulated their adjusted gross incomes.

The definition of a TARP bonus depends on the term "disqualified bonus payment." Section 1(b)(2) of the bill takes on the task of defining that term. A disqualified bonus payment is any "retention payment, incentive payment, or other bonus which is in addtion to any amount payable to such individual for service performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate." The term does not include "commissions, welfare or fringe benefits, or expense reimbursements." The term also does not include "any amount if the employee irrevocably waives the employee's entitlement to such payment, or the employee returns such payment to the employer, before the close of the taxable year in which such payment is due," but this exception does not apply "if the employee receives any benefit from the employer in connection with the waiver or return of such payment." Guaranteed, if this is enacted, there will be questions, debates, rulings, and litigation over the extent to which someone "receives any benefit from the employer in connection with the waiver or return of such payment." Finally, to preclude abuse, a disqualified bonus payment includes any reimbursement of the employee by a covered TARP recipient of the "tax imposed under subsection (a)." The "tax imposed under subsection (a)" is the employee's regular income tax, and not simply the 90-percent portion of the tax. Accordingly, income tax reimbursements plans in effect with respect to other income would be caught if the employer is a TARP recipient, even if the employee did not otherwise receive a bonus. At least that's how I interpret the provision.

Actually computing the tax on the bonus is more complicated than simply stating that it must be taxed at a rate of 90 percent. Tracking the language of section 1(a) shows why this is so. The regular income tax imposed on the bonus recipient is described as "not less than the sum of" two amounts. The first amount is the regular income tax that would be computed if the taxpayer's taxable income did not include the TARP bonus. The second amount is 90 percent of the TARP bonus. What this means, of course, is that even if the taxpayer's taxable income is very low or zero because there are deductions offsetting the gross income generated by the TARP bonus, those are not taken into account when computing 90 percent of the bonus.

Nor is this sufficient. Section 1(e) of the bill provides that any "increase in the tax imposed under chapter 1 of the Internal Revenue Code of 1986 by reason of subsection (a)," which means the 90-percent portion, "shall not be treated as a tax imposed by such chapter for purposes of determining the amount of any credit under such chapter or for purposes of section 55 of such Code." In other words, the 90-percent portion of the tax cannot be used to increase the tax liability limitation that applies to most credits. Similarly, it is not treated as a regular income tax in computing the alternative minimum tax.

Is this all? No. It is possible that something has been overlooked. It is possible that application of the provision in the context of existing tax law will create ambiguities or interpretational conflicts. Here comes section 1(f) with the solution: "The Secretary of the Treasury, or the Secretary's delegate, shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section." I wonder if Congress will appropriate funds so that the IRS can hire one or two bright law school graduates to write those regulations and guidance. That would be a wee bit of economic stimulation. It certainly would be intellectual stimulation for whomever was hired. The problem is that there are no law school graduates who have taken a course in taxation of TARP bonus payments because no such course exists.

Finally, there is a question as to whether this tax should apply to bonuses paid in previous years. The answer is found in section 1(g). It makes the provision effective for disqualified bonus payments received after December 31, 2008, in taxable years ending after December 31, 2008.

That is an example of how a simple concept becomes several pages of Internal Revenue Code text. As codified concepts go, it's a fairly simple one, as difficult as it may be to accept that proposition considering the length of this posting. Some tax concepts require dozens or more pages. Ask someone who has studied Partnership Taxation how many regulation pages are dedicated to the concept of "substantial economic effect." Ask someone who has done a tax return for a Social Security benefits recipient how many pages of instructions and computations are required to handle the concept of "taxing social security recipients on some of their social security benefits." The list of such examples could go on for many more paragraphs but I'll stop. I have some Senate bonus taxation legislation to read.

Those AIG bonuses have been the talk of the town. People are outraged that a company surviving on taxpayer dollars has paid bonuses to more than six dozen executives. How, people ask, does one justify a reward for piloting a company onto the reef?

The outrage has sparked a variety of proposals. Members of Congress have proposed a 100% tax on the bonus, as reported, for example, in this story, this one, and this one. When asked if the tax would be an excise tax, or an income tax on the recipients, or both, staffers replied that they did not yet know. Others have proposed that AIG be denied income tax deductions for the bonuses, as reported here. The Senate Majority Leader suggested that the recipients return the bonuses, though he has also signed on to other reactions. Still other proposals include revealing the identities of the recipients unless they return the money to AIG and requiring the recipients to donate some or all of the bonuses to charity. There are those who think that the government should have let, and should let, AIG go into bankruptcy. One Senator put forth the idea that the bonus recipients should resign or kill themselves, though he later recanted. The Secretary of the Treasury has explained how the Treasury intends to recoup the amounts that were paid.

Yet there are those who defend the payment of the bonuses. In his Dealbook column, Andrew Sorkin explains that AIG must abide by the employment contracts providing for the bonuses, and that failure to pay the bonuses would encourage departure of employees whose talents are required to unravel the mess in which AIG finds itself. Others have pointed out that perhaps the bonus payments went to people who performed well and whose divisions showed a profit, though as the facts trickle out from behind the AIG curtain, it appears that the bonus payments are going to people who are responsible for the mess and whose decisions generated losses.

The flurry of suggestions and the continued defense of the bonus payments in some quarters indicates the turmoil and uncertainty surrounding the transactions. Piled onto this cacophony of commentary are reactions from radio talk show hosts, blog visitors leaving comments, and others who appear to lack an understanding of how the tax system works.

It is to that tax issue that my attention turns. For those who think that a 100% excise tax is unprecedented, check out what happens when a tax-exempt organization or qualified retirement plan engages in a prohibited transaction and fails to take corrective action. Yes, there is imposed a 100% tax. Though the tax has the quality of being punitive, it has an even stronger characteristic of being a deterrent. The downside to imposing a 100% tax on the AIG bonuses is that it would not serve as a deterrent. We are paying the price for decades of ineffective controls on inappropriate executive compensation and decades of weak enforcement of what restrictions are in place. There also is a risk that the tax could be challenged on the grounds it is an impermissible taking and confiscatory.

Taxing the recipients makes no sense unless the proposal envisions imposing a higher rate of tax than otherwise already applies. As it stands, the bonus payments are subject to income tax. There's nothing but symbolic value in the imposition of an addition 10 or 20 percentage points of income tax. The proposal makes sense only if it anticipates a 100% tax rate on the payment, but that in turn raises the same issues that afflict the imposition of an excise tax on AIG.

For those who think that denying a deduction to AIG for the payments that are made, that approach is not unlike denying radio access to a deaf person. AIG does not need tax deductions. It is drowning in losses. It's not even clear that denying the deduction for the bonus payments would have any long-term impact on AIG's loss carryforwards, because those carryforwards might expire in any event.

Letting AIG enter bankruptcy is an argument that has its merits. It's too bad that huge amounts of taxpayer dollars already have been dumped into what would be a black hole. The argument against letting AIG go bankrupt is proof that the American corporate system must be gutted and rebuilt. Opponents of an AIG bankruptcy claim it is "too big" to fail. Its failure, they argue, would bring down the economy in some catastrophic way. That could be true. Either way, it's absurd that any private organization is permitted to become so big that it cannot fail. An organization whose owners know it will not be permitted to fail have, in effect, a blank check to do all the unwise and misguided things that the owners and managers of large entities are tempted to do. There was no good reason to permit AIG, or any of the other conglomerate multinational giants, to become "so big" that they are beyond the restraints of a properly operating free market. In a free market, those who make foolish decisions should pay a price. The mega-sizing of corporate America put yet another nail in the "free" market, creating a situation in which a group of wealthy and wealth-manipulating self-selected "elites" hold everyone else hostage. For those who have suffered on account of the oligarchy's irresponsible behavior, is economic slavery any less life-destroying and spirit-sapping than physical slavery?

The safeguards that ought to have protected America from rapacious entrepreneurs are the provisions that never found their way into state law, or that were installed into state law by legislators anxious to appease the folks who purchase for them their position in the legislature. It's not a tax issue. It's an issue of corporate law. The nominal owners of these modern-day goliaths aren't in a position to exercise their ownership rights. Devices of all sorts dilute their voting power. Votes with respect to stocks owned through mutual funds may or may not be cast in ways that conform to the principles and views of the mutual fund investors. State corporate law has failed America.

What's left? The answer is a deeply troubling one. The enterprises that have been mismanaged, pillaged, and used as money-grabbing machines need to be nationalized, at least for some interim period. The folks who are responsible for the mess need to be removed from any further opportunities to do damage. Who cares if they have some particular skill? They're not the only people in the world who have those skills. They lack something that at least some of those other people have, and that is a respect for justice, a bit of empathy, an appreciation of wisdom, and a grasp of why the pursuit of money at all costs is a short-run mirage burdened by long-term disaster.

But it cannot end there. It's not enough to pull out the weeds, for surely more weeds will grow until the soil is modified. The culture that spawned these self-absorbed, greedy, and defiant captains of industry must be ripped apart. Years of affirming bad behavior by trying to see its good side, decades of accepting the "blame others" response to failure, year after year of being more concerned about offending wrong-doers, and days and days of pretending that things are other than they truly are because the truth is unwanted have filled America's boardrooms with creatures who come up short when it's time to account for understanding the difference between right and wrong.

While held in trust for the nation by the government, these huge dinosaurs of business activity need to be cut down to size. Corporations that become so big that no one knows what's happening throughout the company are destined to fail. The idea that an enterprise should have its hand in everything is nothing more than a reach for world domination. Instead of perfecting products and services in its original line of business, corporations shift attention to each new activity that comes down the road, jumping from bandwagon to bandwagon, unwilling to let anyone else prosper by doing well in some other line of business. The nation and the world end up with corporations that do all sorts of things and none of them very well. Investment banks wanted to be commercial banks, Microsoft wanted and wants to be Google (and Apple and Intel and.. and .. and), brokerages want to be investment banks, and without a doubt this list could be expanded for pages.

Imagine a middle school playground. One student says to another, "I'm cool and you're cool." The other student returns the favor. Together they chime, "Yeah, we're cool." The culture of the school becomes one of self-selected "cool" kids ostracizing the majority of the students in attendance at the school. Now fast-forward to the world of corporate boardrooms, high finance, wheeler-dealers, and the other "players" in the money game. "Yeah, you're cool and what you're doing is ok," says one to another. And the affirmation is returned in kind. "Yeah, we're cool, and what we're doing is ok," they chant in unison, as they not only ostracize but take advantage of everyone else. In the schoolyard, responsible adults can, and should, step in to prevent a bad situation escalating into one infused with bullying and its dangerous consequences. Who steps into the financial and corporate playground to restore order? Who takes over that playground? Surely a tax on "coolness" or on "we're ok" won't get the job done. It's too late for deterrent taxation. It soon may be too late, period.

It was bound to happen. Andrew Mitchel, the tax chart guru, has opened up a new line of tax graphics production. This time, he's venturing into the world of animations. No, not tax cartoons, though that's a tempting idea, but animated portrayals of corporate transactions and their tax consequences.

You can get to the animations here. Give yourself a few minutes to go through them. I expect that Andrew will create more of these animations. For those who want to learn some basics or brush up on some basics, they provide an educational experience that is more effective than mere text.

I also expect that these animations will evolve into, and become part of, something more elaborate. I can see the rudiments of an on-line CLE program, and a study aid for law students. The challenge will be keeping them up-to-date, as the Congress continually fiddles with the tax law and as the IRS and the courts bestow regulations, rulings, and cases on taxpayers and tax practitioners. But that challenge exists no matter the medium through which the instructional endeavor is undertaken.

For those needing cross-references to my previous commentary on Andrew's chart work, look here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

The current recession, even if it doesn't grow into a depression, is a transformative one. When, and perhaps that should be if, the economy regains vibrancy and robustness, it will be an economy very different from the one that has tumbled wildly out of control in a downward spiral. There will be new industries and professions, there will be abandoned industries and professions, and there will be countless industries and professions adapted to new products and techniques. For example, if American automakers survive, their products will be very different from what they cranked out during the past fifty years. Similarly, the home construction industry will build smaller homes using energy-efficient materials in an environmentally responsible manner.

Though surely there are others who can offer predictions with respect to these and other industries, there is one area of the economy to which my professional life is very connected. I speak of law, in two manifestations, law practice and legal education. Specifically, it is the relationship between those two segments of law that need to be examined. I predict that because one is changing rapidly, the other needs to, and will, change dramatically.

By the middle of the current decade, the practice of law had evolved into a profession that dished out salaries north of $150,000 to law graduates with little or no practice experience, coming out of schools that may or may have not provided a clinic experience opportunity and that often emphasized courses focusing on philosophy, sociology, and other disciplines taught by academicians who found a home in law school by adding "Law And" to the course title. Law students continued to sit in classes set apart by doctrinal divisions with little relevance to legal practice. As the gap between law school and practice started to widen during the latter decades of the twentieth century, state and local bar associations initiated a variety of "Bridge the Gap" programs and similar efforts to ease the transition from law school to law practice. In the meantime, law firms found themselves with new associates in greater need of training but with decreasing opportunities to do the training. Not only did the need for partners and senior associates to increase their own billable hours reduce the time they could devote to mentoring recent graduates, they provided a more efficient personnel resource for doing client work because even though their hourly rates were higher than those of new hires, the reduction in the number of hours they required to accomplish a client task more than offset that difference. First-year associates making six-figure salaries need to be billed out at very high hourly rates in order for the firm to avoid losing money. Unfortunately, because they are so unprepared to do much of what need to be done, young associates end up taking two, three, or more times as many hours to do the task because of the steep learning curve that they face. Because of client complaints, billing partners often chopped a good chunk of these hours out of the invoice.

The onset of the current economic tailspin accelerated client concerns about invoices reflecting charges that were higher than they would have been had the work been done by someone not requiring additional hours of time because of inadequate preparation for practice. Other clients, for business reasons, scaled back recourse to legal advice. Still other clients went out of business. Law firm revenues have dropped, and massive layoffs have rippled throughout the law practice world. In turn, this has caused law firms to do one or more of several things with respect to hiring law graduates.

Some law firms aren't hiring. They have barely enough work to feed their current employees. Some firms are cutting out summer associate positions, while others are scaling the summer associate program back, in some instances by reducing the number of summer associates and in other instances by reducing the number of weeks. In one instance, the number of weeks has been cut 40 percent. Some law firms are withdrawing offers, causing hindsight distress for students who had turned down offers at other firms that might not have been withdrawn. More and more firms are telling 2009 graduates to show up in September 2010, and the rumor mill has it that these firms plan to tell any 2010 hires to show up in 2011. That, of course, assumes there will be hiring in 2011. Several firms have offered to pay small monthly stipends to these "suspended" hires if they work pro bono for an appropriate agency. Some firms are eliminating the hiring of law school graduates, choosing instead to hire lawyers with several years of practice. The reasoning is sound. Why pay to educate and develop an attorney when it's cheaper to let someone else take the economic loss of doing so? For students who can find positions as law clerks and government agency employees, this change won't be a significant one, but the number of students who will find such positions likely will not increase. As budget cuts ripple through governments, it is more likely that the number of these positions will decrease.

So why does this matter to legal education? It matters because it is one more nail in the coffin of legal education as we know it. The current economic downturn affects three segments of law school revenue. Schools that receive state funding have already faced big cuts, and will encounter more. Schools that use endowment income are suffering as are other institutions that rely on endowment income, and the bad news is that available endowment income will continue to fall, because the income determinations lag behind the market value changes. Schools that rely on tuition, which pretty much is every law school, must deal with the very real prospect of dwindling applicants. Applications will continue to decline because the impact of the recession, and its effect on law practice economics, will change the results of applying the financial equation that is a major component of the decision to attend or not attend law school. At best, law schools will be competing for fewer qualified applicants, and where those applicants end up studying will reflect not only law school reputation but the tuition charged by particular law schools.

The law school attendance decision financial equation, in English rather than mathematical terms, is simply this: Does it make sense to give up three years of salary and pay out law school tuition, either up front or through debt repayment, in exchange for the increased income expected to be earned by reason of having a law school education? When students in the now defunct Digital Legal Practice Skills course created spreadsheets to answer this question, the results surprised them. Unless they had a realistic prospect of earning significantly more income through having a law school education or unless their other employment opportunities offered rather low income prospects, law school made no sense financially. The transformation of law practice suggests that the financial advantage of a law school education will diminish, because law firms cannot sustain the huge salaries that have been paid in recent years to law school graduates, for the simple reason that the client revenue sources have shrunk and are being more carefully stewarded. Compounding the problem is the credit crunch, which puts at least some would-be law school applicants into a position of financial impossibility.

When prospective law school students begin to realize that the chances of getting a job upon graduation have fallen to the levels faced by college graduates with degrees in those majors that have persistently not been rewarded by the economy, even some of the more idealistic of them will view a J.D. degree as an over-priced ticket for admission to what at best is an employment lottery. When they learn that fewer and fewer law firms are hiring law school graduates because clients are not willing to pay for what little law school graduates bring to the table, some will turn away from the idea and others will join in the increasing chorus to reform legal education. Who else will be singing? Perhaps those law school graduates and current law students, who already have invested $150,000 or more in their education, only to find that they would have done better investing that money in the stock market.

Ultimately, the outcome will be some combination of a reduction in the number of law schools and a transformation of what transpires at those that survive. To make the financial equation work for applicants, law school tuition must be reduced. For that to occur, law schools must cut their biggest expense, which is total faculty salaries. Total faculty salaries can be cut through some combination of a reduced number of faculty positions and reduced salaries. The former approach would require an increase in the number of credit hours taught by each faculty member. The trend of cutting faculty credit hours, chiefly for purposes of permitting faculty to write scholarship "for the benefit of other scholars," as one visiting faculty member put it, will need to be reversed. This is not a new thought from me, for I have been asking why students should subsidize faculty scholarship ever since the rankings chase heated up several decades ago.

One other possibility remains. Bar associations and bar admissions committees, and perhaps state supreme courts, will question the wisdom of limiting bar applicants to graduates of accredited law schools. Enterprising practitioners, perhaps law firms joining together in collaborative and creative efforts, will form schools focused on preparing people to practice law. Properly operated, they need not charge the tuition rates currently being charged. Wise organizers will hire people with law teaching experience and ability, who have more attachment to teaching and less concern about scholarship, to administer and teach in these new institutions. They should be able to provide more experience in the nature of clinics, practical writing, transactional courses, and marketable post-graduation skills. With sufficient clout, they and their practitioner organizers should be able to persuade bar admission authorities to accept their graduates as bar exam candidates. By hiring bright, accomplished law graduates to team teach with experienced practitioners, they will foreclose the expected arguments from the law school monopoly that only faculty at law schools of the present kind know how to teach law. Ultimately, universities will see this development as a threat to their law school revenue sources, and seek to imitate or take over these institutions, at a far greater cost than would have been the cost of reforming their own law schools. Despite that disadvantage, it would provide the benefit of returning law schools to their principal mission, and like other industries, cause legal education to emerge from this transformative recession in a new and more robust form as will happen in other professions and areas of business.

Even if it does not come to pass in precisely this way, the possibility should compel legal educators, including law faculty, to think seriously about where they've been, where they are, and where they might be going, voluntarily or involuntarily. The threat of change ought be considered not as a risk but as a welcomed encouragement.

Like just about every other state and local government, Philadelphia is facing a fiscal mess. So it wasn't all that surprising when Philadelphia's Mayor Nutter floated the idea of charging city residents and businesses for trash collection based on the number of bags of trash picked up from their properties. Nutter spoke in terms of one or two dollars per bag. Reaction from City Council was fast and furious. One member called the idea of charging by the bag "unbelievable." Another explained that people consider trash collection to be something for which they already pay taxes, and suggested instead that the number of trash collections be reduced.

This story would be an excellent tax policy object lesson, but for the fact that within days, Nutter withdrew the proposal. His rationale was insufficient time to draft language for "the complex program." Where he will come up with funds to reduce the city's projected 5-year $1,000,000,000 budget deficit remains to be seen.

The notion of paying a separate user fee for trash and garbage collection is not a new one, nor is it an uncommon one. I live in a township that includes basic trash pickup as a service rendered in exchange for the township property taxes that I pay. However, if I want to dispose of large items, I must file and application and pay a special fee. This is the first home in which I have lived, and I have lived in ten of them, where there was not a separate fee for trash pickup. As best as I can recall, all of the fees were paid to private contractors. What I don't know is whether these fees where in place from the beginning or were the outcome of a township or city deciding that it would no longer collect trash. The answer to that question matters, because once people become accustomed to a service as part of a menu of benefits obtained from paying a general property tax, they will object strenuously, as, for example, did the writers of these letters, to the withdrawal of what they perceive as a right. The only practical way to make the change is to reduce the general tax and then to add a trash collection user fee. In an era of fiscal crisis, that isn't going to happen.

Studies indicate that where per-bag or other measured trash fees exist, recycling increases. But studies also show that in some localities, trash fees cause increases in littering and illegal dumping. Whether it is cost-effective to hire people to police landfills and other areas in search of illegal dumpers is an unanswered question. It probably would require some fairly steep fines to make such a program worthwhile, although the concept of a user fee justifies slapping these folks with a substantial penalty.

The suggestion that it would be better to cut back on the number of trash pickups as a way of saving money is deceptively simple. The only way it would reduce the city's budget deficit is by reducing the number of city employees who pick up trash. Because it is unlikely that these employees can step in as police, fire fighters, librarians, or city swimming pool staff, the outcome almost certainly would be an increase in the unemployment rolls. In the short-term that doesn't save the city any money. With reduced trash pickups, the city will become dirtier, as bags of garbage and other debris pile up on the streets. If that happens in the tourist areas, even a marginal reduction in the number of visitors would curtail city tourism revenue and worsen the deficit.

Charging by the bag makes sense. Why should someone who puts out one bag of trash a week pay the same amount as someone who puts out five bags of trash a week? Is not the latter person imposing a greater burden on the environment, on society, and on the public good? Treating trash pickup as a service funded by property taxes assumes that the environmental and other burdens generated by a person is proportional to the assessed value of the property. And that simply isn't so. Trash pick-up is very different, for example, from snow removal, the benefits of which cannot be allocated to individuals with any degree of rationality, and which arguably have some sort of relationship to property values. Not that Philadelphia does much in the way of removing snow from its streets, but that's a different story.

The tax policy lesson is that nothing is free. The days of South Jersey pig farmers driving their carts through Philadelphia collecting garbage are long over. The people to whom Philadelphia's trash has any value aren't, for the most part, close enough to come around to pick through it. What does have value is, for the most part, already being separated and collected, specifically in the form of recycling. The costs of collecting trash, of hauling it to a landfill, and of operating the landfill have increased. Have property taxes increased sufficiently to cover these costs? At some point, citizens must figure out that it is not possible to freeze or cut taxes and maintain increasingly expensive services. Something must give.

In addition to the tax policy lesson, some excellent drafting challenges would have been presented had the per-bag proposal advanced through the city's legislative process. What is a bag? If a poor person puts trash out in several of those rather small ubiquitous plastic bags used by grocery stores, because they cannot afford to purchase new trash bags, would that person be charged several times as much as a person who puts trash out in one of those 90-gallon almost-as-tall-as-I-am superbags? Would there be a bag equivalency chart?Who would count the bags? Would the proposal shift to a per-pound charge or a per-cubic-foot-of-landfill-space charge, both of which make more sense, environmentally, than a per-bag fee? What if someone puts out trash in something other than a bag? Then what?

For the moment, at least in Philadelphia, these questions do nothing more than provide some fodder for speculation. But they ought not be dumped or thrown away. Mayor Nutter says that the idea of a trash collection fee might pop up again in the future. That's good news, because it means that this blog post isn't a waste of time, effort, and brain cell exercise.

Tax ignorance is disturbing. Taxation is at the core of maintaining the existence of the nation and its political subdivisions, and yet the extent to which people do not understand taxation is startling. I'm not focusing on the arcane, the computationally complex, and the definitionally intricate. I'm highlighting basics.

Tax ignorance disease afflicts both the general public and politicians. It knows no bounds, and can be curtailed only through reform of high school and undergraduate education, coupled with an effective public service campaign by the apppropriate authorities.

Turning first to the general public, consider this letter to the editor of the Philadelphia Inquirer with respect to taxation:

A letter-writer Wednesday ("Whose taxes to cut?") has a fundamental misunderstanding of what taxation is. Income belongs to those who've earned it. The government doesn't give tax cuts to people; it simply takes away less of their earnings.

The left wing's conception of income and taxation often seems more like the actions of the schoolyard bully who steals $4.50 of your lunch money while leaving 50 cents in your pocket, and then asks for your thanks because you can still buy milk.

The analogy fails, because unlike the writer of the letter to whom the writer in question is responding, the writer in question has a fundamental misunderstanding. The schoolyard bully who steals the lunch money gives nothing in return. In contrast, the government provides something in return for taxes that are paid. Though it is possible to argue about the value of what is taken and given, on both a macro and micro level, the letter writer in question surely cannot think that when he pays taxes he gets nothing in return. He, like most other Americans, don't necessarily see what they are getting in return. Their homes have not been invaded by foreign nationals because the military provides a deterrent. When they fly on an airplane, ride a train, drive a car, or jump into a taxi, tax dollars make it possible. Airplanes don't collide because the FAA supervises and cares for airspace. Trains operate because they receive tax subsidies in the absence of which they would cease running. Tax dollars provide resources to ensure that the gasoline purchased at the pump is unadulterated, that the pumps properly record quantity and price, and that the roads on which the car is driven are maintained. By paying taxes, the citizen funds the commissions that oversee taxi drivers, with the goal of keeping bad drivers from behind the wheel and protecting the rider from being cheated on fares. Taxes fund the CDC's monitoring of sickness outbreaks to fend off epidemics. These are but a few examples of what people are getting for their tax dollar without being conscious of the benefit.

The flaw in the letter writer's reasoning is the notion that "Income belongs to those who've earned it." That statement is correct only if "income" means income net of the cost of producing the income. One reason I support user fees is that it highlights the cost of services, benefits, privileges, and protections that otherwise go uncharged against the person earning income. Without user fees or taxes, a person's income is overstated because the person is shifting costs to the general public. There may be administrative reasons that make it impractical to get the charges measured down to the penny, but the refusal to accept taxation as a cost of civilized society is not so much the cause of the ignorance but a symptom of a deeper culture of self-centeredness. Where in our educational systems do we teach that so many things that are taken for granted indeed have a cost, and that someone will bear that cost?

Turning now to the politicians, consider this snippet from the latest Kevin Ferris Back Channels column, in which he summarizes the economic and budget plan put forth by Paul Ryan, ranking Republican on the House Budget Committee. According to Ryan, one alternative is to "Simplify the tax code down to two lower rates, 10 and 25 percent, depending on income." Setting aside the "same old, same old, tried-and-failed" qualities of this nonsense, let's turn to the thoroughly ignorant notion that reducing the number of tax brackets to one or two somehow "simplifies" the tax law. It's a simple sound bite for simple minds. It thrives on tax ignorance. A closer examination of the tax law illustrates the misleading quality of the proposal.

The number of tax brackets affects the computation of tax liability, a task undertaken after taxable income has been computed. It is purely computational. It is built into tax software. It has been done for most taxpayers by the IRS, so that a person not using tax software merely looks at a tax table, finds the row with his or her taxable income and easily spots his or her tax liability. That process is awfully simple. Even creating the tax table isn't rocket science.

What's complicated is the determination of taxable income. Determining taxable income requires determining gross income, adjusted gross income, and deductions. Whereas determining regular tax liability is a one-step matter, determining gross income requires dozens, hundreds, and even thousands of steps. The same, or worse, can be said of determining deductions. It is in the gross income inclusion provisions, the exclusion provisions, the deduction provisions, the deduction limitation provisions, and the deduction denial provisions that one finds thousands of exceptions, thousands of defined terms, and hundreds, if not thousands, of complex computations. The flow charts for each provision can fill multiple pages in fine print, and there are thousands of provisions. Further complicating the tax law are timing issues, questions with respect to identifying the taxable year in which a particular item of gross income must be reported or in which a particular deduction is allowable. More complications arise when dealing with the identification of the taxpayer obligated to report a particular item of gross income or entitled to a particular deduction. Changing the number of tax brackets or adopting a so-called "flat tax" does absolutely nothing to reduce this complexity. But it sounds good and suckers in the tax ignorant.

There are several things that could be done with tax rates that would simplify tax liability computation, but they have nothing to do with the tax brackets. One would be elimination of special low rates for capital gains and qualified dividends. Eliminating these rates would not only jettison multiple-page capital gains tax liability worksheets, it would also permit ditching the numerous Internal Revenue Code provisions that define capital gains and qualified dividends or focus on attempts to make something that is not a capital gain or qualified dividend appear to be eligible for special low tax rates. Eliminating these rates would reduce tax compliance costs, IRS audit expenses, tax litigation, and taxpayer confusion. It is estimated that eliminating these preferences would remove one-fourth to one-third of the substantive provisions in the Internal Revenue Code. Yet the "nice sounding" two-rate sound bite completely ignores these special low rates, because there is no intention whatsoever on the part of flat taxes or two-rate taxation advocates to repeal the good deal put in place for those with sufficient wealth to benefit from special low rates for capital gains.

Another change that would reduce complexity is the elimination of the alternative minimum tax. It has its own rates, designed to take away the tax-lowering benefits of particular deductions and exclusions. Why the game? Why not one tax system, instead of two, with rates, deductions, exclusions, and credits structured in a sensible way? The answer is that by clearing away the tax underbrush, there are fewer places in which to hide special interest tax breaks. Someone benefits from complexity, and it isn't the tax return preparer, and it isn't the majority of tax planners. It's the tax camouflager.

So long as steps are not taken to eradicate tax ignorance, one must ask why it is permitted to exist. The answer is simple. Tax ignorance benefits those who are trying to pull the tax wool over the revenue eyes of the nation and its honest taxpayers. The advocates of reduced taxation manage to gather together people who get their hopes up thinking that their taxes will be reduced, when in fact what happens is a wicked combination: (1) their taxes are reduced ever so slightly, (2) their incomes are reduced significantly, especially in real-dollar terms, leaving them worse off net of taxes, and (3) the proponents of lower taxes see to it that taxes are reduced for themselves and their friends. Now that the truth is being uncovered, the culprits are stepping up their efforts to take advantage of others' tax ignorance, making them think that it is the tax of the working-class laborer or middle-income manager that will be hiked. They make this effort in order to strike up a chorus of petitioners seeking relief from tax hikes that don't threaten them, so that in the end, the repeal of unwise tax reductions for the wealthy will be blocked.

Perhaps the time is nigh for a coordinated attack on tax ignorance. The nonsense that is being circulated, as evidenced by the letter to the editor and the two-rate sound bite but including many more foolish items, is a rerun of claims made in years past. Those claims found buyers, those buyers cried for adoption of the plan, and then their worlds collapsed while the designers of the tax nonsense pocketed their tax breaks. While the wealthy gambled the money in a variety of high risk markets, and while the people who wanted to be wealthy or simply tried to stay upright on the economic treadmill borrowed money in a futile attempt to get the promised benefits of the plan, the economy tanked. What further proof is there that the nation was fleeced? Why would anyone continue to support the policies and tactics that promised jobs and delivered unemployment, that promised home ownership and delivered foreclosures, that promised prosperity and brought economic disaster? The answer is simple. Ignorance persists. So long as it does, we're in for a horrific economic ride.

A colleague passed along to me this URL, which provides the text of a proposed amendment to the West Virginia statutes. Introduced by Delegate Jeff Eldridge and referred to the Committee on the Judiciary, the bill would add a new §47-25-1 to the laws of West Virginia. The proposed legislation provides:

Be it enacted by the Legislature of West Virginia:

That the Code of West Virginia, 1931, as amended, be amended by adding thereto a new article, designated §47-25-1, to read as follows:
ARTICLE 25. BARBIE DOLLS.

§47-25-1. Unlawful sale of Barbie dolls. It shall be unlawful in the state to sell "Barbie" dolls and other similar dolls that promote or influence girls to place an undue importance on physical beauty to the detriment of their intellectual and emotional development.

NOTE: The purpose of this bill is to ban the sale of Barbie dolls and other similar dolls.

So where's the tax angle?

The tax angle is this. People do all sorts of things that are detrimental to the development of important skills and traits. Unless the behavior infringes on another person's rights, it is not the practice in this country to criminalize the behavior, though surely some exceptions to that general principle exist somewhere. Instead, there is a long tradition of imposing taxes, or user fees, on behaviors or materials that contribute to detrimental consequences. Smoking eventually destroys brain cells, directly or indirectly, and thus impairs intellectual skills. Excessive drinking has the same effect. Gambling poses a variety of risks to intellectual and emotional development. Certain foods, for example, those heavy in transfats, damage circulatory systems so that nourishment provided to brain cells declines, ultimately triggering diseases that cause intellectual decline. Proposals have been circulated to impose "sin taxes" on fast food, carbon-based fuels, and ammunition, and furs.

So why not deal with this concern with a tax on Barbie dolls? Imagine the stimulus to the economy when Mattel brings out the "Barbie the Enrolled Agent" line of accessories. Undeniably, such a tax would make Barbie dolls less affordable for children in families with lower incomes. Yet somehow lower-income families figure out how to purchase tobacco and alcohol, so perhaps a Barbie doll tax would compel some people to give up smoking so their children can have Barbie dolls.

Experience teaches us that when a state imposes a user fee, sales tax, or other imposition on a product, consumers will seek to make their purchases elsewhere. For example, tales abound of Pennsylvania Liquor Control Board agents watching for vehicles with Pennsylvania license plates parked outside major beverage stores in the District of Columbia and elsewhere. A tax on Barbie dolls might encourage West Virginians to shop in neighboring states. I'm sure the neighboring states would appreciate the economic stimulus, for when people head out to find a cheaper Barbie, they'll surely make other purchases outside of West Virginia that otherwise would have been made in-state. But this effect is no different from the effect of the proposed bill, which would compel West Virginians to seek Barbie dolls by making purchases in adjacent states or through the internet. The proposed statute does not ban possession of Barbie dolls. Wouldn't that be amazing? Imagine someone being denied permission to sit for the bar exam because when they were 8 years old they were convicted of possessing a Barbie doll. Perhaps possession of multiple Barbie dolls would bring longer prison terms?

Pardon my not-so-disguised sarcasm. Doesn't the West Virginia legislature have more important things to do? But lets' suppose for a moment that the notion of banning the sales of Barbie dolls because they presumably warp the minds of girls with respect to beauty and brains is a good one. What about Ken dolls? Ought not boys be protected from dolls that warp their minds with respect to brains and looks? What about items other than dolls? Perhaps the sale of mirrors could be outlawed because they encourage people to check themselves out before heading out, all in the interest of looking good to get attention. What about the sale of cosmetics? Don't they exist simply to alter a person's appearance in order to improve looks? And why the emphasis on the supposed conflict between beauty and brains, a conflict that has been disproven time and time again. Ought not Delegate Eldridge be more concerned about violence? How many people have killed or been killed with a Barbie doll or on account of a Barbie doll? Ought not there be a ban on the sale of action figures that encourage violence? How about "It shall be unlawful in the state to sell items that promote or influence people to place an undue importance on fisticuffs and other violent physical approaches to solving problems to the detriment of the development of negotiation and compromising skills."

But, perhaps there is a silver lining in this barbed cloud. Anyone who has dealt with, conversed with, or knows a lawyer understands that the phrase "other similar dolls" will open up all sorts of opportunities for lawyers. It's an economic stimulus, particularly welcome at a time when lawyers are losing jobs and law graduates are struggling to find work. There are all sorts of types of dolls. Is a Miss Piggy doll within "other similar dolls"? How about a "Chatty Cathy" doll? Whether the legislature bans "other similar dolls" or imposes a tax on "other similar dolls," the hours that need to be invested answering these sorts of questions will keep lawyers busy for quite some time. "Your Honor, my client contends that the item in question is a mannequin and not a doll, and thus is not subject to tax."

In the meantime, it's time to check out the proper legal and tax treatment of voodoo dolls. Perhaps a pin-sticking tax?