MauledAgain

It may be time to begin collecting Tax Urban Legends. It's not so much the quantity, but the quality of the misinformation. Thanks to the alert eyes of Paul Caron over at the TaxProf blog, I found myself reading an AP story about the taxation of income earned through selling items on eBay.

A woman who sells household items wanted to know if she was required to report her income for federal income tax purposes. Somehow she ended up unable to get a clear answer. Perhaps it's because she posted her question to an online discussion forum operated by eBay for its sellers.

eBay is big business. Had I guessed, I would have been far off the mark, because $34 billion would not have been on my radar screen. That's $34 billion of sales, to at least some of the 135 million people registered on the site. And to think someone once told me the Internet really wouldn't make much of a difference in the lives of most people. Almost half a million people derive all or substantially all of their income from selling things on eBay. Wow.

Well, here's the answer: Gross income includes income from whatever source derived, unless there is an exclusion. A person who sells property on eBay has gross income equal to the sales proceeds reduced by the adjusted basis of the property, which in most instances will be what the person paid for the property. These principles appear in sections 61, 1001, and 1011 of the Internal Revenue Code. There are no exclusions available, unless the person sells their principal residence and meets the requirements of section 121. I doubt that has happened, but I'm not ready to write off the possibility.

What happens if the item is sold for less than its adjusted basis? I have no doubt that this happens frequently, when people sell for a few dollars some old no-longer-needed household item that they purchased for more than the selling price. The answer is that there is a loss. Is it deductible against other income? It depends. If the person is in the business of acquiring and selling these sorts of items, yes, according to section 165(c), but how long can one stay in business if one keeps incurring losses? The deductible loss will occur for the business entrepreneur who unloads a few items for less than cost to clear out the warehouse. But if the sale is not a business transaction, or is not a sale of property held for investment, the loss is not deductible. By definition, hobbies are not businesses nor are they for-profit activities. There are dozens of tax cases so holding.

Time for the urban legends?

Not quite. The AP story is filled with quotes that taken out of context appear to qualify. I'll let those go. After all, it's unclear whether the person was responding to a question about deductions (allowable for businesses but not for hobbies), losses (same), or gross income (no distinction).

The one quote that withstands criticism is the comment by one veteran eBay vendor that many sellers overlook taxes. Indeed. The comment by an eBay spokesperson that eBay is simply a venue like the mall or flea market is unsettling, because it's very likely that the flea market vendors are swimming in the same tax urban legend infested waters. Another is the comment that if you are selling on eBay and making a profit, it's taxable.

Here's eBay tax urban legend #1: One person commented that people think they're not a business if they're selling on eBay. Not only is that not so, it doesn't make a difference when it comes to the matter of reporting income. Of course some of the vendors on eBay are operating businesses, and operating on eBay doesn't preclude being a business. But, business or not, the income is gross income and must be reported. At that point, what matters are deductions, and for deductions, it's better to be a business. It's easy to see that people are very confused.

Here's eBay tax urban legend #2: The woman who asked the question that triggered the discussion went to lunch with a friend, and the friend told her that because eBay is not regulated there's no need to file. Guess what, friend? You are flat out wrong. Read sections 61, 1001, and 1011 of the Internal Revenue Code. When you're finished, I'll point you to the penalty provisions.

Reports from other tax professors disclose that the AP story ended up in a variety of newspapers, where re-writing and editing ended up adding more urban legends:

eBay tax urban legend #3: Gains on personal use property are not taxed. Wrong. Just because losses on personal use property are not deductible under section 165(c) does not mean that gains are not taxed under section 61.

eBay tax urban legend #4: Capital gain rates apply to the income. True, if the item is an investment item or a personal use item, but if it's inventory, that is, merchandise purchased with an intent to resell, the income is not capital gain and is subject to ordinary income tax rates. Take a peek at section 1221.

eBay tax urban legend #5: The limitations on the deduction of hobby losses creates an exclusion for hobby income. Wrong. Hobby gross income can be offset by hobby expenses, but if hobby gross income exceeds hobby expenses, the excess is taxed. Section 183 is the place to go to read about this rule.

It gets better. Inevitably, when tax professors discuss these sorts of practice world questions, good stories emerge.

One story tells of a high school teacher and coach who concluded that money earned during the summer as an umpire was not taxable because umpiring was a hobby. When challenged by a very bright and experienced tax lawyer turned tax professor, the teacher-coach dismissed the explanation because, get this, the commissioner of the baseball league had explicitly told the umpires that their income was not taxable. Amazing. Get your tax advice from a baseball commissioner, and have your surgery done by a lumberyard sales clerk.

Apparently this is not an unusual situation. Another experienced, able tax lawyer turned tax professor reported that a basketball referee he knows claimed that HIS fees were not taxable. Apparently steroids aren't the only problem in the sports world.

silly tax urban legend #6: Income from pursuing a hobby is not taxable. WRONG. Do I need to repeat the Code cites?

Along comes another story. Referees at a Special Olympics don't want their paperwork for having officiated events so that they can report their income, they want them so that they can take a charitable contribution deduction. Maybe they plan to donate their fees. Or perhaps they're thinking of....

tax urban legend #7: It is permissible to claim a deduction for doing work for a charity. Absolutely not. The charitable contribution deduction requires a donation of money or property. See section 170.

It continues. A tax professor who is a basketball referee tries to educate his colleagues who are discussing the possiblity of incorporating. Despite the tax professional's attempt to refute them, not one, but TWO, urban legends emerge:

tax urban legend #8: Incorporation would make officiating fees that are not taxable subject to tax. Duh, the fees are taxable whether or not there is an incorporation. It's that pesky section 61 again.

tax urban legend #9: Unless you receive a Form 1099, the fees aren't taxable. NO! A Form 1099 is required only under certain circumstances, and its absence does not change the character of compensation as includible in gross income.

All of this led another tax professor to suggest what may become the next mantra of the tax protestor crowd:

tax urban legend #10: My income is not taxable because I enjoy my work.

At that point, I had to comment that as I get my students to understand that income analysis begins with the search for an increase in economic wealth, they realize that non-economic riches, such as a kind stranger's warm smile, isn't subject to federal income taxation, generating the truism that "happiness is not taxed."

Now these matters don't involve the complicated part of the tax law. What's complicated about "gross income includes income unless there is an exclusion"? Nothing. The exclusions may be complicated, but simply reading a list (gift, scholarship, fringe benefit....) is enough to learn that there is no exclusion for hobby gross income.

No, this has nothing to do with complexity. It has to do with an "ignore the tax law" culture that runs rampant not only among eBay vendors and amateur sports officials, but even among some personal injury and domestic relations attorneys. "Simply ignore the tax consequences" is a scary (and stupid) motto. The damage done to the clients can be overwhelming, as illustrated by a no longer common practice of tax-savvy domestic relations attorneys foisting burned out tax shelters onto their clients' ex-spouses in property settlement agreements when they realized the other attorney was clueless. The tax bar rode to the rescue on that one, educating domestic relations lawyers one-on-one and at seminars almost a decade ago. And they wonder why as a practical matter the pervasive role of taxation in legal matters commands that every law student take the basic tax course while in law school. And yet many law schools do not require the course. How unwise.

Of course, if tax principles were taught in the K-12 world, both at school and at home, along with checkbook balancing, identity theft prevention, flat tire changing, the value of doing good deeds, the long-term disadvantage of greed, and a variety of other life skills and values that ought not be restricted to the college-educated, the tax urban legends could be starved of the nutrients on which they feed, namely, ignorance and greed.

Oh, did I mention sales taxes on eBay transactions? Or state and local income taxes? Or business registration taxes? Whew. I've had enough for the evening and other things to do.

Larry Staton, referring to the gasoline and free markets post asked:

Are these two statements contradictory?

"Any method we can employ to increase production of oil in the United States and decrease dependence on foreign oil should be a top priority for our government."

"I don't think the government needs to interfere with the price of gasoline to achieve what it deems as a socially desirable goal"

BTW, I agree with the first statement and agree with you that we should increase user fees on gasoline. The user fee income should then be used to subsidize alternative energy sources, such as biodiesel and solar.

* * * * * gasoline companies are and have been heavily subsidized. Perhaps the gasoline companies can return/forgo those subsidies and then the market will reflect the true price of gasoline!

In my reply, I noted several things and identified a follow-up posting:

Yes, there is some inconsistency, unless one considers the second statement to reflect a view that interference with price via taxes would not cause increased oil production in the U.S. In other words, it's an argument that the government should use any method but not one that won't work and thus is not needed. That's how I read it.

There are a lot of strange subsidies in the tax law for oil and gasoline. Depletion deductions can aggregate to more than the amount paid (causing a weird "negative basis" concept that is not called that). Offshore drilling platforms qualify as "intangible drilling costs" but since I've never touched an offshore drilling platform I can't vouch that they're not intangible, ha ha. There also are subsidies for certain alternative energy sources, but in a hodgepodge mishmash conglomeration of piecemeal bits and pieces. In other words, incoherent.

I sense a follow up posting that goes over the income tax impact on energy. Could be a book. I had best be careful.

Well, this morning, I did a quick run through the Internal Revenue Code (class coming up in a few minutes, so no time to do extensive research), and identified these energy incentives in the tax law:

Section 29 provides a credit for producing fuel from a nonconventional source.

Section 30 provides a credit for qualified electric vehicles.

Section 40 provides a credit for alcohol used as a fuel, but section 87 provides that the credit must also be included in gross income.

Section 40A provides a credit for biodiesel used as a fuel, but section 87 provides that the credit must also be included in gross income.

Section 43 provides a credit for enhanced oil recovery.

Section 45 provides a credit for electricity produced from certain renewable resources.

Section 45H provides a credit for production of low sulfur diesel fuels.

Section 45I provides a credit for production of oil and gas from marginal wells.

Section 48 provides that the energy credit portion of the investment credit is available for certain equipment using solar energy to generate electricity, to heat, cool, or provide hot water for a structure, or to provide solar process heat, and for certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.

Section 136 provides that gross income does not include direct and indirect subsidies from public utilities to customers for the purchase or installation of equipment designed to reduce consumption of electricity or natural gas.

Section 142 provides that exempt facility bonds, which qualify as tax-exempt bonds, the interest on which is not taxed, even though they finance private activity, include bonds issued to provide facilities for the local furnishing of electric energy or gas, to provide local district heating or cooling facilities, or to provide environmental enhancements to hydroelectric generating facilities, and then provides extensive and detailed definitions of these types of facilities.

Section 179A provides a deduction for clean-fuel vehicles and certain refueling property.

Section 193 provides a deduction for qualified tertiary injectant expenses.

Sections 611 through 613A provide a deduction for depletion, computed in a manner that in some instances allows the taxpayer to deduct more than what was paid for the natural resouce subject to depletion.

Section 616 provides a deduction for certain costs of developing a mine or other natural deposit, other than oil or gas wells.

Section 617 provides a deduction for certain costs of ascertaining the existence, location, extent, or quality of any ore or other mineral deposit.

Eventually I'll find time to identify some of the provisions that give special tax breaks on the disposition of energy property.

Being a tax practitioner without understanding energy is somewhat limiting. Of course, being a tax practitioner requires a lot of energy, but that's another tale for another day.

Saw a license plate the other morning, just a mile from home. RAD TAX was on a car parked in front of the offices of Radnor Tax Services. Easy guess is that the vehicle, and the plate, belong to the owner. Radnor is the township in which I live, and in which Villanova University is located.

I wonder if someone in adjacent Haverford Township has HAVE TAX or HAVER TAX on a license tag. Or if someone in another adjacent township, Newtown, where I grew up, has NEW TAX. Want more? Yet another adjacent township is Lower Merion. Would a plate with LOWER TAX on it fly? Not in that township.

If you didn't get a chance to follow the tax license plate posts some months ago, you can take a look here.

My recent comments about the increase in gasoline prices brought a reply from one of our students, Nakul Krishnakumar, who is no stranger to my taxation outlook, as he has been in my courses. He says:

I just read your very interesting blog on the rise in oil prices. I have to say that I respectfully disagree with your analysis on a few points.

First, I think you are right in stating that oil prices, like everything else in the economy, are subject to supply and demand. Nonetheless, I don't think the meteoric rise in oil prices in the last year is solely due to a serious change in supply and demand (although I would certainly concede that this is part of it). I think one main reason (which you mention) is the relative weakness of the dollar as of late (due to mild increases in inflation) and also the war in Iraq (which is having a temporary affect on oil supply). Once these problems are rectified, if indeed they do become rectified, I imagine that oil prices will stabiize.

More importantly, I disagree with your assessment that we should INCREASE the taxes on gasoline. I believe that is unnecessary. I don't believe that tax incentives, or quite frankly, tax disincentives will solve the problem. The fact is that oil and gas, as compared to other forms of energy are relatively cheap. If this were not the case, the market simply would have shifted to another form of energy that is less expensive.

I once had an economics professor in college who asserted that we will NEVER run out of oil! While that seems chimerical at first, it makes sense when one thinks about it. All else being equal, as the availability of oil starts to decrease, it will become more expensive to drill, refine, and convert oil into energy. As such, the price of oil, relative other forms of energy such as solar, nuclear and wind will increase. Once this happens, it will be cheaper to provide the world's energy needs through other forms of energy, and the use of oil will become relatively obscure. In essence, we will stop USING oil long before we actually RUN out of it.

Whether this happens in my lifetime or not is immaterial. The point is that at the current point in time, oil is still the predominant energy source because it is inexpensive when compared to other forms of energy (taking into account transition costs). Moreover, I don't think adding another tax to gas prices, as an incentive to FORCE people to use other forms of energy, is a proper solution. The invisible hand of the market will eventually lead to a shift in the energy sources we use, we don't need politicians meddling even more in the workings of the market.

In the meantime, we should relax environmental laws that prohibit drilling oil off of Lake Michigan, Texas and other oil rich areas in the United States. Drilling in Anwar would also be helpful. Any method we can employ to increase production of oil in the United States and decrease dependence on foreign oil should be a top priority for our government.

I look forward to your comments.

And, of course, I was more than willing to share comments:

You're right that there are other factors, as speculation is contributing to the price increases. Yet speculation is part of the market, and if the market "sees" future shortages the speculators drive up the prices. If the market does not agree, the speculators don't have much, if any, effect.

Experts who analyze oil production and demand have projected shortages. Currently production barely exceeds demand, and OPEC has no more capacity. True, Iraq's production is down, but it will be quite a while before things stabilize enough to bring back pre-1991 levels of production. Future production estimates count on oil flowing through the still unfinished Caspian pipeline, which is in yet another unstable area of the world. China and India will double their demands during the next 5 years, and by 2020 will be "demanding" more than the U.S. uses.

Because taxes on gasoline are generally fixed in amount rather than set as a percentage, they have been falling over the past few decades. I blogged that point in an earlier post and failed to (forgot to) link to it. [It's here.] Taxes such as a gasoline tax are really a user fee, and ought to compensate society for the cost of using gasoline (pollution, cancer, leaks, etc.) Americans pay too little gasoline tax, compared to, for example, Europe. Americans are wasteful of oil, and now sit on the edge of disaster. One refinery fire and there will be long lines at the pumps.

I don't see tax as a way to compel using other energy sources. People could choose to reduce energy consumption. There is a price to be paid for the sprawling developments built out in the middle of nowhere because the land is cheap, and that price is a price shifted by the developers to the home buyers who are many miles from work, and in one instance with which I am familiar, 5 miles from the nearest store or anything other than a farm. In other words, artificially low user fees insert irrationality into the market, or at least subsidize it.

I agree that we are oversensitive and insufficiently logical when it comes to the environment (hence my criticism of the anti-road lobby). There are all sorts of areas where oil can be extracted with far less harm to the environment than would have taken place using the technologies in place when the environmental restrictions were imposed. Yet I wonder if there is truth to the accusation that the U.S. is deliberately "using up" OPEC oil rather than its own so that someday OPEC will have very little oil and then we will open up our taps and become the OPEC for China and India. If that's true, it's conspiratorial. And devious. But very clever. It could work. By the way, the really HUGE oil resources are in areas you didn't mention: off the coast of California. Dwarfs even the Arctic according to some experts.

And, of course, as all good lawyers-in-training do, Nakul rejoined:

* * * * * In general, I'm uncomfortable with "user fees" for gasoline or any other product. The price of gasoline, set by the market, is a user fee. As oil becomes less abundant, that user fee will increase in accordance with the dictates of the laws of supply and demand. When that user fee becomes too much, or if India and China begin demanding more oil, that will only accelerate the demise of oil and the emergence of a new form of energy. I don't think the government needs to interfere with the price of gasoline to achieve what it deems as a socially desirable goal (which usually means a couple of politicians thinking they know more than everyone else).

One more point. I don't believe that the market for gasoline is irrational. In order to believe that prices for gasoline are irrational, one has to buy into the idea that there is some inherent value to gasoline separate and apart from the actual price that the market sets. The price of gasoline that exists today (minus taxes and other transaction costs) is the socially objective value, determined by supply and demand. I would be opposed to any action by the government to cure the " irrationality" of gasoline prices in the same sense that I would be opposed to the Federal Reserve or any other monetary authority curing the "irrationality" of the stock market.

As you can probably tell, I'm a free market capitalist, so I am looking at this problem from that vantage point. Nonetheless, I'm a dying breed, so I suspect, most people will disagree with my assessment of this problem.

Speaking of user fees, there's an interesting article in today's Philadelphia Inquirer about TerraPass, which could be characterized as a voluntary user fee. Creative idea, more on it later. In brief, a fascinating way to encourage grass roots self-regulation instead of waiting for the government to step in.

It really is sad to learn that a problem that should have been solved wasn't solved. Some years ago, IRS employees were discovered to have trashed incoming tax returns in order to keep up with daily quotas. It was a huge mess, and the lesson learned by tax practitioners and even by others who were paying attention was to send tax returns as certified mail, return receipt requested. Then if the IRS notifies the taxpayer that the return was not filed, there is proof that it was filed, and the IRS has to deal with the problem internally.

Apparently the IRS decided to "outsource" the receipt of tax returns. Whether that is permissible or even a good idea is one thing, considering the privacy issues that are implicated. Worse, it turns out, according to this story, that an employee at Mellon Financial, which the IRS paid to receive tax returns and process tax payments, told five co-workers to "hide and destroy" about 80,000 tax returns and $1 billion in payments. EIGHTY THOUSAND? ONE BILLION DOLLARS?

Yep. This happened back in the spring of 2001. Now a grand jury has indicted the six Mellon Financial employees. Check out the charges: conspiracy to commit major fraud against the United States, theft of government property, and theft of mail matter.

The excuse is that the employees "felt swamped by the amount of work." Too bad. Join the world. Choose another option. Report the problem to the supervisor. Let the stuff pile up. Then the executives hauling in salaries in the upper six and seven digit range can hire a few more people. Good for the economy, too.

So I guess a lot of tax practitioners are going to be getting phone calls from at least some of the 80,000 taxpayers whose returnes disappeared. I really do hope they knew to send the returns by certified mail, return receipt requested, that they kept the return card from the postal service, and that they have a copy of their return.

On the heels of yesterday's post about gasoline prices and the environment comes news that the Senate has approved H.R. 1270, which extends the financing rate for the Leaking Underground Storage Tank Trust Fund from April 1, 2005 until October 1, 2005. The House had passed the measure by a 431 to 1 vote, and so now the bill goes to the White House for an expected signature.

This fund assists states and the EPA pay the expenses of cleaning up environmental damage caused by underground oil and gasoline tanks that leak. A leak from an underground tank pollutes the groundwater, and sometimes the leaking product can travel miles underground. Messy stuff.

The fund is financed with a tax under section 4041(d). It's the Leaking Underground Storage Tank tax. And, as tax practitioners aren't ones to shy from acronyms, this one does take the prize. It's the LUST tax.

Explain that to your friends visiting from abroad.

So gasoline prices are getting higher, and news media have something to write about during the four-day lull between the second and third rounds of the NCAA Basketball Tournaments. Yes, it's news, but what should we make of it?

First, gasoline prices are not as high as they appear to be if they are adjusted for inflation. It's interesting to hear someone who earned $30,000 a year when gasoline was $1.30 a gallon complain about gasoline that costs $2.10 a gallon when they're making $90,000 a year. But at least many of the media stories are pointing out the difference between nominal price and inflation-adjusted price comparisons. Near the end of the stories, of course, which is fine except that most readers don't make it to the end of the story.

Second, gasoline prices are getting higher for reasons that suggest that they will continue to increase. At some point they will begin increasing at rates exceeding inflation or economic growth rates, emulating health care costs. At least with health care, consumers are getting new and improved technology and actuaries can demonstrate that we are living longer (contributing, of course, to the financial pressures on the Federal Insurance Contributions Act ("Social Security") system). But with gasoline, we're still getting the same gallon of gasoline. Perhaps a wee bit improved, environmentally, perhaps not. What happens when gasoline reaches $4 or $5 a gallon? Keep reading.

Third, that gasoline prices are rising is a warning. Gasoline is a finite resource. Whether there is a 50-year supply or a 100-year supply is an argument about deck chair arrangements. Drilling in the Arctic is, at best, a short-term solution, and distracts attention from the impending crisis. Of course, that doesn't mean drilling in the Arctic should be dismissed out of hand, but it gives advocates of long-term planning some leverage to get the world for the post-gasoline era. Planning needs to be underway NOW because even with a 100-year supply, the oil wells begin to sputter long before 2105.

Fourth, that gasoline prices are rising is a second warning. The cause, though attributed by some to environmental regulation, is a simple one: demand outpaces supply, and expected increases in demand exceed expected increases in supply. OPEC claims it cannot solve the problem, because it's at full pumping capacity, and I don't doubt its claims. When two countries, each with populations exceeding ONE BILLION PEOPLE move into modernity, their collective appetites are enormous and will increase to gargantuan. Today it is oil. And concrete. And steel. Tomorrow it will be food. The day after tomorrow it will be medicine. And they will have the money with which to outbid the rest of the world on the marketplace. The money obtained by exporting more than they import and by providing the outsourcing that corporate managers think is the solution to all economic problems. Map out the trend lines. Figure out who will be living in a "third world country" in 2105.

Fifth, slowing down increases in domestic demand don't solve the problem but simply buys some time. For all the autophobes who cry for bicycle use, there are sensible people crying for traffic sensors so that vehicles don't sit for 90 seconds waiting for the invisible cars on the cross street to pass by. Aside from the fact that if bicycle transportation were so great the demand for oil in a once-bicycle-intense nation like China would not be going through the roof, and aside from the fact that invisible cars do exist as any long-time automobile insurance claims agent can attest ("an invisible car came out of nowhere, hit my car, and drove off"), improving vehicle fuel efficiency is pointless if we don't do something about the ZERO MILES PER GALLON that EVERY VEHICLE attains at the many "dumb" intersections population the nation. Toss in the insufficiencies of highways, which reflect the foolish argument that building roads brings traffic (when we know that what brings traffic is the juxtaposition of increased population and the movement of residences to places further and further away from work locations), and the avoidable energy waste becomes a near crime. Why are our public servants not dealing with these matters? They're too busy grandstanding on baseball player steroid use. Now, if we could just drop some steroids into the gasoline tanks....joking aside, that causes me to think:

Sixth, how about developing practical applications of infinite energy resources? Whether it's vehicles, heaters, air conditioners, or power plants, a nation with almost 300 million people and a world with more than 6 BILLION people, 10% of whom are in the top 10% intellectually, ought to be able to figure out how the sun, the wind, and where I live, the snow, can be used to power the economy. Think about the headline when someone invents the automobile that runs on ocean water. The socio-political consequences would be shattering. Literally. But how likely is this to happen when children are encouraged away from the sciences ("it's too hard") and into the softer disciplines (sorry, folks, but some of those "life fulfilling" and "dream enhancing" college majors don't cut it, either in terms of finding meaningful jobs after graduation or making a needed, useful contribution to humanity). The launch of Sputnik caused a sea-change in American education in the 1950s and yet, half a century later, we're sitting around figuring the person next door will solve our problem (which is so typical of the "it's always someone else's job and someone else's fault and someone else's problem" mentality of the postmodern spoiled brat culture in which we live).

Seventh, as for taxes on finite energy, raise them. Call them users fees and crank them up. In taking this approach, I part ways with those who advocate doing nothing, though that opinion was written almost half a year ago. The scarcer the resource the higher the tax. In contrast, there's no point in taxing the infinite resource. A tax of $10 per gallon on gasoline and a $0 tax on solar or sea-water energy should add a nice economic incentive to get the folks who invent all those miracle drugs to invent some not-really-a-miracle technological improvements. As for calls to reduce gasoline taxes, why pretend that gasoline is inexpensive? Why reduce the message-sending sting of the service station pump? Though the poor and impoverished would suffer, to some extent, from higher gasoline taxes, the impact isn't as serious as imagined, because so many of the poor and impoverished do not own or use cars and thus don't purchase gasoline. Until gasoline prices hit $4 or $5 a gallon, all that will happen (aside from the usual griping) is that consumers will shift some of their discretionary income from purchasing $150 brand-name athletic shoes (that enrich some already wealthy athlete) or ten more made-overseas video games to the purchase of gasoline and slightly less flamboyant footwear and fewer recreational items. Businesses using gasoline need to pass their increased costs onto their customers. That's how the market works. In turn, the incentive to fix those "dumb" traffic lights, improve public transportation so that it is useful, eliminate choke points in the highway grid, and move residences back to the vicinities of workplaces will be, sorry, energized.

And eventually no one will care about gasoline prices. When's the last time you chatted with somebody about buggy whip prices?

Did you see the headline in the Wall Street Journal?

Federal Tax Code Draws Criticism From Citizens, Experts, Economists [headline now archived]

Now I WOULD be surprised with this one:

Federal Tax Code Draws Praise From Citizens, Experts, Economists

THAT would be worth blogging.

After they picked me up off the floor.

An interesting article at the Law.comsite, All You Really Need to Know You Learned in Law School, by Prof. Kristen David Adams of Stetson University College of Law makes an interesting defense of law school education against the oft-heard charges that law schools are not living up to their duties to prepare students for law practice. As I read it, the temptation to respond overwhelmed me.

Prof. Adams makes some points that rest on what I believe to be shaky premises. These are the things law school teaches:

"Law school teaches discipline" because law professors are deliberately "rigid" and have rules that reflect those in practice (due dates mean due dates, being late is costly, etc.)

"Law school also taught you time-keeping" because many law school examinations are timed, and students in clinics and perhaps on law review must keep time sheets.

"Law school also taught . . . how to manage time" because law students have to juggle multiple tasks (classes, trial or moot court practices, interviews, journal deadlines, etc.)

"Law school also taught you how to conduct an initial client interview" because the process of working through an examination is "an excellent simulation of an initial client conversation" by giving the opportunity to sort through information, and organize facts.

"Law school taught you to think on your feet" because students are called on in class, with questions that were not known in advance.

"Law school taught you how to be both a mentee and a mentor" because upper-year students help first-year students.

Here's how I would amend the statements: "Law school COULD teach you [fill in the skill] IF the law faculty took the time to do so rather than dumping students into situations where they had to figure it out for themselves." I will elaborate.

Yes, law school teaches discipline, if in fact discipline exists and is enforced. Disciplinary rules at law schools (and at other educational institutions) began to erode in the 70s. Many faculty and administrators are quick to excuse late responses. Why? They'd rather avoid the lawsuit, and, yes, law students are not reluctant to sue the moment rules aren't bent to their preferences. Law faculty are extremely reluctant to dismiss students who have failed to comply, creating instead waivers and allowances permitting students to make up credits in the summer after graduation or excusing requirements if a sympathetic case is put before the school. Faculty who attempt to be rigid are criticized (by students and even other faculty, and sometimes by administrators), marginalized, and depopularized.

I've yet to see a law school teach time-keeping, other than on a haphazard basis. Clinic faculty, still in many law schools a "second class" of faculty citizen, if not in form, at least in attitude, sometimes require time records (even though clients are not being billed). Faculty using research assistants may, on an individual ad hoc basis, require some sort of time sheet for pay purposes. The number of law students with these experiences is small.

Law schools do not teach time management, other than through the sink-or-swim-teach-yourself method, or through the occasional one-on-one or small group explanation of time budgets. I have sat down with students who sought advice about time constraints, and have shared my time budget approach. "There are 168 hours in the week. What will you do with them?" As I show them how spending a weekend back home golfing crushes the budget, their eyes widen. Of course, in defense of law schools, there's no reason law schools should need to teach this other than the total failure of the K-12 and undergraduate education systems to do so. It is no surprise to those who read my postings on education that I consider time management a life skill, rather than a skill over which lawyers have a monopoly. Considering that many faculty at every level of education have time budgeting issues, I can understand why the students are learning how to manage their time.

Yes, law schools offering courses in client interviewing and counselling teach students how to conduct an initial client interview. But examinations do not do so. At best, examinations require students to do SOME of the things attorneys need to do when interviewing clients, and hopefully they are things that have been taught to the students before the examination takes place. Examinations do not teach students how to deal with emotional, crying, weeping, angry, yelling, and fuming clients. They do not teach students how to react to the client who lies. They do not teach students how to make a client feel comfortable, to set lighting properly for clients whose eyesight is failing, or to arrange things in a manner that minimizes challenges for disabled clients. They teach nothing about interviewing multiple clients, such as marital couples. They teach nothing about deciding what needs to be put into writing and signed by the client. If law schools were teaching ALL students how to interview clients, they would require ALL students to take realistic client interviewing courses. Sorry, the fact that some existing law school examinations requires SOME of the same skills used in an interview isn't enough for me to agree that law schools teach students "how to conduct an initial client interview."

Do law schools teach students how to think on their feet? Yes, in classes where students are questioned without warning, and in appellate and trial practice arguments. The practice of calling on students without warning has almost disappeared, a victim of the backlash against the "cruel Kingsfields" of the law school world. Instead, students are told in advance that they will be "up" or "principally responsible rows" are assigned. Some faculty sit with the selected group ahead of time. The desire to decrease student discomfort and to increase popularity (for those ever-present student course evaluations used in tenure and compensation decisions) pervades the halls of academia. I gave up calling on students years ago, when I discovered that too much valuable class time was lost because students were unprepared and wasted time trying to appear prepared (though, admittedly, some simply passed without consuming too much time doing so). Instead, I now use the classroom clicker system, and student responses on some of the question count toward their grade. For students who want to be challenged, it works. They like the clickers. Every student is now on notice that he or she will be called on, and there is no hope that "someone else" will be tagged. Students who want to be in an active learning environment jump in. Other students avoid my classes because they want nothing other than an examination at the end of the semester and have no tolerance of being required to provide answers to clicker questions and other semester exercises that will be counted toward a grade.

I've yet to see any law faculty teach law students anything about being mentors or mentees other than, again, through happenstance, or a student's subsequent realization, years after graduation, that they had been mentored. Sometimes it's support staff who come through in specific instances in this regard. But what happens surely isn't something for which the faculty can or should be taking lots of credit.

My classes, to the chagrin of many, are in fact designed to prepare students for practice. Not practice in the sense of finding the courthouse, learning who's who therein, filling out forms, or doing time sheets. I focus on practice as a place where lawyers have two major objectives: prevent problems and solve problems. The skill set for doing so is one that is emphasized. Even in doctrinal classes, I ask students what to say or ask of the client. I ask students to weigh the law, the facts, and the risks and determine what advice to give to the client. Against the backdrop of black letter law I turn their attention to the acquisition of facts, the setting aside of irrelevant information, the connections with other doctrinal area, and the seamless web of transactional reality.

Perhaps at Stetson there is more emphasis on practice reality than there is at most of the schools in, or clamoring to be in, the U.S. News and World Report upper echelon rankings. Surely the emphasis on writing the "think piece" and trying to get it published in an "elite" academic law journal (read: edited by students and so far behind in publication schedule that for some areas of the law it's history by the time it appears) has spilled into teaching at many institutions. Emphasis on "what should the law be" and "let's get interdisciplinary" has overshadowed "let's get ready to practice." I've been told that "we're not in the business of prepping lawyers, we're here to train the legal philosophers." Wow, let's put that in the "view book" (the former "admissions brochure") and on the web sites and see what happens to law school applications at schools other that those sitting at the U.S. News head table, fighting with each other over seating position, and pushing aside all interlopers.

I don't disagree that students can leave law school having learned, in some way, something about discipline, time keeping, time management, client interviewing, thinking on their feet, and mentoring. They must learn some of these things, at least at a rudimentary level, if they're going to pass their courses and graduate. My disagreement is (a) law schools do very little teaching of this sort intentionally, (b) law schools do not have these considerations at the forefront in designing curriculum, (c) law schools do not do as much of this sort of teaching as they can and should, and (d) law schools come up short because their faculties are distracted by the philosopher take-over that is sweeping through law and other areas of education.

Someday the nation will pay a steep price for sitting by as those fearful or distasteful of the practice world and its engineers, nurses, accountants, computer programmers, technicians, and effective lawyers marginalized those disciplines. It is no wonder that it is in those areas there are shortages of college graduates. It is no wonder that it is in those areas that outsourcing of jobs to other countries has made inroads. It is no wonder that fewer and fewer law firms want to hire new law school graduates (other than those coming out of the U.S. News elite, the top 10% at other schools, and those coming out of their alma maters) and looking more and more to find laterals who need far less post-law-school training (that some other firm has undertaken).

It was predicted that playing the U.S. News and World Report rankings game would cause serious problems over the long-term. I'd rather go for another sort of ranking: a measurement of the success of law school graduates, based on something other than "reputation" surveys. How about a survey of law school graduates 3, 7, and 15 years out of law school, asking them the extent to which they learned in law school the things they needed for practice, with a very long list not just of the six skills Prof. Adams addresses, but the others, such as time budgeting, client management, and those I mentioned in connection with client interviews? Every time I propose that, I get the same reaction I receive when I propose bringing professional educators in to run seminars for law faculty on pedagogical topics. I'll let you know when it happens.

OK, it's not quite taxes, or chocolate chip cookies. One of these days I'm going to share my thoughts about the entire scam industry, but for the moment, read, learn, copy, paste, share....

Got this from a friend - seems like good advice.

Friends, the following story is a good reminder of how vigilant we need to be in protecting ourselves from scams. These scam artists sound pretty smooth and convincing.

This information is worth reading. By understanding how the VISA &Mastercard Telephone Credit Card Scam works, you'll be better prepared to protect yourself. Thanks to Dr. Pat Cloney for passing this on. Those con artists get more creative every day.

My husband was called on Wednesday from "VISA", and I was called on Thursday from "MasterCard". The scam works like this:

Person calling says, "this is , and I'm calling from the Security and Fraud Department at VISA. My Badge number is 12460. Your card has been flagged for an unusual purchase pattern, and I'm calling to verify. This would be on your VISA card which was issued by bank. Did you purchase an Anti-Telemarketing Device for $497.99 from a marketing company based in Arizona?"

When you say "No", the caller continues with, "Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?"

You say "yes". The caller continues... "I will be starting a Fraud investigation. If you have any questions, you should call the 1-800 number listed on the back of your card (1-800-VISA) and ask for Security. You will need to refer to this Control #" The caller then gives you a 6 digit number. "Do you need me to read it again?"

Here's the IMPORTANT part on how the scam works. The caller then says, "he needs to verify you are in possession of your card". He'll ask you to "turn your card over and look for some numbers. There are 7 numbers; the first 4 are your card number, the next 3 are the 'Security Numbers' that verify you are in possession of the card. These are the numbers you use to make Internet purchases to prove you have the card. Read me the 3 numbers". After you tell the caller the 3 numbers, he'll say, "That is correct. I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?" After you say No, the caller then thanks you and states, "Don't hesitate to call back if you do", and hangs up.

You actually say very little, and they never ask for or tell you the card number. But after we were called on Wednesday, we called back within 20 minutes to ask a question. Are we glad we did! The REAL VISA Security Department told us it was a scam and in the last 15 minutes a new purchase of $497.99 was charge on on our card.

Long story made short, we made a real fraud report and closed the VISA card, and they are reissuing us a new number. What the scammers wants is the 3-digit PIN number on the back of the card. Don't give it to them. Instead, tell them you'll call VISA or Master card direct. The real VISA told us that they will never ask for anything on the card as they already know the information since they issued the card! If you give the scammers your 3 Digit PIN Number, you think you're receiving a credit. However, by the time you get your statement, you'll see charges for purchases you didn't make, and by then it's almost to late and/or harder to actually file a fraud report.

What makes this more remarkable is that on Thursday, I got a call from a "Jason Richardson of MasterCard" with a word-for-word repeat of the VISA scam. This time I didn't let him finish. I hung up! We filed a police report, as instructed by VISA. The police said they are taking several of these reports daily! They also urged us to tell everybody we know that this scam is happening.

Please pass this on to all your friends. By informing each other, we protect each other.

[Urban legend? I doubt it. See this analysis. To which I add: After all, they REALLY do want what they're trying to get. Interestingly, web sites that take credit cards but that don't verify billing address and the other information make it easier for these thieves to do their dirty deeds. So tell your business clients to tighten up the input forms. A little paranoia goes a long way.]

# posted by James Edward Maule @ 2:03 PM

The Extreme Makeover? Extreme Tax post did not pass unnoticed. A nearby CPA asked several questions.

His first question was whether section 109 would apply. Section 109 provides that a landlord does not have gross income to the extent of the increase in value of the rented property caused by improvements made by the lessee, provided those improvements are not paid as substitutes for rent (in which case their value would constitute rental gross income).

For section 109 to apply, several conditions must be satisfied. First, the transaction between ABC/producers and the homeowners must be a rental. ABC appears to be buying the homeowners' story, and the stories of the other members of the household, and they appear to be purchasing their time (in this instance, the time spent painting a hospital). It does not appear that ABC or the producers are renting the house for use as a house. Second, the improvements must not be a substitute for rent. In the paradigm, the lessee pays rent and also adds an improvement. If this transaction is a rental, where is the rent payment? We're back to the section 280A issue. Third, lessee improvements are improvements made and used by the lessee. ABC and the producers did not live in the house that was demolished or in the house that was built. The house is no more a lessee improvement than is a house constructed on my raw land by a contractor. Yes, the contractor's employees are "in" the house as it is being built but they are not "using" the house.

Apparently (and I would have known this if I watched the show but I haven't), ABC and/or the producers also bless the family with big-screen TV sets, new furniture, and all other sorts of personalty. Unquestionably, section 109 does not apply. Nor would section 280A. And if the family is characterized as employees, compensated to perform painting and public relations services, section 102(c) precludes treating these items as gifts. So there's even more gross income. Does ABC "gross up" its payments so that the families have money with which to pay the tax? We don't know.

The CPA's second question is whether I think the IRS would go after these families, some of whom were in dire straits. His question referred to orphans, so I'm guessing (I should stop writing tax stuff and watch TV) that in one episode some orphans got a new or remodeled home. I do wonder what the IRS will do (assuming that ABC/producers are not providing money to be used to pay the taxes). Would it make for bad PR for the IRS to issue notices of deficiencies against these families? Maybe. Surely other families, in similar circumstances but not getting new or remodeled homes, might not be so sympathetic. Or perhaps they would be. Of course, politicians, especially the "eliminate the IRS" crowd, would jump all over this, oblivious to the fact that the LAW that applies is law that they wrote, but we know that they, paradigms of postmodern culture, are expert at shifting blame from themselves to anyone within range and anyone they don't like.

But if ABC issues 1099s to these taxpayers, the IRS computer system will automatically flag the tax returns of these families. It isn't a question of whether the IRS is "too busy" to do something, but whether someone at the IRS manually overrides the mis-match flagged by the computer. The first, benevolent negligence, is not all that uncommon, as the IRS has for decades "overlooked" some things for reasons of administrative logistics or policy, even though the law required something else. But the second, stopping a computer-generated "there is a mismatch" letter from going out to the taxpayers, is an affirmative interference with a system set up in compliance with, and designed to increase compliance with, the tax law. It might even be a violation of IRS internal working procedures for tha sort of interference to take place.

We do know that the IRS went after Richard Hatch, another TV show winner, who failed to report his income. From what I understand, he wasn't a likeable guy, but should tax law outcomes reflect the presumed likeability of orphans (assuming orphans are per se likeable, which isn't necessarily the case) and the dislike of others? If the answer is that Hatch received cash and these families received property, the outcome would turn on a distinction always rejected in the tax law, namely, the fact something is received as property rather than as cash makes no difference in the gross income analysis (except for certain narrow exclusions not relevant to this discussion and arising from specific statutory exceptions). And if the argument "it's in property so don't tax it" carries the day, I guarantee that tomorrow all sorts of transactions will be shifted from cash exchange to property exchange arrangements. The IRS cannot write, and the Congress cannot approve, such a ticket.

The solution will make the income tax even more complicated. Would some other sort of tax be better? What of a sales tax? My guess is that ABC/the producers would simply pay it as part of the deal. What of a VAT? Same outcome, as it would be imposed on ABC/the producers who would choose not to shift it to the families. What of a consumption tax that had no exception for residential realty? Boom. The discussion would not involve the niceties of sections 102(c), 109, and 280A(g), but would be just as laden with cries of "this isn't right." Well, then, what is right?

One of the ABA-TAX listserv participants explained earlier today that the producers of Extreme Makeover: Home Edition shifted gears last night and did more than a makeover. Following the family's request, the producers sent the family to paint a pediatric cancer center unit in another town's hospital. They were absent for a week.

ABC then tore down the family's house and built a 5400 square foot replacement. The family did not know this would happen. Gee, did anyone ever think someone could build a house in a week? Even ignoring time for the building permit and environmental clearance processes, actual construction in a week?

Anyhow, there's a tax issue here. (I really need to start watching television for other than sports, news, and weather. I'm told I don't get out enough. I also don't sit at home and watch network TV enough. I must be flunking something.)

Anyhow, does the family (or at least the parents) have gross income? And can ABC (or the producers or whoever actually paid for the new house) claim a deduction?

Let's start with gross income. Gross income is all income from whatever source derived, unless an exclusion applies. Go read section 61(a) of the Internal Revenue Code, which is where that not-for-everyday-conversational-use language can be found.

Income? Certainly. The owners are economically wealthier and they've taken the house into their ownership and possession.

Exclusion?

First possibility: the exclusion for gifts (section 102). For it to be a gift, it must come from the donor's "detached and disinterested generosity." That's a quote from a Supreme Court case called Duberstein, and even though the Court told us not to quote that language as a test, everyone, including the lower courts, has been doing that for decades, so why should I be different? ABC does this to get ratings, because ratings mean income. ABC is not the kindly uncle buying a house for his starting-out-in-life niece and her husband (disclosure: I have not done that. Warning to my son, daugher, nieces and nephews: don't get your hopes up). Someone suggested that it was a gift because if someone leaves money or property where an intended donee is expected or intended to find it, it's a gratuitous transfer. My response: Mr. Duberstein's employer left the car where he expected Mr. Duberstein to find it. And yet the Supreme Court held it was not a gift.

Second possibility: an exclusion for rental gross income if the rental period is less than 15 days of the year (section 280A(g)). Is this a rental? That question has been debated in instances where ABC remodeled a house. The obstacle in those cases is that the value of the benefit is disproportional to the rental value of the property. But this demolition scenario is even tougher. How can the owners claim ABC is paying rent for the house when ABC promptly demolishes the house? Rental for the land? If so, is $500,000 or whatever the house is worth equal to the rental value FOR A WEEK for a small plot of residential land? Hardly. The rumor mill has it that attorneys for ABC have advised it that section 280A(g) does apply, but even if that is true, there are serious reasons to doubt the conclusion. I'm very certain that if the attorneys advised anything, it's in a letter that hedges its way all over the map.

I'll come back to this after I consider ABC's deduction.

First possibility: ABC deducts the value of the house as a business gift. The problem with this approach is that there is a $25 (yes, twenty five dollar) limitation on the amount that can be deducted as a business gift to any one individual for a year. I cannot imagine ABC taking this approach.

Second possibility: ABC deducts the value of the house as a rental expense. The problem here is that the deduction is limited to ordinary and necessary rental expenses that are reasonable. There is no way that the value of a 5400 square foot house is reasonable for a one week "rental" of a plot of residential property. It won't fly.

Third possibility: ABC deducts the value of the shouse as an advertising expense. That's what it is. Advertising. Ordinary and necessary? Yes, within the context of the business (television production) in which it is incurred.

So why would ABC limit itself to a minuscule gift deduction or risk losing most of the deduction as a contrived rental deduction when it can get the best (and correct) tax result taking an advertising expense deduction? Of course, that leaves the owners in a tough place. What happens to the gift argument, already shot down under the gross income exclusion analysis? What happens to the rental exclusion that was struggling to stay alive?

Well, what happens, I contend, is that the family has gross income. That's a brutal result. So, too, were the results for the recipients of all those automobiles that Oprah gave away on one of her shows. At least in that case the producers forked over cash sufficient to pay the taxes. Does ABC do that with the Extreme Makeover: Home Edition episodes? We don't know. The families sign confidentiality agreements, evident from looking at the application.

One last item. In addition to the statutory provision making all income gross income unless there is an exclusion, yet another provision (section 74) provides that prizes are included in gross income. Is this house a prize? The families entered a contest, much like a lottery. Some selection process beyond their control is used to determine the winner. It's like a lottery, except it costs 37 cents for the postage rather than $1 for the ticket. Someone suggested that it might not be a prize because they don't enter to win it, but the application surely is an entry form.

Or perhaps, as one listserv participant suggested, the show is staged. I doubt it. I think they really do seek out "needy" families because it makes good television. After all, tax professionals are watching. Well, some of them, at least.

Oh, the producers or ABC or someone paid off the mortgage on the old house. Well, sure, after all, the bank wouldn't be too happy to see its collateral get razed!!! Think of all the loan officers who must be watching the show!

So, I'm sure once ABC's tax advisors realizes how important it is to ABC's deduction that it NOT be a gift, they'll decide to send that 1099 to the recipients. Then let the fun (and tax games) begin!

It's so nice to have the experts affirm what I assert. Several years ago I wrote an article for the Villanova University School of Law weekly newsletter, in which I asserted that the best way to learn is to teach someone else, and that law students should focus on learning how to teach, because they will spend their careers teaching clients, judges, other lawyers, bureaucrats, and others.

Now, in a new report about the comparative success of siblings, researchers claim that one reason, and probably the most important reason, first-born children tend to be more successful than their siblings is that they have more opportunity to, and in fact do, teach their younger brothers and sisters.

Of course. OK, so I'm the second-born of my parents' children. But I had two younger sisters who probably could claim to be my first students. Somehow, despite that, both have done quite well. One's a teacher, the other a lawyer. And I'm a lawyer who teaches.

Credit, though, goes to my mother, who through the years, even when I was in graduate school, would insist on my sitting down and explaining to her what I had learned. Until I was in my 20s I thought it was something for her benefit, which, of course, I was more than happy to do. Then I realized, it was really for my benefit. Too few parents do that for their children. Thanks, Mom.

I was startled when I read the news about the House passing a new highway funding bill to read this quote from Representative Peter A. DeFazio, a Democrat from Oregon, who is a member of the Transportation Committee:

It will be the signature domestic legislation in this Congress in terms of the positive impact on the economy of this country.

Keeping in mind that "this Congress" sits from January 2005 through January 2007, that's quite an assertion.

It means that any tax legislation enacted this year or next would fail to qualify as "the signature domestic legislation in terms of the positive impact on the economy" and it means any social security legislation enacted this year or next also would fail to qualify as "the signature domestic legislation in terms of the positive impact on the economy." That means one of the following:

• No tax and no social security legislation
  
• No tax and insignificant social security legislation
  
• Insignificant tax and no social security legislation
  
• Insignificant tax and insignificant social security legislation

Considering the political realities, it would not be a shocker if this Congress failed to pass social security legislation or enacted some minor tweaks that were insignificant in the context of the overall economy. But for a spending bill to overshadow the tax legislation of this Congress would mean that this Congress, like its predecessors, will fall flat on its face when it comes to putting the needs of the nation, its citizens and its economy above their own individual pet projects. The cynic in me would not be surprised, for, after all, the highway spending bill contains piles of special pet projects inserted by members of Congress to appease highway construction firms in their districts even though the 8-lane highway in the middle of the prairie that gets four vehicles an hour really doesn't energize the nation's economy or reduce traffic gridlock.

But this is a Congress full of members who have orated incessantly about their dedication to reforming the tax system. Perhaps Representatvie DeFazio is stating what would be obvious to Maule the Cynic, "That won't happen but at least we got this highway spending bill through" or perhaps he is stating what he intends to try preventing, "This Congress should not do anything else that could qualify as the signature domestic legislation in terms of the positive impact on the economy." Or perhaps he simply meant to use the article "a" and somehow the article "the" slipped in. Or maybe he was just so excited that the legislative date of the evening overshadowed every other statutory encounter he's had or expects to have.

Perhaps, though, there won't be any more economic legislation because the Congress will be busy investigating the use of steroids by major league baseball players. Hey, first things first. Forget about the unimportant stuff like the economy, jobs, health care, defense, and safety. Several months of televised hearings, giving members of Congress more opportunities to grandstand, may generate a new tax provision denying deductions for the cost of steroids. Wow. It might be as effective as the provision enacted years ago denying deductions to drug dealers. We know how effective that was in reducing the use of illegal pharmaceuticals.

Still, the ideal of giving "the signature domestic legislation" status to a bill passed (and not yet enacted) early in the first year of a two-year Congress is much like a baseball player claiming that a 2-hit, 2 RBI game in later April is "the signature performance" of his season. Doesn't Representative DeFazio have any hope that maybe the Congress can accomplish something better in the 22 months it has left? Perhaps he knows his colleagues too well.

Steven Lubet, a professor of law at Northwestern University, has written a thought-provoking article that challenges the traditional approach to examinations taken by most law schools with respect to most courses. It deserves a full read not only by law faculty and law students, but also lawyers who use the results of examinations as a factor (sometimes the principal factor) in their hiring decisions and even the rest of the citizenry, many of whom are affected by what lawyers say and do.

Prof. Lubet's thesis is that "law school tests and bar exams reward skills that are largely disconnected from everyday lawyering." How very true. For years I've contended that first-year law school examinations put too much weight on a student's memorization skills and not enough on their analytical skills. Students who do not have the sharpest memories, but who nonetheless can be and have become excellent attorneys, struggle to do well and rarely "make" Law Review, the gateway to admission into the elite circles of large firms and the law professoriate.

Prof. Lubet points out that law faculty try to measure a student's educational achievement in a semester-long course with what they accomplish on one three or four hour final examination. He notes that these sorts of examinations reward "rapid recall and facile composition" rather than depth of understanding. That's one of many reasons I base as much as one-third of course grades on student performance on exercises assigned throughout the semester. It's a huge amount of work, but it's worth it. When an administrator told me I must be crazy to subject myself to the workload, I replied that I'm paid to do this. See why my colleagues want me to be their next Dean, hahahahahahahahaha?

I enjoyed Prof Lubet's comment that if lawyers did in practice what law students are expected to do on law school exams to earn high grades they'd probably be hit with malpractice suits. Of course. The disconnect between the ever-more-philosophically-focused law faculty and the practicing bar is growing. This is not good, especially when many firms need to cut back on mentoring and training because of the competitive business characteristics that have infected law practice. No wonder that hiring preferences are shifting to searches for attorneys with 3 or more years of experience, namely, folks that some other lawyers have trained. Do I hear "free agency"?

Prof. Lubet also notes that though lawyers sometimes need to react quickly and to have good recall, chiefly in certain litigation areas, most lawyers don't do those things and those who do generally don't do them most of the time. He points out that many important legal skills get little attention outside of clinics. Think "tenacity, diligence, thoroughness, collaboration, consultation, fact investigation, and, crucially, the willingness to admit error and start over from scratch." Then he tries to match me in becoming endeared to our colleagues in the academy by revealing the truth about law school exams: they get used because they are "easy to grade."

His comments about the bar exam raise similar concerns, though in a different context, and without as disadvantageous an effect as law school exams, but for the moment I leave a critique of his views to those who have experienced the joy of writing and grading those exams. Suffice it to say I agree with his analysis.

I hope to get Prof. Lubet's permission to reprint his article in our law school newsletter. I wonder if I'll have a more challenging task getting permission from the newsletter's editor! But I'm glad I'm not totally alone in the law faculty universe. It's a comforting thought. Perhaps fifty years from now scholars writing about the history of legal education will look back to 2005 as a meaningful turning point in the modernization of law school pedagogy as it was dragged from the late 19th century into the 21st. That I would live long enough to see that happen. Or, perhaps, at least that my students should live so long.

Andy Cassel's Philadelphia Inquirer column on consumption tax possibilities addressed some of the same issues that everyone else interested in the fate of tax reform has been pondering. Andy's comments have inspired me to elaborate on my most recent analysis of the consumption tax.

Would the consumption tax be simpler than the income tax? How could it not be? How could anything be more complicated? At least any sort of tax system. Well, the income tax COULD be more complicated. After all, ten years ago, twenty years ago, people characterized the income tax as absurdly complex, and hindsight tells us that what existed then, in the "good old days," wasn't anywhere as complicated as what now exists. The trend is for the Internal Revenue Code to set up a different tax system for each citizen.

So, yes, the consumption tax could be at least as complicated as the income tax. Why? Andy describes the complexity of the income tax as "the need to distinguish "taxable" income from other kinds of cash flow." That's true, though most of the complexity involves deductions, credits, and special rates. There's very little room to twist around gross income, short of fraud or near-fraud tax shelters.

With a consumption tax, the question is a focus on "spending," to use Andy's term. But what spending gets taxed? A consumption tax that resembles a state sales tax is going to have a bad role model. To appreciate how simple the federal income tax is, take a peek at state sales taxes. The lists of taxable and non-taxable items not only are long, but difficult to comprehend in terms of policy. And many don't simply classify something as taxable or not, but make the distinction turn on where the item is used (eat-in versus take-out, for example) or who uses it, or who buys it, etc. etc. The reason consumers are shielded from the complexity is that the vendor is responsible for figuring out if the tax applies, and in recent years digital technology has made that much easier. The problem is that when a mistake is made, the consumer doesn't realize it unless the mistake is huge. Years ago, several bold people suggested that the IRS be allowed to tap into citizens' bank accounts so that the IRS could compute the income tax and pull it out of the citizen's account. Painless, like the sales tax. Errors unnoticed, like the sales tax. The problem was that about the same time the IRS was erroneously depositing refunds into citizen's bank accounts that were orders of magnitude out-of-whack. So the idea went nowhere. Fortunately. Today, businesses and the government are far more likely to make mistakes than they were twenty years ago. The reasons can be the topic of a future post.

So what WOULD get taxed under a consumption tax? Buying a house? But that's not consumption. Houses are used but not consumed. Perhaps the tax should be on the person who demolishes property. What about purchase of a refrigerator? Is it "consumed" as is food? Yet food is the most common exception to state sales taxes. If, as consumption tax advocates argue, the consumption tax is more efficient because it forces savings, ought it not be designed to encourage efficiency? No taxes on recycling, and high taxes on use of resources that cannot be replaced, would fit the bill. Will it happen? No.

I pointed out the problem with the argument that comsumption taxes are good because they encourage savings, which in turn is good because it causes economies to grow. Savings simply shift consumption to a debtor, because ultimately the saved amounts are loaned to other consumers. Those with, become creditors. Everyone else, a debtor. What makes an economy grow is development of resources, either through recycling or discovery (of either natural sources, an ever-diminishing prospect, or through invention). Let's see if a consumption tax does this.

A manufacture takes resources and builds an automobile. The manufacturer is not hit with a consumption tax, because it is imposed on the purchaser (even if the manufacturer is stuck with collecting it, in the style of a state sales tax). The tax doesn't take into account the proportion of materials in the automobile that can be recycled or that cannot be recycled. The purchaser eventually sells the automobile to someone else. What happens? Another consumption tax, just as there is another sales tax. The difference is that the sales tax is what it says it is, a tax on sales, and if the automobile is sold from purchaser to buyer to third buyer, and so on, the state collects far more than just, say, 6% of the original manufacturer's sales price. So, who has "consumed" the automobile? The first purchaser? No, because the first purchaser has sold the automobile for something more than zero, indicating that the first purchaser did not consume the entire automobile. Ought not the first purchaser get a consumption tax REFUND when selling to the second purchaser? Or, to put it another way, ought not the second purchaser reimburse the first purchaser for the consumption that is being shifted from the first purchaser to the second purchaser? That sale, from first to second purchaser, does not consume additional resources. Does it cause the economy to grow? Yes, if measured by volume of goods changing hands. Yet this sale is a transaction that "grows" the economy without consuming anything. Why tax it? After all, if the economy could be "grown" without anything being consumed, taxes would be unnecessary.

So, something more must be involved. Let's think again about what gets taxed, even before all the special interest lobbyists show up and turn the consumption tax into an inspiration for a "bring back the less complicated income tax" movement. Is the "purchase" of corporate stock taxed? No. The purchase of a building? Hmmm. But isn't the purchase of real estate an investment just as is stock? Goodness, even purchase of a high quality refrigerator is an "investment."

What if the building is a home? Imagine a 25% consumption tax on home sales. Very good for the economy? OK, exception needed. But wait. Purchase of an existing home is merely a transfer of resources, not a consumption. Purchase of a new home consumes resources (at least in the sense that they are transformed from tree and bauxite deposit into a residence). But if only new home purchases are taxed, that puts builders out of business. Or at least moves them into the remodeling business. Maybe that's not a bad idea, considering how many vacant buildings populate both the urban and rural landscape.

Of course, we know that real estate will be exempted. After all, the Congress (not the IRS, Andy) has been persuaded by every "don't let taxes get in the way of our real estate deals or the country will go bankrupt overnight" song chanted by the real estate lobby. Good thing, too, else we'd have a huge shortage of vacant office buildings and empty shopping malls, and we know it's not good for the economy for resources to be diverted from building commercial properties that will sit unleased for years. Thus, real estate financed with third-party nonrecourse debt is treated as at-risk for the investors even though they are not at risk. Investors who own real property that increases in value are permitted to deduct depreciation that doesn't exist as though they were no different from business owners who purchase equipment that diminishes in value in very visible ways. Real estate investors are the beneficiaries of special exceptions to the passive loss limitations. So I doubt real estate is going to end up being taxed under a consumption tax.

What about K-12 and college tuition? Is that "spending"? Of course. Taxable? Just imagine, an overnight 25% increase in the cost of education. Good for the economy? Who gets hit? The person making $500,000 a year sending two children to school? Or the person earning $50,000 a year trying to send two children to school? OK, let's make tuition exempt.

So what gets taxed? Mostly the money that is spent on shoes, clothing, food, medicine, automobiles, and, OH WAIT. We can't tax shoes, clothing, food, and medicine. After all, they're exempt under most sales taxes. Unless, in many states, it's prepared food being taken out of the establishment to be consumed. Hmmm. Food is consumed no matter where it is eaten. What's the difference? So, anyhow, do those necessities get taxed? Maybe not.

What's left. Oh, let's see. DVD players? Ah, to some people those are necessities. No matter, they'll find some common value set that tells us that DVD players are not as important as food or medicine. And they're right. So what gets taxed is the stuff that isn't necessary. What does that do to an economy that for more than fifty years has thrived on the "disposable income spending" pattern? I'm not sure. It could be good. It could be bad.

So what will happen is that people who must spend most or all of their income on necessities will pay taxes on most or all of their income. Those with incomes that permit saving will pay about the same amount of tax (after all, one can double the cost of food by choosing more expensive items but there is a limit to how much one can eat) as do those with far less income. If, as some suggest, provisions will be put in place to rebate the tax to the poor, who's left paying the tax? A tax that is, essentially, a tax on wages? Why, the middle class.

What will happen? Eventually the middle class will disappear. It already is beginning to disappear, and the consumption tax will hasten its demise. How awful, one might think. Well, someone IN the middle class will think that way, unless they're fairly confident they can break into the upper class (the wealthy, super wealthy, hyper wealthy, etc.). No wonder parents go nuts at sports games. Their child making the pros is perhaps their only ticket out.

Would the poor be upset? In theory, yes. It means that there would be far less chance of "moving up" the economic ladder (because the middle rungs will have been removed). So, as is the case today, much emphasis will be placed on getting one's self, or one's children, into the limelight that brings big bucks. No wonder so many untalented people flock to the TV reality shows, and all the other "lotteries in disguise." This is not news. The fact that lotteries draw most of their revenue out of the poor neighborhoods has been known for quite a while.

And that leaves the upper echelon. Historically, the upper echelon has always feared the middle class. Whether it was royalty bucking the nobles, the upper crust fending off the merchant class, the Soviet power brokers putting the middle class on the farms, the Maoists in China and the Khmer Rouge of Cambodia putting the intellectuals into the fields, or the Roman Senate keeping close tabs on citizenship rights, the money-fueled, power-lusting megalomaniacs have always been far more of a threat to the middle than to the peasants, despite the common portrayal of Robin Hood feuding with King John. The middle class thrives when the upper echelon needs a buffer during times of social unrest. Robin Hood didn't steal from King John as much as he did from the petty nobility.

So, the more I think about it, the more palatable I find a user-fee based revenue system that rewards production and discovery, and burdens irrecoverable resource consumption. The more I learn what sort of thing a so-called "consumption tax" would be that imposes multiple taxes on the same automobile sold 5 times over a 15-year period even though its manufacture used no more resources than the one held by the one owner during the same period, one that imposes a tax on the purchase of residences but not corporate stock, and one that is loaded with exceptions resembling those permeating state sales taxes, the less I like it. I might even like it as much as I do the income tax. Which is to say, not very much. No, not at all. At least not what presently exists.

Speaking of which, Andy mentioned that he started in on his tax return preparation this weekend. What a coincidence. So did I. I hope he's done. I'm not. As I was slogging through, I realized I had not yet done the tax return for TaxJEM, and it is due in a week. Fortunately, its return doesn't look like Microsoft's, so I should be able to get it done within a few hours. HOURS? Yes, the Pennsylvania return, which includes an antiquated capital stock franchise tax, makes the federal 1120S look like child's play.

I wonder if a consumption tax would apply to the oxygen I will consume as I do the return. Perhaps I get a credit for planting and caring for trees and shrubs that replace the oxygen. Or perhaps I could impose a consumption tax on the legislators who require me to consume time (an irreplaceable resource) filling out the forms that their revenue laws require.

And, for those thinking that states would say bye-bye to their income taxes and jump on a consumption tax bandwagon being pulled by the federal tax locomotive, brace yourselves. At best, states will ADD the consumption tax to their already interminably long list of revenue devices.

And with that, I've consumed my allocated time and space for today's posting.

In his column this morning, Andy Cassel reports that the buzz in Washington suggests making individual social security accounts an "add-on" to, rather than a "carve-out" from, the existing system. My response to those suggesting add-on accounts is this: "We already have them. They're called IRAs, SEPs, SIMPLEs, 401(k) plans, etc etc. We don't need yet another layer of complexity. It would be better to reform the mish-mash of retirement planning devices and create one device. It does not need to be, nor should it be, part of social security."

I also would ask, "What would these add-on accounts accomplish? Those too poor to contribute to IRAs wouldn't contribute to add-on accounts. The wealthy would get what, another tax deferral opportunity?"

Folks, the add-on suggestion makes no sense as a proposal because it makes no sense to propose what already exists. I wonder if it is some sort of smoke screen, or some device that is a stealth carve-out.

We'll see, soon enough. Thanks to Andy for alerting us, because I hadn't seen this add-on news.

In a comments before the President's Advisory Panel on Federal Tax Reform, Alan Greenspan explained:

a consumption tax would be best from the perspective of promoting economic growth" because it would encourage saving and the capital formation that the economy needs to expand and modernize.

So let me see if I understand this. A consumption tax encourages us to reduce spending. OK. We reduce spending. People who sell stuff and who manufacture stuff see their sales decline, or, at best, flatten out. So the factories lay off workers and stores cut back the hours worked by sales clerks. This is good?

And the money that is "saved" rather than spent goes where? Into banks and financial institutions? Who do what? Ah, lend it to other people so that they can, aha, buy homes and cars and, whoops, they're spending. That's bad, right? Oh, perhaps the saved money goes into the stock market. That pushes up stock prices. Which generally has the effect of making people feel good about the economy and they start... yep, spending.

Or perhaps the idea is to get people to invest in government securities so that the government can pay off all the foreigners who currently hold a good chunk of our Treasury obligations. Which is, of course, a way of financing government spending. So rather than paying taxes, consumers will be encouraged to cut spending and to invest in government obligations so that the money can be spent by the government.

Whoa! So this is a complex way of getting money into Washington rather than having it go to China or other countries in exchange for consumer goods, and then being invested by these other countries in Treasury debt. Not that this is a bad idea. After all, who wants to wake up some day and discover that China owns the United States?

If this is the goal, let's put it up front. Why? So that we can figure out who would be giving up spending in order to finance the deficit.

Let's divide the population, like ancient Gaul, into three parts: the poor and near-poor, the middle class, and the superwealthy, wealthy and near-wealthy. The consumption tax will not deter the first group, the poor and near-poor, from spending because they spend on things such as food, clothing and shelter. So they're stuck. They'll be paying a consumption tax. Absent a reduction in income and payroll taxes (and even some sort of rebate system because it may not be enough to reduce income taxes considering that most of the poor and near-poor don't pay income taxes), this group takes a hit. The consumption tax will not deter the third group, because for them, it is an outlay from petty cash. They're already saving and investing. After all, how DOES one spend $12,000,000 a year? So who's left that ends up cutting spending because the tax makes spending unaffordable? Yep, the middle class. The group too poor to pay lobbyists to buy votes and too rich to get sympathy from the idealistic reformers of the world. Caught in the middle. That's why it's the "middle" class.

There's enough libertarian in me to object to regulations that limit income. If Americans want to watch television and purchase products from sports and other advertisers that fund multi-million dollar salaries for celebrities, professional athletes, and overpaid executives, that's their right. Even if it means that the bus drivers, pothole fillers, nurses, cancer researchers, day care workers, and others scrape by on far less. After all, they're nowhere as near glamorous or exciting. We'll miss them only when they're gone and there's no more left.

But there's enough pragmatic in me to harp back to user fees. And sometimes income can be a benchmark for a user fee. Here's one example. Folks who make huge amounts of income usually do so because huge numbers of people gather in public places, such as concert halls, stadiums, and theaters. Well, the homeland security costs of defending those places are high. Time for a user fee, based on the benefit obtained by being present (physically or virtually) in those places. Here's another. Folks with huge amounts of wealth (in the form of investments (savings) or other property (spending)) have more that needs to be protected against attack. Time for another user fee, measured by excess value. Now, it may simplify things to measure these user fees by a surrogate benchmark. A combination of income and wealth. Actually, that's what already exists, if one considers federal, state, and local taxation as one huge monolithic revenue raising machine.

So what we're talking about is fine tuning. Not tinkering with engine settings. No, the fine tuning that racers do: tear down the engine and rebuild it. The way it should have been built.

Greenspan's reluctant approval of a combined consumption - income tax suggests he might support heading in such a direction. That, however, tells us little about the Advisory Panel's eventual conclusions.

When do we, the people, get a chance to question and challenge that Panel? As is my custom, I extend to those whom I question here to consider and respond to my questions and comments. And I invite readers to spread the URL for this post throughout the citizenry, so that tens of millions of taxpayers begin asking these questions of the Panel. Find out NOW what's going to happen before it becomes a huge snowball rolling down the hill, gathering momentum, and suffocating everything in its path. I can't imagine anyone in the Administration objecting to the idea of asking questions and raising challenges pre-emptively.

My recent posting on Bill Gates' call for education reform brought yet another response in addition to this one. It's a long story but well worth the read, because it provides some insight into the sorts of things that are happening in the schools, and I'll break up the comment with my editorial asides:

I just read your two blog entries on education (Bill Gates and I Agree and the followup). I have to say that I agree with Bill Gates as well. (Or more accurately, I agree with the people Gates copied to make his speach. This topic has come up several times on NPR and on some TV shows on The Science Channel, etc. It wasn't Gates's idea.)

I don't have that much to add, just some personal comments. First, I remember in high school there was a class that was available that was supposed to teach people things they needed to survive out on their own, things like how to balance a checkbook and other such things. Many of my friends took the class and tried to talk me into taking it as well. I didn't, thinking it was a stupid class and it was only "common sense" stuff that everyone should know anyway. One friend told me that there was more to balancing a checkbook than I realized and he would have a leg up on me after graduation. It turns out that he had more trouble balancing a checkbook than I did so how usefull was the class anyway? [MauledAgain says, "The person making this comment is a very intelligent fellow who probably could teach himself quantum physics. Actually, I think he did. Probably wrote a check-book balancing program years ago. Oh, wait, I'm the one who did that. The concern about education isn't so much a need to teach those at the upper ends who can teach themselves. It's the "middle 90%" that often gets short-changed."]

Second, I don't think that teachers care to teach concepts anymore, they just teach how to take tests. Here is a real world example. My
stepson get very good grades in almost everything including math. One time last year he was out of school for a few days and needed help with catching up in his math class. He had his book and the list of homework problems from the book that he was supposed to do and turn in and he wanted help doing the problems. Since he didn't go to the classes he didn't know how to do the problems so I was supposed to teach him. I wanted to make sure that what he learned from me was similar to what he would have been taught so I read through the chapter he missed in his math book and set about teaching him how the book said that he was supposed to learn it. He had a lot of trouble learning it that way so I figured that I would help him out by teaching him a slightly different way than was in the book. A light went off in his head and he immediately understood and was able to get the right answer to all the assigned problems (from a spot check of the answers in the back of the book). He was happy, I was happy, everthing was ok. He then came back home the next day upset and saying that his teacher didn't like what he learned and said that every single answer he gave was wrong. I asked him how it was wrong and what answer did the teacher want. He said she wouldn't tell him, she just said that everything was wrong. I knew that what I had taught him was right and maybe my pride was a little hurt so I told him that he needed to learn this the way his teacher wanted it learned so he had to insist that she teach him the "right" way so that he wouldn't be behind for the rest of the year. He came back the next day and said that she refused again and then told [him] that it didn't matter that he didn't know the subject! (What?!?!) A few weeks later he told me that the teacher said he was back on track again and his grade picked up from the drop it took learning the "wrong" thing from me. I decided to test him to see what he had learned and to find out how things differed from what I learned about math. I took one of his tests that he had scored an 'A' on and I changed one of the numbers then asked him to solve the problem. He was lost and couldn't do it. I then gave him his test back and showed him the problem he got right then asked him to use the test as a guide to do the problem I just gave him. He couldn't do it! He later had some goofy problems of trying to figure out how to maximize profit for a business. The book gave *one* method for solving the problems. Worse, the book didn't explain *why* you were using that method as opposed to some other method, the concept behind the method it chose, how the method worked, or even how to check your answers to make sure you got it right afterwards! He did a lot of graphs but he doesn't know why. He doesn't know what the slope or intercept mean (straight line graphs, not anything resembling hard stuff). He doesn't understand why a steep slope changes the answer, but he gets 'A's and the occasional 'B' so he thinks he knows math. His teacher thinks he knows math! He doesn't want to learn from me anymore because he thinks I take this too seriously and that I am too much of a math geek. I don't understand what is truly important in his life.

[MauledAgain says, "Yet another classic information of teaching information without comprehension and teaching formulaic processes without understanding. My students, especially in tax, learn processes. That gets them to a C+ or B- at best. If they can EXPLAIN the process, or identify errors in a corrupted process, they climb into the honor grade region (A, A-, B+, B). Merely knowing information in any of my courses gets a student a passing grade, but unless they can understand it they won't earn an honor grade. Why? Because law, like many other areas, is dynamic and the fact situations that are encountered change and evolve. Learning how to learn is more important than learning how to mimic processes or regurgitate information. There are many teachers who can do things and show others how to do things but who do not understand why they can do what they do and thus cannot teach the understanding. It's a reason that some of the best hitters in baseball don't do well as hitting coaches. When students get to law school and struggle with the challenge to learn how to 'think like a lawyer' I tell them that lawyers don't think any differently than any other professional, skilled artisan, or worker. What we're doing is teaching students to think. Some can, some can't. It depends on what and how they've been educated for the 16 or more years before they arrive.]

BTW, even after a stern warning from his mom on use of the ATM card he insisted he needed, it turns out he had trouble balancing his checkbook too. I guess he should have taken a class on that... [MauledAgain says, "Very funny. YOU could have taught him, no? :-)]

I wish I knew who first said that quote about common sense. "The problem with common sense is that it is not so common." Or something
like that. [MauledAgain says, "Heard that from my parents. But they don't claim authorship. I'm going to guess it was Mark Twain. It wouldn't be the first Mark Twain quote that was shared with me as I was going through my formative years."]

Now I'll wait for the teachers to explain that they'd like to explain the hows and whys rather than just the whats, but that administrators restrict them, their time is constrained, the students don't get sufficient support at home, and other problems interfere with such an objective. Probably true in some cases, and not in others. It takes us back to the question, "What are we trying to instill in the students? Information? Comprehension? Capability? Diligence? Adaptability? High score tests for the sake of high score tests? Life skills? Something else?" Only after that question is answered can a productive discussion of "how" begin.

My postings (original, first follow-up, second follow-up) on dealing with email and other digital content at death included a discussion of password lists. This brought a response from Mark Morin that includes both a sensible suggestion and a humorous suggestion that demonstrates, I suppose, that sometimes we can go too far looking for the perfect solution. Mark Morin wrote:

Since we're talking about a password list, how about encrypting it with some public key-type method and sending the private key to your attorney or executor. Heck, if you wanted to get clever, put the key in your will. If you really didn't trust anyone, encrypt the list with a large key. Encrypt the key and give the encrypted key to your attorney. Give the key to decrypt that key to your executor, then both the attorney and executor must conspire to violate your trust.

And so on, and so forth, depending on your level of paranoia. (I wanted to include a[n encryption] key tattooed on the tongue of a rottweiler who hates everyone somewhere in the chain so the principal would know when the key was compromised. [As the dog would be dead before giving up the secret.] But, I thought that would be going too far.)

My response:

Wow, Mark, my brain was whirring through the chain and then I got to the dog and lost it!! Excellent.

I guess if we left instructions to executors and lawyers as to how public key/private key encryption worked, it would make sense. And perhaps, eventually, people will deal with encryption the way they now deal with telephones, that is, without a second thought. But for the next decade or so, there's a lot of folks "out there" who would need hand holding. On the other hand, imagine the law firm that puts "understands and uses encryption keys" in its brochure or on its web site.

Somehow we could end up with a benchmark telling us what percentage of the population is paranoid. Or at least what percentage has email or other digital content they don't want getting into anyone's hands. Looks like a law and sociology or law and anthropology course beginning to take shape.

To that I add this thought. What happens if the attorney and executor die before the testator dies? Somehow the key must move from them to their successors. Yes, there is a risk of overkill (no pun intended) with this issue, but on the other hand, I love watching the reactions I get when I ask people, "So what do you think happens to your email when you die?" Maybe I just happen to hang out with a lot of paranoid people.

So, how many people will answer "I don't care" when asked that question. Responses such as "my spouse/child/parent will take care of it and make sure no one invades my privacy or usurps my rights in web sites and other digital content" don't count because there's no guarantee they will survive. So we get to add something else to the "to do" list. Namely, "what to do about the email, the web site, the diary, the letters, the novel in progress....."