MauledAgain

A question that was posed last week presents an opportunity to explain how a student of taxation needs to learn not only rules but methods of dissecting a transaction to identify what is deemed to occur for tax purposes. The fact situation that my students see early in the semester involves an employer who persuades a valued employee to continue employment by transferring an automobile to the employee's spouse. At first glance, almost all students see a transfer from an employer to someone who is not an employee and begin thinking that the rules applicable to gifts would apply. But careful analysis reveals that the transaction, in substance, is a transfer by the employer of an automobile to the employee followed by a transfer by the employee to the spouse. Thus, the compensation rules apply to the employee, and the marital property transfer rules apply to the spouse. I tell my students that this hypothetical serves as a paradigm for many situations in which what appears to be one transaction ends up being treated as two or more steps.

Last week's question was described this way:

Sole owner of an S Corp wants to pay his top employees a bonus of land he owns personally instead of cash.

I assume this would be compensation and would be reported as such on W-2s. Is the amount to report the current FMV or the owner's basis?

One analysis concluded that the owner would be "entitled to a compensation deduction equal to FMV" and would be required to "recognize gain equal to the difference between owner's basis and FMV." This would give the employee an adjusted basis equal to fair market value.

Someone tactfully challenged this analysis by asking where the compensation deduction would be reported on the owner's tax return. Back came a response: "Wages." That, however, though describing the nature of the transaction, does not identify where the deduction would be taken. Schedule C? Schedule E? Schedule A?

Someone else pointed out that what appeared to be a transfer by the S corporation shareholder to the S corporation employee would be a "deemed contribution of the land to the corporation, with a carryover basis and a gain to the corporation when the land is transferred to the corporate employee as compensation for services rendered to the corporation." Bingo. It's a marvelous application of the "automobile transferred to employee's spouse" paradigmatic hypothetical that comes early and often in the basic tax course. Someone was paying attention. So, too, was another respondent, who explained that the deemed contribution of the property to the S corporation would be tax-free under section 351 and give the S corporation an adjusted basis equal to that of the shareholder, and that the deemed transfer to the employee would trigger a compensation deduction and also gain to the corporation because it was using appreciated property to pay an obligation.

At about the same time, I replied, in what turned out to be an incomplete answer. I asked, "Why is this not a deemed contribution of the land to the corporation and a payment by the corporation of compensation?" I overlooked the gain recognition that would fall upon the corporation. I turned too quickly to the "so what?" portion of the question. "Yes, the deduction will flow through to the owner," I noted, so that ultimately the shareholder would get a deduction, but in the form of a reduced amount of income pass-through or a larger loss pass-through from the corporation. So, ultimately, the answer to "where?" is Schedule E, in an oblique sort of way.

But then I pointed out one reason it mattered: "[B]ut (at least theoretically) the determination of whether the compensation is reasonable will be affected by bunching the bonus and regular salary, and the computation of FICA, etc., will differ." Otherwise, the employee's total compensation would be split between two payors, causing a variety of problems in the determination of its deductibility and the computation of taxes and limitations that are affected by total compensation.

This scenario demonstrates that one of the several complexities of tax law is transactional complexity. In this instance, what appears to be a simple transfer turns out to be two transfers, each triggering a variety of tax consequences. Knowing the rules is insufficient, because the first thing that must be accomplished is identification of the facts to which the rules are to apply. Identifying the applicable rules requires an understanding of the facts. This is one reason I reject the "IRAC" (issue, rule, application, conclusion) nonsense hailed by some law professors and bar review instructors as helpful. Sorry, but the first step is to identify the actual facts, because until that is done, there is no way to identify the issue or the applicable rules.

It is important to recognize that these sorts of factual analyses are not something over which tax law has a monopoly. In every area of the law, and in many areas of life, what appears to be a one-step transaction turns out, in substance, to be a two-step even multiple-step arrangement. Yes, the parties could have taken each step. The employer could have transferred the car to the employee and the employee could have transferred it to the spouse. The shareholder could have transferred the property to the corporation and the corporation could have transferred it to the employee. But other considerations must be given their due. Would there be multiple state and local transfer taxes? Would it generate problems with state regulation of the employer or the property? Would there be other transaction costs doubled by the doubling of the actual transfers?

It takes some practice and experience to become facile with the art of "splitting" one transaction into two or more steps for tax or other purposes. That's yet another reason someone who spends a mere three years in law school enters law practice with many unpolished skills and some hurdles to overcome. There is no magic rule or computer program that can parse a transaction. The folks who think tax is a mechanical discipline which provides "answers" to each problem can ponder these sorts of transactions as they try to understand why there are as many situations with no clear answer in tax as there are in other areas of the law.

Slightly more than two years ago, I commented on the tale of Arthur L. Farnsworth, who lost by a huge margin his campaign for Congress, during which he explained that he believed no one is obligated to pay federal income taxes and that he had not paid federal income taxes. Farnsworth's tactics caught my attention, in part, because, as I explained in that earlier post>

Unlike some tax protestor advocates, who encourage people to ignore their tax paying duties while filing their own returns because they don't really believe what they're preaching, this fellow apparently told the truth. At least the IRS and the Department of Justice believed him.

They believed him enough that he was arrested and indicted.

Now comes news that Farnsworth has been convicted of tax evasion. A jury rejected his argument that paying federal income taxes is voluntary and not mandatory. Farnsworth agreed he had gross income and taxable income, but claimed he had a good faith belief that compliance with the tax law is voluntary.

But the jury did not believe him. Taking less than two hours to return the guilty verdict, the jury accepted the prosecution argument that Farnsworth's motives reflected his tax-protester philosophy and not the "intense legal research" Farnsworth claimed he had undertaken to corroborate his position.

Apparently Farnsworth came across as "confident and combative" when he was testifying. Those are two characteristics of many politicians. Farnsworth also racked up a third, namely, extreme difficulty getting people to believe what is being said. It's ironic that the one thing he did say that was believed triggered the investigation, arrest, indictment, and conviction. He was telling the truth when he admitted he had not paid federal income taxes. So, perhaps Farnsworth is different from most politicians, because he had the courage to back up his philosophy with consistent action. Perhaps the judge should sentence him to holding seminars for the nation's politicos. Free of charge, of course, so that Farnsworth isn't confronted with the challenge of deciding whether to pay taxes on the income.

Several months ago, in Adding Up The Telephone Tax Refund, I described how I invested a bit of time adding up the long-distance excise taxes that I had actually paid, and determined that it made more sense to take what I call the "standard refund" offered by the IRS. I am guessing that unless a person spends an unusually high number of hours on long-distance calls, the outcome would be the same for others.

The IRS has now released guidance for organizations computing the telephone excise tax refund. The guidance applies to businesses and to tax-exempt organizations. Everyone has the option of sitting down and adding up the actual excise tax paid during the March 2003 - July 2006 period for which the refund is calculated. Depending on how an organization maintains and retains records, this could be a fairly easy task or a nightmare. The alternative is to use a formula.

Here's how the formula works. Take a telephone bill with a statement date in April 2006, and another bill with a statement date in September 2006. For each bill, divide the total telephone tax that has been paid by the total of the bill. Because the September bill includes only the tax on local service but not long-distance service, the difference between the two percentages generates what I will call the "long distance excise tax percentage." For example, assume that on the April 2006 bill of $200, the telephone tax is $3, and on the September 2006 bill of $100 it is $1. The April percentage is 1.5 and the September percentage is 1.0. Thus, the "long distance excise tax percentage" is 0.5%. Next, add up the telephone bills for the March 2003 - July 2006 period, and multiply it by the "long distance excise tax percentage."

Simple enough?

No!

If the organization has 250 or fewer employees, the "long distance excise tax percentage" is limited to 2.0%, even if the computation generated a higher amount. If the organization has more than 250 employees, the "long distance excise tax percentage" is limited to 1.0%, even if the computation generated a higher amount.

I understand the simplicity of calculating the April and September percentages, computing the difference, and applying that result to the bills for the March 2003 - July 2006 period. I don't understand why there is a limit, nor why the existence of a 251st employee should make the limitation half of what it otherwise would be. Perhaps it's a law of physics or a chemistry formula I failed to learn in college, or learned and have since forgotten. Perhaps it has something to do with time travel or teleportation.

Then it gets even more complicated for sole proprietors. A sole proprietor who reports gross income of $25,000 or less on Schedule C may use the standard refund amount or the long-distance telephone excise tax actually paid. A sole proprietor who reports more than $25,000 of gross income has three options: (1) use the standard refund amount for individuals and the formula for business, (2) use the formula for the business and the actual telephone excise tax paid on the personal bills, or (3) use the actual excise tax paid on both business and personal bills.

There's more. Special rules exist for trusts and estates. Analogous rules apply for farmers. And on and on it goes. Wait, don't hang up!

I wonder how long it will take someone in government to call the refund computation process something that has added 20,000 jobs to the economy, mitigated the downturn in the housing market, strengthened the dollar overseas, or reduced mortgage rates. And if that happens, how many Americans will see the disconnect?

In early October, I explained, in Ready It Was Not: The Demise of California's Government-Prepared Tax Return Experiment, that the California Franchise Tax Board had terminated the Ready Return program, which I had criticized in Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return and in ReadyReturn Not a Ready Answer. Without repeating two justifiably long analyses of the defects of the program, suffice it to say that conflict of interest permeates the arrangement, the track record of government employees in these sorts of situations is too far from ideal, opens the door to fraud, poses logistical problems, tricks millions of taxpayers into thinking that complicated tax laws are not their problem even though they continue to pose a threat to the national well-being, and puts taxpayer privacy at risk. Joined by many other critics, I tried to explain to the advocates of Ready Return why it was the typical "good idea in theory" that falls apart in the real world of tax practice.

In late October, I noted that opponents of Ready Return continued to lobby against it. In As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, I suggested that perhaps the reason a seemingly dead program was getting negative attention could be found in the many "horror flicks where the monster, the alien, the bad guy, or whomever it is that should be dead appears to be dead but isn't." Opponents of the program were contributing to the campaign of a candidate running for the office of state controller who supposedly did not favor Ready Return.

In my late October post I stated that, "Perhaps most folks think, as I do, that the ReadyReturn experiment is over."

Wow, was I ever wrong.

Along comes news that Ready Return has been resurrected. There is no way to paraphrase the first part of the opening sentence of the story: "State tax authorities defied lawmakers Monday by reviving ReadyReturn..." Yes, "defied." The outgoing state controller, and the incoming state controller, "engineered" the restoration of the theoretically ideal but pragmatically horrific arrangement. The legislature had let funding and authorization for the program expire earlier this year.

The incoming and outgoing controllers, along with the Director of the Finance Department, comprise the Franchise Tax Board, which reinstated the program after being assured by staff that the Board could act on its own despite the actions (or inactions) of the legislature. Yet legislative leaders explained that they would not try to stop the Board from taking this step. Why?

The justification offered by the outgoing controller is the high praise from taxpayers who used the program. But is high praise meaningful when the taxpayers do not know if their returns were properly prepared, if their privacy was protected, if their returns reflected all available tax breaks? Surely a drug dealer's new customers, getting some free "samples" on the corner, have nothing but high praise for their provider. Who gets to audit the returns prepared by the California government on behalf of these taxpayers? Oh, wait, the government will audit itself. Considering the developments of the past many decades, I have little confidence in government getting it right.

Twenty-one other states have taken a different approach. They are cooperating with private sector enterprises, with IRS assistance, in the Free File Alliance, to make available to low-income taxpayers the same software that middle-income and upper-income taxpayers can access directly or through paid preparers. Would citizens prefer food stamps or meals prepared by government employees? It's possible to assist citizens without taking control of their lives, a point too often lost on elected officials, and almost always ignored by appointed bureaucrats. Even so, some members of Congress and others have criticized the Free File Alliance, claiming it exploits taxpayers. I suppose that handing out food stamps exploits hungry citizens, whereas providing government-prepared meals doesn't?

If private enterprises challenge the actions of the Franchise Tax Board, it probably will not be litigation brought by one plaintiff. Not only should we expect Intuit and other software providers to oppose this government intrusion into the private market, other critics, such as the California Taxpayers Association and the California Chamber of Commerce, probably will join, together with other businesses and business groups representing one-person and small firm tax practitioners, to oppose the Franchise Tax Board's unilateral action. Of course, the Franchise Tax Board will not defend such a lawsuit by itself. Stanford University law professor Joe Bankman, who used $30,000 of his personal funds to hire a lobbyist to argue for restoration of ReadyReturn, almost surely will file an amicus brief in support of the program if it gets to that point. Considering reaction I've seen to the news of the program's re-emergence, he almost surely would not be alone.

As I argued in my earlier posts on this subject, would not the state of California, its citizens, and its taxpayers, be better off if the Franchise Tax Board would use its resources to work for simplification of what is one of the two most complicated state income tax systems in the nation? Rather than quieting the complaining voices of millions of taxpayers by doing their returns for them and masking what really is happening to them, the Board ought to confront the problem rather than paper over the symptoms. But because the Board, its members, and the politicians who run California have vested interests in complicated tax systems, they prefer to silence hordes of would-be critics by patting them on the head and telling them, "There, there, Uncle California has everything under control for you."

I cannot imagine why any of the low-income folks supposedly being helped by the government in this program should have any reason to trust the government any more than people do generally. According to this study, "The percentage of Americans who trust the government in Washington plunged from 76 percent in 1964 to 25 percent in 1996." A May 2006 poll indicates that 63% of the people do not trust government, and that 78% think the federal government has too much power. In California itself, according to this recent survey, 29% of those polled "say they trust the government to do what is right just about always or most of the time." I wonder what the other 71% think about the state government doing their tax returns.

There is something much deeper in this entire story than simply the elimination of tax return preparation burdens on low-income individuals. After all, the easiest and cheapest way to attain that goal is to remove low-income individuals from the tax rolls. Ah, but then the control factor isn't there. So what is it, really, that ReadyReturn represents? And though I run the risk of being as wrong as I was when I suggested ReadyReturn had found its appropriate place in the tax idea trash can, it's a foot in the door and a camel's nose in the tent. At what point will all taxpayers simply be told, "we figured out how much of your money we want, thanks for prepaying, see you next year"? Be afraid, be very afraid.

Paul Caron relayed an interesting rhetorical comment about the constitutionality of the Internal Revenue Code on his TaxProf Blog. The observation was triggered by news that Judge Audrey Collins of the Central District of California again struck down a portion of the Patriot Act on the ground that despite amendments to the provisions they remain "too vague" to be understood by "a person of average intelligence" and thus are unconstitutional. The Wall Street Journal Best of the Web commented:

So laws are unconstitutional if "a person of average intelligence" can't understand them? Someone ought to get the Internal Revenue Code before this judge.

Two thoughts occur to me. Neither is reassuring.

The first thought is whether vagueness should be attributed to the Internal Revenue Code. The Code has many faults. It is complicated. It gives multiple definitions to the same word or phrase. It changes so frequently that tax practitioners are compelled to empty portions of their brains and refill them at a faster rate than do many other professionals. It is loaded with special interest provisions that aren't necessarily of benefit to the public generally. It contains provisions reflecting bad policy. But vague? There's nothing vague about the application of the tax rates in section 1 or the rule that a pet cannot be a dependent. Yes, there are questions that the Code does not answer, but the Code itself provides for administrative interpretation.

The second thought takes the form of a question. If everything that could not be understood by a "person of average intelligence" were to be declared unconstitutional and removed from the planet, what would remain? Is there something wrong when a patient cannot understand a medical procedure used by a surgeon? Is there something wrong when a driver does not understand the engineering formulae used in designing the bridge over which the vehicle is crossing? Is there something wrong when someone enjoying a fine meal cannot understand the recipe?

I'm not taking any position on the merits of the case decided by Judge Collins. There is, however, something alarming about reducing everything to a least common denominator of "average" anything. That's not a defense of complexity. Complicated things aren't vague. To the contrary, they generally are very precise and quite the opposite of vague.

But even a constitutional ban on complexity would be no less counterproductive. If everything that was complicated were to be declared unconstitutional and removed from the planet, what would remain? Think about it.

In a Tax Notes Weekly report authored by Helena Klumpp, "Congress Returns, Extenders Wait," 113 Tax Notes 701 (Nov. 20, 2006), former Senator Bill Bradley is quoted as saying, "There's nothing that people care more about than the tax code." Is that really so?

Bradley made his comments in the context of a discussion about the prospects for tax reform now that control of the Congress has shifted to the Democrats. Most commentators don't think the realignment will make any difference.

If Bradley meant to say that there's nothing in life or in the world that people care more about than the tax code, he's wrong. Tax may be everywhere, and affect everything, but it doesn't mean that people care about it, or care about it more than they care about other things. I googled "care about most" and several variations, and was rewarded with all sorts of answers. Good health. Safe schools. Competent medical personnel. The environment. Energy dependence. National security. Friends. Family.

If Bradley meant to say that there's nothing more that people care more about in the legislative context than the tax code, he could be correct, in an odd sort of way. Congress increasingly turns to the tax code to implement its plans. Want changes for retirement plans? Amend the tax law. Want to encourage energy conservation? Amend the tax law. Want to encourage charitable contributions? Amend the tax law. Want to encourage environmental responsibility? Amend the tax law. Want to reduce trafficking in illegal drugs? Amend the tax law. Want to encourage adoption? Amend the tax law. Want to encourage home purchases and sales? Amend the tax law. Want to make education more affordable? Amend the tax law. The list is very long. Anyone who has been paying attention to changes in the tax law will recognize the few examples I've provided of the tax law's status as the workhorse of modern American legislative endeavor and policy determinations. So, in this respect, anyone who wants to do anything will be paying attention to the tax code. Will they be caring about it? Not in the way we care about our friends and family. Will they be caring about it more than anything else? I doubt it.

If Bradley meant to say that there's nothing that lobbyists care more about than the tax code, he's almost certainly correct. Pick the lobbyist's object, and then write a provision creating a deduction or credit to encourage it. That's what has happened to the federal legislative process, and it's not very different in most states. I'm picturing the Roman legions that hailed as Emperor the commander who handed out the largest bonuses. Perhaps some retired Roman Senator, pondering the destiny of the Empire, said, "Populus curat nihil magis quam exactio legionum." Or something like that. In somewhat better Latin. But I doubt most inhabitants of the Roman Empire cared more about that than their friends, their family, their health, and their next meal. Few, I think, could see the larger fabric. Sixteen hundred years later, not much has changed.

Perhaps people should care more than they do about the tax code. It affects the things people seem to care about most: education, health, energy, environment, friends, family. So few people have even seen or read the Internal Revenue Code that it's difficult to envision very many people caring about it. If reading the Internal Revenue Code was obligatory, would people care more or less than they do at present? I don't know. I simply find it difficult to accept former Senator Bradley's observation as a literal or even figurative truth.

Thanks to Paul Caron's TaxProf Blog writeup, I found myself reading Professor Melissa Waters' short essay, Clicker Training for Law Students. Thinking it was something dealing with the use of clickers - the shorthand term for student response pads - I started reading, only to discover that it was reference to a type of dog trainer. Professor Waters analogized the difference between two types of dog training approaches to differences between law school teaching approaches. She concludes that the old guard "Alpha Wolves" are passing away, taking with them their "old-school, Socratic-style" teaching, and that most young law faculty are "clicker trainers," who emphasize positive reinforcement while turning a blind eye to almost all bad behavior.

Prof. Walters is describing something that has been the topic of many discussions between several of my teaching colleagues and myself during the past decade and a half. I put it in starker terms. The generation of law faculty educated in the seventies and eighties, recoiling in horror at what they perceived as abuse from their teachers and their law firm superiors, is replete with individuals who determined to stamp out needless anxiety. Making matters worse was the increasing emphasis on student evaluations, which rewards the easy-going lecturer and punishes those who challenge students beyond what the students are willing to accept. It is another instance of over-reaction, a characteristic that permeates American culture, driving political and economic arenas into two extremes. Paul Caron titled his writeup "Tax Profs: Are You an "Alpha Wolf" or a "Clicker Trainer"?" but I'm proud to claim that I am neither.

Though I share the general distaste for law faculty who thrived on insult, deliberately encouraged fear, gave no guidance or constructive feedback, and left students unsure of which direction was up, I don't think the antidote is to spoonfeed black letter law, to let most of the class off the hook each day by identifying a few "principally responsible students" two or three days before each class, to accept every student comment as a monumental contribution no matter its erroneousness, to cut reading loads back to minimal levels, to water down the material, to attach an "A" grade to every initial written exercise, or to abandon grades below C+ or B. It indeed is possible to be demanding without being ruthless, to hold every student accountable every day without making each instance a make-or-break situation, to give constructive feedback without insulting students, to insist on a professional practice-world approach without being power-crazed, to be honest about a student's performance without destroying confidence, and to turn out successful lawyers without abandoning respect. Unfortunately, in an environment reflecting a consumer mentality where none belongs, and too often poisoned by the congruence of student desire for passive and entertaining experiences and faculty desire to be liked and highly evaluated, the law professor who holds firm is perceived as out-of-line. Yet, years later, as graduate after graduate explains that he or she "hated" the course or "thought [the professor] was [euphemistically, a total jerk]" and yet came to discover that "I learned more than I did in the fun courses and the classes with the easy teachers," the motivation to resist playing to the crowd is strengthened.

I like to tell a story about how law teaching has changed since I've been a student. One of the benefits of having earned one of my law degrees from the law school where I teach is that I can compare my student perspective of my teachers with my collegial perspective of them. Only two of my first-year teachers remains on the faculty, and one of them was the person whose classes were most anticipated because he wasn't quite as "socratic" as the others. He tells me that over the years he has mellowed, and has become far less demanding, has reduced reading loads, has taken more steps to ease the anxiety, and has tried to acclimate to changing student expectations. For at least the past seven years, students tell me he is their most demanding professor, is tough, and is nowhere as easy as their other faculty. Wow. He's easing up, and he's perceived as far more challenging. I know him well enough to know that he indeed has softened. The students have changed. Why? Because the same thing is happening in undergraduate schools and in many K-12 school systems. But is all of this for the better? I think not.

There are few so-called old guard "Alpha Wolves" remaining on law school faculty. "Clicker trainers," most of whom unfortunately do not use or do not use effectively the clicker device, predominate. But Paul's question, suggesting that faculty fall into one or the other category, is misleading. There are those who never settled at either end of the spectrum. And it appears, anecdotally at least, that the generation of law faculty educated in the nineties, isn't lining up in the "clicker trainer" category. Perhaps these new teachers, having had few if any "Alpha Wolf" faculty as teachers, have far less compulsion to make deliberate choices to be the opposite type of teacher in their approach. Perhaps they've experienced one or two "Alpha Wolf" teachers, along with some "clicker trainers," and have tried to meld the best of both.

The two extremes are counterproductive in the long run. Alpha Wolves generate resentment, rebellion, and abandonment of the solid intellectual and practice traits hidden behind the smog of insult, deliberate confusion, and absence of constructive feedback. Clicker trainers generate deceptive self-confidence, misplaced expectations, and shallowness of accomplishment fed by a deep insecurity and inability to hold firm. Finding the middle isn't easy. For students educated in the late eighties and nineties, there were far fewer balanced role models than there were inhabitants of the extreme edges.

Professor Waters asks:

What is the right learning environment for today's law students? Do they respond better to alpha rolls, or to clickers and treats? The popular wisdom on this generation is that they're fragile, that they respond best to positive reinforcement. On the other hand, lawyers live in an Alpha Wolf world, and the sooner we prepare our students for that reality, the better. More importantly, isn't the hard-core Socratic method an essential component of learning to "think like a lawyer"?

My response to her first question is found in the halls of the education schools, through which few law professors have walked. My answer to her second question is "neither." My answer to her third, and perhaps rhetorical question, is "No, one can learn to think like a lawyer without being dragged through hard-core socratic game-playing or the far more common quasi-socratic technique used by most law professors who claim to be users of the socratic method. Sit through one of my courses, and you'll see what I mean."

In her short essay, Professor Waters notes that her school's "quintessential Alpha Wolf," one Roger Groot, recently died. She notes that students used the phrase "I got Grooted" to describe their encounters with the fellow. But such clever turns on professorial surnames isn't limited to the old-guard or the socratic method devotees, as demonstrated by the fact that the title of this blog has its origins in a very similar phrase used by students at both law schools where I have taught. Professor Waters proceeds to note that when Groot's passing was announced, the "outpouring of love and respect -- and sheer gratitude -- from his former students was a real lesson for me." She often heard students make comments to the effect of "The day I got Grooted was the day that I started down the path to becoming a real lawyer." I've heard similar comments, which demonstrates that Alpha Wolves don't have a monopoly on such post-graduate opinion reversals, and I hope that Roger Groot also had the good fortune to hear these comments while he was still among us.

Professor Waters closes by wondering "if we clicker trainers, for all our cheerleading, will one day inspire similar outpourings from our students." I suggest she talk with law graduates who were educated primarily by clicker trainers. Their responses might suggest why her statement, "On the other hand, lawyers live in an Alpha Wolf world, and the sooner we prepare our students for that reality, the better" is difficult for me to reconcile with her disclosure that she is "an unapologetic clicker trainer." It's too bad we live in such a bipolar world that the marvelous opportunities in the middle are so often overlooked, or, if noticed, attacked or criticized from both ends. Fear not, Professor Waters, those of us in the center invite you and welcome you to the best of both places. And what will they say of you? "Demanding but fair" has echoed through the years. I take it as a compliment.

A recent story about a graduate of an unaccredited on-line law school suing the Connecticut Bar Examining Committee because it denies him the opportunity to take the examination caught my attention. I understand the applicable rule, because it or something very much like it requires bar applicants to have a law degree from a law school accredited by the American Bar Association or by the state in a separate approval process.

My question is why? If the point of a well-designed examination is to determine whether a person has the requisite skills, does it matter whether the person acquired those skills by attending an unaccredited institution, an on-line program, or a traditional law school?

Put another way, what do bar examiners fear? That someone who would be a catastrophe as an attorney would pass? If the bar examination is properly designed, applicants lacking the necessary skills won't pass.

The applicant in question, Mel Thompson, took the route he took, not because he did not qualify for admission to an accredited law school, but because he faced financial obstacles. Should his past financial struggles relegate him to a lifetime of being an over-educated paralegal? Considering how much the legal academy pats itself on the back for making opportunities for disadvantaged students, one might expect that it would step up and support the efforts of a person dedicated to becoming an attorney. But the legal academy has a vested interest in the present system of legal education, one that funnels would-be attorneys into institutions that must be accredited and that cannot obtain accreditation unless they play the scholarship game.

Thompson's lawsuit rests on several grounds. He alleges due process and equal protection violations. He also claims that law schools, the accrediting agencies, and bar examiners are "engaged in a conspiracy to restrict and monopolize trade and or commerce through unfair trade practices." He amended his initial complaint to drop the American Bar Association and local law schools as defendants.

The Connecticut Bar Examining Committee is defending the litigation on procedural grounds. It claims that Thompson failed to petition the Committee for a separate evaluation of his legal education. Connecticut has a process that permits a law school not accredited by the American Bar Association to obtain a separate approval. Two schools have done so. The institution which awarded Thompson his degree has not done so, even though other unaccredited schools apparently expressed interest in doing so but did not follow up. Yet, according to Thompson, none of this matters, because the Connecticut Bar Examining Committee web site states that "correspondence and internet law school work will NOT be approved."

Several states do permit individuals to sit for the bar exam even though they have not graduated from accredited law schools. Connecticut permits lawyers so admitted in another state to waive into the Connecticut bar after ten years of practice. Thus, argues Thompson, the Connecticut policy of restricting the bar examination to graduates of accredited schools is "capricious."

I've yet to hear a convincing explanation of why the bar examination isn't open to anyone who clears a character and background investigation. Unlike some professions, where education plus a simple license application authorizes a person to engage in a particular trade or business, the legal profession denies entry to those who cannot pass its entrance examination, no matter where they obtained their legal education. Considering the likelihood that most applicants who earn a law degree from an unaccredited institution will not pass the examination, what's the harm in letting a few more applicants sit for the exam? The examining boards would not lose money on such an approach, because the fees should cover whatever marginal out-of-pocket costs are incurred by the boards.

Another thing to consider is that accreditation is no guarantee that a law student's education is superior. Accrediting committees might identify horrific teachers, but for the most part they worry more about abstract factors such as student-faculty ration, the number of seats in the library, the size of the library collection, and other factors not directly correlated with educational quality. Little, if any, attention is paid to whether law teachers are making the most of technology, are available for student questions in their office or through email, are well organized, design exams that properly measure achievement, understand grading, or have take courses of any sort at education schools. The best test, of course, to determine whether a person has been adequately educated to enter the legal profession is a properly designed bar examination. That being the case, why shut the door? Why not give someone a chance?

About a month ago, I commented on indictment of actor Wesley Snipes on tax fraud charges. Stories at the time reported that Snipes could not be found, but as noted a week later, it turned out Snipes was in Namibia filming a new movie called Gallowwalker. I'd be nervous if while filming something called Gallowwalker the IRS and Department of Justice came calling. The Snipes story has since taken more than a few weird twists and turns.

With thanks to Paul Caron's TaxProf Blog, which has kept track of each new development, as currently summarized here, I've watched in amazement as the story has taken on the trappings of a screenplay. About a week after the reports circulated about Snipes presence in Namibia, a story in Variety, which was picked up by news services and reported in stories such as this one, that he had reached a settlement with the IRS. The settlement would permit Snipes to avoid prison and provided for installment payments of the allegedly overstated tax refunds. When I saw this story, my first thought was, "Well, that's the end of that, there's not much more, if anything, to ponder." Without knowing the full allegations or the terms of the settlement, there's no way to evaluate the matter.

Within a day, though, another story appears, reporting that the U.S. Attorney denied the existence of a settlement in the case. The author of the Variety story, though, maintains he had good sources. I try to emphasize to my students that good lawyering requires compilation of the facts, and that the temptation to jump to analysis and conclusions before the facts are known is a human frailty that lawyers must consciously seek to overcome if they are to do justice well. Ideally, everyone, including journalists, back yard gossips, and busybodies ought to do the same thing. But that's not the way life seems to work, so it's no surprise to me when all sorts of reports begin circulating, though none come directly from Snipes, and only one comes from a person officially involved in the case. That person, an Assistant U.S. Attorney in charge of the case, denied the settlement rumors. So I leave this "he said, they said, who said what said" circus to the side, and focus on other issues.

But it wasn't long before Snipes then spoke up, and it surely doesn't clarify anything. In an e-mail to columnist Scott Maxwell recounted inhis Orlando Sentinel column, Snipes wrote:

* * * * * Wow this is so crazy . . . Scott this was almost (10) ten years ago. Why are they coming with this issue now? Were the statutes of limitation running out or what? We thought all issues had been resolved. Guess not, huh? Like the situation in New York, and Florida, I know this has more to do with a few individuals with access to power, making moves (trying to move up!) and less with some alleged crime against the whole population of the United States of America. This reminds me of Rape cases where the "victim" is flipped, turned or converted into the role of victimizer, the "architect conspirator." It appears I'm to be the scapegoat, because there's more public interest in "celebrities gone bad" than "rich people being taken advantage of."

Being, a black male who asks questions doesn't help the situation either. But this is a serious issue, NO, a very serious issue that I am not taking lightly one bit. I will abide by the law, seek the protections the law affords me and as always seek the advice of competent council in effort to resolve this issue. I'm not running, I'm not a fugitive, despite the misrepresentations in the press . . .

. . . I have yet to tell my side of the story, but that time will come shortly. By the Will of the Most High. And boy what a story. I recall mentioning to you once before, when they were trying to steal the Florida house, it's a lot deeper than that! This is the second attempt, after the failure in New York with that paternity lie, they've come after me. . . . I've injured no one, I've violated no one's rights and (as far as I know) I owe no one. If I have violated someone, then I'm prepared to seek forgiveness and make amends. One is a artist and scholar seeking truth though diligent study and spiritual practice. Perhaps people like that have now become the enemy of the State. And trading with the enemy is dangerous business no matter who you are. In peace and in Light I only ask for your prayers Until then, stay well.

I can follow until the end of the first word. Yes, "wow" pretty much describes my reaction. So what is Snipes saying?

It seems to me Snipes is arguing:

(1) If the tax fraud is old, it ought be ignored. Note that, perhaps as a surprise to Snipes and many others, the statute of limitations for civil tax fraud is indefinite, and for criminal tax fraud generally is six years. I recall a situation involving a dentist where the IRS reached back almost forty years to reconstruct the taxpayer's tax liability. [Thanks to Bill Conroy for pointing out the error in my original posting.]

(2) The situation had been the subject of discussions with the IRS and/or Justice Department and had been settled. Apparently not.

(3) The indictment has nothing to do with tax liability but is the result of a few powerful people trying to benefit from the indictment. Powerful people don't need to hang a Snipes indictment on their wall. Perhaps he means to say that people who want to be perceived as powerful brought the indictment in order to make a name for themselves. That can happen. But if they're wrong, and it backfires, the risk would turn out to be too great. It's easier for folks in the U.S. Attorney's office to progress by going after the sure-shot convictions. They don't like to lose. That's why I doubt that the Snipes indictment is based on whimsical daydreams.

(4) He's a victim. Yes, he may be a victim of tax-fraud-package marketers, but why was he buying their stuff? He has as much admitted that he bought into the scheme. He wants sympathy for rich people of whom manipulators have taken advantage. Excuse me, but are rich people incapable of hiring some good tax advisors to analyze the deals being offered to rich people? According to the indictment, Snipes did have a tax advisor who refused to go along with the "arrangement." So why was that person's advice ignored?

(5) He would not have been indicted had he not been a celebrity. Guess what? Most criminal tax fraud convictions are entered against people who are not celebrities.

(6) He's a double victim. Someone hit him with a paternity suit in New York, but lost. Is he claiming that the people involved in that litigation are responsible for the indictment?

(7) He's a triple victim. Several years ago, his Isleworth home was seized in a mortgage foreclosure. Snipes claims that someone put a mortgage on the house without his knowledge. How?

(8) He's been indicted because he's "a black make who asks questions." This allegation has triggered some outrageous commentary, such as those here. There are people who think that white celebrities escape the long arm of the IRS. There also are people who point out the absurdity of such claims. As I noted, it helps to get one's facts in order before tossing inflammatory accusations. So much for the rational mind of "sapiens sapiens."

According to Maxwell, Snipes then sent another email, noting the existence of a web site that congratulated him for refusing to pay income taxes in reliance on the "only foreign income is taxable" nonsense that has been circulating for more than a decade. I'm sure I can find some people who can prove that people whose surnames begin with the letters "MA" and end in a vowel are not required to pay income taxes. But fortunately I have enough common sense to laugh rather than sign on to their ludicrousness.

Snipes is a celebrity. People pay attention to him. Therefore, he has an obligation to set a good example. Although some celebrities do not want to be role models, the very fact that they are celebrities makes them so. I have advice for those who do not want to be role models: avoid the limelight, make a career in something obscure, and lay low. Yes, that course of action will cut your income by 90 percent or more. Such is the price that must be paid.

At this point, it appears as though Snipes intends to contest the charges. If he persists, the tabloids and blogs will have plenty of material. The only good thing that can come out of this is that the nation's taxpayers will understand how much fraudulent garbage is being peddled. By that point, only those who truly wish to evade taxes will be signing up with the fraud merchants, as there would be even less reason to believe the "I didn't know" excuse. Incidentally, doesn't this situation make for an even stronger case that basic tax should be taught in America's high schools? What high school student can make a plausible case that remaining in ignorance of basic tax law is a good thing?

Tomorrow is Thanksgiving, as almost every person in this nation knows. I won't be posting tomorrow. So, as I have done the past two years (2005, 2004), I am sharing in advance a few of the things and people for which I am thankful.

Thanks for Arabic numerals, because I can't imagine doing tax returns using Roman ones. And I'm thankful for the scholars who have explained that Arabic numerals are a transformation of Hindu, Indian, and perhaps even Chinese numerals.

Thanks for the English language, because I wouldn't want to parse out tax laws written in proto-Indo-European. And I'm thankful I do not have the task of identifying the proto-Indo-European word for tax, because I cannot find it.

Thanks for the Internet, because it lets me share my thoughts in a blog, find tax law while sitting at my desk, discuss tax issues through listserves, communicate with students in virtual time using email and discussion boards, make class materials available with little effort, and have students register their student response pads. I'm thankful I can leave behind the world of snail mail, trips to the library, the lugging of Code and Regulations volumes, the photocopying of tax class handouts, and the administration of semester exercises on paper.

Thanks for all the folks who have made teaching tax a fulfilling adventure. I'm thankful that students can leave knowing and understanding more than they did when they arrived, particularly the discovery that tax is not boring, and has never been so.

Thanks for all the tax practitioners and tax faculty who give me credit for having influenced their professional careers in a positive way. I'm thankful I managed to minimize whatever damage I did to their brains.

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

This is long, but it's an issue that deserves more than a soundbite.

The MoneyLaw Essay

Thanks to a tip from a posting on Paul Caron's TaxProf Blog, I took a look at Jeff Harrison's Moneylaw essay on Counter-Preferential Choice, Shirking, and Moneylaw. Jeff questions whether law faculty are holding up their end of the bargain, perhaps implicit bargain, with what he calls stakeholders: students, donors, and, in taxpayer-financed schools, the public. Jeff takes the position that law schools have an obligation to educate students "that prepares them for the bar exam and, as much as possible, prepares them to provide competent legal services," and gives them the ability to help generate legal reform. Taxpayers, he points out, are entitled to "expect a law school to produce competent attorneys who will be accessible and play a role in improving the overall welfare of the community."

What brought Jeff's essay to the Tax Prof blog was his suggestion that among law school characteristics failing to help law schools meet their obligations are taxpayer-subsidized LL.M. tax programs. He asks if "there is any chance" that LL.M. (Taxation) graduates will do public service work. He asks why is a law school hesitant to charge graduate tax students a tuition reflecting the full cost of their education?

Reaction

Reaction was swift. Several tax faculty pointed out that graduate tax students often end up in public service positions. The salaries earned while working for Chief Counsel to the IRS, the Department of Justice Tax Division, or a tax court judge do not match, by far, what can be earned in the private sector. Although I agree with the gist of Jeff Harrison's analysis, I part company with him when he assumes that LL.M. (Taxation) graduates give little or nothing back to society. Yet, despite that disagreement with Jeff, I don't think it negates the idea that public subsidy of graduate education ought not be across the board, but tailored to the needs of individual students.

Another criticism of Jeff Harrison's essay was the implicit assumption that the same charge could not be levied against LL.M. programs in other areas of the law. Are lawyers with LL.M. degrees in trial litigation or securities regulation more likely to devote more time to public service efforts? I doubt it. That is why I think taxpayers ought not be subsidizing graduate programs generally as though every student entering such a program deserves or needs tax-subsidized tuition.

Of Course I Have an Opinion

My interest in the discussion was energized by an assertion that the "primary public function of a law school (including tax LL.M. programs) is its research, not its education of students." This opinion was tempered with a disclaimer to the effect that educating students is important and a central goal of law school. Nonetheless, it was pointed out that law school are "expense to run in significant part because professors typically teach only 6 hours a week or less, with half of their time or more set aside for research," thus causing students to "overpay" for their education. Why do students acquiesce to this arrangement? The notion is that students are willing to pay for a degree from a prestigious law school because those degrees have higher value based on the reputation of the law school, in turn allegedly dependent "in large part" on faculty research. The point was then made that law research is a "type of good that has to be subsidized or it will be under-produced by the market." Thus, the argument concludes, law schools receiving tax subsidies are using them more to finance faculty research than to fund law student education.

Something is terribly amiss. Here's an anecdote with a lesson. Years ago, when I was teaching Digital Legal Practice Skills, a course designed to teach law students both the "hows" of technology and its use in law practice, I gave them as an opening problem the design of a spreadsheet to be used for determining if choosing law school rather than a post-college paying career made economic sense. Most of these students had little, if any, business background. It was a classic Jim Maule remedial catch-up course. We no longer teach it because in part I'm teaching other things, no one else wants to teach it, and the need for the course diminished as more entering students understood how to use computers (though not the underlying business and finance principles). Certainly, the students learned about making economic assumptions. Were they forsaking a career opportunity for a degree in history or a degree in computer engineering? What salary opportunities faced them when they graduated law school? What value did they put on a pro bono career?

The interesting outcome was that law school is a poor economic choice (setting aside valuation of satisfaction, prestige, pro bono accomplishments, etc.) unless the student earns a significantly higher salary than the student could earn coming out of college. The degree of difference depended in part on the student's undergraduate major (and in part on the student's other opportunities, such as athletic careers, coaching careers, etc.) There are three years of lost wages to make up, plus the cost of the law school education. One experiment was to jigger the law school tuition amount (using other amounts rather than the then-applicable Villanova tuition). To the extent students are funding legal research by faculty, they are being short-changed. They don't analyze their economic prospects by putting value on law school faculty research. Various studies show that judges and practitioners don't rely as much on law review articles as they do on the commercial advance sheets (perhaps with tax as being a significant exception, ironically).

Compare medical school research. Medical school faculty generate income, both from patient services (some of which are publicly funded) and from outside grants (some of which are publicly funded). Law faculty rarely generate income, and when and if they do, rarely does the school see it.

This is why I think something is amiss. The primary public function of a law school *should* be to educate students so that they can serve the public, whether as public service sector attorneys or as private sector attorneys. The same can be said of any school. The notion that legal research must be subsidized tells us much about the value placed by the market place on it. Indeed, in certain areas the market *does* subsidize research (tax being one), though many law faculty shy away from what is legitimate research because it isn't edited by folks with one or two years of legal education. What has happened is that a good that belongs, if it belongs anywhere, in think tanks, has been put onto the backs of unsuspecting law students, because the cost of educating law students is far less, per capita, than the cost of educating medical students, dental students, engineering students, etc.

If higher education is doing the great job it claims to be doing, there ought be no good reason not to subsidize education through loans with repayment tied to a graduate's economic success, with public funds being used to "reward" graduates who do public service. This is done to some extent, though weakly, through certain tax breaks and loan cancellation programs. Such an approach might help narrow the gap between the high private sector salaries and the low public service sector salaries.

The allegation that the public sector is not getting its money's worth when it funds law (or some other) higher education program is far from new. It's been around for decades, though in recent years its advocates are getting louder and speaking more frequently. The internet creates a wider audience and a deeper communications channel. Institutions of higher education, already summoned, for example, by state legislatures to account for how they operate, surely need to re-define their perceived missions and their operating plans if they intend to survive in a form responsive to the needs of the public.

In other words, public (and private) institutions of higher learning had best figure out how to justify public subsidies on the basis of a return of a public good that the public accepts as a desired public good, rather than on the basis of legal research. Though I agree, to some extent, that legal research has value, I don't think the taxpaying public is or will be convinced by its status as the primary public function of a law school. That may be unfortunate, it may reflect a deep divide between the public and the academy, but it's a very real concern that some current university officials are pondering with deep concern.

Reputation Based on Scholarship: What is It Worth?

Perhaps in response to these views, or perhaps in response to an array of opinions, came an observation, noting two essays written by Russell Korobkin of UCLA, who in Harnessing the Positive Power of Rankings: A Response to Posner and Sunstein, 81 Ind. L.J. 35 (2006), and In Praise of Law School Rankings: Solutions to Coordination and Collective Action Problems, 77 Tex. L. Rev. 403 (1998), argues that scholarship is a public good that is produced because schools can enhance their reputation by producing it and because only law schools can produce it. The essay uses this argument to defend the proposition that law schools should be ranked primarily or exclusively by the school's scholarship.

To Korobkin and those who agree with him, I offer the following. There have been more than enough successful lawyers (in terms of income, public interest cases won, beneficial influence on society) who have graduated from law schools lacking high levels of "scholarship reputation" and more than enough disgraceful attorneys (in terms of corruption, disbarment, malpractice, and political scurvy) with degrees from the "scholarship elite" schools to explain why law students (and even some applicants) are beginning to understand that ultimate success as a lawyer has more to do with (a) attending a school where one can learn to think about law in a practice context, (b) having or acquiring good values, and (c) working diligently than it has to do with the reputation or volume of scholarship by a law faculty. Why pay an extra $10,000 a year for a chance to finish in the bottom half of a class at a "scholarship happy" school when there's no guarantee of a successful career, and even a risk that the lack of a practical orientation will make the career far from ideal and possibly even curtailed?

I understand that the reputational thing gives some graduates an "edge" when first entering the marketplace, but the lack of adequate preparation, good values, diligent work habits, and adeptness at dealing with clients in a practical manner soon is unmasked. Likewise, the student from the school whose faculty writings are held in disdain as "too practical" by law school faculties living in abstract worlds may struggle to find the first job but can soon excel once they find a position. It's not all that different from the disappointing play of first-round picks and the successes from the sleepers taken in the latter rounds, or, better yet, the fall-on-their-face performances from graduates of acknowledged football or other factories and the out-of-nowhere accomplishments of people coming out of "never heard of it" schools.

That's not to say scholarship is irrelevant. Worthwhile scholarship, that is, publications that add quality to the practice of law such that judges and lawyers seek it out, generally correlates with the production of graduates who can provide quality to the public sector. The problem is that there is too much abstract stuff that simply has no value outside of the small, closed circle of scholars, or, to quote someone writing a piece that had no connection to reality, "I'm not writing for judges or practitioners. I'm writing for other scholars." I doubt that much value, if any, is being added to the education for which the students are paying in those sorts of circumstances. Truly excellent scholarship should dovetail with truly exceptional, practice-relevant teaching. There's no reason that good teaching should preclude good scholarship. Measuring the value of scholarship by the number of times other scholars cite it is like measuring an athletic team's success by how many times its fans tell each other it's really a good team that got raked by bad calls from the officials. Measuring the value of scholarship by the number of times practitioners find something in it useful to their attempts to assist clients in the public or private sector find justice is far more meaningful.

The sort of scholarship produced by law faculty surely can be produced elsewhere. Imagine a think tank with 10 or 15 scholar types, freed from the distraction of teaching (as some have called it). Why do these places not exist? The market doesn't see a need for it. The fact that scholars with more interest in (and in some instances, having more talent for) writing than teaching, aided by the silliness of rankings that let law school faculties tell each other how wonderful they are, are increasingly taking over law faculties does not mean it is right, and, more importantly, does not mean that the quality of legal education is therefore enhanced. Most importantly, it does not mean that the quality of service and justice rendered to lawyers' clients is getting better.

As more and more law firms find it economically unfeasible to pay high salaries to trainees who know little and understand less (and of which practitioners and their clients are complaining every more vociferously), and as the shock impact of the chasm between practice and academia encountered by graduates increases with its concomitant disillusion, practicing lawyers will move to disconnect bar admission from the monopoly held by accredited law schools. Already, employers are beginning to look at transcripts as they attempt to figure out why some newly hired associates struggle while others do well. So far, all that exists is a small set of anecdotes, but slowly the data will increase to a point that correlations can be identified. It is going to be a battle royal, but it's on the way. Practitioners with specific practice-focused needs will look more closely at transcripts, and favor students with useful education over students with degrees from elite institutions, for they have learned that high LSAT scores alone mean nothing when the client needs immediate assistance. Even the presumption that the brightest and most talented graduates are those coming out of the schools with the higher position in the rankings is eroding, and eroding quickly.

Perhaps if the "what faculties think of each other" component was removed from the rankings, and if components were added that measured malpractice and disbarment among a law school's graduates, that added number of graduates fired, asked to leave, or pressured to depart from firms, and that reflected job performance rankings of graduates, we'd see an entirely different array. But, that won't happen because too many of the influential ranking designers have vested connections. Talking about failure isn't very popular.

But perhaps I am wrong. Perhaps we should measure the quality of medical schools by how many times other medical faculty cite the medical faculty's scholarship, and ignore the infection rate and malpractice experience of that faculty's students. Perhaps we should measure the quality of engineering schools by how many times its faculty's writings are cited, and ignore how many leaking Big Dig tunnels are designed by its graduates. Surely the value of a public good measured by dead patients and crushed vehicles in tunnels is less important that how many times people congratulate each other on a job supposedly well done. Misdirected intelligence isn't a public good.

Maybe There Is Undervalued "Good" Research?

These thoughts brought a response from another national tax colleague. It was noted that my point that the market does not value much of what passes as legal research doesn't predispose the outcome, because it is from that very point that advocates of taxpayer subsidization of law faculty scholarship begin their arguments. Just as important, legal research of value to practitioners does not require taxpayer subsidy because practitioners who benefit from it will find ways to pay for it. It's the valuable research for which there is no market that subsidization must finance. An example provided to me is the discovery of "a good way to tax income from offshore tax havens," an outcome that would be "an enormous contribution to a just society."

My question is why that sort of research is not being undertaken by the government agencies that are subsidized by taxpayers to enforce the tax laws. Why should tuition-paying law students bear the cost of law faculty research into ways that the IRS or any other federal agency in any other area of the law can do the jobs their employees are being paid to do? Perhaps it's because those agencies are not paying sufficient salaries to attract the bright minds, many of which are busy trying to find ways to hide even more income in offshore hideaways?

Market Disclosure: What Would It Do?

The bottom line is that I do not think faculty research needs to be subsidized. I do not think that education needs to be subsidized, except to the extent the body politic deems it to be a necessity that the market for some reason cannot address. Thus, I favor public funding of education for all children under 18, regardless of their families' economic position and despite the fact that absent a public subsidy many of those children would otherwise be driven by the market away from school and into some other enterprise.

As for higher education, if the market speaks and creates a need, then students will drift to those programs that promise a reward greater than the investment. The market can up the reward (increase salaries) if the market needs to increase the supply of students educated in a program. There is a place for public co-investment to assist those students unable to make the investment. The public subsidy and higher education ought to show confidence in its product by requiring a small (3%?) stake in the graduate's future earnings. If the market wants to subsidize outright grants, it has ways of doing so.

The same can be said for research. The market will fund the research that it needs, either internally (e.g., corporate research), or externally (e.g., university research). The public sector should subsidize such research only if the body politic deems the need to be more than the market determines (e.g., perhaps orphan drugs). What happens to "legal scholarship"? It depends. Some of it has value, and there should be a market for it. In fact, there is a market for some legal scholarship. It's limited and tends to be concentrated in areas of technical specialization (e.g., tax, bankruptcy, environmental). The market does not appear to value other legal research, perhaps because the market perceives it as opinion, politics, and abstract theory. My point is that those producing legal scholarship for which there is no demand other than the producer and the producer's circle ought not leverage their way into having law students pay for it, when law students are ostensibly paying for a legal education.

Perhaps the answer is "Truth in Tuition" legislation? Schools should disclose the portion of tuition that pays for research and scholarship that is not otherwise funded. The computation probably would reflect the number of faculty positions that are filled so that faculty can engage in unmarketable research and scholarship. I wonder what that sort of disclosure would to rankings, after students adjusted their admission decisions?

Jen Burke, who graduated from Villanova Law in 2004, is hosting Blawg Review #84 on her Transcending Gender blog. The editors of Blawg Review have provided an introduction to her review that is very informative. I did not know she had written a novel.

Time flies. Have seven months already flown by since I hosted Blawg Review #53? Has it been two years since Jen graduated? I guess so.

It isn't difficult to find stories, such as this one, about the PlayStation3 craze, with people waiting in line for days for a chance to shell out $600 to acquire a game. Actually, it's difficult to avoid reading, seeing, or hearing a story about this latest "must have" marketing adventure. From the gym where I work out I can see one of the entrances to the King of Prussia Plaza. This morning we counted at least a dozen police vehicles gathered where the PlayStation3 line had formed. Would that the lines be so long when it's time to volunteer.

The tax side of this story is readily apparent to anyone who plays with the Code. Some of the people who were waiting for a chance to make the purchase plan to sell the item on eBay. In other words, they're not gamers, at least not this sort of gamer. They're capitalists, to paraphrase one of these entrepreneurs. Edgar Alcala, who is 18, was quoted, ""When I get home, I'm going to take a quick picture of it, slap it on eBay and go to sleep." Estimates suggest that these re-sellers are looking at potential profits of $1,500 or more per unit.

The obvious tax question is easy to answer. Is the profit secured by these enterprising people subject to federal and state income tax? Absolutely.

The more interesing question is more fun. How many of the people earning a profit in this manner will report it on their tax returns? If you guess 100 percent, I think you are wrong. There is no category of income, even wages, on which reporting compliance is 100 percent. If you guess zero percent, I also think you are wrong. There surely are a few fastidious people in the resell-on-eBay crowd.

The final question is frustrating. Will Congress approrpriate funds so that the IRS focus a portion of its audit efforts on identifying, and collecting tax from, the people who fail to report this income? Incidentally, lest anyone think that the most anyone can make is about $1,500, there are reports that some people are thinking on a grand scale, are hiring people to wait in line at every store, are paying those people, some of whom are homeless, a portion of the profit, and are pocketing the rest. Do the math. Fifty stores, $1,500 profit per item, $200 fee "line" fee, that's $65,000 of income. Not bad for a half-week's "work."

He's back. Again. With another forty-two tax charts. By my calculation, that brings TaxChartMan's output to 372. What's new this time?

Cases and Rulings

1. Bausch & Lomb Inc.(Assembly of Sunglasses Was Not Fgn Base Co Sales Inc.)
2. Fink (No Deduction for Voluntary Surrender of Stock to a Corporation)
3. Madison Gas & Electric Co. (Ten.-In-Com. of Nuclear Power Plant was a P'ship)
4. Podell (Real Estate Joint Venture Was A Partnership)
5. Spaulding Bakeries, Inc. (Worthless Stock Ded.: Liquid'g Distrib'n Was Only on Pfd Stock)
6. Rev. Rul. 69-74 (Private Annuity In Exchange for Appreciated Property)
7. Rev. Rul. 81-78 (Profits Not Attributable to a U.S. Permanent Establishment)
8. Rev. Rul. 91-32 Situation 1 (Nonres. Partner Disposed of P'ship Engaged in a Trade or Bus. in the U.S.)
9. Notice 2006-85 (Purchase of Parent Stock in Triangular Reorgs Involving Foreign Corp'ns)

Section 338 Examples

10. Stock Acq'n Merger Followed By Upstream Merger - No 338(h)(10) Election
11. Stock Acq'n Merger Followed By Upstream Merger - With 338(h)(10) Election
12. Stock Acq'n Merger Followed By Brother-Sister Merger - With 338(h)(10) Election
13. Stock Acquisition (Not a QSP) Followed By Upstream Merger

Foreign Base Company Sales Income Examples

14. Purchase from Related & Sale to Unrelated
15. Purchase from Unrelated & Sale to Related
16. Sale Commission to Foreign Subsidiary
17. Sale of Lathe Used in Manufacturing Business
18. Interest and Service Fees Included as Foreign Base Company Sale Income
19. Coffee Beans Grown in Same Country
20. Diamonds Manufactured in Same Country
21. Electric Transformers Sold for Use in Same country
22. Sewing Machines Sole to Retailers in Same Country
23. Knowledge that Sulfur will be Partly Consumed Outside Country
24. Sales of Toys for Delivery to Duty Free Port
25. Wood Pulp Transformed Into Paper
26. Steel Rods Transformed Into Screws & Bolts
27. Tuna Processing and Canning
28. Manufacturing by Partnership Attributed to Partner
29. Sales Branch with Tax Rate Differential
30. Manufacturing Branch with Tax Rate Differential
31. Trading Branch with Tax Rate Differential
32. Branch Rule Cannot Be Used Affirmatively to Avoid Subpart F Income
33. Multiple Sales Branches with Tax Rate Differentials

Section 1032 Examples

34. Subsidiary Exchange of Parent Stock for a Truck
35. Subsidiary Exchange of Option on Parent Stock for a Truck
36. Partnership Exchange of Grandparent Stock for a Truck
37. Parent Stock used as Compensation for Subsidiary Employee
38. Parent Stock Purchased At A Discount by Subsidiary's Employee
39. Parent Stock Subject to a Substantial Risk of Forfeiture
40. Parent Stock Subject to a Substantial Risk of Forfeiture
41. Parent Stock Option Used As Compensation for Subsidiary Employee
42. Owner's Transfer of Parent Stock to Subsidiary's Employee

I tell my students that a good way to learn tax (or any other kind of) law (or any other subject matter) is to make a chart. One learns a lot by designing a chart and thinking through all the pieces of the transaction. I'm going to suggest that Andrew Mitchel has learned a lot of tax law. We will, too, if we take some time to study his charts and to think about them. But the chart maker always has the edge. As you know, I am a big fan of charts. So that makes me a fan of TaxChartMan. I think it may be time for T-shirts, mugs, and lapel pins.

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

Andrew continues to welcome comments on his charts. You can contact him through his web site. For direct access to the charts, you can enter by Topic, by Alpha-numeric order, or by Date uploaded .

The charitable contribution deduction presents more than a few snags for taxpayers. One, the restricted vehicle mileage allowance applicable to all but Hurricane Katrina relief efforts, was discussed in Sometimes Tax Law Makes No Sense. The lack of sense in that instance is directly attributable to statutory language. It's not the only problematic language in section 170. Paragraph (17) of subsection (f) deserves some attention.

Section 170(f)(17) was added by the Pension Protection Act of 2006. A preliminary question is why the charitable contribution deduction is being amended by legislation seemingly focused on pensions. The simple answer is that Congress can, and often does, stick things into legislation that have nothing to do with the original purpose of the bill. Whether Congress should do this is a different issue. It's almost always a matter of politics, a way of getting indirectly what the process won't support directly.

Section 170(f)(17) provides:

No deduction shall be allowed under subsection (a) for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

What does this mean?

It means that the days of claiming deductions for cash contributions for which the taxpayer has no receipt are over. It means that taxpayers who fail to keep copies of cancelled checks written to charity or, alternatively, copies of the bank statement with the photocopies of the checks, cannot claim a deduction for the contribution unless the taxpayer has some other written record, such as a dated receipt showing the amount of the gift and name of the charity.

Why did Congress enact this provision? The answer is that too many taxpayers were "inventing" cash contributions that had not been made, and claiming deductions for them. How did Congress decide this was the case? It had information from the IRS summarizing the results of audits during which taxpayers were unable to substantiate claimed deductions.

When does the new rule go into effect? It applies to contributions made in taxable years beginning after August 17, 2006. Essentially, for taxpayers with calendar taxable years, and that means just about every individual, the new provision is effective for contributions made after December 31, 2006. What's the magic of August 17, 2006? That's the date the Pension Protection Act of 2006 became law.

How can taxpayers comply with the new provisions? For contributions made by check, it's fairly easy even if annoying. Save the cancelled check or bank statement. For cash contributions handed to a person representing a charity, request a written and dated receipt on the organization's stationery and make certain it shows the amount and is signed. For cash contributions dropped into collection baskets, I doubt there is much, as a practical matter, one can do to salvage the deduction.

What should a taxpayer do if a receipt is requested and refused? The choices are simple. Don't hand over the cash. Or hand over the cash with a full understanding that no deduction is available because the receipt has been refused. In most instances, it would make sense to shift the charitable dollars to a similar organization that is willing to issue receipts. What no longer is an option is claiming the deduction without the receipt.

But what should taxpayers do when given the opportunity to put cash into a collection plate or donation basket? That's one of the interesting questions. Will people continue to give, despite not having the deduction, because they give for reasons other than tax savings? I surely hope so. But I doubt it. I think some people either will refrain from giving or will reduce what they give because of the lost tax benefit. Why do I reach such a cynical conclusion? Years ago, when Congress was discussing repeal of the provision that permitted the deduction of some charitable contributions in computing adjusted gross income, a provision that permitted people who did not itemize deductions to claim both the standard deduction and some of their charitable contribution deductions, charities lobbied, unsuccessfully, against the repeal. Why? One argument was that people would curtail or stop their charitable giving because of the loss of the tax benefit. That assertion amazed me then and amazes me now. Should we assume no one gave to charity before there was an income tax deduction? Should we assume people compute what they contribute to their religious institution on the basis of tax deductions? Perhaps someone should ask religious institutions and organizations that collect cash in donation baskets to track their 2006 offering plate and donation basket cash receipts with their comparable 2007 cash receipts. I'm curious to see the effect.

There's another interesting question lurking here. I owe thanks to Alan Gunn for pointing this out. What happens to the deductions available for expenses paid, in cash or by check, on behalf of a charity? Would the receipt from the store, given to a person who buys supplies to use in fixing a charity's property, be sufficient? Or must the person get some sort of receipt from the charity? What about the mileage incurred in doing work for the charity? How does one obtain a receipt? I'm going to guess that if the taxpayer uses the standard mileage rate rather than actual expenses, that the use of the mileage rate is per se substantiated, but does the taxpayer have an obligation to obtain a receipt for the number of miles driven?

This is another one of those "in theory it works" but "in practical application it crashes" situations that increasingly afflict the law. My hypothesis is that more and more lawmakers are being advised and lobbied by people who have been educated in a theoretical sense but who have been exposed to little, if any, practical or common sense. The chief reason is that those educating them have little, if any, practice world experience. I've commented more than a few times about flaws in legal education, from whence come most legislators, lobbyists, and legislative staffers, and I'll let others, for the moment, put two and two together.

Yes, I understand why something needed to be done. But I wonder if the solution will cause the baby to be thrown out with the bath water. I wonder what impact this provision will have on charitable giving and on out-of-pocket expenses incurred on behalf of charties. I wonder if the days of people putting additional cash into a collection plate because a sermon inspired them are over. I wonder if tax advisors should tell their clients to carry their checkbooks with them when they attend services at their temple, mosque, or gospel hall. I wonder if churches will follow through with a suggestion I once made, to no avail, to put credit card swipe units at each seat in the pews. Many people leave home with checkbooks. Few who have credit cards leave home without at least one of them.

And the very deep cynical side of me wonders if this could be another step in the direction of removing cash from our economy, so that there is a record of every economic transaction. Success in such an endeavor might curtail the "underground" economy and change law enforcement and tax compliance parameters. But if that is the case, what a sly way for the idea to creep closer to fulfillment.

Tax is a strange thing. Students meeting it for the first time usually expect tax law to be nothing more than complicated, convoluted, and inconsistent principles that defy understanding. It doesn't take long, though, for students who take the time to consider the tax law to learn that much of it is complicated, but symmetrical, logical, and coherent. Eventually, it makes sense. Complicated sense, perhaps, but sense.

Yet there do remain some oddball situations in the tax law. Consider the question of how the deduction for vehicle miles is computed.

A taxpayer is entitled to a deduction for vehicle miles that are driven for any one of four purposes. First, a taxpayer is allowed to deduct the ordinary and necessary cost of vehicle miles driven in carrying on a trade or business or in a for-profit activity. Second, a taxpayer is allowed to deduct the cost of vehicle miles driven in connection with medical care that qualifies for the medical expense deduction. Third, a taxpayer is allowed to deduct the cost of vehicle miles driven in moving from one location to another if the cost of the move is allowable as a moving expense deduction. Fourth, a taxpayer is allowed to deduct the cost of vehicle miles driven in performing services for a qualified charitable organization.

I'm not going to focus on the precise requirements for the deduction. Rather, I want to examine the computation of the deduction.

The taxpayer is permitted to compute the deduction by calculating actual costs. In doing so, an allowance for depreciation is permitted with respect to the trade or business category, but not for the medical and charitable category. On the assumption that some taxpayers find it a bother to maintain actual cost records, and perhaps to alleviate the troubles faced by taxpayers whose records are lost, the IRS provides an option by which the taxpayer may deduct an amount equal to the number of miles driven for a particular purpose multiplied by a standard mileage alllowance for that particular purpose.

The mileage rate for trade or business use of a vehicle in 2006 is 44.5 cents. The mileage rate for the medical and moving expense deduction is 18 cents. The mileage rate for charitable purposes is 14 cents, but if the miles were driven for charities providing Hurricane Katrina relief, the rate is 32 cents (with a separate rate of 44.5 cents if the taxpayer is reimbursed).

Where does the IRS get these numbers? For all but the charitable contribution deduction, the IRS examines the costs of operating an automobile. Thus, the rate is increased or decreased from time to time as gasoline prices or other costs increase or decrease. The difference between the trade or busines rate and the medical and moving expense deduction rate reflects the fact that depreciation deductions are not allowed with respect to the latter.

So why is the rate for charitable mileage so low? And why is there a different rate for Hurricane Katrina charitable efforts?

The answer is simple.

It's in the statute.

Congress has provided the rate for charitable mileage in section 170(i) of the Internal Revenue Code. There is no adjustment for inflation. Why not? I don't know. As inflation causes the cost of operating an automobile to increase, the rate computed by the IRS for trade or business and medical or moving expense deduction purposes increases. Why only 14 cents? Do members of Congress not understand what it costs to operate an automobile? I don't know. Perhaps they pay as much attention to their personal bill-paying as they devote to keeping the federal budget in balance.

The significantly higher rate for Hurricane Katrina relief efforts also seems strange. What is so special about one sort of charitable relief than another? Hurricane Katrina was a devastating catastrophe, but so too have been most of the other hurricanes, tornadoes, and similar disasters to afflict citizens of the nation.

It is this sort of discrepancy that adds to complexity without adding to coherency, symmetry, or logic. If the Congress continues to do to the Internal Revenue Code what it has been doing for the past 20 years (and I spare no political party in that characterization), eventually there will be a tax law that is different for each taxpayer, or at least for each taxpayer with sufficient clout to bring about a "special rule" for his or her situation. The best analogy I can craft is the traffic signal with each driver's special color. My computer monitor is capable of handling almost 16,800,000 colors (there are that many?). Somewhere along the line, logic, common sense, and efficiency demand a rollback of these sorts of special tax rules and a wariness for their intrustion into the selection of traffic signal colors.

Kay Bell shares with us Tax Carnival #6: Decision 1040. Having done a roundup of tax information (Blawg Review #53), I can appreciate the work that went into Kay's post. My only regret is that I'm spinning so rapidly with the juggled plates that I didn't get this post up a few days ago. But don't let that stop you from visiting Kay's Tax Carnival #6 posting. There's enough tax reporting in it to get you spinning around, too.

So, many people, especially those who are not tax experts, are asking me what I think will happen now that the Democrats control Congress. My response is uncharacteristically brief. "Not much, if anything."

Of course, when asked why I say that, I get a chance to say more than four words. With me, brevity is brief.

The perspective that most Democrats take on taxation differs significantly from that taken by most Republicans. If the Democrats try to make changes unacceptable to Republicans, the legislation most certainly would be vetoed. And there are insufficient votes to override a veto. So I suppose a one-word reply to the first question could be, "Stalemate." Or perhaps "Stagnation."

So we're stuck with at least two more years of special low capital gain and dividend tax rates. The "not much" hedging in my initial reply reflects my awareness that legislation to extend some expiring tax breaks might make it through the Congress and be signed by the President. I emphasize "might" because I am not convinced it necessarily will happen.

Looming over the entire tax legislative process is the wrangling over the estate tax. Considering the history of negotiations between the parties, I doubt anyone can predict what sort of procedural mess ( think filibuster) any attempt at estate tax restoration and reform will encounter.

Someone suggested that the election outcome may reflect a more militant political center, presumably a force that would protect the tax base. I don't think the tax base is safe. The center may be "militant" or perhaps just disgruntled, but the center doesn't hold sway. If anything, the Congress is even more polarized, and the gap between the legislature and the executive is so wide that shaking hands across it isn't possible other than for photo ops.

Others have suggested that stagnation might be a good idea, for it would give the Congress time to ponder what it should do with the tax law. See, for example, Linda Beale's commentary on the election results on her A Taxing Matter blog. There's much truth in this assertion, because it makes no sense for anyone in the next Congress to dive into wholesale changes in the Code. Yet every day that things remain as they are is another day that too many dollars are added to the federal debt and shifted onto future generations. Someone else suggested things are best when Congress and the President aren't in D.C., because they cannot make things worse. My concern is that, in some respects, when Congress and the President leave town, the ball they started rolling down the hill keeps rolling.

Some contemplation about the problem solving is helpful. Waiting until 2008 or 2010, though, might be a bit too much. The ultimate price may be a bit too steep.

The Ethics column in the November issue of the American Bar Association Journal, "Lawyers Are Doctors Too," (no on-line version found) reviews the several state ethics opinions addressing the question of whether lawyers can use the "Dr." designation in front of their names. The Model Rules of Professional Conduct don't focus directly on the question, leaving it as a matter to be decided by the states when they apply the rule that lawyers must not engage in false or misleading communications about the lawyer.

The author, Kathleen Maher, correctly points out that the issue is of fairly recent vintage, with its origin in the decision by law schools in the late sixties and early seventies to replace the LL.B. degree with the J.D. degree. She describes a 1986 North Carolina ethics opinion that use of the term "Dr." by a lawyer "without explanation could be misleading and is therefore inappropriate." In contrast, a 2004 opinion from the State Bar of Texas ethics committee reversed course and concluded that "Dr." is not "inherently false or misleading," finding "no reason to prohibit lawyers from indicating their advanced level of education."

The J.D. degree is a fake doctorate. I have one, and I know full well that I did not do formal prepartory work in the discipline deserving of the prerequise bachelor and master degrees. I happened to enroll in five business law courses while doing my undergraduate work at Wharton, but that surely isn't enough to earn an LL.B. It was quite helpful, though, in preparing me for law school. In fact, after earning a J.D. degree, I proceeded to earn an LL.M. That would be backwards, except that the next degree is an S.J.D. rather than an LL.B. I don't use Dr. because I don't want people asking me for medical advice; they might not like my answers. I have a colleague who occasionally addresses me as "Dr. Maule" though I think he does so to rattle my cage a bit. The University addresses me as Dr. James Edward Maule in its communications. Maybe an "S" snuck in somewhere in front of the J.D.?

I wouldn't object to law schools awarding J.D. degrees if they required entering students to take an array of undergraduate courses that covered sufficient material so that the first-year of law school could be far more advanced than it is today. Somewhere along the way I'd like to see a master's thesis and a doctoral dissertation. If it's going to be done, let's do it correctly. Just the other day I was commenting yet again (or perhaps griping) about the challenges of covering basic tax in three credits and wills and trusts in three credits. Law school has been fixed at three years for decades, while the law has grown exponentially. If extending law school to four or five years, with externships, which I've unsuccessfully advocated, isn't going to happen, why not squeeze in the additional year or two by asking undergraduate universities (which are in the business of awarding bachelor degrees) to offer the LL.B.? I know the answer. The colleges are too busy doing remedial education because students leave the K-12 system with less than the ideal package of intellectual skills and experience.

How did this fake doctorate show up? Law students in the sixties decided that they should be awarded a doctorate because they had completed seven years of post-high school education. What's so special about seven years? Their friends in other disciplines who completed seven years of post-high school education received doctorates. What was conveniently ignored was the fact that these friends had invested seven years of study in their discipline, whereas law students invested three. Rare was, and rare is, the law student who enrolled in five or six undergraduate law courses. Perhaps if someone convinced me that in the three years of law school the students do seven years of education endeavors in the law I might retract my characterization of the J.D. degree as a fake doctorate. To the contrary, the four years that medical students invest in medical school are four years, not six 14-week semesters. Medical students, incidentally, don't receive a doctorate after seven years of post-high school education. They invest eight, and then put in long hours in their internships and residencies before hitting full stride professionally. In other words, lawyers are woefully undereducated, and I'm not even taking into account the nature of the courses in which some law students enroll.

Perhaps with all of the post J.D. formal and informal education that I have experienced I've "done enough" to consider myself a "Dr." but nonetheless I'm not inclined to stick that prefix in front of my name. After all, my highest formal degree, in terms of chronological sequence, is a master's degree. Am I Master James Edward Maule? I haven't seen that since before my twelfth birthday. So for now I'll stick with the "Prof." designation (which they relish in Europe and in some other areas of the world), and in the not so distant future hopefully I'll be permitted to attach the Emeritus tag. For the moment, though, my friends can call me Jim.