MauledAgain

No tax practitioner worth his or her professional license is unaware of the concept of sin taxes. For years, governments have found it morally and politically easy, at least compared to other alternatives, to impose taxes or fees on products and activities associated with "sin." Thus, it is not uncommon to find states and localities imposing taxes on items such as tobacco, beer, wine, liquor, and gambling. Whether the true intent of legislatures is to use the tax to discourage the activity or the use of the product or to ride a profitable revenue stream has been debated for decades. In our post-modern world, some have taken to using the term health promotion revenues rather than sin taxes.

According to a recent Philadelphia Inquirer story, the chances of a decline in revenue from these sources on account of the economic downturn are slim to none. In Cash-Strapped? Not for Necessary Treats, the manufacturers of alcohol, cigarettes, and yes, candy, are reporting "healthy sales." The use of the adjective "healthy" by the writer is most clever, because although red wine and chocolate are sufficiently medicinal to warrant that description, the same cannot be said of cigarettes, most candy, and most liquor. According to the article, although the value of so-called sin stocks have fallen, most of the companies producing these products are reporting strong sales. Anheuser-Busch reported a profit even though it has faced increases in the price it pays for ingredients, for manufacturing, and for shipping. Cadbury has reported a 7.3 percent first-half sales increase. Diageo P.L.C., which manufactures such brands as Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum and Guinness stout "expects its Scotch whiskey business to continue to grow at least 8 percent to 9 percent annually." Philip Morris has reported a 23 percent increase in earnings for the second quarter.

How is this possible? Economists call consumer demand for these items "inelastic," meaning that higher prices don't deter purchases. For that reason, as reported in Cash-Strapped? Not for Necessary Treats, Anheuser-Busch plans to increase the price it charges for its popular brands. According to this report, Hershey is raising prices by an average of 11 percent, the second increase of 2008, even though it still expects sales to grow, and even though, according to Cash-Strapped? Not for Necessary Treats, it "reported dramatically higher second-quarter sales and profit."

Because I don't smoke and because I'm not much of a beer drinker, I suppose my zero demand for those items is totally inelastic, or perhaps infinitely inelastic. On the other hand, if the price of chocolate keeps rising, perhaps it ought to be covered by health insurance drug plans, because, as we know, chocolate is medicinal. Seriously, there is something strange about lumping stocks in candy companies with stocks in tobacco and liquor companies. Unlike smoking or chewing tobacco, eating chocolate and drinking red wine in moderation, though not necessarily simultaneously, is good for one's health. So-called sin taxes have been imposed on cigarettes, cigars, chewing and pipe tobacco, beer, wine, and other spirits for decades if not longer. In contrast, chocolate and candy have not been included in the products generally tagged as "sin" products. If the list is to grow beyond tobacco, liquour, and gambling, I can think of a some other things that fit in with that crowd far more readily than medicinal chocolate. Think about junk food, soda, and coffee, to name but a few.

If the notion of sin taxes gives way to the idea of taxing activities that do not promote health (so called "health promotion revenues"), should we expect a couch potato tax? How about a tax on elevator use by those who could use the stairs? Imagine a tax on television sets and video games because they encourage children to give up outdoor activities, which presumably are healthy. Perhaps a tax on plastic bags makes sense because it is a sin, some say, to waste resources making something that ends up clogging landfills.

Theoretically, there is no limit to the number of products or activities that can be swept within the reach of a sin tax. As the Pet Shop Boys explained:

Everything I've ever done
Everything I ever do
Every place I've ever been
Everywhere I'm going to
It's a sin

Indeed, one person's vice is another person's virtue. For all the damage they do, smoking and excessive drinking supposedly calm the nerves, which in the current economic and political climate, is something more and more people are seeking to attain. My advice: put out the cigarette, put down the fifth drink, jump on the treadmill, the bike, or the stepper, and when done, luxuriate with some dark chocolate. All while reading the Internal Revenue Code, of course.

In Why This New Tax Provision?, I questioned the necessity for the new, one-year-only additional standard deduction reflecting $500 or $1,000 of real property taxes, wondered whether its benefits are worth the extra complexity it causes for the tax law and tax administration, and asked who was the driving force behind its appearance in the Internal Revenue Code. Shortly thereafter, in Is This How Tax Laws Are Created, I shared the views of Andrew Oh-Willeke and Robert D. Flach, the former pointing out that the AARP likely provied the lobbying effort behind the provision, and the latter pointing out that a few retired senior clients would benefit.

Last week, I received a comment from Prof. Mary O'Keefe of Union College. Among other responsibilities, Mary is the faculty sponsor of its Volunteer Income Tax Assistance (VITA) program. That puts her in an ideal dual-role position, a teacher who is deeply connected with the practice world. What she shared is informative, extensive, and enlightening. With her permission, here is her take on the new provision:

Hi Professor Maule,

I found your article about the new property tax deduction for non-itemizers thought-provoking. I agree that tacking on yet another provision compounds the confusion and tax administration difficulties and I can think of many higher priorities for tax reform.

However, as the faculty sponsor of Union College's VITA site in Schenectady in upstate NY, I can immediately think of a number of taxpayers who will benefit from the new provision. And I'm not just talking about the senior citizens already mentioned by your other correspondents.

Our VITA clients are mostly working families with household incomes under $40K. Most are renters, but a signficant minority are homeowners, especially those with incomes in the $30K to $40K range. A typical homeowner might have paid about $3K in property tax and $5K in mortgage interest. (Housing prices are relatively low in upstate NY, but property taxes are relatively high.) A few had significant charitable donations but most did not have much in the way of other itemized deductions, other than a bit of sales tax or state income tax. My student preparers always run the numbers both ways (standard deductions vs. itemized deductions.) The majority of our homeowner clients did not have enough in itemized deductions to justify itemizing. Even among the small number of our clients who have found it worthwhile to itemize under the prior tax law, many received only very marginal tax benefits from doing so because their itemized deductions generally totaled only a few hundred dollars more than their standard deduction.

Here are the kinds of our site's clients who immediately come to my mind as likely beneficiaries of the new property tax deduction for non-itemizers.

1) First-time homeowners who bought a house late in any given tax year. In the past, new homeowners have come in to our site all excited and expecting a higher refund because they'd heard all the hoopla about the tax benefits of home-ownership. However, when my student volunteers added up their itemized deductions, they were disappointed to discover that they still didn't have enough deductions from the partial year of homeownership to make it worth itemizing in their first year. The new tax deduction will give them an immediate tangible tax benefit even in their first year of home-ownership.

2) Low-income clients who financed their home through a zero-interest mortgage obtained from a local nonprofit agency. They pay property taxes but zero interest and never have enough deductions to make it worth itemizing, so they will fully benefit from the new deduction not just in their first year of ownership but for many years to come as well.

3) As mentioned above, even the small portion of our clients who benefited from itemizing under prior law, got very little incremental advantage from doing so, as their itemized deduction total was generally only marginally higher than their standard deduction.

So I would say that most of our clients who itemized last year will do better this year if they take the new deduction.

As you point out in your post, the new provision won't make much difference to most middle-class or affluent homeowners, who already benefit from extraordinarily generous tax benefits for owner-occupied housing, but the amounts of money involved are enough to ease life at least a little bit for the families we serve. Even the small "telephone tax credit" two years ago put smiles on the faces of many clients--I think the new property tax deduction will make some of our clients smile as well.

Every year, our low-income clients who are homeowners come in hopefully with files full of receipts they dutifully saved because the receipt said "Save this for tax purposes," and my students go through the exercise of examining each receipt and entering deductible items in the schedule A worksheets. Many clients bring in as many as 8 property tax receipts (since the city and the school district each issue quarterly bills) as well as bank statements, charitable donation letters, and medical copay receipts. The clients hold their breath as they watch our student volunteers painstakingly enter all the numbers from these receipts into their computers. We all hope for the best. But in the majority of cases, in the end, our student preparer has had to inform the client that they are better off taking the standard deduction.

You wrote: "It is inconceivable that anyone will find a tax provision worth $50 to $75 for one year will make the difference between keeping and losing his or her home."

There is a highly debatable but much-vaunted tradition of promoting "the American dream" of home ownership through tax breaks, but up until now, low-income homeowners have seen little if any benefit of those tax breaks on their tax returns. I agree that $50 or $75 (or even double or triple that number, given the indirect benefits I mentioned above) will not make the difference between keeping and losing one's home for many taxpayers. However, as long as our country feels the need to make a big symbolic statement about home ownership via the massive home ownership tax expenditures built into the tax code, there is something to be said for ensuring that the symbolic statement includes low-income taxpayers as well as the middle class.

Fifty to one-hundred-fifty dollars is still a non-trivial amount of money for our VITA clients. Our clients have household incomes below $40K, and those clients who are homeowners tend to be married couples in which both husband and wife work at several modestly paid jobs. They face pretty high marginal tax-rates (due to phaseout of Federal & NYS EITC and other credits as well as FICA and Federal & State taxes). Taking into account daycare and commuting costs as well as their marginal tax rate, it might easily take a full-day's work for one of them to earn fifty dollars.

Mary O'Keeffe
Union College Volunteer Income Tax Assistance site faculty sponsor

Mary definitely has drawn attention to a group of taxpayers, albeit small, who benefit from this provision but who were not on my list of beneficiaries. Certainly the "late in the year" purchasers and the "zero interest mortgage" homeowners defy the notion that homeownership by folks without paid-off mortgages means that itemized deductions will exceed the standard deduction. The irony is that I doubt Congress was thinking about "late in the year" purchasers or "zero interest mortgage" homeowners when it enacted the provision, and I cannot imagine either of these two groups has lobbyists working on their behalf in Washington. It's a rather interesting aspect of the legislative process, namely, benefits of tax legislation accruing to people who weren't under consideration by legislators who were aiming to benefit some other group. I wonder whether the estimates of revenue loss attributable to the provision took into account the people Mary identified. Revenue estimating being the mystery that it is, shrouded behind all sorts of secrecy, we'll probably never know.

Nonetheless, from the broader perspective of designing an efficient tax system, the idea of having a standard deduction in lieu of itemized deductions but then grafting special provisions so that those claiming the standard deduction also claim some itemized deductions defies logic and common sense. Years ago, Congress enacted a provision allowing taxpayers claiming the standard deduction to deduct a portion of charitable contributions as above-the-line deduction. The justification was that people who did not itemize deductions donated less to charities than they would if they were itemizing, and that the provision would increase charitable contributions. Certain charities lobbied intensely for the provision, but the empirical research demonstrated that the provision had little or no effect on charitable giving, and eventually the provision was repealed. The new provision, as additional standard deduction rather than above-the-line deduction, has a slightly different effect because it does not change limitations based on AGI, but it opens the door to a potential "standard deduction plus part of real property tax deduction plus charitable deduction plus plus plus" arrangement that defeats the purpose of the standard deduction, which is to spare taxpayers the burden of keeping records of expenses when they know that they're not paying much, if anything, in state and local taxes, etc. Ought not the solution be a larger deduction for personal and dependency exemptions and the repeal of deductions for personal expenditures? Better yet, ought there not be a "credit for personal and dependency exemptions" in lieu of the current deduction and the deductions for personal expenditures? On this point, Mary agreed with me that increasing the exemption and using tax credits "makes a lot more sense." However, like me, she is " fairly pessimistic about the potential for permanently getting rid of tax deductions in any rational orderly way." That may happen, she points out, if the number of taxpayers subject to the AMT, and its effective denial of these deductions, continues to grow. But no one thinks that's the ideal way of fixing the income tax.

Two more comments have arrived in response to Why This New Tax Provision. The first is from Wayne Brasch. The second will be shared in next Monday's posting. Wayne shares my distaste for the complexity generated by converting a small portion of what would be an itemized deduction into an above-the-line deduction. More on that issue will appear in next Monday's posting.

Wayne directed my attention to another provision in the Housing and Economic Recovery Act of 2008, P.L. 110-289. In section 3011 of this legislation, Congress provides a tax credit for individuals who are first-time homebuyers of a principal residence in the United States between April 9, 2008, and June 30, 2009. The credit equals 10 percent of the purcahse price, but is limited to $7,500 ($3,750 for taxpayers who are married filing separate returns), allocated among joint purchasers who are not married. The credit is reduced if the taxpayer's modified adjusted gross income exceeds $75,000 ($150,000 on a joint return), at a rate that eliminates it for taxpayers with modified adjusted gross incomes of $95,000 or more ($170,000 or more on a joint return). In the interest of brevity, I omit the definition of modified adjusted gross income, first-time homebuyer, principal residence, purchase, purchase price, and the treatment of constructed residences and purchases from related taxpayers. I also omit discussion of the exceptions.

What irks Wayne is the recapture provision. Section 36(f) provides, with several exceptions, that during the 15-year recapture period the taxpayer who claims the credit must increase tax liability by 1/15 of the credit. In other words, the credit isn't a once-and-done deal but the equivalent of a loan. For example, a taxpayer who claims the full $7,500 credit in the year of purchase must add $500 to his or her tax liability for each of 15 years, beginning with the second taxable year following the year in which the purchase was made. If the taxpayer sells the residence, the remaining unrecaptured credit must be added to tax liability. The only limitation on this accelerated recapture is that it cannot exceed the taxpayer's gain on the sale of the residence. Exceptions exist for death, involuntary conversion, and transfers between spouses or incident to divorce.

Here is what Wayne noted with respect to this credit: "These people are going to have to be concerned with paying for their house and keeping up with when it's time to begin to repay the "interest-free governmental loan". What will IRS to do recover this money from those who don't or can't repay it timely? Will they actually take back the house the government helped them purchase? This is really going to complicate the lifes of IRS and tax preparers in general." Indeed. If the taxpayer is unable or unwilling to pay the recapture tax, does the IRS jump in ahead of the first mortgagee, or is the IRS relegated to a secondary position? Does the IRS have a lien on the property from the time the credit is claimed, or only after it files in response to nonpayment of taxes in a subsequent year? Does the Congress really want the IRS to be in the business of foreclosing on homes, or forcing their sale, in order to collect taxes that would not have existed but for the credit? If the taxpayer would not have purchased the house but for the credit, isn't the Congress putting the United States Treasury into the same position as many sub-prime lenders put themselves when they made it possible for someone to acquire a home who wasn't financially ready to do so? If the banks making the bad loans are bailed out by the United States, who bails out the United States?

Another thought crossed my mind. To the extent the government decides to assist people in purchasing homes, is that not within the bailiwick of the FHA, to be administered through loans made or guaranteed by FNMA and FHMC? Why now get the Treasury Department into this business? Unlike the credit for first-time home purchases in the District of Columbia, a provision designed to entice people to purchase homes in Capitol Hill's backyard that would otherwise continue to spiral into the consequences of local government mismangement, this new provision does not target economically depressed areas or neighborhoods with higher than average foreclosure rates.

The temporary nature of this credit also raises questions. It suggests that Congress expects the "problem" to be fading away by the middle of 2009. The problem, it seems, is that housing sales have dropped. Housing sales have dropped because the veil has been removed from the mortgage lending market, and those not financially ready to own homes cannot get loans. Is the solution to have the government lend them money in the form of a must-be-paid-back tax credit because the private sector has finally come to its senses and put an end to irresponsible lending practices?

Yet another concern pops up. This credit is refundable, and there is a reason for that. Many taxpayers with adjusted gross incomes making them eligible for the credit will have tax liabilities that are less than the credit. A useless credit isn't much of an incentive whether or not one agrees with the incentive. This nation has had an educational experience with refundable credits targeted toward low-income taxpayers. The earned income tax credit has spawned so many schemes, many fraudulent, and has caused such havoc among taxpayers and tax return preparers, that the Congress should beware of imitating it without taking steps to minimize the temptations it presents to the schemers who would manipulate it to their advantage. Will the IRS end up directing even more of its resources toward audits of low-income home purchasers as it has had to direct a disproportionate amount of its resources toward auditing the earned income tax credit?

This seems to be another in the long line of tax provisions tossed into the Internal Revenue Code during the past decade that reflect the "Wouldn't it be cool if…?" approach to decision making that permeates post-modern America. Where are the studies that carefully consider the full implications of enacting this credit? When were the hearings that put the spotlight on this provision? Does anyone know if this credit will have any meaningful impact on the economy or the housing sector? Is this simply a matter of tossing another provision into the Code and seeing if it works, figuring that if it does, fine, and if it doesn't, oh well, no one reduces the lobbyists' salaries or votes the incumbents out of office for the gaffe?

Wayne's closing comments are a fitting end to this peek at new section 36: "I just think this whole law was a very ill-conceived thing that got through Congress somehow. I've been in the tax preparation profession since 1963 and have never seen such a crazy concept as contained in this law. I realize the economy needs a kick in the pants, but this is not going to do it."

I'm certain everyone knows who I think needs a kick in the pants, and it isn't the economy and it isn't Wayne.

Last week, in Why This New Tax Provision?, I asked why Congress had complicated the Internal Revenue Code, tax return filing, tax forms, instructions, and the tax law by adding a new above-the-line deduction for a small portion of real estate taxes, and invited the member of Congress who inserted the provision into the legislation to educate me on what transpired during the legislative process with respect to this provision. Though I haven't (yet) heard from anyone on Capitol Hill, I have been the beneficiary of two explanations, one from Andrew Oh-Willeke and the other by Robert D. Flach.

Andrew suggests that the lobby for this new deduction is the AARP and that the beneficiaries of the deduction are "elderly homeowners with low incomes who want to keep living in their homes." These homeowners are asset-rich and income-deficient, and even though the provision "doesn't make much sense from a tax complexity or economic necessity perspective," it is difficult for legislators to deny some sort of relief to these homeowners. What the AARP and Congress understand is that older voters are "the most reliable voting block in existence, and are capable of mounting massive letter writing campaigns." Older voters who don't own homes, or who itemize deductions, see the provision as an indication that "a member of Congress who votes for it cares about elderly homeowners generally." Andrew notes that to this extent it resembles the additional standard deduction for elderly taxpayers.

After doing some research, for which I am deeply appreciative, Andrew determined that the AARP did lobby the bill but, as reported by the New York Times and other media outlets, with its primary focus on reverse mortgages and FHA administration. It is possible that the provision had been sitting on the shelf, waiting for an appropriate piece of legislation to come along to which it could be attached. Considering that the AARP lobbies at the state level for senior citizen property tax relief, it makes sense to conclude that the AARP was the moving lobbying force behind the provision. Interestingly, an earlier Senate version of the provision, which would have limited its benefits to taxpayers living in localities that did not raise property taxes, met objections from a large coalition including the National Conference of State Legislatures, the United States Conference of Mayors, the Council of State Governments, the National League of Cities, the International City-County Management Association, the National Association of Counties, and the National Education Association. Their point was that the Senate version would discourage localities from raising tax rates to make up for revenues lost to falling home values, and could force localities to cut funding for schools, police, and other public services.

According to AARP research, 63 percent of Americans aged 65 or older filed tax returns in 1998, but only 50.6 percent of them had positive tax liability. The other 49.4 percent would not benefit from increased deductions, increased exemptions, reduced rates, or increases in nonrefundable credits. They are not the beneficiaries of the new provision. The AARP also determined that only 27 percent of older filers itemize deduction and thus benefit from the existing deduction for real estate taxes. What is unclear from these two disconnected bits of statistical information is how many of the the 50.6 percent with positive tax liability itemize deductions. A good guess is that all, or almost all, of the itemizers are among that group. That suggests that only one-fourth of senior citizens file tax returns with positive tax liability but do not itemize deductions. In other words, the new provision benefits, at best, one-fourth of senior citizens.

Robert D. Flach, the Wandering Tax Pro, shares this comment: "In response to who will claim the deduction, as I have mentioned here before I do see several of my retired senior clients receiving the very small benefit of this deduction – taxpayers who have paid off their mortgage and have an inflated standard deduction which is more than their deductions due to 2 additions for age 65 or over." In other words, the conclusion that I reached, that the benefits of the new provision are rather limited, is corroborated by the observations of yet another tax practitioner.

If the notion that the other three-fourths are more willing to vote for incumbents because their support of the new provision indicates some sort of caring about older citizens is correct, it strikes me as rather sad that the nation's tax laws must be complicated and tax administration increasingly burdened in order to make some people feel good about Congress. That people would consider something of no value to them to have value is baffling. It is inconceivable that anyone will find a tax provision worth $50 to $75 for one year will make the difference between keeping and losing his or her home.

If Congress truly cared about the impact of rising property taxes on elderly low-income homeowners, it would do something other than enact a provision that benefits a fairly small proportion of them. It would examine the reasons for those property tax increases, and if it did so properly, it would discover that it, yes, the Congress, is responsible for a substantial portion of the increase. The Congress consistently enacts mandates that it imposes on state and local school systems, but fails to provide funding. These unfunded mandates then become a fiscal obligation of the states and localities, which then must raise taxes in order to pay for what the Congress has ordered them to do. I suppose, though, that by enacting these unfunded mandates, members of Congress obtain yet another block of votes in their perpetual campaigns to remain in office and hold power. Somewhere, somehow, the goal of retaining power has usurped the task of doing what is right for the country, and somehow politicians and their consultants have figured out how to distract taxpayers from focusing on long-term questions of national interest by blinding them with misleading promises of short-term individual benefits that aren't, after close examination, benefits after all.

The Comparative Effectiveness Research Act of 2008, introduced last week in the Senate as S. 3408 (which can be found through a search at the Thomas legislation site), is a proposal worth examining because, although it would impose a tax on health insurance in order to fund "comparative effectiveness research," it seems to be slipping under the radar because so many other issues are getting attention in the press. As I interpret the legislation, people would be funding research designed to compare the effectiveness of differing approaches to dealing with a disease, illness, or medical condition. The few Senators who have commented on the legislation claim that the funding is a tax rather than a fee, but for me, regardless of what the charge is called, the initial question should focus on what people are acquiring in exchange for what they would be paying.

The fee, or tax, or whatever it is called, would be imposed by new Internal Revenue Code sections 4375 and 4376. Section 4375 would impose a $1 fee on each person covered under any accident or health insurance policy, including group health policies, issued with respect to individuals residing in the United States. The $1 would be reduced to 50 cents during 2012. The issuer of the policy would be required to pay the fee, but it would be a good guess to conclude that this cost would be passed along to insureds. The fee would not be imposed on an insurance policy if substantially all of its coverage is limited to accident insurance, disability income insurance, supplemental liability insurance, workers' compensation, automobile medical payment insurance, credit-only insurance, coverage for on-site medical clinics, and coverage described in regulations as being secondary or incidental to insurance benefits other than medical care. Starting with policy years ending in any fiscal year beginning after September 30, 2013, the $1 amount is increased to reflect the percentage increase in the projected per capita amount of national health expenditures. An identical fee is imposed on self-insured health plans, defined by the legislation as plans providing accident or health insurance through a means other than an insurance policy, if established or maintained by one or more employers for their employees, by one or more employee organizations for their members, and by several other specified associations or organizations. Under section 4377(c), the fee would be treated as a tax for purposes of the procedural and administrative provisions of the Code.

The fee, or tax, collected under sections 4375 and 4376 would be transferred to the Comparative Effectiveness Research Trust Fund, known as the CERTF. In addition to the fee or tax imposed by sections 4375 and 4376, there would also be transferred to CERTF fixed dollar amounts, ranging from $5 million in fiscal 2009 to $75 million in fiscal 2012 through 2018, to be taken from the Treasury general fund. Amounts in the fund are to be made available to the Health Care Comparative Effectiveness Research Institute, which I am going to call the HCCERI even though the statute does give it an acronym as it does for the CERTF.

The HCCERI is established as a D.C. nonprofit organization, though the statute provides that it is "neither an agency nor establishment of the United States Government." According to the proposed legislation, "The purpose of the [HCCERI] is to improve health care delivered to individuals in the United States by advancing the quality and thoroughness of evidence concerning the manner in which diseases, disorders, and other health conditions can effectively and appropriately be prevented, diagnosed, treated, and managed clinically through research and evidence synthesis, and the dissemination of research findings with respect to the relative outcomes, effectiveness, and appropriateness of the medical treatments, services, and items described in subsection (a)(2)(B)." Those items are " health care interventions, protocols for treatment, procedures, medical devices, diagnostic tools, pharmaceuticals (including drugs and biologicals), and any other processes or items being used in the treatment and diagnosis of, or prevention of illness or injury in, patients."

The HCCERI is charged with eleven duties. First, it must identify national priorities for comparative clinical effectiveness research, taking into account factors such as disease incidence, prevalence, and burden in the United States, evidence gaps in terms of clinical outcomes, practice variations, including variations in delivery and outcomes by geography, treatment site, provider type, and patient subgroup, the potential for new evidence concerning certain categories of health care services or treatments to improve patient health and well-being, and the quality of care, and the effect or potential for an effect on health expenditures associated with a health condition or the use of a particular medical treatment, service, or item. Second, it must establish and update a research project agenda to address the priorities identified under the first duty, Third, it must conduct a study on the feasibility of conducting research in-house and issue a report within five years. Fourth, it must collect data from specified federal agencies and "Federal, State, or private entities." Fifth, it may appoint advisory penels. Sixth, it must establish a methodology committee. Seventh, it must ensure that there is a peer-review process in place for its research. Eighth, it must share its findings with clinicians, patients, and the general public. Ninth, it must adopt the national priorities described with respect to the first duty, the methodological standards described with respect to the sixth duty, the peer-review process described with respect to the seventh duty, and the dissemination protocols and strategies developed with respect to the eighth duty. Tenth, it must take steps to avoid duplicating research conducted by other public and private agencies and organizations. Eleventh, it must submit annual reports to the Congress and the President, making it available to the public.

The HCCERI would be directed by a Board of Governors, and the statute elaborates on how its 21 members would be selected, not only in terms of constituencies but also in terms of "diverse representation of perspectives" and considerations, though not elimination, of conflicts of interest. Members of the Board would be compensated. The Board would be authorized to hire a director and other employees, to retain experts, to enter into contracts, to provide expense reimbursements, and to issue rules and regulations for operation of the HCCERI. There would be financial oversight by a private sector auditor and the Comptroller General, who would be required to review a variety of information with respect to research priorities and funding. Procedures would be established to ensure transparency, credibility and access, through public comment opportunities, forums for public feedback such as the media and web sites, and disclosure of the process and methods for conducting its research and other information.

So we will be paying for the establishment of another bureaucracy, a rather elaborate one that will conduct research into the efficacy of various medical treatments, but only if it does not duplicate what the private sector and other federal and state government agencies are researching. I suppose there are medical diseases and conditions with respect to which no one is researching the effectiveness and cost efficiency of available treatments. Surely there are private sector organizations, and existing government agenices, looking at the best ways to treat heart disease, various types of cancer, diabetes, tennis elbow, migraine headaches, drug and alcohol addiction, depression, athlete's foot, broken bones, concussions, insect bites, and just about every other medical problem other than, perhaps, the diseases for which the so-called orphan drug credit was designed to alleviate. The proposed legislation does not mention any specific medical illness or condition, so it's rather difficult to figure out what this legislation really is designed to accomplish. It's not as though it is designed to reduce or eliminate Medicare fraud or medical profession malpractice, in which case it would be contributing to the preservation of the free aspect of a free market. It's not as though it is designed to evaluate new pharmaceuticals, because an agency already exists that does that.

Before deciding if it makes sense to impose a tax, or fee, the nation must understand what that tax or fee would be funding and why whatever would be funded needs to be funded. Whether the imposition is called a tax or fee doesn't answer those primary questions. Again I invite the Congress to explain what truly is going on with respect to this proposed legislation.

Last week, in Selling One's Place in a Class: Part I: The Tax Issues, I suggested that the amount received by a student for selling a spot in an over-enrolled course should be treated as amount realized from the disposition of property and gain or loss realized should be computed by taking into account the student's adjusted basis in the right to enroll in the course. I specifically suggested that the adjusted basis in that right should be some fraction of the tuition paid by the student.

A former J.D. and LL.M. student, Ryan Bornstein, practicing in Berwyn and also a colleague teaching as an adjunct in the Graduate Tax Program, though agreeing with me that the transaction is a disposition of property, challenged my suggestion that a portion of tuition be allocated to adjusted basis in the right. The gist of Ryan's argument rests on the fact that the student almost certainly will enroll in another course in order to maintain the number of credits that the student needs to meet academic requirements. Under my approach, the student would need to do yet another allocation so that the right to enroll in the "new" course has adjusted basis, but perhaps instead it would have a zero basis? I think my friend Ryan raises a very good point, and he has persuaded me to reconsider my approach. After all, he teaches the Tax Consequences of the Disposition of Property course, so he is immersed in this are of the tax law.

Perhaps the better view is that this is a situation in which allocation of basis is impractical. The student who pays tuition acquires a variety of rights, including not only the right to enroll in courses, but the right to enter the building, an email account, use of the library, use of school computers and equipment, access to financial aid and career decision advice, and other benefits. Are these rights some sort of inseparable whole, despite the ability of the student to transfer the right to enroll in a particular course?

Ryan raised another point. Suppose the selling student did not need to enroll, and did not enroll, in another course. Would it then make sense to allocate a portion of tuition to the right that has been sold? There is logic in reaching this conclusion, but logic doesn't always find a home in the tax law.

What makes this situation, as Ryan put it, "a very interesting issue for sure," is that other analogies generate different conclusions. These conclusions surely would find even less favor with those critical of my original suggestion. As I thought about Ryan's questions, I considered several other analytical paths. Could the disposition be similar to the grant of an easement? In other words, the student retains the ability to make full use of whatever the school provides in exchange for the tuition. The problem is that the student has transferred the right to enroll in that particular course and no longer can make use of it, whereas when an easement is granted the owner usually has the ability to continue making use of the land. The easement is a sort of "sharing" whereas the sale of the right to enroll in a class is the antithesis of sharing. Nor is the payment akin to the receipt of severance damages, because the place in the course under consideration has not been damaged or destroyed. Interestingly, the consequences of treating the transaction as an easement or as the receipt of severance damages is recovery of basis in the underlying land. The inapplicability of this outcome is apparent from the requirement in one case that the basis recovery be allocated to the portion of the land affected by the easement. What the selling student retains is unaffected by the transfer, and what is affected by the transfer is a right to enroll in a course that the student no longer has. The treatment of basis under like-kind exchanges would be helpful, but I tossed that aside because the student is not carrying on a trade or business or otherwise qualified to bring the transaction within section 1031.

If the student's adjusted basis in the right that is sold turns out to be zero, how does that change the outcome? There would be gain realized. How would it be characterized? Is the right a capital asset? If so, the gain would be short-term capital gain, and unless the student had capital losses to offset it, it would be taxed at ordinary income rates. That's not quite the same result as treating the transaction as compensation for services, as many of my tax colleagues across the country who weighed in on the issue suggested, because this compensation would be subject to self-employment tax (assuming the student was above the threshhold), but It would be close. If the right is not a capital asset, then the gain would not be offset by any available capital losses. It's for these reasons I doubt we will ever see an IRS ruling or a judicial opinion on the question. It will remain a wonderful discussion piece for tax professors, an object of curiosity for tax practitioners, and a looming nightmare of an examination question for tax students.

On July 30, the president signed into law the Housing and Economic Recovery Act of 2008, P.L. 110-289. In section 3012 of this legislation, Congress provides that up to $500 of otherwise deductible state and local property taxes ($1,000 on a joint return) may be deducted by taxpayers who do not itemize deductions. The provision is effective only for taxable years beginning in 2008.

Here's my question: What's the point of this provision? Considering that it adds yet more complexity to the tax law, what urgent national interest does it serve? What significant public economic benefit is generated by a provision that adds not only to the size of the Internal Revenue Code, but also will require attention from the Internal Revenue Service in terms of revised and more complicated forms, additional instructions, alterations to its computer programs, and issuances of notices and announcements if not rulings and regulations. What essential economic repair is accomplished by a change that is certain to confuse many taxpayers and annoy many tax return preparers?

The provision is useless for taxpayers who itemize deductions, because the new legislation adds the $500 (or $1,000) real estate tax deduction to the standard deduction. Most taxpayers who deduct real estate taxes also deduct mortgage interest, and those two deductions alone put the taxpayer in the position of having itemized deductions that exceed the available standard deduction. That leaves, as taxpayers possibly benefitting from this provision, those taxpayers who pay real estate taxes in amounts less than the standard deduction and who have insufficient other itemized deductions to bring their total itemized deductions above the standard deduction. This means we are looking for taxpayers who own homes, pay real estate taxes that are not exorbitant, do not have significant medical expenses, pay little or no state and local income (or sales) taxes, and do not make more than trivial charitable contributions.

How many people own homes on which they are paying little or no mortgage interest? Almost everyone in such a situation either is well-to-do or past retirement age. Most people in those situations make sizeable charitable contribution deductions, incur significant medical expenses, and pay state and local income (or sales) taxes. I have been unable to find any statistical information that identifies the number of people who pay little or no mortgage interest, and have few other itemized deductions aside from low to moderate real estate property taxes.

To make the situation even more bizarre, consider the tax savings generated by what amounts to a $500 or $1,000 increase in the standard deduction. It could be as much as $175 (or $350). It could be as little as zero, if the taxpayer has otherwise unusable credits. Again considering that most taxpayers in the 35% marginal tax bracket, and even in the intermediate brackets, itemizes deductions, the few taxpayers who benefit from this new provision are likely in the 10 percent or 15 percent marginal tax brackets. That means they are looking at a $50 or $75 per-person tax savings. Even if all of these taxpayers rush out and spend that money, it isn't going to stimulate the economy.

An even more perplexing question is the identification of the lobby that pushed for this provision. I doubt it was the American Petroleum Institute, the health care institute, multinational corporations, professional athletes, or charities. Was it the product of a theoretical analysis? What propelled its passage? Surely it found its way into the bill for political reasons. It's in a bill designed to alleviate the housing crisis and the foreclosure chaos, but $50 or $75 of tax savings definitely isn't going to save a person's home from foreclosure or encourage someone to purchase a home.

Would the member of Congress who put this provision into the legislation kindly email me and explain what really has transpired? Even if it's a matter of educating me on the votes that this provision will procure in 2008, I'm looking forward to enriching my understanding of civics and the legislative process. I'm certain others are similarly eager to be enlightened.

On Friday, I commented on the tax issues that were raised by the practice of law students at NYU buying and selling places in their law school courses. Though in his TaxProf Blog post, Paul refers to this practice as "cash for class," as do I in my comments, the ABA Journal article on the story notes that not only cash, but also gift certificates, food, and even sexual favors reportedly have been offered for places in an over-enrolled course.

However the tax issues are resolved, the legal education issues are no less formidable and in many respects, much more important. There's probably not much tax revenue at stake, but there are many legal careers affected by the situation.

The articles cited by Paul don't inform us of how many students are trying to get into closed courses. Is it one or two? A flood? No matter the answer, it is reprehensible that law students need to resort to buying enrollment rights from their classmates in order to get the education they need to learn how to practice law. According to the New York Post version of the story, students are looking for spots in Environmental Law and Capital Punishment. The ABA Journal article notes that a spot in Entertainment Law was being sought.

If the situation involves merely one or two students trying to get into a course, in many cases the solution is to permit those students to enroll. I've lost count of the number of times I've acceded to requests from law school administrators to permit more students to enroll in a course than the cap allowed (with classroom space being the only true constraint), so that a student's curricular needs could be accommodated. So I had another exam to grade, and 10 more semester exercises to grade, but as I told the dean (to the chagrin of some), "We're paid to teach, students are here to learn, and considering most of the school's revenue comes from students paying tuition in order to learn how to practice law, the right thing to do is to let this student enroll." If the course is one in which students are teamed up in pairs, adding one student to a fully-enrolled course with a cap of 16 isn't feasible. But those instances are far less frequent than those in which 83 students want to enroll in a course capped at 80.

If the situation involves a significant over-enrollment, then the school has an obligation to offer another section of the course. There have been times when one or another of my colleagues have agreed to an administration request to add a section of a course. This happened, for example, with trial practice, when several classes were larger than expected because of high yield so that the existing number of trial practice sections were insufficient to accommodate the students. Far more often, the school hired adjunct faculty to teach the additional sections of a course that were needed so that students could enroll in courses essential to their education.

NYU claims that the problem exists because it does not maintain waiting lists for courses. Why not? Whatever the answer, NYU plans to institute waiting lists. But does that solve the problem? It might eliminate the cash-for-class market, but it still leaves students unable to take courses in which they need to enroll. I'm not worried about the students who want to take Professor A rather than Professor B for course Y. I'm concerned about students who want to practice tax law who cannot get into an advanced tax course because it is oversubscribed.

So here is my advice to law school administrators and faculty. If it's a matter of a few students needing a course, let them in. If it's a matter of many students seeking a course, open up more sections. To the objection that no one on the faculty has "room" in their teaching schedule to add a course and there are insufficient funds to hire adjuncts, I respond as follows. First, teaching loads at many law schools have been on a downward trend in recent years, probably because teaching interferes with "scholarship" and because schools offer lighter loads in order to attract "scholars" onto their faculties. People express shock when they learn I teach five courses, with one semester of 8 credits, and a total of 13 credits for the entire year. There are many schools where full-time faculty teach roughly as many credits in one year as I do in one semester. Worse, the inequilibrium in course offerings and course enrollments reflects another recent trend in law school education, namely, asking a newly hired faculty member to teach a course that is essential to the curriculum and permitting the faculty member to select two other courses (often one being a seminar) in an area that interests them. Consequently, essential practice courses are oversubscribed or put on the shelf, while interesting but far from essential courses limp along with 3, 4, or 9 students enrolled. If students are over-enrolling in courses J, K, and L, barring a surge in total student enrollment, it means there is a decrease in, or lack of demand for, courses Q, R, and S. Why not put the latter courses on the shelf, even if they are the courses offered because they appeal to the faculty member offering them? Rather than chastisting students for trying to find a way into courses that they want to take because their eyes are on their law practice careers, law school administrations and faculty ought to review their schools' curricular design and make them relevant to preparing students for practice.

In the long-run, this flap at NYU could be an excellent development. It might persuade law schools to offer what students want to take, and what employers need for them to take, rather than being a place where a scholar can earn a salary by teaching one or two sections of what the school needs and another course (or in rare instances, another two courses) of "whatever you would like to teach." Perhaps the pendulum could begin to swing back?

Thanks to Paul Caron's TaxProf Blog, I learned that students at NYU are buying and selling places in their law school courses. Though Paul refers to this practice as "cash for class," as do I in my comments, the ABA Journal article on the story notes that not only cash, but also gift certificates, food, and even sexual favors reportedly have been offered for places in an over-enrolled course.

Two significant sets of issues immediately pop up. One is the inevitable question, "What are the tax consequences?" The other is an even more obvious, "Why is this happening?"

Today's post discussed the tax issues. Monday's post will discuss the education issues.

The tax questions have triggered interesting discussions among tax law professors. My perspective is that some sort of "market" suggests that acquiring the "right" to enroll in a class has value. A student who has this thing of value sells it. Is this "thing" property? My conclusion would be yes, it is, even though NYU's Dean Murphy disagrees. A student who pays tuition and enrolls in a course has a right to attend that course, and because that right has economic value, it is property. As to whether the students are violating law school rules by selling those rights is a different question, and though Dean Murphy claims that is the case, I have yet to see the text of any such rule. I find it difficult to believe that law school administrators and faculty drafted prohibitions against something that until very recently they didn't even realize was taking place.

One of my colleagues challenged me, asking why I considered this a sale of property and not the performance of services. He perceives the transaction as a student being paid to withdraw from a course, which he sees as the performance of a service. In response, I explained that I see the transaction as a sale of property because successful enrollment in the course gives the student the right to attend class, take an exam or other evaluative experience, and to earn a grade. Withdrawal from the course is tantamount to surrendering this right, and in this instance, because the withdrawal comes in response to cash from a specific person, who acquires the same right only because of the withdrawal, the transaction has the characteristics of a sale. Were the student simply to withdraw for other reasons, there being no excess demand for the course, it would be similar to an abandonment, which would generate a nondeductible loss. I followed with an example. Suppose B contracts with S to purchase land. B puts down a $50,000 deposit. X approaches S shortly thereafter, not knowing of the contract, and offers to purchase the land from S. S, in turn, tells X that the land is under contract and that S is not free to sell it to X. X asks S what S would do if X could persuade B to cancel the contract so that X could buy the land. S responds that S doesn't care who buys the land so long as S gets the purchase price. So X approaches B and pays B $65,000 to cancel the contract, which B does, and X then buys the land from S. Should B be treated as being compensated for services? I disagree. I think B has sold his contractual right to purchase the property, not unlike the sale of an option. It is true that B has done X a "service" but that could be said of many property transfers.

That explanation brought another challenge. The existence of a sale or exchange was questioned, on the grounds that the "right" was not transferred to the buyer. Instead, the seller simply surrendered the right, leaving it available to whomever came along and enrolled. In my example, B would be treated as not having sold anything. The situation was compared to someone "standing in line for a concert" being paid by another person to take their place. Three points need to be made in response. First, the student receiving payment has made a disposition, which is sufficient to generate the comparison of amount realized with adjusted basis, whereas existence of a sale or exchange becomes an issue only when it comes to characterizing realized gain or deductible loss, and thus in this instance isn't relevant unless the facts end up indicating that there is a gain. Second, the cash-for-class situation and my example are transations done in a manner that for all practical purposes opens the door to the paying student, or X. The student who transfers the right does so in response to payment from the other student, not from the school. Thus, the right to enroll in the course is not extinguished. In fact, if the cap for the course is, say, 25, there exist 25 rights to enroll, and they do not disappear until drop-add ends with fewer than 25 students enrolled. I'm not persuaded that the right to enroll was extinguished, for there is nothing in the facts to support an argument that the administration then re-created the right, or created a new one. It's not as though the cap was lowered to 24 by faculty or administrative action and then, in a subsequent action, increased to 25 by the creation of a new right. Third, the concert line hypothetical is helpful. If the person is standing in line waiting to be admitted and holds a ticket, the buyer would purchase the ticket and there would be a property sale, with indisputable consequences. If the person is standing in line waiting to be admitted to a free concert, then there is a right to be sold, and the person who sells their place in the line, as I see it, has sold a right, namely, the right to be seated in the venue. It is as though the person paid zero dollars for a ticket and has now sold it. If the person is standing in a line to puchase tickets, then the outcome is different. The person standing in line has no rights to sell vis-à-vis the concert promoter, because there is nothing guaranteed when that "spot" in the line reaches the ticket office. Depending on the speed with which the line moves, tickets could be sold out before even the first person in this line gets waited on by a ticket clerk. In this instance, the situation is not unlike K paying L to stand in line for K, and when L nears the window, L calls K and K shows up. L is paying K for K's services as a line stander, not for any rights because K hasn't acquired any. Suppose for a moment, that NYU had a "preference to people whose surnames begin with A through J" registration approach. Joe Smith pays Andy Doolittle to sign up for the course, with a plan for Andy to drop the course after initial registration, so that Joe can jump in at that point. In this instance, I would treat Andy as I would treat the line stander, namely, as an agent being compensated for performing services. The stories appeared to suggest that this latter arrangement, namely, students enrolling with the intent of making room for someone not able to enroll at that point, is not what is transpiring.

So, for me, the next question is how much basis the student has in the right to attend a class. The answer would appear to be some fraction of what the student paid in tuition and fees. Others disagree with me, some claiming that there is no basis to allocate to this proprety right, and some claiming that whatever basis might exist cannot be allocated to specific incidents of what one obtains by paying tuition.

Whether there is gain or loss depends on the numbers. None of the articles cited by Paul tells us how much students are paying. Nor is there sufficient information to compute basis. For example, if a semester tuition of $20,000 brings, say, 15 credits, one could argue that the basis in the right to enroll in a 3-credit course is something short of $4,000 (because some of the tuition is allocable to the purchase of other rights). My guess is that there would be a loss, because I doubt students are paying four-digit amounts to other students for the right to enroll in a course. The loss would be nondeductible because the students are not in a trade or business of attending law school or of trading in class places.

My conclusion was also challenged by someone who argued that the Foote and Glenn Miller cases require a conclusion that "this" -- presumable the gain -- is ordinary, based on the conclusions that no capital is being freed up for alternative investment, the property has not been held for a year, and it is not property within the meaning of section 1221. This characterization issues arises if the student recognized gain, and because I concluded that the facts pretty much precluded that conclusion, I did not address the characterization issue. Even if the question of whether the right is property within the meaning of section 1221 should resolve the question of whether there has been a disposition of property within the meaning of section 1001, neither Foote nor Miller bears on the resolution. Aside from arguments that Foote was wrongly decided (see Everett, Raabe & Gentile, Tenure Buyouts: The Case for Capital Gains Treatment, in Foote, there was simply a releas, not a sale, of the right in question to its issuer. The Miller case is distinguishable on several grounds. First, the court reasoned that Universal purchased "freedom from fear [of being sued]." Nothing comparable exists in the cash-for-class situation. Second, the right sold by Miller's widow was a right to income, whereas the right sold in the cash-for-class situation is not a right to income. Surely the sale of rights to income must be excluded from the definition of a capital asset because otherwise all income could be converted into capital assets. Third, the court rested its decision in part on the need to define capital assets as narrowly as possible, which has nothing to do with the issue of whether the right is property. It very well could be that the characterization of the gain (if any) or the loss (a moot point because it's not deductible) would be ordinary and not capital. In other words, Miller deals with the meaning of the term property in section 1221, a provision not in play when determining whether there is section 1001 gain from the disposition.

Senator Barack Obama has suggested that if NATO contributes more troops to the war in Afghanistan, the United States would incur a reduction in military spending that could be used "in making sure we're providing tax cuts to middle class families who are struggling with higher gas prices that will have an impact on our economy." But if these savings came to fruition, is that the best use? I don't think so.

First, our national defense is in a weakened condition because of the huge amount of resources expended in the Iraq war. Supplies are being exhausted, future projects have been shelved or postponed, and there are those who argue that military readiness is impaired. Would it not make more sense to use these hypothetical savings to restore the self-defense capability that has been harmed by the Iraq war?

Second, our national debt is spiraling out of control, to the point where national bankruptcy will make the current flood of personal bankruptcies and foreclosures appear to be trivial and petty. The increase in the national debt weakens the dollar, and the weakened dollar is a factor in the recent increase in oil and gasoline prices. Would it not make even more sense to pay down the national debt, causing the dollar to strengthen overseas?

The suggestion that by cutting some spending it is possible to cut government revenue is not unlike an argument by a family burdened with credit card debt that because they have chopped a vacation from their budget that it makes sense to work less and bring home less income. It's that sort of thinking that contributed to the current economic disaster, and it makes no sense for a government to adopt the same sort of flawed financial reasoning.

Reducing taxes so that people can continue to purchase gasoline as they did in 2007 or 2006 makes little sense, considering that oil is in short supply and society needs to be encouraged to find feasible alternatives to the vehicle that runs solely on gasoline. Perhaps the hypothetical savings could be used by the military to find alternatives to oil-powered ships, vehicles, and planes, and those technological developments could filter into the private sector. High gasoline prices have focused attention on a long-term problem, and reducing those prices does nothing to solve the long-term problem. A candidate running on the theme of change should not hesitate to make a change by abandoning vote-getting promises resting on short-term band-aids and adopting a long-term perspective the necessity and benefits of which are shared with the public in an exercise of effective communication.

Back in March, in Soccer Franchise Socks It to Bridge User, I questioned why bridge tolls were being used to fund a professional soccer franchise rather than to maintain and repair bridges under the care of the Delaware River Port Authority (DRPA). A week later, in Bridge Motorists Easy Mark for Inflated User Fees, I criticized the failure of the governors of Pennsylvania and New Jersey to veto the inappropriate use of bridge toll revenues by the DRPA, a power that each governor has and can exercise independently. New Jersey's governor explained his decision by announcing an expectation that when it came time for the DRPA to pump money into unrelated projects in New Jersey, his refusal to veto the use of bridge tolls for unrelated Pennsylvania projects would compel the Pennsylvania governor to refuse to veto the New Jersey project expenditures.

In the first posting, I noted that the DRPA had announced it would be seeking increases in bridge tolls in order to pay for required maintenance. In the second posting, I noted that motorists had no effective control over membership in the DRPA and that the entire structure was unsuitable for the collection and use of user fees. I suggested that the DRPA charter be amended so that it could spend bridge tolls only on bridge maintenance and repair, and not on handouts to "Lincoln Financial Field, the Kimmel Center, the New Jersey Aquarium, and dozens of other projects that surely are not bridges."

Late last week, the DRPA held two days of public hearings on its toll increase proposal. It also is trying to raise the fares for the PATCO rail line that connects New Jersey and Philadelphia through the Benjamin Franklin Bridge. At both hearings, motorists and others showed up and blasted the DRPA for its mismanagement of revenues.According to More anger aimed at DRPA hikes the $350 to $375 million outlay -- depending on who's doing the math -- to construction projects having nothing to do with crossing the Delaware does not sit well with the more than 100 people who showed up at the second hearing to protest the DRPA's plans. According to Commuters decry DRPA bridge toll and train fare hikes, speakers at the first hearing were no less irate. They noted that they had no confidence in the DRPA's budgeting ability, that there was no accountability by the DRPA to the public, and that the DRPA had a history of bad spending habits.

The DRPA plans to eliminate the commuter discount and to cut back on the senior citizen discount. The DRPA's attempt to make the $350 million misdirected funds seem irrelevant to the proposed toll increases makes no sense, because it constitutes roughly one-third of the $1 billion that the DRPA claims is required to repair and maintain the bridges.

Members of the DRPA promised that the revenues from the toll increases would be used for the bridges and not for other projects. That misses the point. The toll increases could be reduced by 1/3 had the DRPA not funneled its revenue into other projects. Approximately $35 million remains in DRPA funds earmarked for other projects, and there was no explanation of why this money could not be returned to bridge repairs, permitting an additional 3% reduction in the proposed toll increases.

One speaker told the DRPA, ""As much as you say you get it, you obviously don't get it. If I earmark money for a new Cadillac and my roof starts leaking, I defer the car and fix the roof." It is comforting to see someone understand the point I made back in March. It would be even more comforting to see the two governors replace the DRPA members with people who understand the concept of civic trust and fiduciary duty while proposing to their respective legislatures changes in the DRPA charter that would restrict its activities and spending to Delaware River bridges and the PATCO system.

Once again, I was startled to learn something that a student shared on a course evaluation. According to this student, it is "unreasonable" for me to expect students to remember what they had learned in previous courses. Whoa! That is so shocking I cannot fathom where or how the student came to that conclusion.

Perhaps it should not have surprised me. In Partnership Taxation, there are numerous times when the material requires us to "look back" at concepts studied in Taxation of Property Dispositions, which is a prerequisite for Partnership Taxation. Yet far more often than not, students looked bewildered when I asked them to recall the process of dealing with nonrecognition, depreciation recapture, installment sales, gain realized, or other subjects from the previous course. Until now, I had thought it was for some reason other than what appears to be the case.

It appears that some students consider what is learned in a course something to be returned on an examination and then purged from the brain. The goal for these students, it appears, is to earn a string of grades that permits the hanging of a degree on an office wall. Excuse me, but I had considered the goal to be an immersion into and a mastering of tax law and tax thinking processes so that one could be an effective tax practitioner. That means carrying into practice, and implicitly, into subsequent courses, what is learned in the program. The point of earning a master’s degree, whether an LL.M. or M.T., is to demonstrate a mastery of the subject. Oh, how I wish for that three-hour, oral examination before a panel of faculty used in other disciplines to be incorporated into J.D. and graduate tax programs.

It’s not that I expect students to remember Revenue Rulings citations, or the intricacies of how mortgages are treated in like-kind exchanges. I’m encountering students who continue to confuse amount realized with gain realized. I’m finding that some students don’t understand that the disposition of an installment note can trigger gain even if the disposition is by gift. I’m discovering that some students don’t grasp that there is no depreciation recapture with respect to real property subject to straight-line MACRS. It’s not that these things aren’t being taught. They are. I’ve checked. The person teaching the course was a student in several of mine. He was an excellent student, he knows how I teach, and he brings the same effort and goals to the classroom. He simply has no way of preventing the "brain dump" in which some students seem to engage after the exam. Goodness, I’ve had students tell me, in response to my advice that they go back and review their notes on depreciation recapture, or nonrecognition, or whatever, that they deleted or tossed out their notes. On the other hand, some former students with more than a few years of practice tell me they still have their notes and outlines from my courses, so perhaps there is hope that the "brain clearing and note trashing" approach is confined and eliminated before it becomes a trend.

Though I usually expect students to learn tax problem processes by following how a problem is solved in class, noting the sequence of the analysis and identifying the relevant and necessary information, there are some instances in which I provide the process to the students in the form of a checklist, or what could better be called a step-by-step process list. In the basic tax course, for example, I do this with the overall process of computing the tax liability of a minor child. In Partnership Taxation, I do this for sales of partnership interests, partnership operating distributions, partnership liquidating distributions, and for some others.

The partnership checklists are long, in some instances requiring 15 major steps, some of which have as many as 6 sub-steps. Sequence is essential. Doing something out of order makes things a mess. For example, the taxable year must be brought up to date before other steps are analyzed. Yet students continue to jump to the first issue they see, which usually is the section 751 analysis, and they end up missing parts of the analysis and in some instances reaching erroneous conclusions. What is lacking is what I call academic discipline. The checklist must take precedence over the impulse that strikes the student when reading the problem.

One of the most serious difficulties I have noticed over the years is the application of the wrong checklist. Students sometimes use the sale checklist when the transaction is a distribution, and vice versa. The first step in the checklist, incidentally, is "What is it? Is it a sale? Is it a distribution?" I repeatedly try to hammer home the importance of using the appropriate checklist. Every semester 10 to 20 percent of the students use the wrong checklist. It kills their grade. For a few years, in the early part of this decade, the percentage of students using the wrong checklist declines. "Progress!" I thought to myself. I thought too soon. Three semesters ago, the percentage of students using the wrong checklist increased. But that isn’t the worst part.

Much to my surprise, last fall I noticed a few students who didn’t even bother to use any checklist. Then, this past spring, it became an epidemic. "Checklist? We don’t need no stinkin’ checklist!" What was written can best be described as disorganized snippets of disconnected repetition of rules or facts, smatterings of analysis relevant or not relevant to the question, and huge omissions from the sequences that should have been followed. The lack of academic discipline evidenced by these answers is overwhelming. Are these the same students who complain that they haven’t been told what the answers are? I do not know. Are these the same students who report investing one or two hours a week in a course for which my strongly recommended out-of-classroom study time is four to eight hours per week? I do not know. What I do know is that these are not the students earning A, B+, and B grades. If they were to earn the same grade in their other courses that they earn by totally disregarding my advice and instructions with respect to the use of checklists that I give them, they would not graduate. That would be good, because no client is well served by a practitioner who uses the wrong checklist or, worse, doesn’t use one at all and overlooks most of what needs attention.

One of those epiphany moments happened to me when I read a complaint on a course evaluation filled out by a student in the Graduate Tax Program. The gripe was one I have seen on some other evaluations. The student simply claims, "He doesn’t tell us what he wants the answer to be."

The epiphany is the realization of how deeply entrenched in rule memorization our students have become. They think that a tax practitioner, and some J.D. students think that a lawyer, demonstrates proficiency by reciting rules. The occasional token deference to application to facts might show up when one of these students confronts one of my assigned problems or examination question.

Somehow the students are not getting the message that the key to successful tax practice, or legal practice, is adapting a problem solving, or problem prevention, process to a set of facts. Because there are so many possible fact combinations that clients can bring to the practitioner, a process is far more valuable than a set of rules, and in many instances knowing the rules with nothing more is quite inadequate. If mere knowledge of rules were sufficient, computers could be programmed to replace practitioners.

When I try to determine how our students end up with a fixation on rules, my attention turns to high school, and even more significantly, to undergraduate education. Consider an example. In the K-5 grades, students begin learning arithmetic by learning some "rules." They learn that two plus three equals five. In a good school system, they learn why that is so. Students memorize multiplication tables, but with good teachers, they learn that there is a system, or process, underlying those tables, and the memorization slowly transforms into comprehension. When it is time to tackle the computation of 7,598,394 added to 9,430,484, it is time for a process, and not the memorization of a rule that gives the answer. Likewise, when asked to multiply 498 by 984, a memorized multiplication table, standing alone, isn’t worth anything. Students who study and learn the process of adding or multiplying do well. So what happens to turn good students into Graduate Tax Program participants who want the answer provided so that it can be repeated back to the instructor?

What happens, I think, is that some high school teachers and many, many undergraduate faculty reward the regurgitation of information. The "google" effect, the notion that all answers exist "on the internet," compounds the problem. It is easier to test what a student knows rather than whether a student can think. Often, the testing of a student’s ability to think is wrapped in the testing of a student’s expression of his or her feelings about an event, a book, or a work of art.

The more troubling aspect of this student demand for a slate of question answers provided before the question is asked, for lists of rules, and for grading based on the ability to "give back" the rules is that by the time they reach my classes they should have been broken of this bad academic habit. Understandably, some students might reject the message and yet succeed in passing courses until they reach mine. But I don’t think that explains the substantial proportion of students who have not yet grasped the idea that it is through process that one solves and prevents tax problems.

Perhaps an example from Partnership Taxation explains what is so disturbing. As complex as they are, the rules with respect to the sharing of liabilities boil down to two basic precepts. For recourse debt, a partner’s share is the portion that the partner would bear if everyone pursued their legal rights with respect to the debt. For nonrecourse debt, a three-step analysis is applied. I could ask, on an examination, for a repetition of those rules. That, however, is a waste of time. It only tells me that the student can copy information from his or her notes onto an examination paper. Rather, sometimes I present them with the following true-false question, or a variation: "Because limited partners have limited liability, they never share in recourse liabilities." The answer is false. I also ask why, because a guesser has a 50% chance of being correct. Why? Because a limited partner could guarantee a recourse debt. Alternatively, a limited partner may be obligated to contribute additional capital when called upon to do so under the terms of the partnership agreement. What is the most frequent response? True. The reason? Because limited partners are liable only up to the amount of their original contribution. That is nonsense, but I see it so frequently, in almost the same language each time, that I am convinced there is some old outline or other "study guide" floating around with this incorrect assertion. The better students think about the proposition and apply the rules to possible facts. The not-so-good students “look up” the answer, and in this instance, fall flat on their faces. Now, of course, they can read this post and repeat the answer back to me, assuming I ask the question again. But has these students learned to think for themselves? Or for their clients?

American Heritage Magazine, a subscription to which came to me as a gift from my younger sister the lawyer, recently published the results of a reader poll for America's Top 25 Heritage sites. I decided to match up my travel decisions with those results, to see how closely my interest in historical events and places aligned with the American Heritage Magazine list. This quick enterprise also provides me with hints for future travel.

I have visited, at least once and in several instances more than once, these places:

1. Smithsonian Institution Museums, Washington, DC
2. Gettysburg National Military Park, Gettysburg, PA
3. Statue of Liberty National Monument and Ellis Island, New York, NY
5. U.S. Capitol, Washington, DC
6. Independence Hall and Liberty Bell Center, Philadelphia, PA
7. Colonial Williamsburg, Williamsburg, VA
8. The White House, Washington, DC
9. Yellowstone National Park, WY
10. Arlington National Cemetery and Arlington House, The Robert E. Lee National Memorial, Arlington, VA
11. Historic Jamestowne and Jamestown Settlement, VA
12. Mt. Rushmore and Wounded Knee Battlefield, MT
13. USS Constitution, Boston, MA
14. George Washington's Mount Vernon Estate and Gardens and George Washington's Grist Mill and Distillery, Mount Vernon,VA
15. Bunker Hill Monument and Battle of Bunker Hill Museum, Charlestown, MA
17. Ford's Theatre National Historic Site, Washington, DC
18. Shenandoah National Park and Manassas National Battlefield Park, Manassas, VA
19. The Alamo at the San Antonio Missions National Historic Park, San Antonio, TX
20. Little Bighorn Battlefield National Monument, Crow Agency, MT
21. Valley Forge, Washington's Crossing, PA
23. Niagara Falls, Fort Niagara, NY
25. Old State House and Faneuil Hall, Boston, MA

I have not visited these sites:

4. USS Arizona and USS Missouri Memorials, Pearl Harbor, HI
16. Appomattox Court House National Historical Park, Appomattox, VA
22. The Wright Brothers National Memorial, Manteo, NC
24. Antietam and Monocacy Battlefields, Frederick, MD

It helps that at one time or another in my life I have lived in, near, or within a day's trip ride of most of the sites I've visited. There are interesting stories about most of the visits. Some occurred when I was but a child, thanks to my parents' interest in history and their willingness to teach their children about these places. Others occurred more recently, two within the past several months, thanks to a friend who also is willing to teach and share knowledge and who was surprised to learn that I had not been to those places.

Surely a "Top 50" list will appear because there are sites that many will claim should be on the list. For example, Promontory, UT probably would make the Top 50 list, along with Fallen Timbers, Ticonderoga, Yorktown, Sutter's Mill, and other places where important events in our nation's history took place. When that list appears, I'll figure out if I maintain that .840 batting average.

Recently, I finished reading David Cay Johnston's "Free Lunch," a powerful expose of how a small group of mostly wealthy individuals and, in some instances, their corporate enterprises, have milked the nation for their own gain. It took me some time to read the book because I could handle only one or two chapters at a time. It would have been far more pleasant had I found a book that persuaded me that my carping about how Congress does business was off the mark. Instead, I discovered even more reasons to understand my distaste for the modern American political process and the greed of those hardly in need.

Johnston answers a question that touches the core of what this nation should be about. How can it be, that in a nation as economically successful as ours has been, so many people are jobless, facing foreclosure and bankruptcy, lacking quality health care, and struggling to make ends meet? The answer lies in wealth and income distribution, which in recent years has tilted increasingly in favor of a very few at the expense of the great many.

Centuries ago, nobility enriched themselves through the use of serfs, slaves, and indentured servants. These workers put more into the economy than they withdrew, permitting the wealthy to accumulate more than they contributed. Though present-day America, and most other places, does not countenance outright slavery and servitude in a physical sense, Johnston demonstrates how, and this is my articulation, not his, economic slavery runs rampant.

It's worse than corporate executives pulling down compensation that is hundreds and thousands of times what the rank-and-file earn, despite the impossibility of an executive contributing hundreds or thousands of times more genuine value than does an ordinary worker. It's worse than the obvious biases in the tax system that favor the wealthy at the expense of the middle class, and, to a lesser extent, the working poor.

What has been transpiring behind closed doors, in corporate boardrooms and during high-end restaurant meals, in politicians' offices and on junkets to here and there is infuriating. Early in the book, Johnston describes how lobbyists persuade governments, or more accurately, legislators and agency bureaucrats, to tilt the marketplace in favor of their clients. The so-called free market isn't free, not only because government is reluctant to enact and enforce laws that protect the market, but also because government interferes with the market in ways that benefit a select few.

Some of the abuse is wrapped up in federal, state, and local tax systems. There are taxes imposed on the public that fund business enterprises that profit one or two or a few owners. There are taxes that go uncollected because enforcement is ignored, though excuse after excuse is paraded forth when and if the discrepancies are noted publicly.

Johnston does more than provide a list of abuses, abuses that range from subsidies for elite golf courses to fraudulent stock options, from corrupted deregulation to the sale of taxpayer-financed public assets like turnpikes and sewer plants to manipulation of the electricity market, and from government-assisted oligopolies to lying about the cost of the Medicare prescription drug legislation. Johnston presents these machinations not as would a lawyer using technical language and obscure references, but through stories. Where he can, he reveals what was happening behind the headlines unbeknownst to all but the few who were directing the efforts and the few who had no choice but to go along for the ride. One does not need to be a lawyer, an accountant, an actuary, or a private investigator to learn from Johnston's account of what went wrong. This book not only is an interesting read, a powerful indictment, and an understandable explanation, it also should be required reading during this election year.

Johnston's book was published late last year, which suggests it went to print no later than last fall. When the book appeared, the subprime mortgage crisis had yet to crescendo into the catastrophe it has become, gasoline prices were yet to explode upwards, and the other economic problems of recent months had yet to surface. Johnston, though, provides the explanation for how the economy has become such a mess. It's a wonder that the charade lasted this long. Unless the underlying causes of current economic woes are identified, understood, and eliminated, all of the stimulus payments, gasoline tax holidays, and other superficial distractions will do nothing to prevent America from back-sliding into a medieval system of economic nobles and economic serfs, or worse. One supposes that medieval serfs knew that they were being mistreated and understood why. One wonders whether most Americans understand why their economic situations are so shaky at best. The sad news is that it will take much more than reform of the federal tax system to fix things. The worst news is that much of what is proposed as reform is more of the charade.

It is said that teachers learn from students and that the students do not have a monopoly on the learning that takes place in a course. My experience corroborates that observation. One avenue of learning, for me, is the student evaluation form. Specifically, the comments sometimes cause me to recoil in horror.

A student in last semester's Graduate Tax Program Partnership Taxation course, in an effort to persuade those reading the evaluations that I am a terrible teacher, noted that one of my teaching flaws was the dedication of class time to "nuances." I suppose that this student thinks that tax without nuance should be the focus of graduate tax program education.

The disadvantage to anonymous student evaluations is that there is no way to engage this student in a dialogue that would assist him or her in restructuring his or her view of taxation so that in practice the student doesn't trip over the inattention to detail that dovetails with a lack of appreciation for the role of nuance in taxation. This anonymity is designed to protect students, though the fact no one sees the evaluations until grades are submitted and distributed makes any sort of disadvantage to identification quite unlikely. Somewhere, there is a student soon to be practitioner with LL.M. or M.T. who sneers at the value of nuance in taxation.

Nuance is the essence of taxation. Perhaps there could be taxation without nuance, but I teach to prepare students for the realities of what they must handle, and with limited time, exploration of some ideal world must be relegated to the Tax Policy course. For example, there is a difference between inventory items and substantially appreciated inventory items. The former are in play when a partnership interest is sold, whereas the latter is relevant when there are distributions. It's a distinction that trips up the inattentive. I focus on this difference in class, and often find a place for it on the exam. It is not alone, of course, but it is one of the simpler nuances to use as an illustration. Failure to respect this sort of nuance is the doorway to malpractice.

Perhaps there is some expectation that teachers will "dumb down" the tax law to some short sound-bite-like generalities that can be returned as such in a memorization demonstration. However and wherever that expectation is developed, it is the obligation of the tax teacher to destroy it. It is an expectation to be dashed. It's harsh, but necessary. It is disappointing to me that someone can reach a course as advanced as Partnership Taxation in a Graduate Tax Program and still be under the impression that those who omit or gloss over nuances are somehow better teachers than those who give nuance in tax its due.

What have I learned? I've learned that students can arrive in my courses with unrealistic expectations. And I have learned that I must add yet another one to the list of misimpressions that I specifically identify and target for destruction during the course. The clients of these present and future tax practitioners deserve no less.

In What is the Value of the Charitable Deduction for the Human Body?, David Brennan asks a good question. The standard answer is that one looks to the amount at which a willing buyer and a willing seller would exchange the item. Is there a market for human bodies? Apparently so, even though trafficking in them is illegal. Read this book review but be careful when, where, and with whom you do so. According to this analysis, try $45,000,000.

I can't resist making this observation. If the same concepts that generated the notion of component depreciation were applied, the human body would be worth the sum of the value of each of its ingredients. According to this computation, we're talking $4.50.