MauledAgain

My post yesterday on the unnecessary declaration of unconstitutionality of section 104(a)(2) by the D.C. Circuit in the Murphy decision brought this strong response from an unidentified reader:

Dear Mr. Maule,

I just read your post. With all due respect I recommend you take down your post, for the four reasons below.

Many people would have preferred that the court exercise judicial restraint and not reach the constitutional issue. That would have been less jarring. However,

1. It is crystal clear, from the legislative history, that congress intended its modifications to 104 to tax emotional distress damages.

2. I can not think of one case where a federal appellate court read a congressional statute in a way which directly contradicted crystal clear legislative intent -- without pointing to the constitution (even if just in dicta.) I challenge you to find such a case.

3. The court didn't necessarily even reach the constitutional issue. They said that *if* 104 taxes emotional distress damages then it is unconstitutional. They didn't definitively say that 104 taxes emotional distress damages. Ironically by confusing "the IRC is unconstitutional" with "if the IRC taxes emotional distress damages it is unconstitutional" you are doing the *exact* same thing you criticize the judges of doing! (confusing "ED damages are taxable income" with "if ED damages are taxable income then they will not be excluded under 104.")

4. A law professor should exercise greater diligence and restraint before criticizing three appellate judges, especially before claiming they are not competent enough to pass your introductory tax course.

Thank you,

In my response, I maintained accuracy, precision, and restraint:

Dear [initials removed],

1. Congress intended the amendments to section 104(a)(2) to free section 61 of the exclusion that overrode the inclusion in gross income of these sorts of damages in gross income by section 61. Section 104(a)(2) does NOT state that damages for reputation injury and emotional distress are included in gross income.

2. It is not a matter of the court misinterpreting Congressional intent. Congress did have an intent. That intent was to let section 61 include damages for reputation injury and emotional distress in gross income. It was not an intent to have section 104(a)(2) include these damages in gross income because section 104(a)(2) is not an inclusion provision.

3. At no point have I stated that the court held the IRC to be unconstitutional. That was a headline in a blog post by a non-tax law professor, and I presented it as evidence of the confusion sparked by the DC Circuit's opinion. The court stated: "Therefore, we hold §104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation." It also stated "Therefore, insofar as § 104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional." It did not use the term "*if*" as you assert. The term insofar does not mean "if." It is used by the Court to make certain no one thinks that it is holding the exclusion from gross income of damages for physical injury to be unconstitutional. If section 104(a)(2) is unconstitutional because it "permits" section 61 to tax damages for reputation injury and emotional distress, then so, too, every other provision in the Code is just as unconstiutional because they, too, fail to provide an exclusion. But no exclusion is required if, as the court asserts, these damages aren't income in the first place.

4a. I am amazed that you think I did not exercise diligence. I know this area of the law. I have taught it for more than two decades. I have written about it. The position that I took has found agreement among other tax law professors, with whom I engaged in an extensive discussion yesterday on a listserv. A collection of their thoughts can be found on Paul Caron's TaxProf blog at http://taxprof.typepad.com/taxprof_blog/2006/08/tax_prof_commen.html#more. Several almost mimic the point I made when I began the discussion yesterday morning (and that appears in the posting you dislike) about the lack of need to deal with the constitutionality of section 104(a)(2).

4b. Your assertion that I did not exercise sufficient restraint is not justified. I fairly criticized the logic, or lack thereof, in the opinion. I have read comments about this case that go beyond an analytical examination of the opinion and delve into the backgrounds and philosophies of the judges. They are not my comments, and those that are not public are not for me to share. Those that are public I leave for you to find, but I will point out, for example, several comments from the aforementioned posting on the TaxProf Blog, such as "I’m astounded that Judge Rogers joined it." and "By the way, wasn't the opinion' author they guy who lost a seat on the Supreme's for smoking dope?" I hardly think that my precision analysis lacks restraint.

Your email address suggests you are a law student. I do not know if you have taken the basic tax course, and I do not know what you learned or did not learn in that course. Any student who writes on an examination or other graded exercise that section 104(a)(2) is what taxes or permits taxation of damages for reputation injury or emotional distress would earn zero points. If a student performed at this level on every question, he or she would not pass the course. I did not say the three judges would not pass the course, I stated that "the grade that the court would earn in my basic tax course on this particular issue would not be a passing one."

The Murphy opinion is flat out a bad opinion, not only for the reason I have stressed but for other reasons, including those I also mentioned and those discussed on today's TaxProf Blog post cited above. It has also been roundly criticized by at least one tax practitioners. See Joe Kristan's commentary at http://www.rothcpa.com/archives/002087.php. It has been criticized by some of the nation's most renowned constitutional law faculty. E.g., Stephen Bainbridge at http://www.professorbainbridge.com/2006/08/this_ones_for_t.html, Orin Kerr at http://volokh.com/posts/1156261829.shtml, Marty Lederman at http://balkin.blogspot.com/2006/08/is-federal-tax-on-damages-for.html, and Eugene Volokh at http://volokh.com/archives/archive_2006_08_20-2006_08_26.shtml#1156283499.

If you do not mind, I would like to post your comments. It would be anonymous, of course, because you chose to be anonymous when you emailed me.

James Edward Maule
Professor of Law
Villanova University School of Law
http://vls.law.villanova.edu/prof/maule/myresume.htm

I suppose I am demanding when I insist that my students take great care with words and even greater care with their analysis. The Murphy opinion is a good example of what happens when murkiness trumps precision.

The email from Paul Caron, carrying a link to his TaxProf Blog post on the news, put my tax brain on full alert. "D.C. Circuit Holds § 104(a)(2) Unconstitutional Under 16th Amendment; Not All Receipts Constitute 'Income'" isn't the sort of news that circulates in the tax world on a regular basis. Without doing extensive research, I quickly thought to myself that it had been decades since a federal court had invalidated a substantive federal income tax law provision on constitutional grounds. That was in 1972, when the Tenth Circuit, in Moritz v. Commissioner, 469 F.2d 466, reversed the Tax Court, held that the then dependent care deduction violated the due process clause because it was unavailable to unmarried men, and accordingly permitted the taxpayer, an unmarried man, to claim the deduction for which he otherwise had qualified. It's not surprising that invalidation of federal income tax law substantive provisions is a rare occurrence, in part because courts avoid deciding cases on constitutional grounds unless there is no other avenue of resolution, and in part because the federal income tax law has been crafted in ways that obviate most constitutional challenges. Only once has the Supreme Court invalidated a substantive federal income tax law provision, and that was in 1920.

So it was with great interest that I, and others, including not only tax lawyers but also those specializing in constitutional law and other areas of the law, turned to Murphy v. United States, No. 03cv02414 (D.C. Cir. Aug. 22, 2006). As I read the opinion, I cringed. Here's why.

The case was brought by a taxpayer who had brought an administrative action against her former employer and recovered compensatory damages for emotional distress and loss of reputation. She included the damages in gross income and then sued for a refund. She made two principal arguments. First, she argued that she was entitled to exclude the damages from gross income because they were "on account of personal physical injuries or physical sickness" and thus within the exclusion provided by section 104(a)(2) for such damages. Second, she argued, in the alternative, that "[section]104(a)(2) is unconstitutional insofar as it fails to exclude from gross income revenue that is not 'income' within the meaning of the Sixteenth Amendment." The district court rejected her arguments and she appealed.

On the first argument, the D.C. Circuit agreed with the district court and the IRS. Murphy had received damages "for mental pain and anguish" and "for injury to professional reputation." Because the statute limits the exclusion to damages received on account of physical injuries and not damages manifested by physical injuries, Murphy's reliance on section 104(a)(2) as justification for not being taxed on the damages was rejected. Properly so, I must add.

On the second argument, the D.C. Circuit disagreed with the district court and the IRS. The court reasoned that the Sixteenth Amendment restricts the income tax to the taxation of "gains" and "accessions to wealth" and prohibits taxation of "returns of capital." The court then explained that the question was not one of return of capital, "except insofar as Murphy analogizes human capital to physical or financial capital" but whether "the compensation she received for her injuries is income." To deal with this question, the court asked "In lieu of what were the damages awarded?" The court answered its question as follows: "[T]he damages were awarded to make Murphy emotionally and reputationally 'whole' and not to compensate her for lost wages or taxable earnings of any kind. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income." Accordingly, said the court, "it would appear the Sixteenth Amendment does not empower the Congress to tax her award."

The court then noted, however, that this conclusion was tentative because it needed to explore the "commonly understood meaning of the term" "incomes" in the Amendment that was "in the minds of the people" when they adopted it. Examining the House Report on the Revenue Act of 1918 and a Treasury Department ruling issued in the same year, the court decided they strongly suggested that "incomes" does not include amounts received solely in compensation for a personal injury and unrelated to lost wages or earnings. The court noted that in 1922 the IRS opined that "there is no gain, and therefore no income, derived from the receipt of damages for ... defamation of personal character. ... If an individual is possessed of a personal right that is not assignable and not susceptible of any appraisal in relation to market values, and thereafter receives either damages or payment in compromise for an invasion of that right, it can not be held that he thereby derives any gain or profit." The court then stated, "Note that the Service regarded such compensation not merely as excludable under the IRC, but more fundamentally asa not being income at all."

Based on this analysis, the Court then stated, "Therefore, we hold [section]104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation." It then remanded the case with instructions to the district court to enter an order and judgment in favor of Murphy's refund claim.

Was the court correct in concluding that damages received for injury to reputation and for emotional distress are not "incomes" within the meaning of the Sixteenth Amendment? Perhaps.

Some think not. It has been suggested that the damages are not an "accession to wealth" and that the court did not explain how they are not so. In a footnote, the court seems to endorse the taxpayer's argument that compensation for harm to one's personal attributes, is "but a restoration of the status quo ante" analogous to a restoration of capital, and that "in neither context does the payment result in a 'gain' or 'accession to wealth.'" It also has been suggested that if damages are not an accession to wealth because they simply replace "human capital," which is what the court seems to suggest, then the same conclusion must be reached with respect to wages, which also represent the conversion of human capital into dollars. I hasten to add that the difference, that one is involuntary and the other voluntary, is meaningless, the law being well established that a person who receives more money for property than he or she paid for it has gain, whether the receipt comes from a voluntary sale or an involuntary conversion such as condemnation.

Several commentators have noted that the D.C. Circuit failed to determine if the income tax applied to these damages was a direct tax, for if it is not, then it need not pass muster under the Sixteenth Amendment. It also has been suggested that the authorities cited by the court don't stand for the propositions attributed to them. That is a debatable point. For the moment I will leave these concerns aside. Why? Because the court's "incomes" analysis is isn't, by far, the worst part of the court's opinion.

Where the court goes haywire is its conclusion that section 104(a)(2) is unconstitutional. This conclusion reflects a total misunderstanding of how the Internal Revenue is structured. There is no need to comment on, or decide, the constitutional validity of section 104(a)(2), and doing so opens up a hornet's nest of problems. Here's why.

Section 104(a)(2) is an exclusion provision. It says in effect, as do all other exclusion provisions, "Even though something would otherwise be included in gross income, this particular thing is not." Thus, if something is not otherwise included in gross income, there is no need to examine exclusion provisions. They are irrelevant. What makes something included in gross income? Section 61 states that unless an exclusion provision applies, anything that is income is included in gross income. So the question becomes one of determining if something is income. What is income? That question is asked of law students early in the basic federal income tax course. After working their way through hypothetical after hypothetical, they conclude that there needs to be some sort of increase in economic wealth that is clearly realized. Overshadowing this analysis is the Sixteenth Amendment's prohibition on taxing something that is not within the term "incomes," namely, something that is not a gain or accession to wealth. It would be unconstitutional for Congress to require taxpayers to include in gross income, and pay tax on, the repayment of a loan for which the taxpayer had never taken a bad debt deduction. Why? Because there is no gain or accession to wealth when a person receives back the money they lent to another person.

So if, as the court concludes, correctly or incorrectly, damages for injury to personal reputation and emotional distress are not accessions to wealth and thus not "incomes," that ends the matter. If these damages are not "incomes" they cannot be income. If they cannot be income, they cannot be gross income. If they are not gross income, exclusions are irrelevant.

When the IRS took the position that Murphy's damages were taxable, it essentially made a two-step analysis. First, the damages are otherwise included in gross income. Second, section 104(a)(2) does not change that result. When the court rejected the first step in the IRS position, it mooted the second step. Section 104(a)(2) does not include the damages in gross income. It is not an inclusion provision. Therefore, because it does not make the damages taxable, it cannot be branded as unconstitutional for making the damages taxable.

Understanding the difference between an inclusion provision such as section 61 and an exclusion provision such as section 104 is one of the "core" achievements that a student must demonstrate in order to earn a passing grade in the basic federal income tax course. Another, for example, is understanding the difference between an exclusion and a deduction. There are others. The point is that a student who does not understand the precise nature of these provisions is going to get into trouble as he or she seeks to build a broader understanding of the tax law on what would end up being his or her flawed foundation. The same holds true for a court. By failing to understand the difference between section 104(a)(2)'s rule as an exclusion provision that is relevant only if there otherwise would be gross income and section 61's role as an inclusion provision, the court decided a constitutional issue that did not exist, did not need to be decided, and that as decided, is decided incorrectly. As I wrote yesterday to a listserv of tax professors, the grade that the court would earn in my basic tax course on this particular issue would not be a passing one.

It's worse. The combination of the court's "human capital" analysis and its declaration of constitutional infirmity in section 104(a)(2) will encourage the tax protest crowd to treat the decision as justification for the invalidity of imposing an income tax on wages. As Stephen Bainbridge put it, "Let a 1000 lawsuits bloom. Every tax nut in the country is probably getting ready to file suit challenging some tax or another using Murphy as a template." If these cases come before the same panel of the D.C. Circuit that decided Murphy, we'd get an interesting view of a court either agreeing with the tax protestors and spawning a tax crisis of huge proportions or twisting and shifting in an attempt to dig itself out of the mess it has created. Even folks who should know better are mischaracterizing the case: Is the Internal Revenue Code Unconstitutional? No, it isn't, and the post makes that clear, but the headline is more than a wee bit over the top, and certain to attract tax protesters the way sugar attracts ants.

There has been speculation on how the court could have gone so far off kilter. The suggestion that the judges cannot read statutes, or cannot figure out the tax statute, may or may not be correct. Their biographies on the D.C. Circuit's website suggest that they have the education and experience that would have exposed them to statutes, though probably not the Internal Revenue Code. But we're not talking here about complex portions of the Internal Revenue Code. We're talking about very, very basic concepts learned early in the basic tax course.

What happens next?

Hopefully the government asks for a rehearing by the D.C. Circuit and the court gets it right. There's the remote chance that after reading blog commentary the three judges realize the mess the opinion creates, withdraw it, and revise it. The former is much more likely than the latter.

If things remain as they are, expect the government to take this case to the Supreme Court. Though there has been some disagreement about the probability of that Court taking the case, I think that it will. Perhaps it won't get it right, but I think there's a far better chance that it would, as for example, does Orin Kerr. There also would be the opportunity for tax lawyers and tax professors to file amicus briefs, something that I don't think happened in the Tenth Circuit because this case seems to have flown in under the radar.

Stay tuned. As these things go, it's early and much more awaits us.

My posting the other day about ranking tax faculty by relying on SSRN downloads prompted some rapid and thought-provoking responses. Somewhere along the way the facetiousness of my proposed "Ranking Tax Faculty by Tax Management Portfolio Authorship" effort was lost.

Ted Seto, who extracts the tax faculty rankings from the SSRN data, shared some perspectives and asked some questions. He noted that Tax Management portfolios are not held in the same high regard in some portions of the academy as are articles. He's right. That's one of my pet peeves about the rankings game and the evaluation of law faculty. Treating law review articles as superior to all other forms of publication is a an anachronistic remnant of a dying elitism. Though there are good, but easily countered, arguments that some forms of tax publication, such as blogs or listserv postings, aren't as carefully reviewed as are law review articles, it makes no sense to consider treatises, portfolios, and articles in practitioner journals such as Tax Notes and Journal of Taxation to be inferior to something published in a traditional academic law journal.

Ted also pointed out that court citation counts don't interest most academics. Again, he is quite right. The reason probably is that many, perhaps most, law review articles are not cited by the courts, which is in and of itself telling. Why be interested in something that sends an unwelcome message?

Ted also pointed out that reputational surveys, which lie at the heart of some rankings, such as the ones done by US News, are biased by extraneous factors. If a school's athletic teams do well, somehow that translates into academic prominence. Academics on the West Coast claim that East Coast schools do better in the rankings because of their location, press coverage, and similar factors.

Ted asked me: "What objective proxy measure would you use instead? Or would you really prefer to stick with reputational surveys?" Here's my reply:

Ted,

I think you and share similar concerns. The focus on academic journal articles to the detriment of books and other publications, to say nothing of digital course materials, etc., skews the rankings. I confess that to placate my dean and colleagues I periodically (no pun intended) put something into an academic journal. The impact of university name on program rankings is very real, and another source of skewing. Reputation surveys canvas opinions, which are worth, well, sometimes a lot and often not much.

Why have rankings? Supposedly to give various groups some sort of baseline against which to make decisions. Prospective applicants need information, hiring partners need information, law schools seeking faculty need information. So perhaps there should be different rankings based on the group seeking information. Not that I'd go so far as to
rate "party law schools" (as is done for undergraduate schools) to assist prospective applicants, but things such as percentage of students receiving scholarship financial aid, work study opportunities, and the like would be factors useless to hiring partners. On the other hand, bar pass rate should be a factor with meaning for most rankings
constituencies, and that's a statistic that is more objective than many of the others.

For me, in measuring faculty (individually or collectively, for different purposes), I want information on what faculty should be doing: teaching effectiveness, publication, and service. The first and third I'll leave for now. When it comes to publication, what is the purpose? To enrich teaching? Then its measure is within the measure of teaching
effectiveness. Is it to get attention for the school? Where? Among whom? Is it to contribute to an academic environment? I think the point of publication is to demonstrate to the various constituencies that a school's faculty can think, express itself, and be persuasive. What's the best test of its effectiveness in doing so? The extent to which
their publications (of any sort) are favorably quoted, reprinted, republished or cited by courts, journals, mainstream media, blogs, etc. and the extent to which their publications are so quoted, etc., as reference sources. In contrast, I'd subtract for cites and quotes that demonstrate serious flaws in a publication, such as a court's dismissal
of an article because it omits consideration of relevant precedent.

Thus, mere cite counts is insufficient, for the same reason SSRN downloads don't tell us why there was a download or what someone's reaction to the downloaded article was. To do what I propose would require resources, of time and/or money, to sift through the cites so that they could be evaluated as positive, neutral, or negative. It's not
a matter of looking for the A publications (the universally accepted treatise, for example) or F publications, for they, like student grades, announce themselves. It's in the middle that it matters, and so the measure of quote/cite/etc. would need to be carefully done.

As you can tell, I would consider all publications. So there would need to be some interesting research. I've yet to figure out how to identify all the people who have cited/quoted me in the digital world. Every once in a while I come across something very positive that I didn't know was "out there."

One idea that occurs to me, that probably will never fly, reflects the fact that at many schools faculty are subject to a merit compensation system. So perhaps some sort of "citation bank" where faculty provide their publications and discovered cites, perhaps supplemented with cites found by others (student research assistants independent of the school?). Then this pool of information would be available not just to those doing rankings but also to Deans and administrators seeking a better measure of faculty value beyond "I published an article in X" or "I have z downloads" or "it was cited y times." So we could factor out the times I cite myself, or the 20 downloads of someone's article by the entire faculty of his or her institution!

The fight over what to count means something with compensation committees. I've been there and I've skirmished, though because of what I publish it never has been an issue because there's enough traditional stuff to let administrators defer the question of how to value the blog, for example. But for someone doing rankings, there's no fight ... the rankings are created and then people can argue about its value, and those who make good points contribute to refinement of the rankings system (as I think has happened with U.S. News to a small extent).

If the goal of faculty publication is simply to get the school's name "out there," then a variant statistic would be relevant though perhaps of dubious quality. As I've mentioned to my faculty, a portfolio sent to 10,000 subscribers gets something in front of far more people than an article published in a journal with 300 subscribers. Of course, we don't
know if 1 person or 20 people share a portfolio or article, and we don't know if a subscriber to her law school's journal reads a particular article in it. So mere numbers are as unhelpful as mere cite counts or download statistics. At the moment, I remain fond of my "analyzed quote/cite/etc" approach.

I must hasten to add that I appreciate your SSRN download analysis. It is information, and it has its uses. But it also has its limits, and my concern is that unknowing folks (e.g., non-tax faculty) would consider it to be much more than what it is. My Dean wanted to know why and how we were behind Chapman, and I responded that somehow we were ahead of Florida. Tax folks would know that those three are in inverse order, but non-tax people might not.

Mike McIntyre made several observations. Though he suggested that they might be "perhaps useless," I find them helpful, perhaps because I agree with them to some extent. One, for students selecting law schools, the US News rankings have credibility, a sina qua non of any rating system. Two, a rating system should reflect its audience, but it might not make sense to invest resources into a system that helps faculty making lateral moves pick their destination school. Three, it's difficult for schools to make significant moves in the U.S. News rankings but it probably is a bit easier than it was before U.S. News rankings appeared, when national reputations were "nearly immutable." Four, there may be some East Coast bias in the rankings, but West Coast schools are beginning to attract "top students and top scholars" and have "caught up a lot quicker" because of U.S. News rankings. Five, bar passage and job hunting success might be sensible factors in theory, but in reality few schools' "actual worth fluctuates anywhere near as much" as those factors do. Six, counting books and articles says little about quality, but because no one can agree on how to measure quality, we end up using things that can be counted, though counting is sufficiently flawed that reputational surveys may be better.

I addressed several of Mike's points:

The serious flaw in U.S. News or any subjective evaluation-based ranking is that it polls people who are not necessarily aware of what changes have been taking place in legal education. How many of the polled judges and practitioners who graduated years ago will shift their perception from what the relative positions were 20 years ago? In other words, much of the pre-U.S. News lock-in that you describe continues to exist, to a great extent, in the subjective polling. When reputation numbers are inconsistent with other information, which should be considered suspect? Depends on the numbers, I suppose. There are some schools, as you point out, that have changed significantly, but are those changes showing up in US News as they should? Some are. Some aren't.

As for rankings audiences, the other group, perhaps, of substantial size with interest would be employers. But perhaps their minds are already made up, and no ranking will convince them otherwise.

Of course, law faculty are interested, not only for issues of lateral movement and even (perhaps) law review submission selection, but for purposes of convincing central administration that their efforts in upping the school's ranking warrants more money staying at the school and not going to main campus. Now to persuade some Deans that this proposition has some merit ....

In turn, Mike agreed that there is a flaw in the reputational aspect of the rankings, but it probably was not too important because in making decisions, law school applicants react to reputation and not to the outcome of objective measurement. That applicants behave in this manner is evident from the extent to which they will pass by lower-tuition high quality state schools for more expensive prestigious schools. Mike also noted that the ignorance of survey responders with respect to many schools is muted if there are sufficient survey responses. I'm not so sure of this. Ten times as many ignorant responses doesn't filter out the nonsense. Mike agrees, though, that there is a bias, as demonstrated by the high ratings that a Princeton Law School gets in some tests, simply because Princeton has a fine reputation. Mike wonders why the academy would do rankings for employers, and I agree. I'm not proposing that law schools do the rankings, I'm just suggesting that if employers, or someone in the private sector on behalf of employers, did a ranking the reflected the needs of employers, translate, the needs of clients, we might see something very different, and surely not paying much attention to SSRN downloads though perhaps paying a bit of attention to Tax Management portfolios. Mike sees a risk in employer-focused rankings, because law schools might succumb to student pressure to "teach to [those] ratings," but I'm not convinced that's in and of itself a bad thing. Employers have as much incentive to tell law schools, in effect, "this is what we need you to provide to us" and law schools seem to have to tell employers, "this is how we educate lawyers-to-be so figure out how to adapt your practice to their arrival in your offices." Mike closes by noting that "[a] 'objective' rating system that truly measured quality would be a disaster for a large number of schools." Do tell. That's my point. Using the wrong ranking masks problems. As Elliott Manning put it: "In short the ratings are like the drunk looking for the car keys under the street light, instead of the middle of the block where he dropped them--because the light is better there.  This also part of the national trend of judging schools by scores on standardized tests, because they are easier to measure--never mind whether they actually teach students to think."

Finally, Paul Caron weighed in with a defense of rankings based on SSRN downloads. Because the SSRN rankings tend to correlate with "the right top schools," Paul concludes that "most people would find SSRN's tax faculty ranking more persuasive" even though I claim that ranking by Tax Management portfolio author is "no more or less meaningful than any other tax faculty ranking." Paul agrees that SSRN is incomplete, but defends it on the basis that 3,500 law faculty have posted 11,500 papers on SSRN. Paul is correct that the response is "not to go in the other direction and focus on the offerings of a single publisher." I agree. As I noted at the beginning of this post, there was an intended facetiousness to my rankings. Of course ALL publishers should be considered. Think not only Tax Management, but the various editions of Tax Notes, the practitioner journals, and all the other forums in which good, sound legal reasoning is displayed. There may be 2.4 million SSRN downloads, whatever that measures, but how many millions of times has a publication that is not an SSRN article been opened and used by someone trying to solve or prevent a tax or legal problem?

I think Paul agrees, because he quotes his previous proposals to use "all faculty publications" and to weigh them in some manner that reflects utility and value. He suggests that an extensively quoted publication should carry more weight than a mere cite in a footnote. Of course. Here's the challenge. Even if the resources are acquired to do such a ranking, it will be resisted, chiefly by those who don't do as well under it, on the ground that "we've been using SSRN-download rankings and why change something that isn't broken?" That's why I prefer to abandon SSRN-based rankings so that the advantage it obtains by showing up early in the game doesn't overshadow the fact that it shows up early because it quick and easy. The defense of using SSRN-download rankings because anything is better than nothing ought not apply because there are all sorts of anythings and somethings that are not preferable to nothing.

I'll close with my two responses to Paul's commentary. The first deals with a systemic SSRN flaw:

SSRN is biased in favor of recent articles, having almost nothing, as best I could tell, that was published before the mid to late 90s. Some of the most influential pieces of tax publishing, whether in article form or otherwise, was generated long before the mid 90s.

The second summed up the point I tried to make on Friday:

Don't take my facetious jab at SSRN rankings too seriously. The point of my post wasn't to advocate using one publisher, but to

(a) count everything, not just the self-glorified world of articles, beyond which the world has moved,

and

(b) count something that has meaning in terms of influence, such as citations by courts and other authors, filtered for approval and disapproval, rather than download numbers that can easily be bloated, don't tell us if the downloaded item was read, and, most importantly, don't tell us anything about the quality of the downloaded item.

The point of my post was an exaggerated display of the "easy to count, therefore gets attention" game that is going in with the rankings game, whether by US News, Leiter, or any of the others, except for a few attempts here and there to introduce something of greater value.

In a world where "money talks," perhaps a fun way to figure this out would be a web site that offered free subscriptions to lawyers, gave them $1,000,000 in non-redeemable credit, provided a list of all law faculty publications, and asked the lawyers to spend the $1,000,000 as though they were purchasing what they needed for whatever it was they were doing as lawyers. Assuming the Justice Department didn't brand such a technique some sort of on-line gambling national security threat, it might trigger a high response rate by combining the concepts of money, lawyers, and games. So what would they buy? Yes, I know that some would argue that some truly valuable legal scholarship would fare badly in such an experiment, and my response would be, "Why?"

Paul Caron's post today of Advice for the Incoming Law School Class of 2009 on TaxProf Blog, and its reference to the columns in Villanova's Gavel Gazette sharing what Paul called "thoughtful advice for law students," reminded me that I ought to update and repost my Maule on Legal Education posting from September 1, 2004 every year at this time. There's now a sixth column in the series, and the URLs need to be revised because the school juggled the content on the website where the columns are archived.

With my son in the Class of 2009 at Michigan, I have yet another reason for directing another group of law students to things my students claim they wish they had been told before they set forth on their legal education journey. It should be nice for him to have the essence of those oral discussions bundled into a coherent written package. So here they are, in chronological order:

Money for Nothing and Work for Free?, The Gavel Gazette, at 1 (March 5, 2001)

Crumbling Myths & Dashed Expectations, The Gavel Gazette, at 1 (Sept. 3, 2002)

Learning to Teach and Teaching to Learn, The Gavel Gazette, at 1 (Sept. 29, 2003)

Time CAN Be on Your Side. Or at Least by It, The Gavel Gazette, at 1 (Feb. 16, 2004)

Doing Puzzles While Learning & Practicing Law, The Gavel Gazette, at 1 (Sept. 20, 2004)

Up All Night = Grades Go Down, The Gavel Gazette, at 1 (Nov. 7, 2005)

Are they worth reading? Should busy law students, particularly frenzied and disoriented first-year law students, invest perhaps 15 minutes in what I have to say? Consider that there have been three republications in other media, two have been reprinted, one has been quoted, at least six law faculty at other schools distribute one or more of them to their first-year students during orientation or the first week of class, and collectively they have been cited at least 10 times.

A close look at the publication dates reminds me that the seventh in the series hopefully will appear this fall. I haven't yet picked from my topic list.

Buried in a column in the Sports section of this morning's Philadelphia Inquirer is a story that offers all sorts of issues for examinations in several law school courses. For me, it speaks volumes about how the left hand and right hand communicate.

The folks over at TaxBrain, which describes itself as "Your Home for Online Tax Preparation and e-Filing," came up with an ideal for promoting their services. OK, maybe their advertising agency or other consultants had this brainstorm.

Picture the race track at Altamont, California. Track officials, drivers, and other staff are doing whatever it is they do on days when there are no races. Suddenly a man jumps into a race car and starts to drive it. Don't mess with NASCAR, folks. Using tow trucks, employees put up a road block. A NASCAR driver ran over to the car, dragged the man out of it, and wrestled him to the ground.

It's not recommended that citizens try to drag car-jackers from vehicles, but under these circumstances, those seeking to stop and apprehend the would-be thief had circumstances, numbers, and opportunity on their side. The problem was that they didn't have information on their side. The guy who took the car was an actor. No one noticed, it appears, the cameras that were filming the action. They were filming a commercial for TaxBrain. Nice, but no one had bothered to tell the track officials, drivers, and other personnel on the field at the time.

The columnist closed his short account of this episode with this witty remark: "The drivers had not been told, apparently for fear it would tax their brains." The lawyers and law students can comb through this event to find the legal questions, and, yes, the tax issues.

I don't know if, after everything calmed down, they returned to filming the scripted commercial. If the cameras were running and caught everything, perhaps they ought to run what they have as the ad. Phrases such as "you can't run away from the tax collector," "run-away taxation," "don't let anyone block your attempt to file," "you can run but you can't hide," and "here's what happens when communication between taxpayer and tax advisor breaks down" might be put to use.

It's a good thing they weren't using an airplane rather than a race car. Imagine an actor taking off in a plane at an airfield where the staff hasn't been told what's happening. The sight of the fighter jets would not be pretty. Might make a bizarre tax return preparation commercial.

Next time they ought to have the actor jump on someone's horse. Saddled by taxes? Rein in those tax liabilities? Chomping at the bit for that refund?

And who said tax ads couldn't be humorous? Or at least attention-grabbing?

As the latest trend of "ranking" law schools and law faculty by using the number of downloads of papers from the Social Science Research Network website became more popular, it didn't take long for the Monthly Rankings of the Top 15 Graduate Tax Faculties (as measured by the number of SSRN downloads) to appear. In the latest edition, Villanova ranks ninth, having moved up one place since the last monthly ranking. With 468 all-time total downloads, Villanova is only 20 downloads shy of eighth place, but far out of first place, held by Michigan with a total of 4,672 downloads.

Curiosity took hold. Two of my articles are posted on SSRN. None of the others are on that site, perhaps because they are older, perhaps because no one responsible for the posting knows they exist, or perhaps because they don't meet some prerequisite of which I am unaware. My guess is that they are too old. Curiosity became even stronger when I discovered that no one has ever downloaded either article. Wow, are they that useless, uninteresting, and unwanted? Of course not. One of the articles, "Instant Replay, Weak Teams, and Disputed Calls: An Empirical Study of Alleged Tax Court Judge Bias," published in print at 66 Tenn. L. Rev. 351, had been digested in one tax journal, extensively quoted in one case and another tax article, and cited in at least 20 other articles, including one by the then Chief Judge of the Tax Court. The article inspired several other authors to examine the alleged bias issue from other perspectives. The other article, "IRS Hot Asset Reg Re-Tuning Falls Flat, Causing Sharp Pain for Partner Estates," published in print at 94 Tax Notes 751, was republished in full in another tax journal and has been cited in at least two other tax articles and in a law casebook teacher's manual. It also brought a phone call from a Treasury Department attorney working on the area of tax law addressed by the article.

So people are reading these articles, but they're not being downloaded from SSRN. Why? My guess is that it's easier to get the article from sources such as LEXIS and Westlaw. It may also be that these articles did not show up on SSRN until after they appeared in print.

So if I'm not contributing to the 468 downloads of Villanova papers, who is? I checked SSRN for downloads of papers written by my tax colleagues. One colleague has seven articles on SSRN, of which four have not been downloaded. The three that have been downloaded include one that is pending publication, so SSRN is the only source for it at this point. The downloads of the other two articles that have been dowloaded may have taken place while they were awaiting appearance in print. The downloads of the three articles total 139, almost evenly distributed. That's not quite one-third of 468. So I turned to another tax colleague, who has written books, book chapters, and articles by the bucket load. He has just one paper posted, and again I suppose it's because his other articles are too old or perhaps were not submitted to SSRN for some other reason. The one posted article has been downloaded 330 times. Wow. A close look provides what I think is the explanation. The article is an examination of the Sarbanes-Oxley Act and its impact on excessive executive compensation, published by Pennsylvania Bar Institute. It's not an easy article to find. So those who are interested will turn to SSRN. When the total downloads of 139 for one colleague's three articles is added to the 330 for my other colleague's article, it comes to 469. That's one more than 468, probably because of a download since the most recent statistics were compiled for the Monthly Rankings of the Top 15 Graduate Tax Faculties.

Those rankings are what they say they are, namely, rankings by SSRN downloads. What does such a ranking tell us? Not much. It doesn't tell us how often an article has been republished, digested, quoted, or cited. It doesn't tell us anything about a faculty member's books, book chapters, or other publications.

The rankings game has become an epidemic of nonsense in our post-modern world. Many of the folks who provide rankings do so to make money, with U.S. News and World Report taking the prize, but sharing the field with outfits such as Philadelphia Magazine, which pops out now and then with a "Best of Philly" rankings of restaurants, hospitals, doctors, and all other sorts of places, events, and people. Several law-focused publications try to identify "Superlawyers" and "Top Law Firms." Trying to find statistical "proof" of what is nothing more than opinion for some reason attracts enough interest to generate income for the enterprises doing this for profit. To his credit, Ted Seto puts together the Monthly Rankings of the Top 15 Graduate Tax Faculties as a public service and isn't generating even one tiny penny for his efforts. I suppose he does it because it's fun and no one else was doing it.

So I am going to start my own tax faculty rankings. It won't be limited to graduate tax faculty or even law school faculty. It will focus on what I consider to be a very important aspect of what tax faculty should be doing for their schools, law or otherwise, namely, bringing them to the attention of the tax and legal world. If downloads from SSRN are supposed to be some indication of a law school's "visibility" then my new rankings surely will measure "visibility."

Here's my reasoning. The more people who see a faculty member's name attached to a written publication that they are using, the higher the visibility of the faculty member's law school, the name of which accompanies the faculty member's name. If SSRN downloads are primarily by law faculty and other academics, the universe for SSRN tax article downloads is somewhat limited. On the other hand, the universe of tax practitioners is much larger, perhaps by several orders of magnitude. So, let's measure visibility in that world. The highest quality scholarly publication, designed as such, available to tax practitioners is Tax Management's three portfolio series. Thorough, copiously footnoted, practical, analytical, and replete with conceptual explanations and suggested ways of dealing with predicted upcoming legal issues, these books are the gold standard of tax writing. Yes, that allegation is going to bring all sorts of criticism, but the level of peer review and professional editorial review that is added to the experience, knowledge, and understanding of the authors surpasses anything that shows up in academic journals save for the few that are faculty-edited. Because so few tax articles find homes in academic journals, compared to other areas of the law, it doesn't hurt to measure the rankings from a place where tax is naturally at home, a place where tens of thousands of tax practitioners and tax academics regularly go to Tax Management portfolios to work through a tax question.

So here goes, using the Tax Management author publication list, which is a few months out of date. When I have the time, I might count citations to the portfolios that appear in cases, Department of Justice briefs, and articles.

Note: I omitted overseas law schools. An * indicates a tax lawyer who is on the faculty of a school other than a law school.

Villanova 15 portfolios (Maule 14, Mulroney 1)
Iowa State 6 portfolios (*Harl (Prof of Agriculture, Prof of Economics) 3, *McEowen (Prof of Agricultural Law) 3)
Southern Methodist 4 portfolios (Lischer 3, Campfield 1)
Suffolk 4 portfolios (Polito 3, Rounds 1)
Emory 2 portfolios (Pennell 2)
Georgia 2 portfolios (Hellerstein 2)
Houston 2 portfolios (Streng 2)
Michigan 2 portfolios (Avi-Yonah 2)
Washington and Lee 2 portfolios (Danforth 2)
George Washington 1 portfolio (Brown)
Florida State 1 portfolio (Dodge)
Nova 1 portfolio (Gilmore)
Washington 1 portfolio (Huston)
John Marshall 1 portfolio (Kennedy)
Miami 1 portfolio (Manning)
Nova 1 portfolio (Marty-Nelson)
Quinnipiac 1 portfolio (Wenig)
New York University 1 portfolio (Shaviro)
American 1 portfolio (*Williamson (Prof of Taxation, Director of Graduate Tax Program in Business School))

So what do these rankings mean? Nothing more than what they are, namely, an insight into how many practitioners (and the occasional academic) are seeing the name of a school when they turn to Tax Management Portfolios for high quality analytical legal guidance in resolving a tax problem for a client or mapping out a tax strategy for a client. It's a ranking no more or less meaningful than any other tax faculty ranking.

While reading this morning's Philadelphia Inquirer, my eye caught a headline,H&R Block to discuss tax-refund lending, probably because it had the word "tax" in it. H&R Block, the nation's leading tax return preparation enterprise, has been lending money to clients to whom federal income tax refunds were due. The company is not alone in this practice, but because of its size and nationwide presence, it gets a wide and bright spotlight cast upon it.

This morning's story focuses on a narrow aspect of the longer tale. The company agreed to meet with he managers of three state pension funds owning H&R Block stock to discuss the company's lending practices. The managers think that the lending activity puts their investment at a higher risk. While a tax return preparation company might conclude tax refund anticipation loans are good business, third parties might disagree. Recently Liberty Tax Services of Virginia Beach was told by First Bank of Delaware that it was ending a long-term contractual relationship because Liberty had decided to make riskier loans that the bank went so far as to describe in terms of "legally questionable."

Two questions popped up as I read the article. First, is it appropriate for the company that is preparing the tax return and thus calculating the refund to make loans based on that refund? Second, is it appropriate to charge interest at the rates being charged?

The first question should be answered in the negative because there is a conflict of interest. The higher the loan, the more interest income is generated for H&R Block. This puts the company in the position of trying to maximize the refund, when the company should be maximizing the client's compliance with the tax law. Every "close call" is going to be affected, subtly or not so subtly, by the impact on the lending activity. It's best to leave the refund anticipation loan to some other lender, to whom the customer can go after he or she is handed a copy of the return by the preparer. H&R Block, after all, should stick to tax return preparation and not open up a bank.

The second question must be answered in the negative. According to the story, and I've read similar reports elsewhere, the annualized interest rates on these refund anticipation loans are as high as 700 percent. SEVEN HUNDRED PERCENT? Toss in the fact that roughly 80 percent of the people using refund anticipation loans are low-income, and suddenly there is a recipe for all sorts of unacceptable situations. I'm not alone in this reaction. H&R Block has been sued on account of its refund anticipation loan practices, has paid out tens of millions in damages, and still must defend charges brought by the California Attorney General. State banking commissioners have been asked to investigate.

The violence gripping Philadelphia has attracted a variety of proposals to deal with the problem of young people killing other young people, many of them infants and children. Many of the victims are unintended bystanders, without any connection with the killers other than being in the wrong place at the wrong time.

Now, United States Representative Bob Brady has asked the president of the Greater Philadelphia Chamber of Commerce and the chair of a Philadelphia law firm "to draft legislation that would grant tax breaks of some sort to businesses that hire teens, helping them stay out of trouble," as reported this morning by the Philadelphia Inquirer. The story does not clarify if this is a proposal to amend federal tax law, state tax law, or local tax law.

If it's a proposal to amend federal tax law, Brady's more than a bit behind the times. Section 38 of the Internal Revenue Code provides a work opportunity credit for employers who hire certain disadvantaged individuals. Section 51(d)(1)(D) includes "a high-risk youth" among those who are eligible, that term being defined in section 51(d)(5) as persons between 18 and 25 who live in an empowerment zone, enterprise community, or renewal community. Putting aside the dozens of paragraphs required to define those terms, the upshot is that many of the killings are taking place in or near such zones and communities.

Some of the killers are not yet 18, so is Brady's intent to expand section 51(d)(5)? There's no need. Section 51(d)(1)(F) brings within the scope of the tax credit any "qualified summer youth employee," defined in section 51(d)(7) as individuals who work between May 1 and September 15 and who are at least 16. During the rest of the year, these children should be in school, and the tax law ought not encourage employers to hire students away from school. After all, without education of some sort, how are these employees supposed to know how to do a job correctly?

If Brady's proposal is to amend state or local tax law, I doubt the addition of a few more dollars to a credit will make a difference to employers making hiring decisions. Many employers run businesses that cannot afford, financially or otherwise, to risk mistakes. Some, of course, take that risk, which is why customers encounter bad service, ISP network crashes, mis-packaged orders, and a whole array of errors that encourage them to take their patronage elsewhere.

Brady demonstrates more of the "throw money at the problem" mentality that has failed to prove itself as viable. What's required are things that money cannot purchase, though it can facilitate delivery. All the money in the world cannot buy discipline and life value if there aren't any teachers capable of instilling those qualities into children while they are developing. If someone could demonstrate that the lack of money is the reason so many youth lack discipline, think violence is the answer to every problem, have no regard for the lives of infants and other innocent bystanders, and lack comprehension of their responsibilities as citizens, make the case. The reason so many children are turning into criminals is that attempts to instill discipline are met with protest, disguised as advocacy of rights and vilified as attempts to destroy culture.

What's required, Mr. Brady, aren't tax credits, or, as it appears you are suggesting, increased tax credits. What's required is resolve. Resolve to back up teachers who discipline unruly youngsters. Resolve to enforce penalties. Resolve to encourage education systems, and their directors, to accord higher deference to quality values to the point that they overwhelm the culture of the street. Resolve to curtail the drug trade that fuels most of the violence and to label it as the threat that it is. The role for money is not an exit into the hands of credit-claiming business entrepreneurs but as fuel for school systems to increase and energize their programs that teach discipline, obedience, respect for other people, respect for law, and those other qualities that are no less important than reading, writing, and arithmetic.

In my post on Wednesday addressing the impact of the Prudhoe Bay oil field shutdown on Alaska's revenues, I asked "What Will Alaska Do?" and suggested that "[i]f the Permanent Fund is indeed a contractual creature, we may be seeing some very interesting state revenue downturn litigation unlike anything seen with respect to mere tax revenue decreases." I advised everyone to "Stay tuned."

Yesterday, the Governor of Alaska did two things. According to this story, he imposed a state hiring freeze and instructed the state's attorney general to "investigate the 'state’s right to hold BP fully accountable for losses to the state.'" Neither action should be a surprise. The first decision is most unfortunate, because it means some folks who otherwise would have found jobs won't and Alaska citizens will face cutbacks in state services as state job openings go unfilled. The second action triggers a process that will be interesting, because somewhere along the way we will learn if the state will seek lost tax revenue, lost contractual payments, or both.

The Governor also announced his intention to charge a cabinet-level committee with the task of keeping tabs on the fallout from the oil field closure. His goal is “to make certain we retain the ability to exercise all of Alaska’s prerogatives under our Prudhoe Bay leases, unit agreements, state laws and rights of way agreements.”

One other bit of information released by the Governor clarifies two bits of information guess in my Wednesday post. According to the Governor, Alaska indeed is losing $6.4 million a day, not $4.6 million, so the latter figure apparently is, as I had surmised, the result of a transposition or typographical error. The Governor also noted that the state receives 89 percent of its revenue from oil transactions. When I made the comparison to New York, I had made a 60 percent estimate. So it's much, much worse than the calamity I described.

For years, people in the "lower 48" and perhaps Hawaii looked with a bit of envy at people in Alaska on account of the Permanent Fund dividends that they were receiving. Now, suddenly, there's not much to envy. Fortunes and lives can take a turn for the worse in a heartbeat, can't they?

There's a tax angle to just about every news story that comes across the wires, or in this digital and wireless age, should I say every news story that comes through the ether? This time it's the shutdown by BP of its operations at Alaska's Prudhoe Bay oil fields, news of which has triggered all sorts of discussions about the impact of this decision on oil and gasoline supply, oil and gasoline prices, and peak oil concerns.

What has received very little attention, generally a sentence or two such as in this AP story, is the consequences of the closure for Alaska's tax revenues. The Governor of Alaska stated that "Alaska will lose $6.4 million in revenue every day "the fields are shut down. The AP story, quoting an Alaska state legislator and using forecasts from the Alaska Department of Revenue, reports that the state will lose $4.6 million a day in tax revenues. I'm guessing transposition error, and that the loss is $6.4 million per day, as was also reported by this source. Much of that revenue goes into the Alaska Permanent Fund, which makes payments to every Alaska citizen. In 2005, the annual per capita dividend was $845.76. For some people in Alaska, that $800 makes the difference between getting by and struggling to meet life's basic needs.

How much does $6.4 million a day mean to Alaska? Considering that Alaska's population as of July 2005 was roughly 664,000, and considering that New York State's population as of that time was approximately 19,300,000, an equivalent revenue loss in New York State would be almost $186 million per day, or almost $68 billion for a year. That's more than SIXTY PERCENT of New York State's $112 billion budget. No state can handle that sort of revenue shortfall without some serious economic deprivation, whether in the form of increases in other taxes, spending cuts, debt burden overload, or some other adverse consequence. Mix in the impact on the private sector economy, and the results are devastating.

Sudden and unexpected downturns in tax revenues have happened in the past. They will happen again. Taxpaying corporations go bankrupt or move operations out of the state. Taxpaying individuals, as a group, experience income declines or increases in deductible expenses. In most instances, however, the root cause of the events causing tax revenue decreases are either beyond the control of the taxpayer or reflect a legitimate business decision by the taxpayer. In contrast, the shut-down at Prudhoe Bay is the result of corrosion that was not noticed until it was too late because BP had not inspected the pipeline since 1992. What is it about preventative maintenance that causes so many corporations and so many people to ignore it?

What I don't know is whether the amounts paid into the Alaska Permanent Fund by BP and the other oil producers with interests in Prudhoe Bay are simply taxes imposed by statute or amounts specified in contractual agreements between Alaska and the producers. Why does this matter? If the payments are contractual, did BP breach the contract by not conducting more frequent inspections and performing more preventative maintenance? It is not difficult to imagine Alaska's officials considering this question as they ponder ways to deal with a crippling revenue shortfall.

The Permanent Fund receives not only tax revenues but also "At least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state," according to the Fund's web site. There definitely are contractual overtones to the arrangement, but it is embedded in the state Constitution and statutes, which makes it more like a tax and less like a contract. The proposal for a pipeline carrying natural gas across the state is described as a contract. If the Permanent Fund is indeed a contractual creature, we may be seeing some very interesting state revenue downturn litigation unlike anything seen with respect to mere tax revenue decreases. Stay tuned.

Andrew Mitchel, who has contributed hundreds of tax charts to the toolboxes of tax practitioners throughout the nation, recently sent me a comment about simplification. He wrote:

In one of your recent posts you refer to the compliance burden and the need for tax simplification. In my opinion, THE most complicated aspect of the tax code is that it regularly changes. If the law were to remain relatively constant, then taxpayers and practitioners could learn the law and each year's tax filings would be much easier. Of course, taxes could be increased or decreased by changing only the rates of tax.

The problem that I see with "simplification" is that it requires additional changes to the tax laws. As a result, simplification creates complexity. In addition, I am skeptical that the legislative process can achieve and/or maintain true simplification.

When I replied, I mentioned the proposed five-year moratorium on tax changes that passed the Senate on June 24, 1986. It was rejected, however, in conference the following month. The text, which can be found in the June 23, 1986 edition of the Congressional Record at page S8175 is as follows:

SEC. . MORATORIUM ON TAX LEGISLATION.

(a) Findings.--The Congress finds that--
(1) constant and conflicting policy changes in the Internal Revenue Code of 1954 (hereinafter referred to as the "Tax Code") make it difficult for individuals to properly plan for the future,
(2) constant and conflicting policy changes by the Congress retard capital formation by increasing the risk of a project,
(3) constant and conflicting policy changes by the Congress place undue burdens on individuals and businesses by requiring utilization of financial resources to anticipate such changes and modifications in the Tax Code,
(4) the Internal Revenue Service is drained of limited resources in trying to adapt to changes in the Tax Code,
(5) one of the greatest burdens placed upon small businesses is the completion of paperwork to comply with the Tax Code, and constant changes by Congress unnecessarily compound this paperwork burden,
(6) any tax reform legislation passed by the Congress should stimulate economic growth, encourage investment, promote capital formation, expand job opportunities, and encourage savings, and
(7) the American taxpayer deserves certainty in the tax treatment of economic decisions.
(b) Sense of Congress.--It is the sense of the Congress that the provisions of the Internal Revenue Code of 1954 which are added or amended by this Act remain unchanged for at least 5 years in order to provide stability for the American taxpayer and the private sector.

Does anyone want to guess why this proposal was rejected? Perhaps some lobbyists saw their incomes jeopardized? And it only was a "sense of the Congress" and still the Congress couldn't bring itself to agree to the obvious.

The difficulty is that during the two decades since this noble attempt failed, the very thing that was most feared came to pass. The tax law has been riddled with special interest legislation that has turned the Internal Revenue Code into an almost-unadministrable thicket hanging onto the edge of the implosion cliff with its fingernails. A moratorium at this point would be the equivalent of putting garbage in the freezer.

Andrew is correct, though, that simplification will require transition and adjustment. If not with respect to every change, then surely with respect to many changes. And if not with respect to compliance, then surely with respect to planning. After all, elimination of special low tax rates on capital gains would make tax return preparation easier, reduce the "fit it on one page" pressure faced by forms drafters, and shrink the size of tax preparation software. That would make compliance easier from the moment of change. Tax planning, however, would be a whirlwind of panic and frenzy, as those in a position to benefit most from these special low tax rates would be frantic in their search for a replacement tax escape package.

I'm willing to pay the short-term price for long-term tax simplification. It's like cleaning out the garage. Yes, it requires an investment of time to sort everything into a trash pile and a retention pile, and to separate the latter into organized segments. But in the long-run, it makes finding things much easier, and the time saved over the long haul far exceeds the time invested. If the garage is not cleaned, it will get worse, and eventually someone, someday, perhaps when the house is sold or the owner dies, will face an almost Herculean task of digging through mounds of stuff. Of course, had things been kept organized from the get-go there would be no need to engage in a garage cleaning effort, but the tax law is long past the point of sensible development.

Ultimately we have no choice. Either we fix the tax law today, or we wait and fix it tomorrow. Oh, we could ignore repair altogether and watch the lifeblood system of the nation implode. It's not unlike the choice facing us with respect to the federal budget deficit. Fix it today or deal with it tomorrow. In both instances, the task waiting for us in the future will be exponentially more difficult than it would be today. Like the messy garage, sooner or later something will give. Why not deal with it while there are choices?

Last night, the Senate derailed the most recent attempt to reduce the estate tax. Technically, proponents of a bill that coupled estate tax reduction with an increase in the minimum wage failed to gather enough votes to end debate and proceed to a vote. Because I think reduction or elimination of the estate tax must be tied to taxation of unrealized capital gains and elimination of the special low tax rate on capital gains, I am not disappointed by last night's events.

What does disappoint, but not surprise, me is the even lower levels to which politicians sink in an attempt to manufacture artificial support for something. Rather than sell their estate tax plan on its merits, the opponents of the so-called "death tax" resorted to other tactics. In all fairness, they did try to sell their plans on their respective merits, but no matter which variation on the theme they advanced, America wasn't buying. Rather than admit defeat, these stubborn advocates of tax cuts for the wealthy resorted to what must be called political bribery and trickery.

First, the trick. The estate tax reduction and elimination crowd tacked their proposal onto a bill that would increase the minimum wage. They figured that by doing so, opponents of the unpopular estate tax reduction and elimination plan would be forced to vote for it because they would otherwise be tagged as having voted against a bill increasing the minimum wage. Fortunately, this Machiavellian, manipulative nonsense didn't work. For whatever reason, these medieval tactics were seen for what they are, and were rejected. Perhaps the advent of 24-hour-a-day news channels, email, blogs, and other avenues of watching Congress operate in real time has moved the nation past the days when deals were made in smoky back rooms, and the populace learned about the shenanigans after the fact. "Well, that's politics," my critics have said and will say. My response is simple. That sort of politics ought to be rejected and outlawed. It taints the principles and ideals for which this nation claims to stand.

Second, the bribes. Advocates of the estate tax reduction and elimination plan added so-called "sweeteners" to the legislative package. Each one was designed to target the vote of one or two particular Senators. There was a deduction for timber capital gains, as if special low tax rates weren't enough. There was a tax credit for state and local taxes. There was a program to encourage reclamation of abandoned mines and a tax benefit for investing in mine safety. There was a deduction for research and development. There was a deduction for the travel expense of spouses. There was a deduction for college tuition. Ironically, most of the Senators whose votes were the target of these bribes did not fall for the gambit. They voted against cutting off debate. Considering the impact of these so-called "sweeteners," namely, more complications in the tax law, bad policy, increases in the federal budget deficit, and ineffectiveness of the provisions, it's a good thing that they failed to buy the votes.

Of course, all that has happened is that debate continues. In fact, Senator Frist changed his vote from supporting the motion to cut off debate to voting against his own proposal so that he could preserve his right to resume debate when the Senate reconvenes. He just doesn't get it. He's a physician. He's accustomed to keep trying when resuscitation efforts don't revive his patient. He's in the habit of applying the electric paddles time and again. Stubbornness may be a fine quality in a physician, but in a representative political system, there's a point at which defeat must be accepted and efforts turned to other projects. Even the best medical professionals are compelled by reality to stop and pull the sheet over the patient's face. Your estate tax plans are flat-lined, Senator Frist. Pull the plug.

While I was away, news reached me that Andrew Mitchel, the unchallenged champion of tax chart web publishing, added another batch of charts to his already impressive collection of visual aids to understanding Code provisions, cases, rulings, and other tax concepts. This time he focused on some well-known tax cases, names that should roll with ease off the tongues of tax experts. Yes, any person claiming to be a tax expert who reacts with a blank stare when hearing another person mention INDOPCO, Kirby Lumber, Tufts, or Glenshaw Glass, to name a few, is not a tax expert. Would you be comfortable getting medical treatment from someone unfamiliar with penicillin?

Never one to rest on his laurels, or charts, Andrew also revised several charts that he had previously put up on his web site. This recent activity brings the total number of charts to 279. According to Andrew,

The recent charts include:

1. Davis (Transfer for Release of Marital Claims)
2. Eisner v. Macomber (Stock Dividends are Not Taxable)
3. General Utilities (No Gain on In-Kind Corporate Distributions)
4. Glenshaw Glass (Accessions to Wealth)
5. Hendler (Liability Assumption was Boot in a Reorganization)
6. INDOPCO (Deductibility of Takeover Expenses)
7. Kirby Lumber (Gain on Bond Retirement)
8. Knetsch (Sham Interest Expense)
9. Lucas v. Earl (Income is Taxed to the Person who Earned It)
10. Schlude (Prepaid Dance Lessons)
11. Tufts (Debt Relief from Nonrecourse Mortgage: FMV of Property Less Than Debt)
12. Welch v. Helvering (Deductibility of Reputation Payments)

and charts have been revised for

:1. Crane (Debt Relief from Nonrecourse Mortgage)
2. Gregory v. Helvering (Spin-off with Transitory Controlled)
3. Seagram (Pre-Acquisition Continuity of Interest in Multi-Step Forward
Triangular Merger)

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

Andrew continues to welcome comments on his charts. You can contact him through his web site. For direct access to the charts, you can enter by Topic, by Alpha-numeric order, or by Date uploaded . I suppose if you don't see a chart for something you'd like to see in visual representation, you can send Andrew a nomination for another chart. I have a feeling he'd be glad to add one to the growing collection.

While I was away, Matt Gardner sent me a tip about a Citizens for Tax Justice news analysis concerning the federal budget deficit. Mainstream media had reported, and because I was not cut off from newspapers and television while I was traveling, I had read, several stories about the most recent federal budget deficit estimates. For example, in this report, the Washington Post explained that the White House was revising the current deficit downward, from approximately $412 billion to less than $300 billion. The change was attributed to increased tax revenues.

The report to which Matt steered me questions the revised estimate. It points out that when borrowing from the social security trust funds is taken into account, the deficit is on the order of $470 billion. By ignoring this borrowing, the Administration's deficit estimators shift the true excess of spending over revenue to the future years when that trust funds will need to be repaid. During the past five years, according to the report, more than $800 billion has been borrowed from the social security trust funds to finance the shortfall in revenue.

Members of the Administration are touting the revised deficit estimate, and its cause, as a sign that tax cuts are working as intended. Excuse me, but that makes no sense. Without the tax cuts there would be little or no budget deficit. So we're supposed to cheer because the mess isn't quite as bad as it appeared to be? I'd be impressed if the revision showed a budget surplus, because THAT would demonstrate the validity of the "cut taxes, double revenue" nonsense spouted by the "I refuse to pay taxes because I'm special" crowd and the "I cannot pay taxes because I'm selfish" group.

A closer look at the source of the increased tax revenue is most revealing. A significant chunk of it reflects increased corporate taxes, a natural consequence of the huge increase in corporate profits during the past half-year. Most of the rest reflects taxes on high-income taxpayers who have received bonuses. The Washington Post article goes into greater detail on these points. It also explains that taxes on wages are barely increasing, because wages are increasing only slightly. In other words, the tax revenue increases are consistent with the shift of income gains away from the middle class and toward the very top of the income and economic ladders. The rich get richer ....

Making the situation worse are the allegations that the Administration initially overestimated the deficit so that it could return and claim that it deserved kudos for reducing it. That's a ploy not unlike the child who says to a parent, "Would you be upset if I told you I broke the heirloom vase?" only to follow-up with the following comment to the rattled parent, "Well, I didn't. It's just that the picture window is broken." There's one word to describe this approach: manipulative.

Worse, the Administration used the phrase "mission accomplished" to describe the news. What mission? Was the goal to have a deficit? That's a stupid goal. If the goal is to eliminate the deficit, the mission was not accomplished. Of course, the Administration excels at premature declarations of accomplished missions. The only mission that is being accomplished is the continued shifting of income and wealth from the vast majority of Americans to the few power elites who make eighteenth century French nobility appear gracious and generous.

Unless spending is reduced, and one can debate how much existing spending can or should be eliminated, revenues must be increased to cover the cost of government spending. If the level of revenues required to sustain current spending is unacceptable, then the advocates of the spending must re-think the matter. It is interesting that some of the strongest champions in Congress of government spending, identified by voting record and not campaign rhetoric, are also strong supports of special low tax rates for capital gains and repeal of the estate tax. One wonders if they truly believe in what they are doing or simply are trolling for votes (to use the euphemistic version of the phrase I'd like to use), for if they truly believe that reducing taxes raises revenues, why not reduce all tax rate to zero on the claim it would produce infinite revenue?

The price that is going to be paid for this fiscal irresponsibility will be steep. Those who warn us that our children and grandchildren will be paying this price are far too optimistic. The price will be paid, very soon. So very soon, in fact, that we will be paying the price. In more ways than one.

The solution is easy: remove the special low tax rates for capital gains. Adjust asset basis for inflation. Restructure the income tax rates to reflect the windfall nature of incomes exceeding $5,000,000 per year and $25,000,000 per year. Abolish tax credits and deductions designed to influence social policy. Fund the IRS with adequate means to chase down unpaid taxes owed under existing law. Either reform Medicare spending or increase the Medicare payroll tax so that Americans can see the true cost of the Medicare program. And ditch the pork barrel spending projects.

This solution will not be enacted. Politicians drunk with power have no more ability to restrain their binging than does a addict crawling down the street looking for the dealer. We have only ourselves to blame for sending these folks to Washington year in and year out. It is said one gets what one pays for. It also should be said that one gets what one votes for. And in this case, it is federal budgetary disaster.

The Federal Labor Relations Authority (FLRA) has issued a decision in a long-standing dispute between the IRS and the National Treasury Employees Union over education requirements applicable to IRS agents. The FLRA ruled in favor of the IRS, and although according to this Washington Post story it is unclear what the union's next step will be, there is much value in examining the dispute because it provides some insight into how the IRS and its employees view their responsibilities.

In the early 1990s, the IRS proposed a requirement that persons seeking to be revenue agents complete at least thirty semester hours of accounting courses, and demonstrate knowledge in five specific areas of accounting. Thirty semester hours, incidentally, is equivalent to ten three-credit courses. The thirty-hour requirement would replace an existing 24-hour requirement. The IRS proposal was approved by the Office of Personnel Management and included in its Qualifications Handbook.

The IRS implemented the change in 1995. It "grandfathered" existing agents, letting them continue in their positions even if they did not meet the new requirements. However, because of budget constraints, the IRS did not apply the new requirements to job applicants until 2002. When the IRS denied an application by an employee to become a revenue agent because she did not meet the thirty-hour requirement, she filed a grievance. The union also filed a grievance, taking the position that requiring agents to have knowledge in five areas of accounting was unacceptable.

The grievances went before an arbitrator, who concluded that both new requirements were educational requirements, and that because existing agents could perform their duties successfully without satisfying either of the new requirements, imposing the requirements on new job applicants violated section 3308 of United States Code title 5. That provision states, "The Office of Personnel Management or other examining agency may not prescribe a minimum educational requirement for an examination for the competitive service except when Office of Personnel Management decides that the duties of a scientific, technical, or professional position cannot be performed by an individual who does not have a prescribed minimum education..."

The arbitrator also concluded that imposition of the new requirements violated Section 3(B) of Article 13 in the collective bargaining agreement between the IRS and the union. That provision states that "selective placement factors will only be used in determining eligibility when they are essential to successful performance in the position to be filled." Again, because the arbitrator concluded that existing agents were able to perform their duties satisfactorily without having met the new requirements, the IRS violated the agreement when it imposed those requirements on new job applicants.

However, the arbitrator concluded that the IRS had not violated section 300.103 of Code of Federal Regulations title 5, because it "rationally could have found" the requirements related to a person's performance as a revenue agent. The arbitrator determined that the IRS had conducted three analyses of the revenue agent job, which according to the IRS' expert witness, provided "cumulative and converging evidence of the content validity" of the requirement that revenue agents have knowledge in five areas of accounting.

The arbitrator also rejected claims that imposition of the requirements violated the Uniform Guidelines for Employment Selection Procedures, concluding that there was no evidence the new requirements had an adverse impact on minority job applicants. The expert witnesses for the IRS and for the union used different approaches to determine if there was an adverse impact, but the arbitrator found that "any adverse impact of individual components of the process is not dispositive.

Rather than imposing a remedy, the arbitrator ordered the parties to negotiate a remedy. He gave them ninety days.

The IRS filed interlocutory exceptions with the FLRA, challenging the arbitrator's jurisdiction over the thirty-hour requirement dispute. The FLRA agreed, determining that the arbitrator lacked jurisdiction because the 30-hour requirement was set forth in an Office of Personnel Management regulation. However, the arbitrator's jurisdiction over the requirement of knowledge in five areas of accounting was not challenged by the IRS and the FLRA did not address it.

The parties, unable to negotiate a remedy, turned to a different arbitrator to resolve that issue. That arbitrator specified various remedies. The IRS then challenged both the conclusion that the requirement of knowledge in five areas of accounting violated section 3308 and the remedies that were specified. The Union then challenged the first arbitrator's conclusions that the IRS had not violated section 300.103 or the Uniform Guidelines for Employment Selection Procedures.

After pointing out that section 3308 only applies to requirements that may be satisfied solely through education, the FLRA noted that the first arbitrator had concluded that the requirement of knowledge in five areas of accounting could "be satisfied through education or experience." Thus, when he concluded it violated section 3308, he erred in subjecting it to a statutory provision that did not apply. The vacancy announcement provided that the requirement could be satisfied through education or experience, which, according to the FLRA, undercut the union's argument.

Turning to the arbitrator's conclusion that the IRS violated the agreement between itself and the union, the FLRA concluded that the arbitrator finding of a contract violation was contrary to management's right to make employment selections. Because the union did not argue that the arbitrator was enforcing a provision negotiated under section 7106(b) of the labor statute or any applicable law, the union failed to provide a basis for concluding that the first prong of the applicable labor law test had been satisfied.

Next, the FLRA concluded that the union failed to show that the arbitrator erred when concluding that section 300.103 had been violated. That provision requires federal agencies to hire using a job analysis that identifies "(1) The basic duties and responsibilities; (2) The knowledges, skills, and abilities required to perform the duties and responsibilities; and (3) The factors that are important in evaluating candidates," that "[t]here shall be a rational relationship between performance in the position to be filled . . . and the employment practice used[,]" and that "[t]he demonstration of rational relationship shall include a showing that the employment practice was professionally developed." The FLRA accepted the arbitrator's conclusion that three job analyses were conducted in developing the requirement of knowledge in five areas of accounting, and the weight he gave to the testimony of the IRS expert witness testimony on the professional standards used in the analysis. The FLRA rejected the union's attempt to have it give weight to its own expert's testimony that the IRS job analyses were flawed, because that was a matter of fact for the arbitrator. Nor did labor law require the FLRA to impose a different employment practice merely because it would have been preferable. The FLRA rejected the union's claim that the requirement reflected bias in favor of external applicants over internal applicants, both because the arbitrator had not made any such finding, and because such a bias does not demonstrate that the requirement is not rationally related to a revenue agent's job duties. For similar reasons, the FLRA rejected union claims that the IRS relied on college degree requirements that had "little relation" to the revenue agent position.

Finally, the FLRA concluded that the union failed to show that the arbitrator erred when concluding that the IRS had not violated the Uniform Guidelines on Employee Selection Procedures. Because the IRS had no evidence reflecting that the overall selection process had no adverse impact, it should have evaluated the individual components of the employment selection process. Yet, even though the FLRA concluded that the arbitrator erred in this respect, it put aside the error as irrelevant because his legal conclusions were "consistent with law, based on the underlying factual findings." It relied on the fac that the IRS evaluated the requirement of knowledge in five areas of accounting, concluding that this component did not cause an adverse impact on minority applicants, thus excusing the IRS from satisfying documentation requirements the union claimed it ought to have met. Because the union's expert evaluated the thirty-hour requirement and requirement of knowledge in five areas of accounting in combined form, rather than separately, the expert's conclusions could not be broken out and applied solely to the latter requirement. The FLRA concluded that the union was not arguing the requirements had an adverse impact on minority applicants, only that the IRS failed to follow some documentation requirements.

So what does this maze of procedural and evidentiary jousting mean? To me, it means that, for the moment, the IRS can proceed in its attempt to upgrade the job performance quality of its revenue agents. It also makes me wonder why a labor union would oppose requirements that would make its members more educated. The flaw, perhaps, was that in "grandfathering" existing agents, the IRS gave the union some ammunition to use in its argument that revenue agents don't need any additional education to perform their jobs.

The agents now being hired by the IRS may end up working for the agency until 2030 or 2040. The tax law is unlikely to become less complicated or easier to analyze. During the past several decades, the tax law has become so difficult to learn and apply that law students, who surely are among the brightest, characterize it as the "nuclear physics" of law school. Surely it makes sense to have revenue agents, who need not be lawyers or law-educated, to immerse themselves in at least ten accounting courses and to gain knowledge in at least five areas of accounting. Of course, I would recharacterize the requirement as one of knowledge and understanding, for the latter is far more important, but this is not the place where I want to quibble about the specifics of the new requirements.

I don't understand the resistance to taking a few more courses, even if it means going back to school. I understand that there is a cost to the employee if he or she must return to school, and hopefully the IRS would reimburse existing employees for doing so. People currently in college who decide to apply for a revenue agent position ought select courses based on utility and value, signing up for accounting courses numbers nine and ten rather than for some course scheduled at a convenient time, taught by a non-demanding professor, or ideal for grade point padding. I also understand that the real dispute was the impact of the new requirements on a decades-long practice of IRS employees sliding into revenue agent positions after having worked for some period of time in some other capacity. That practice, perhaps becoming some sort of entitlement in the minds of a few employees, isn't necessarily the best practice for an agency charged with enforcing the tax laws in a manner that does right by both taxpayers and the government and that reaches correct results.

Of course, I would prefer that all revenue agents, and all tax practitioners, earn a law degree, because the thinking process that is acquired or polished while studying law has become a sina qua non for tax analysis. Tax is more than running numbers. I've previously posted on why having an accounting degree or background is not a prerequisite for being a good tax practitioner and how it is not even a guarantee that one would be a good tax practitioner. Yes, it helps, but it is far from essential.

The point isn't whether accounting or law is the better pathway to tax practice. The issue is whether someone who has no law background and a limited accounting background should be a revenue agent, or if, instead, it makes sense to jack up the accounting requirement for job applicants who have no law background. That was the issue. I sincerely hope the union surrenders and invests its energies into getting its members access to more tax education, and if it's going to battle the IRS it ought to do so over things such as reimbursement for additional course work and not in opposition to enhancing revenue agent education.

Jennjou Chen of National Chengchi University and Tsui-Fang Lin of National Taipei University have issued Class Attendance and Exam Performance: A Randomized Experiment, in which they conclude:

The study of determinants of a college student's academic performance is an important issue in higher education. Among all factors, whether or not attending lectures affects a student's exam performance has received considerable attention. In this paper, we conduct a randomized experiment to study the average attendance effect for students who have chosen to attend lectures, which is the so-called the average treatment effect on the treated in program evaluation literature. This effect has long been neglected by researchers when estimating the impact of lecture attendance on students' academic performance. Under the randomized experiment approach, least squares, fixed effects, and random effects models all yield similar estimates for the average treatment effect on the treated. We find that, class attendance has produced a positive and significant impact on students' exam performance. On average, attending lecture corresponds to a 7.66% improvement in exam performance.

Thanks to Paul Caron's TaxProf Blog for the tip.

Another factor that does not seem to have been the subject of any serious empirical research is classroom seating position. I've done some informal studies of my students and have discovered that there is a chicken and egg question. After grades are released by the Registrar and I receive a list of names with grades, I've mapped out the grades on the seating chart. Then, using transparent markers, I have coded the grades by color, using green for the higher grades, yellow for the so-so grades, and red for the abysmal grades. The greens generally are clustered in the front and middle, whereas the so-so grades and abysmal grades are on the periphery. It does not matter whether the classroom is full or too large for the class. In other words, some students will sit in the back row even if there are empty seats in the intermediate rows and even if those rows are empty, and those students rarely earn the very high grades.

The question is whether the seating position affects grades, or grades affect the seating position. In other words, because studies show that people on the periphery are not as involved in the proceedings (whether it's a class, a meeting, or some other event), and probably have difficulty hearing and seeing as well as they would were they closer, it is easy to assume that academic performance is compromised by the distance. On the other hand, there is anecdotal evidence that disengaged students seek out the remote seats, even if there are empty seats available closer to the front and center of the room. One could conclude that the selection of seats by students is a self-sorting event.

I wonder if faculty at other schools, and in other disciplines, have done similar evaluations of their students' grades and seating positions. Perhaps someone with education and expertise in classroom dynamics could collect the data and write up something called Classroom Seating Position and Exam Performance. What little I have is insufficient for such a paper. What I have is interesting and thought-provoking. I'd be glad to share the data if I could find the marked up seating charts. That is an entirely different issue, to be addressed someday in Tax and Clutter: How the Internal Revenue Code is a Bad Influence on Office Filing.