MauledAgain

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I have not visited these sites:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Several days ago, in IR-2008-84, the IRS announced it was changing the due date for extensions of time to file returns from October 15 to September 15 for partnerships, S corporations, trusts, and estates. The reasoning makes sense as a way to deal with a practical return filing problem, but the solution only goes so far. I am going to focus on partnerships just to make it a bit easier to explain the problem.

Under existing rules, a partnership that obtains an extension of time to file its return must file by October 15. That is the date on which it must supply Forms K-1 to its partners. But those partners, presumably having obtained their own extensions of time to file because they did not have the tax information from the partnership, also must file on October 15. In all likelihood, the partnership has mailed the Forms K-1 and the partner doesn't get them until October 16, 17, 18, or later.

Under the revised rules, the partnership must file and send the Forms K-1 by September 15. That should allow sufficient time for the partners to file by October 15. Or does it?

Suppose the partnership is a partner in another partnership that is a partner in a third partnership. It isn't difficult to imagine that the partnership won't get its return filed by September 15 because the third partnership's Form K-1 for its partner (the second partnership) doesn't get to the second partnership until, say, September 19, and then the second partnership gets the Form K-1 to the first partnership by, say, September 23. So now the first partnership gets the Form K-1 to its partners by, say, September 27. One of its partners is, yes, an S corporation. So the S corporation files, and gets the Form K-1 to its shareholders by October 1. One of the shareholders is a trust. It now files, and gets its information to its beneficiary by October 5…

The problem simply is that when there is a "chain" of pass-through entities, the theory breaks down when it meets practice. Surely if the chain isn't too long, the IRS change does solve the problem. But if the chain is long, or there are excessive delays in getting Forms to partners, shareholders, and beneficiaries, or if the preparers cannot do the returns the same day the Forms K-1 arrive, the problem continues.

Do I have an answer? No. So long as the pass-through concept exists, the problem exists. One could prohibit long chains, but there are serious constitutional and policy problems with that approach. One could come up with some sort of super-extension system, but the tax is due on April 15, so the taxpayer, to avoid interest and penalties, must play it safe and overpay. And all of this assumes that all the entities have the same calendar taxable year.

Is it any wonder when the "make tax returns due on the person's birthday" proposal resurfaces now and then, that I grimace? I described that nonsense in Tick Tock... Countdown to April 15, so I won't delve into it here.

All in all, the IRS deserves kudos for trying to solve the problem and coming up with something that deals with most of the situations afflicted by it. Now I must go and change my Partnership Taxation class notes, illustrations, slide sets, and problem answers.

On Friday, in When Is a Shortage Not a Shortage?, I noted the decline in fireworks importation because of a shortage of shipping ports in China. I suggested that depending on one country for a product or service wrapped up in American life could be antithetical to independence.

Thanks to my younger sister, I now have discovered how we will cope when there are no more fireworks available for importation. We'll go virtual. How quickly can you click a mouse? No, not the animal.

So what's next? Virtual oil? Virtual gasoline? Perhaps we can pay virtual taxes with virtual dollars. The possibilities are, well, virtual.