Ad Astra Per Aspera

A report issued today by Achieve, Inc. explains that almost 40% of recent high school graduates think there are gaps between their high school education and what they need to succeed in college or the work place. Wow. Achieve Inc, according to its web site, was [c]reated by the nation's governors and business leaders, [and] ... helps states prepare all young people for postsecondary education, work and citizenship by raising academic standards and achievement in America's schools.

The "wow" is not "I'm surprised." I'm not. I've been saying the same thing for years. The "wow" is "Hey, look, someone else has corroborated the claim and it's getting publicity." The publicity isn't this blog, but the coverage in media ranging from general circulation newspapers to the Chronicle of Higher Education.

Lest one think that recent high school graduates have a self-confidence problem, the survey on which the report is based also polled college instructors and employers. From the report:

Employers estimate that 39% of recent high school graduates with no further education are unprepared for the expectations that they face in entry-level jobs, ..... Employers estimate that an even larger proportion (45%) are not adequately prepared for the skills and abilities they need to advance beyond entry level. The employers ... [estimate] that 46% of high school graduates who apply at their company are inadequately prepared for the work habits they will need on the job, 40% are inadequately prepared in math, and 38% are inadequately prepared for the quality of writing that is expected.

Only 18% of college professors feel that most of their students come to college extremely or very well prepared, with just 3% saying extremely well. Fifty-six percent (56%) describe their students as somewhat well prepared, and 25% say that they are not too well or not well prepared at all.

Before blaming high school educators for the situation, consider some other information from the report:

Knowing what they know now about the expectations of college and the work force, the majority of high school graduates would have applied themselves more in high school and chosen to take more difficult classes.

So who's counselling or permitting students to take the easier road? Teachers? Administrators? Perhaps. Or could it be inattentive parents? Peer pressure? A failure of society to convey the "challenging education is essential" message?

The report's findings suggest that students rise to the level to which they are pushed. Again, from the report, which deserves a full read despite the several snippets I've quoted:

Yet, fewer than one-quarter of high school graduates feel that they were significantly challenged and faced high expectations in order to graduate from high school. Those graduates who did face high expectations are much more likely to feel adequately prepared for college or the work force. High school graduates welcome raised standards of achievement. An overwhelming majority of graduates say that they would have worked harder if their high school demanded more of them and set higher academic standards.

I think the pattern repeats itself at the undergraduate and graduate levels. Like the college instructors who "report that they spend a significant amount of
time teaching material that they feel should have been learned in high school," I can repeat my oft-stated assertion that too much of my effort is remedial, taking students through material and intellectual processes that they should have learned in college (or high school). Perhaps the undergraduate faculties will tell me that the reason I encounter the knowledge-base deficiencies that some students bring to law school is the need of the undergraduate faculties to be remedial with respect to high school educational deficiencies. Yet I know, as do most others, that there are too many ineffective undergraduate faculty who dislike or object to the price one pays for being demanding and pushing students. Others do not know how to instill in their students what needs to be taught.

It would be very helpful to have a similar survey conducted among law employers with respect to the educational status of recent law school graduates, and among recent law school graduates with respect to their perceptions of their law school educations. Anecdote tells me that many law graduates regret skipping the challenging courses while pursuing fun courses, charismatic instructors, and subjects with respect there are few answers and thus fewer wrong answers. It is disturbing, still, when a graduate says, "I should have worked harder." or "I partied too much." The alarm bells go off when a phone call or email begins, "I didn't take tax because it was too hard but...." Yes, I can finish the sentence. ".... I've discovered that every which way I turn tax intrudes on law practice."

It's not a subject matter issue. It's a question of what we require students to do. Spot issues? Write essay answers? Practice appellate arguments? No, it's a question of what we don't require our student to do enough times. "What do you say to the client?" and "How would you change the facts in order to generate a different result?" aren't the most frequently asked questions of law school. "What do you feel?" is number something with a bullet. So, no, I don't think law faculties are somehow absolved.

What's missing, I think, at every level, is an essential message that students need to hear. "By the time you leave this place, and are ready to [practice law, go to college, take a job, whatever] your instructors and your employers will demand that you can [do this, understand that, explain this, solve that] and it is our obligation to give you every opportunity to face similar demands at this stage, though we also have the obligation to assist you in learning how to handle those sorts of demands. It won't be easy but then again, life rarely is." That's the message I received when I was in school. Perhaps I was fortunate, blessed with excellent teachers. Well, yes I was, for as I've studied my teachers over the years, since I was a young child, I have noticed that most of them were accomplished in their field and that many of them knew how to make me better by the time I was done with their classes. I also noticed that the ones who taught me while I was still under the mantle of my parents had my parents' full support. Teachers were allies, not enemies.

And that brings me full circle to another proposition that I've held for many years: the problem is cultural. There is no point in trying to change the education system if we don't change the culture in which it functions, just as it makes no sense to tinker with a locomotive if the railroad tracks remain warped. So long as parents continue to do things for their children rather than guiding their children to doing things for themselves the ability of the education systems to raise the standards will be compromised. Let the children learn how to schedule their own soccer games. Let them do their own homework and write their own papers. Take them to work. Show them what is expected of people in the work place. Surround them with knowledge and explanation. Let them find the challenges that kick their energy expenditure into high gear. Show them that life is far more exciting and fulfilling when it is gathered through effort rather than handed down on a silver platter. And stop trying to smooth over all the ruts in their lives' journeys and pretending that there won't or shouldn't be any.

Though I have not yet totally convinced myself of this point, I am almost ready to proclaim that in the long run that which comes from greater effort through deeper adversity is more satisfying that that which comes easily. Ad astra per aspera.

With a little effort, it can be translated.

Federal Proposals on Telecommunications Taxes Don't Touch the States

When I summarized some of the proposals in the Joint Committee on Taxation's report, "OPTIONS TO IMPROVE TAX COMPLIANCE AND REFORM TAX EXPENDITURES" in a previous posting, I did not mention the tri-partite alternative proposal with respect to telecommunications taxes. Considering the length of the post, I passed the information on to Declan McCullagh and figured he'd put something out on politech, which he did. He also wrote up a story for C-Net.

Declan's reference to my post brought me some questions concerning the scope of the proposals, specifically, whether the proposals would affect what state and local governments did in terms of telecommunications taxes. As best I can tell, the proposals deal with the federal taxes. Whether states and localities choose to follow the federal lead, if there turns out to be one, remains to be seen. Federal law can restrict state and local taxation decisions if the tax violates the Constitution, but otherwise Congress cannot order a state or locality to impose or eliminate a tax. Sometimes Congress can link the state or local government's treatment with respect to some other provision to something like a telecommunications tax, taking an approach that could be called leverage, but that is an iffy proposition.

So the matter of telecommunications taxes, an issue that is going to need and get more attention as advances in technology upend decades of traditional patterns of doing business and taxing communication, will be discussed in 52 legislatures, not merely one. Yes, I'm counting the District of Columbia, but not the possessions.

So stay tuned (ha ha) for more information. It will be a long journey.

Working Late?

According to a law.com article, a recent survey shows that 87 percent of lawyers take work home with them. On average, they spend nine months per month working at home. That's twice a week.

The other thirteen percent claim they never work at home. Of the ones who do, 7.5% work 25 evenings each month. That's almost every night. Another 10.5 percent work at home 20 to 24 evenings each month.

Every law student in the country ought to read the article. It would help offset the growing chorus of "it's too much work" that comes from students who are accustomed to a college life (or major) that simply isn't as demanding as most careers in the practice world, law or otherwise. Students who have worked or who are working while attending school are far less likely to complain about the workload.

I hit on this point in Money for Nothing and Work for Free?, The Gavel Gazette, at 1 (March 5, 2001). Perhaps it needs to be republished, considering that all those who were students at the time have graduated. Among my reasons for thinking the message has faded are comments on evaluations to the effect that I am not a good teacher because I expect students to come to class having worked through things on their own. It's graduate school, isn't it? I'll have more to say about student evaluations in another post, soon.

It isn't unusual for K-12 teachers to take work home every evening, to prepare for the following day's class. There are assignments and reports turned in by students that need to be graded, graced with comments, and returned. Delay is an impediment to good feedback. Ah, there's another topic: grades were released yesterday to second and third year students, for a semester that ended almost seven weeks ago. How likely will they remember the examination experience that they now wish to review in order to learn what they need to adjust so that their learning abilities will improve? Yes, indeed, yet another post waiting for my attention.

There are jobs where the hours are fixed. Sometimes the intensity of the effort during the fixed hours is physically or mentally exhausting. Think of 8 hours collecting refuse, 8 hours working in a prison, or 8 hours on an assembly line doing repetitive motions. The world rotates 24/7, people breathe 24/7, and lawyers are needed 24/7.

Interestingly, some lawyers do try to schedule a years' worth of work into 10 or 11 months so that they can vacation for a month or two. But most lawyers are taking work home for several reasons that are shared by members of almost every profession that cannot abandon their responsibilities when they walk out the office door.

First, client and customer problems do not restrict themselves to the hours of 9 in the morning to 5 in the evening. If in doubt, check with your local plumber, auto mechanic, fire fighter, or physician. There are ways, however, of dealing with this aspect of 24/7 and that is the scheduling of staff to cover all hours. This is easily done in some instances. Check again with the fire fighters and the emergency room physicians, though all would confess to inefficiencies and disadvantages.

Second, some problems take longer to solve than 8 hours, and cannot be put on hold until the following morning. Sometimes a well-crafted team approach permits the enterprise to continue working on the problem while individuals go home, but that's not always easy to do.

Third, some problems present time pressures because other people do not plan well. The partner who tells an associate that an answer is needed in the morning might be passing on a task necessitated by a call from the client that the partner received minutes ago. But it can just as easily be something that the partner didn't bother to look at until a moment ago, despite the matter sitting on the desk or in the email inbox, for several days. Lawyers are notoriously bad time managers, and part of the price that is paid, though not necessarily by the bad time manager but by an underling, is the need to take work home. This, too, is a topic I addressed in Time Can Be on Your Side. Or At Least By It, The Gavel Gazette, at 1 (Feb. 16, 2004). Law schools do not teach time management. That's because law faculty are no better at it, and in some respects worse at it, than are practitioners.

Fourth, the world is beginning to drown in problems. Problems are a natural by-product of life. And of death. But too many problems arise in our post-modern era because people are more concerned with their rights than with their responsibilities, have grown up unable to plan to avoid problems, have become accustomed to having someone, beginning with mommy and daddy, take care of their problems for them, and would rather do something other than contribute to a reduction of problems. Exacerbating the problem (ha ha) is the desire for immediate gratification that has infused itself into post-modern culture. After all, there are problems that can wait until the next day, but so many people want to be as important and at least as special as the next person that the demand for immediate solution is made even if it is unnecessary.

Fifth, law firms, just like most businesses, are understaffed. Some of the understaffing is lack of properly trained and competent individuals to fill jobs. Hiring an incompetent person compounds the number of problems. But surely there is no shortage of properly trained lawyers. Hmmm. Well, seriously, there are plenty of properly educated lawyers, many of whom need mentored training in law practice, but who don't get it, or as much of it, as they once received because the partners don't have, yep, the time for it. But much of the understaffing in American enterprise is the result of budget pressure to cut costs so that the executives who should be solving these problems can continue to earn salaries wholly disproportionate to the amount of time they expend, the quality of decision making or product that they make, or the value of leadership that they provide. Employees trying to do more than one person's job end up making more mistakes because of the time pressure. That, in turn, makes more work, in the long run, for the lawyers.

And what happens when the work is taken home? Everyone else in the worker's life suffers. In some instances, the stress is countered with substance abuse or other problems. Which makes for more work for lawyers and others.

It's a vicious cycle and it needs to be broken. Where can a circle be broken? A circle has no beginning or end, but it can be broken. I suggest it be broken by explaining, gently, when it is appropriate to do so, that a person needs to fix his or her own problem, stop demanding instant gratification, and start planning things in ways that avoid problems. It is time to get government, enterprise, lawyers, and people out of the business of solving every problem that someone else has without regard to the nature of the problem, the consequences of its immediate or delayed solution, and the cost of remediation. When a person learns that only he or she will be the one to solve the problem, the person gets better at avoiding it in the first place. The cultural impact of that change will trigger other changes that should ameliorate the sweatshop mentality that is permeating society in the early twenty-first century. Perhaps the "me generation," having evolved into the post-modern "deconstruct the facts and blame someone else" culture, can morph into a "responsibility first" outlook. Then the few, who are taking work home, because too many others are making too many problems and solving and preventing too few problems, won't have as much work to take home.

Rant's finished. In honor of one of Sunday's coaches, "time's yours."

Alternate MAXIMUM Tax???

Bruce Bartlett has written a thoughtful analysis about a proposal for an alternate maximum tax, under which taxpayers would not pay more than 20% of gross income. The proposal is a modification of an earlier one in which the rate was 25% and there was a credit for payroll taxes paid by employees.

Bruce sensibly concludes that not only would the proposal add complexity, but that it "is simply not a serious idea" and is "tax gimmickry at its worst, the sort of thing that has given us the massive complexity the max-tax alleges to redress."

I agree. I simply (ha ha) want to add that I have a nagging sense that the proposal is a diversionary threat. In other words, if people think that this proposal might actually see the light of legislative day, they might be more accepting of whatever it is that Congress ends up passing under the penumbra of "tax reform."

Or perhaps it is intended as a negotiations opener, something that can be given up without much real pain but with feigned agony. Yes, a negotiation gimmick.

Addendum: Bruce has replied that Steve Moore, the proponent, is serious about the proposal. If that is the case, it's a frightening thought, because it's the sort of thing that simplistic minds might simply accept as a simplification. I shudder again.

Throwing Money at the Problem Might Work.... a Wee Bit

According to a news release from the Treasury Department, the Administration's 2006 budget request will include a proposed $500 million increase for IRS enforcement activities. This is a 7.8% increase in funding. Thanks to Paul Caron's TaxProf Blog for bringing my attention to this news.

The news release states that "[t]he increase will provide additional resources to examine more tax returns, collect past due taxes and investigate cases of tax avoidance." But will it?

Some of the increase is required simply to tread water, by accounting for the increase in the cost of doing the same thing in fiscal year 2006 that was done in fiscal year 2005. Adjusting for inflation, in other words, brings the real rate of increase down to something on the order of 5%.

What does a 5% real increase permit the IRS to do? Increase the number of audits by 5 percent? So instead of 1.1% of taxpayers being audited, 1.155% will be audited? Yes, that's an increase of 0.055% of taxpayers, or roughly 18,000 taxpayers. Sounds like a lot, but unless the IRS selects the "right" 18,000, the revenue impact will be small and the deterrence impact minimal. Yes, I understand that if the increase is dedicated to auditing particular corporations and partnerships the revenue dividends can and should be larger than if the increase is used simply to add 18,000 individual taxpayers to the audit list. More on that in a moment.

Of course, as an advocate of properly funding enforcement, I cannot be unappreciative of any increase, however small, but the temptation to be a griping donee is strong. And I yield. To recover the $500,000,000, the average tax deficiency, plus interest and penalties, for each of 18,000 taxpayers needs to be roughly $28,000. That's unlikely to happen. So the increase needs to be directed to enlargement of audit programs targeting high income individuals, corporations, off-shore deals, tax shelter partnerships, and the like. Let's hope that happens. And let's hope that it's effective. After all, successfully upending 10 corporate tax shelter schemes each keeping $50,000,000 from the Treasury makes the request pretty much a break-even proposition.

To audit these sorts of entities the IRS needs agents and auditors whose education, experience, expertise, and energy equal or exceed that brought to the table by the private sector tax wizards who design, market, and sometimes even defend their particular tax avoidance plan. Yet when the IRS proposed that an increased number of accounting credits be required of new hires, the union objected. So how effective can the IRS be? Note that even when it takes some of these cases to court, the IRS has had its problems, as I discussed here not too long ago.

Then there is the question of whether Congress goes along with the request. I have serious doubts. This is a Congress that dislikes taxation and the IRS at least as much, if not more, than has its predecessors. It is also a Congress that is unlikely to eliminate some of the most significant causes of noncompliance and many of the hurdles to enforcement, namely, the complex and byzantine maze and swamp of special-interest and bad social engineering policies wrapped into the Internal Revenue Code. It's much easier to enforce a bridge toll because people know what's required, it's easy to figure out if someone hasn't paid, and it isn't all that difficult to catch the perpetrator and mete out revenue justice.

There are those who insist that even at present the IRS is lax in its enforcement efforts with respect to certain businesses, restricting its audits to situations in or likely to be in the public spotlight, while it continues to track down low income taxpayers whose claimed earned income tax credit is off by a few hundred dollars. Not that the latter should be ignored, but restricted resources demand the setting of priorities, and I, too, wonder why so much of the underground economy continues to escape examination.

Well, at least $500,000,000, reduced to $350,000,000 to account for inflation, would permit the IRS to hire perhaps 1,000 to 1,500 auditors (along with support staff, office space, supplies, etc.) But where does the IRS find that many people willing and capable of taking on the job? The number of accounting graduates has declined. Law school graduates interested in tax are reluctant to take positions that are not classified as "law" positions. So perhaps a good chunk of the money would be spent to educate people who know nothing about tax. A year or two in an M.T. program would do the trick. Just in time for the funding to run out and the job to disappear.

Yes, folks, the great big tax machine that nourished the workings of federal government for the past 70 years is beginning to shake, rattle, and, no, not roll, but creak, groan, and shudder. As do I when I watch things play out in Washington. And as I suspect as do others when they know where and when to look.

Once Again, Grades are "Coming Out"

The Power of Grades

Grades for first-year students were released last week. Grades for second and third year students will be released soon. Grade release days always bring distress to students who fall short of their own or their parents' expectations. Grade release day, for some students, especially in the first year, become watershed moments that, rightly or wrongly, cause a student to affirm or change his or her sense of what lies ahead.

Grades, in and of themselves, can be good or bad, depending on how they are generated and how they are used. A grade that reflects a student's level of competence at the moment of testing can be informative to student, teacher, potential employer, and others. A grade that reflects a student's relative position among those with whom the student was evaluated can be informative, but in a different way. A grade that is used to define the worth of an individual can is a grade that is used in an ill-advised manner. A grade that is used to encourage a student or to reinforce a new set of learning habits is a very worthwhile grade.

The Problem with Grades

The problem with grades is that there is no universal definition. Unlike the Celsius temperature scale, where 40 means the same thing to scientists, meteorologists, and ordinary folks the world over, a B- means as many different things as there are students earning a B-. OK, that's a bit of an exaggeration, but ask yourself, what does B- mean?

Relative grades, that is, grades assigned pursuant to a curve, have a meaning. Assuming one can obtain access to the curve, one can determine that a grade of letter L means that the person earning it did an evaluation set (exam, paper, etc.) that placed the person in the n1th through n2nd percentile of the evaluation performances of those subject to the same evaluation set. But what does that really mean? How helpful is it to know that Student S earned a B- in a course in topic C at university U under these conditions? Not much, really. Even an A at a top-flight school has lost some of its value because grade inflation has "cheapened" the grade.

That is why I prefer grading against a standard. Grading against a standard reveals what the student can and cannot do, provided the standard measures information of value to those looking to the grade for information.

An example helps. If 20 people run a race, the winner gets a gold medal. So what? If the other 19 are terribly slow, the winner comes across as outstanding, even if the winner is only slightly faster than terribly so. Under some circumstances, such as an athletic contest, or a contest for a limited number of prizes, relative position makes sense, and so, too, do the gold, silver, and bronze medals. But it is far more useful to know that a person ran a mile in 3 and a half minutes.

And that brings me to the flip side. There is one gold medal, and a person who runs a mile in 3 and a half minute doesn't get that medal if someone else runs a mile in 3 minutes and 29 seconds. But if an A represents running a mile in less than 3 minutes and 50 seconds, then both runners earn an A.

Relative grades impose artificialities that distort the reporting of the performance results. A mandate that the top 10 percent earn A grades does two things. First, it can preclude a highly accomplished student from earning an A even if the student falls short of the top 10% by a fraction of the difference between the top performance and the performance that is the lowest A. Second, it can cause A grades to be granted to students whose performance, when measured against performances by students in other years, falls short.

Setting Standards

What should the standard be? For law school grades, it should be a measure of what lawyers in practice should be capable of doing. If someone cannot respond appropriately to at least 20 percent of what is presented to them on one of my exams, that person earns an F. Similarly, if a student can attain 80 percent of what a seasoned practitioner would do on one of my exams, that student earns an A. People can quibble about the standard, but standards can be developed. It's done in other areas of education so it surely can be done throughout education.

Who should set the standard? Ideally, organizations representing the interests of those who use the grades. In the context of law school grades, a consortium representing law faculty and administrators, state bar examiners, and lawyers can and should develop a measure of what a student should be able to know, understand, explain, and do with respect to a specific area of law or transaction.

Of course, grading in this manner means that grade distributions will change from year to year. Many years ago, in a specific semester, no one earned an A in Partnership Taxation. No one deserved an A. Relative grading would have caused the best of those examinations to earn an A, which would have "cheapened" the As earned by students in Partnership Taxation in other semesters. In other courses, there have been semesters in which 25% of the grades were A grades. That can happen, and when it does, it makes no sense to tell 60% of those students that they have earned some lesser grade (B, B+) and should present a transcript to employers that rates them less qualified than the person who would have earned, under a mandatory curve, an A in that other semester when no one earned an A.

This year-to-year inconsistency pops up in other areas of life. Could a team from one era defeat a team from another era? Which means more, the individual accomplishment of a ballplayer in the 1930s or that of someone playing the same game under different circumstances in the 2000s? The inability to resolve such questions ought not preclude application of standards where standards can be used. Those practicing law can affect the lives of other people in deep, serious, and long-lasting ways. The practice of law is not, and ought not be, a game.

Grade Inflation as the Cause

The mandatory curve is a reactionary response to grade inflation. It is a cure that is as bad as, if not worse than, the problem. The lack of standards is what permitted grade inflation, and it is the lack of standards which permits artificial grading.

Some of the inflationary pressure on grades, which produced the reactionary mandatory curve, arises from a concern that students are not getting jobs because employers turn their attention to students from schools with high grades. In the long run, this sort of grading arms race would do nothing but cause all students to earn A grades. At some schools, this prospect came so near the horizon that mandatory curve proponents found ammunition for their position. Of course, I still find it difficult to believe that employers simply look at grades without regard to the identity of the school or the class rank of the applicant. Employers surely have had experience with students from several or more schools, and all the high grades in the world cannot undo the reputational damage done by a student with high grades who performs poorly in practice.

Some of the inflationary pressure on grades comes from reluctance by some faculty to "give" low grades to students. "Bad for self-esteem," they say. "With grades so high, a C sends the same message as an F" is another famous assertion. Wrong. A collection of F grades sends the "goodbye" message that a collection of C grades does not send. Of course the notion that grades are "given" rather than "earned" has always troubled me. A gifted or given grade suggests something other than objective evaluation.

Much of this reluctance to declare the failure or low performance of a student arises from a post-modern culture that abhors criticism that hurts feelings. That concern should influence the packaging, and that is why it is inappropriate to broadcast a student's grades in flashing lights for the world to see. But in the long run more harm than good is done by causing a student to believe that he or she is capable of doing what he or she is not capable of doing.

What Really Should be Tested

Of course, all of this discussion about grades assumes that what is being graded is what should be graded. Law school grades provide an example of how what is being measured doesn't equate with what is being sought. Law practice employers seek to hire students who can express themselves well, in spoken and written word, who can exercise good judgment, who can distinguish real issues from red herrings, who can organize information in sensible ways, who can describe errors in someone else's argument, who can identify missing factual information critical to determining the outcome of a situation, who can solve problems, who can prevent problems, who can distinguish one case from another, and who can demonstrate a variety of other legal skills. Yet what law practice employers get, aside from grades in courses such as clinics, drafting, trial practice and the like, are grades assigned to areas of law. Does an A in Contracts mean that the student can draft a contract? Determine what needs to be asked of a client for whom the contract is being drafted? Identify clauses in a proposed contract that pose litigation risks and thus are in need of revision? Or does it mean that the student understands a theory of contracts? Or some combination?

I design my examinations to isolate a variety of challenges that a practitioner faces. One question may focus on fact identification, another on argument dissection. A third might focus on the truth or falsity of a conclusory statement derived from black letter law, and a fourth could focus on the wisdom of suggesting that a client pursue all of the client's legal rights under a particular set of circumstances. This helps me teach in several ways. If I see the same error over and over again, I make adjustments in how I teach the course the next time I teach it. If a student comes to me to find out why his or her grade fell short of expectations, it helps me identify with specificity what the student's shortcomings were with respect to the examination.

Even so, those persons who see the student's grade know only that the student earned a letter grade in Introduction to Federal Taxation, or Partnership Taxation, or whatever. They know nothing more. The grade isn't all that helpful.

Recently, for reasons that are another story that can be told, if ever, at another time, I was looking at my elementary school report cards. (OK, OK, that's because my mother found a few as she was cleaning and passed them along to me even though she thought she had done so years ago.) Not only were there grades for substantive areas such as arithmetic, history, spelling, and the like, but also there were grades for skills and traits such as cooperativeness, obedience, cleanliness, and similar characteristics. Why not do the same with higher education grades, including law school? After all, what students and employers need and want to know are the specifics of their strengths and weaknesses. For some employers, research skills may matter far more than they do for other employers. A cluster of grades in areas of legal doctrine doesn't tell us much.

And So?

Well, if I can "get" a law school, and transform the curriculum into one based on transaction and not doctrine, and then layer on grading with respect to practice abilities, it could get very interesting. Of course, by letting the world know what I'd like to do, I almost guarantee that no one would dare "give" me a law school at which I could conduct this experiment.

Now It's Time for Taxes Meet Emails at Death

Professor Ray Madoff of the Boston College Law School responded to my commentary about the issues raised when planning for the disposition of a decedent's email, blogs, letters, and similar artifacts (a term for which I thank Prof. Madoff, as it works well). The original posting and the followup have generated interesting and informative responses.

Prof. Madoff pointed me to her article, Taxing Personhood: Estate Taxes and the Compelled Commodification of Identity, 17 Virginia Tax Review 759 (1998), in which, among other things, she discusses the estate tax treatment of assets, such as letters (but also more visible items such as publicity rights and the value of the decedent's name), which have a market value for estate tax purposes no matter what is done with the asset. In contrast, she points out, the income tax applies only if the taxpayer chooses to dispose of the property and thus realize income.

Of course, as she points out, for most of us, our emails, blogs, and letters have far less value than those of widely known celebrities and other very public figures. Of course, there may be just one person who so desperately wants to see the emails, letters, and other artifacts of a decedent that he or she may be willing to pay a surprisingly high amount to obtain them, even though the intent is not some enhancement of the public consciousness about a public figure but a need to acquire what could be called gossip from the grave. Interestingly, these artifacts may have more value in their secretive state than in their publicized state. Consider the family member who would then try to outbid the town busybody, assuming that the news is out and about because the will is probated and contains references to these items. Which value, then, holds for estate tax purposes?

One thing that occurs to me is the connection between destruction and the estate tax alternate valuation date. Arising during the Great Depression, when estates experienced huge post-death declines in value as the economy worsened, leaving them with insufficient assets with which to pay the tax on date-of-death values, the alternate valuation date permits the estate to elect valuation at a time later than death (and, as with all tax provisions, it's a tad more complicated than that). What happens if the personal representative destroys the email or letters, with the consent of all beneficiaries (who thus would be most unlikely to raise objections at a later time)? Are the items valued at zero if the alternate valuation date is elected and the items were destroyed before that date? Is there a public policy exception similar to the one denying casualty loss deductions to taxpayers who cause the casualty (a principle applied in a case involving an angry husband who tried to burn his wife's clothes on the cooktop and ended up incinerating the entire house).

Here's a prediction. The issues arising from the explosion of personal information on account of advances in technology will get legislative attention when it is a legislator who dies and some interesting emails come to the attention of a journalist. That is when the question "So tell me again why this is such a problem" will be self-answered with "Oh, I see. Oops."

Never at a Loss for Tax Proposals

The staff of the Joint Committee on Taxation has just released its report, "OPTIONS TO IMPROVE TAX COMPLIANCE AND REFORM TAX EXPENDITURES", providing an array of suggestions designed to increase federal tax revenue. Some of the options are designed to increase compliance by causing tax collections to match more closely tax liabilities. Other options are designed to remove loopholes, or incentives that have been manipulated to the point of undermining the structure of the tax law.

There are 3 suggestions with respect to tax procedure, 8 with respect to the individual income tax, 6 with respect to employment taxes, 8 with respect to pensions and employee benefits, 7 with respect to corporation and partnership taxation, 4 with respect to internation taxation, 6 with respect to other business transactions, 12 with respect to tax-exempt entities, 6 with respect to tax-exempt bonds, 4 with respect to excise taxes, and 5 with respect to estate and gift taxes. That's a grand total of 69 ideas.

I'm not going to describe 69 ideas. Take a look at the report>. But a few deserve some attention.

One suggestion is that government entities be required to withhold on certain payments made to taxpayers. Why? Apparently more than 27,000 contractors doing business with governments have understated tax liability. Withholding increases compliance. That lesson was learned with respect to salary income a long time ago. Why it has taken this long to apply withholding on a wider basis can be answered with one word: politics. The scam job that banks pulled when Congress tried to impose withholding on interest remains to this day a classic example of how lying can get you everywhere (if what you want to do is to avoid acting as a withholding agent). I'll tell that story another time. This proposal, though, adds to the tax law. It is a fine example of how tax law complexity is in part attributable to the need to deal with non-compliant taxpayers. After all, if everyone followed the law, and made appropriate quarterly estimated tax payments, these sorts of withholding provisions would not be needed.

Another proposal would repeal the exclusion for employer-provided dependent care, and leave the dependent care credit as the tax law mechanism for indirectly funding dependent care expenses. Assuming that the tax law should be a means of funding dependent care expenses, how can a simplification advocate not like a proposal that shortens the Code?

Another suggestion is to combine the HOPE education credit, the lifetime learning credit, and the deduction for higher education expenses into one per-student credit. Again, assuming that the tax law, rather than direct grants, should be used to fund education, the idea of trading three complicated and different provisions all focused on the same goal into one provision is a winner.

Yet another idea is to repeal the exclusion for qualified tuition reductions because it is available only to a small group of taxpayers, namely, employees of educational institutions. The benefits would be taxed, althought the taxpayer might qualify for an existing or proposed education expense credit or deduction. Although one might expect that as an employee of an educational institution I would oppose the change, I don't. I simply hope that the principle of "repeal provisions available only to a small group of taxpayers" is applied across the board, because the list of candidates for repeal is long. As a matter of full disclosure, the change would not affect me because I have never received, nor do I expect to receive, tuition reductions or remission for myself or my children (they ended up at schools with which Villanova does not have a tuition exchange agreement).

The report proposes repeal of the interest deduction for home equity indebtedness. Considering the complexity of this provision, the compliance problems, the confusion caused by the difference in the term "home equity" loan for tax and lending purposes, and the advantage the provision gives to homeowners with untaxed appreciation in their homes, the arguments for repeal outweigh the arguments for retention. This is another idea that would foster simplification, by removing something without adding to anything else or changing anything else in the Code.

Another suggestion would limit the total exclusion for the rental value of a residence rented fewer than 15 days to $2,000, and would allow certain deductions attributable to that rental. Why not just flat-out repeal the exclusion? The proposal creates more complexity.

Another proposals would require part-gift, part-sale transactions to non-charities be treated in the same way as those to charities, that is, basis would be allocated between the sale portion and the gift portion. Does this make sense? Yes. Is this a simplification? Yes and no. It is a simplification because there would be one rule rather than two. It would be a complication because it would require taxpayers who otherwise would have used a slightly less complicated rule to use a more complicated rule (the complication being the arithmetic process used to allocate the basis). There's no escaping the need for a rule, and the less complicated rule alos is a rule inconsistent with the tenor of the tax law. This one is easy to support.

The report suggest that children under 18, rather than children under 14, be subject to the "kiddie tax" and that the kiddie tax be changed from taxation using the parents' rates to taxation using the highest rates applicable to the category of income in question. This simplifies things to the extent it eliminates the logistical morass of trying to use the parental rates, allocate parental tax among children, and require parents to analyze the wisdom of making the election to be taxed on the income. On the other hand, the kiddie tax would remain a complex provision, and it would pull more children into its reach. The challenge with this proposal is that it is a band-aid on a symptom of a much larger problem, namely, the impact of a tax rate structure with multiple rates on family wealth shift planning.

Does it make sense to treat salary reduction amounts and qualified transportation fring benefits as wages for FICA purposes even though they are excluded from gross income for federal income tax purposes? The report thinks it does. So do I. All compensation, whether excluded or not, should be subject to FICA so long as the social security system remains as it is at the present time. There are other deferred compensation amounts that have long been treated as wages for FICA purposes despite their exclusion for income tax purposes, so this proposal would be leveling the playing field in that respect.

Another proposal would treat sales incentive payments, which ARE included in gross income, as subject to FICA. Under current administrative practice, for reasons not explained, they have not been so treated. This is another one that is easy to support.

FICA arises yet again in a proposal to remove the "John Edwards" technique. Simply put, it would prevent S corporation shareholders and partners from treating compensation as distributions in order to avoid FICA. This is another winner.

Here's one that's not difficult to like. Another proposal takes the many different definitions of medical care in the tax law and provides that the definition of medical expenses for purposes of the tax treatment of reimbursements from employer-sponsored accident and health plans, health savings accounts, and Archer medical savings accounts would be the same as the definition of medical expenses that may be claimed as a medical expense deduction.

The report proposes changing partnership basis adjustments to make them more accurate from a technical perspective, but this change makes the provision and the computations more complicated. Partnership Taxation students and practitioners will be thrilled to see this one enacted. Again, this is a band-aid solution to a symptom of a larger problem.

Another suggestion is to make all sport utility vehicles subject to the luxury automobile limitations, which would permit repeal of the section 179 expensing limitation for sport utility vehicles. This is a simplification. It makes sense, provided one accepts the idea that sport utility vehicles ought not provide tax savings opportunities. How long until the energy efficient sport utility vehicle lobby chats up an exception? And why not extend the limitation to other vehicles, such as dual cab pick-up trucks, that often are used for everyday passenger transportation. There may be as many pickup trucks with beds carrying living quarters as there are sport utility vehicles that have never been taken off road.

The report proposes repeal of the charitable contribution deduction for facade and conservation easements on personal residence properties, substantial reduction of the deduction for all other qualified conservation contributions, and new standards on appraisals and appraisers of these easements. These deductions have been the subject of recent discussions revealing the extent to which they have been abused, partly through highly overvaluation and partly through the setting aside of easements that don't deprive the owner of substantial rights. The proposal is yet another complication contribution required because of taxpayer noncompliance with the spirit, and in some instances, the letter of the law.

Here's an interesting idea. Because taxpayers erroneously or deliberately overstate the value of personal property donated to charity, the report suggests the following: "The income tax deduction for charitable contributions of clothing and household items made to [charities] is limited to $500 per taxable year for the aggregate of all such contributions made by the taxpayer. No carryover of such contributions over $500 is allowed. As under present law, the deduction for a particular item may not exceed fair market value and the taxpayer must retain records to substantiate the deduction. * * * * The proposal applies to new and used items. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food is not considered a household item. Paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the proposal. A collection must be something given for use or sale as a collection and generally must have value independent of its component parts." In its reasons for the change, the Committee staff states that the deduction encourages taxpayers to contribute property that they might otherwise throw away. I wonder what impact this proposal would have, if enacted, on organizations such as Goodwill or Purple Heart, who employ people to repair other individual's "trash." Hopefully taxpayers would continue to put these things "out for Purple Heart" rather than "out for the landfill." In this instance, tax compliance enhancement policy clearly conflicts with conservation policy.

The report proposes two options, both of which, to a greater or lesser extent, would apply a "lesser of fair market value or adjusted basis" limitation to the amount of the deduction for a contribution of property to charity. I predict that this proposal will trigger many pages of discussion and many hours of debate. It takes away from charities one of their most important arguments used to persuade taxpayers to contribute appreciated property. Under current law, the taxpayer not only escapes taxation on the disposition, but gets a deduction for the gain that goes untaxed. Unlike a gift to an individual, where the gain is shifted to the donee and taxed when the donee disposes of the property, the gain in the property donated to the charity goes untaxed, save for a few exceptions that reach only a small portion of these transactions.

The report also recommends codification of the economic substance doctrine and its application to certain transactions. The proposed statutory language, which is in the report, is worth reading. Why? To show how some of the tax law's complexity arises from the "gaming" that transpires between taxpayers who seek to reduce taxes by engaging in transactions in which they would not engage but for the tax law and government officials who usually trail in the game, reacting to plans that by the time the IRS audits a return have been supplemented by new arrangements. The goal of the proposal is to create statutory language that permits the IRS to attack tax shelters more easily. No matter what logic tells me, I have this nagging feeling that the proposal changes, but does not make a substantial dent in, the game.

So now what? A practitioner once told me that he didn't read legislative proposals because it wasn't worth applying intellectual energy or practice time to something that might not ever become an issue while having the immediate concerns of clients to manage. I understand that perspective. Yet it helps to be aware of possible changes, especially if there are effective dates that make planning "too late" if attention is paid to the legislation only when it is enacted (or reported by Ways and Means). So I think it behooves practitioners (and "academics") to at least skim the report. I touched on a few of the proposals, and certainly I did not want to get into those that deal with issues far beyond the scope of my tax expertise. There's much more in the report than my brief overview suggests.

Where do the proposals go? I don't know. Will they collide with the report of the Commission on Tax Reform? Maybe. Will they be incorporated, or merged in some way? Perhaps. Will the tax law be less complicated? Ha ha. I doubt it.

Here's to your happy reading or skimming. So what that it's only 600+ pages? Isn't War and Peace longer? It's the book report that's due Monday that gets us nervous.

Simple in Theory, Complex in Practice

Some may remember that I did not think that restoring the sales tax deduction, even as an alternative to a state income tax deduction, was an appropriate or wise idea. In my earlier postings I have pointed out the dangers of selectively backing out of an legislative agreement on taxes, the logic of repealing the state income tax deduction rather than adding a state sales tax deduction, the inappropriate effect on tax burden shifting, the countervailing effect of the AMT, the confusion over IRS determination of tables for the restored sales tax deduction, and the seemingly low amounts set forth in that table.

Now another issue arises that illustrates how a simple concept or theory that attracts votes is mostly a complexity generator in disguise. It almost always is that way.

The IRS anticipated some of the issues. In the sales tax tables that it issued, the IRS addressed how to handle situations in which the taxpayer lived in more than one state during the year, and the IRS took into account the fact that in several states the sales tax rate changed during the year. The IRS also provided a means of adjusting the table amount for local sales taxes.

For local sales taxes, the IRS table instructions simply refer to "your locality." What is your locality? Is it the town in which you live? The town in which you work? The town in which you shop? Does it matter? Of course it does. There are, we are told in a message to the ABA-TAX listserv, people who live in rural areas and who must shop in nearby towns or cities. The rural area has no local sales tax (I guess when there's nothing much to tax there's no use having a tax, and there must be a lesson in there somewhere). The town or city has a local sales tax.

There are good arguments to make that "your locality" means "the locality where you live" because the rules for people who move refer to the states in which they lived, and the expression "the locality in which you lived" does not get used. On the other hand, "the state where you lived" is used instead of "your state" and I wonder if this is a deliberate inconsistency in the expressions. After all, if a person lives, works and shops in locality A, which has a local sales tax, and then during the year moves to locality B, in the same state, which also has a local sales tax, I assume that the formula provided by the IRS for persons who move from state to state would be interpolated to apply to the moving from one locality to another.

Has this become sufficiently complicated? No.

Consider the person who lives in one state and shops in another. I'm thinking of Pennsylvanians who cross into Delaware to do their shopping because there is no sales tax in Delaware. These Pennsylvanians, but for the fact that the state income tax deduction is larger, would use a table to compute sales taxes based on where they live and not where they shop. What happens to a person, therefore, who lives in a locality with a local sales tax but who shops in a nearby town that does not have a local sales tax? My guess is that the person would choose to add in the local sales tax rate of the residential locality.

So can it cut both ways? Is it a matter of selecting the locality with the higher local sales tax and making it "your" locality? There is a strong argument that the rule needs to be consistent and that there is no authority for usig a "greater of" approach.

So what has Congress done? To appease some voters, rather than repealing the deduction for state income taxes, it went back on a previous legislative agreement and restored, in a more convoluted manner, a state sales tax deduction, and its attendant complexities. So what Congress did is to impose more burden on the taxpayers' time, more paperwork on their tax return preparers, and more questions on their tax advisors, for which the taxpayers will ultimately, in some way, pay. Perhaps the Congress unintentionally created more work for lawyers, and contributed to the hiring of 17 law school graduates.

What Congress has done is to make the mess messier. Congress gave me material for my blog. The two seem to go hand-in-hand, it seems. Could it be any other way?

Supremes to Congress: Clean Up Your Own Mess

Last fall, I reported on the enactment, by the Congress, of an above-the-line deduction for attorney fees paid by plaintiffs in specified types of litigation. In my post, I criticized the narrow nature of the provision.

Today the Supreme Court handed down its decision in Commissioner v. Banks. It held that the plaintiff's gross income INCLUDES the gross damage award, and is not reduced by the portion paid to the plaintiff's attorney. The Court correctly set aside the recent legislative enactment as non-determinative, because its effective date precluded the case that the Court was deciding.

The Court's decision, with which I agree in result, did not address arguments that had been raised for the first time in the briefs of the parties and amici. That's not an unusual treatment of "new" arguments. The Court's decision, though of small importance to cases for which the above-the-line deduction is permitted, is significant for other cases, such as those involving defamation, and for all the cases in the pipeline not within the effective date of that deduction.

In his Tax Updates blog posting on the Banks decision, , Joe Kristan says, "In effect the Court is again telling Congress: you broke it, you fix it." Exactly. There are those who disagree, who see courts as having some higher duty to set the law right no matter what, but I, without speaking for others, think that doing so leaves the Congress as the spoiled child who grows up to be a societal burden because the parent steps in and fixes everything that the child ruins. The Congress needs a better way of dealing with tax issues, and I, for one, will not accept "but it's complicated" as an excuse for its failure to prevent the sort of mess that taxpayers found themselves in, when it is the Congress itself that created the mess. The fact that Congress chose to help only some taxpayers and not all highlights the dangers of a Congress that legislates by caving to lobbyists rather than acting with wisdom and even-handed judgment. And leaving the clean-up to the courts is just plain irresponsible.

And if Congress had dealt with the matter properly, the arguments properly rejected by the Supreme Court could have been presented to Congress. In a full hearing, the Congress would have the benefit of everyone's insights, and not just the desires of a group with special connections to the law makers. I will not repeat the discussion on this issue that I shared last fall.

The Social Security Chicken and Egg

Andy Cassel's column in Friday's Philadelphia Inquirer raised several very important points about the social security debate that is beginning to heat up a bit. Two of his observations strike me as fundamental to the debate.

Andy's first fundamental point is that there is no point in addressing any of the issues (existence or scope of crisis, financing devices, investment possibilities, retirement age, benefits, etc.) until and unless we have "some basic notion of what we want Social Security to accomplish." He is dead-on right. Part of the problem, perhaps the principal cause of the problem, is that Social Security has a split personality. Is it insurance against being in poverty after retirement? Is it a savings plan? Is it a wealth transfer plan? Is it a disability plan? Is it a survivor benefit plan? If it is some combination, how should each element be weighed?

Though many debate this point, I (and others) continue to assert that Social Security was designed as insurance against being in poverty after retirement. The "I" in FICA is for "INSURANCE." Over the decades, it was expanded to include survivors of retirees, and then survivors of potential retirees. It came to include disabled workers who had not yet retired. Medical benefits were added, though eventually the Medicare portion was separated to some extent. During the heydey of Rep. Pepper's "all elderly are poor, let me get them benefits and their votes" campaigns, any notion of a means test was tossed out the window. Of course, today there are more children living in poverty than there are elderly, and this vote-getting expansion of Social Security surely is partially, if not entirely, to blame.

But before this question can be answered, other information is required to shape the context in which the question is asked. This brings me to Andy's second important point.

Andy's second fundamental point is that we need to reach agreement on whether government-run social insurance does more harm than good or more good than harm. He refers to assertions by Martin Feldstein, a Harvard economist who advised Ronald Reagan and who may succeed Alan Greenspan as chair of the Federal Reserve System. Feldstein argues that social programs are disincentives, claiming that unemployment insurance increases unemployment, retirement pensions induce earlier retirement, and health insurance programs increase medical costs, just as air bags subtly encourage people to speed. There's some merit to these arguments. The existence of unemployment insurance might cause an employer to lay off an employee that the employer might otherwise try to retain because the employee has a family. Some people do retire earlier than they would retire because they have retirement benefits waiting for them. Health insurance might encourage people to get check-ups that they might avoid because of financial restrictions, though I'm not convinced that the cost of wellness is more than the cost of sickness.

Here's the problem. Most insurance is unlike the lottery. One pays, and then prays to lose. Do you REALLY want to collect fire insurance, auto collision insurance, auto theft insurance, or flood insurance? Sure, but only if the fire, accident, theft, or flood occurs. Almost everyone prefers that the casualty not occur. Not only does the insurance not cover the entire loss, these events pose dangers to life and health and are a general inconvenience of the highest order. Life insurance is a strange exception. If it's term insurance, again, most folks don't want to collect during the term. If it's whole life, sure, it will pay someday, but the hope is that it is a day far in the future. All of these insurances cost money, but payment of the premium is good "insurance" against the risk of an undesired but unpredictable and possible event.

Let's turn to retirement. Ideally, individuals would save for retirement. Few people do so. Some are unable to do so. Others are unable to see a long-term need as having the same or higher priority as a short-term want. Many depend on the retirement portion of an employment package, but then end up on the streets when an employer goes under, leaving behind unfunded retirement obligations. That's what FICA was designed to address, namely, retirees who through no fault of their own were left penniless because an employer went bankrupt. FICA was enacted decades before the pension reforms of ERISA that brought us the Pension Benefit Guaranty Corporation, which essentially insures pensions from the employer's perspective. The combination of FICA and PBGC coverage, though far from being duplicative, creates a situation in which many Americans conclude, erroneously as any half-sensible financial planner will explain, that they don't need to save for retirement. And if that is indeed the effect of the current structure, changes are needed.

First, let's separate the different goals of "Social Security" and deal with each one separately, just as a person would treat each goal separately when dealing with each in his or her own way. Just as Medicare has been somewhat cordoned off of Social Security generally, so, too, should be pre-retirement disability and, as a separate matter, financial protection of survivors of people who die before retirement. Let's stop here and consider how this should be done. If it is means-tested, then there is, as Feldstein argues, an incentive to refrain from purchasing disability or life insurance because "the government" will step in to help. On the other hand, using benefits restriction as a means to encourage private investment in disability or life insurance penalizes those who cannot afford to do so. The age-old question arises again: if society elects to assist those in need through government programs, what is to prevent people from pretending to be in need or in "arranging" to be in need. We see this in the game of Medicare qualification when wealthy families shift familial burdens onto society. We see it when tax provisions are used by those for whom they were not intended. Any sort of means testing, aside from being intrusive and judgmental, invites complications of the same order of magnitude as administration of the tax law, or worse.

Second, let's consider putting responsibility for retirement, disability, casualty loss, and premature death planning on the individual. Yes, there are those who cannot afford the premiums, but they also cannot afford food and medicine. Let's issue insurance stamps just as the government issues food stamps, though I wonder if I'm not doing a frying-pan-into-the-fire metaphor with that one. Better yet, instead of separate programs for food stamps, cheese give-a-ways, house insulation projects, etc., all of which create redundant bureaucracies and compel impoverished individuals to fill out reams of forms, let's create one "help those in need" program which will provide funding, lasting only so long as needed, for the basics of life. We can define the basics of life to include not only food and insulation, but also premiums for disability, life, and casualty insurance and contributions to retirement savings. Toss in health insurance.

In the long run, administering such a program would be easier than the combined burden of the disparate offices sprinkled throughout state and federal government agencies. In the short run, the transition could be challenging. But since when have we, as a people, shrunk back from challenges?

And this would put to rest all the subsidiary questions. Retirement, disability, and survivor benefits would return to the private sector, where food and most casualty insurance have been and have remained. Perhaps the government would need to insure the insurers (as it already does to some extent for certain things), but ultimately the individual could choose retirement plans as many employees now do. The tax law dealing with deferred compensation could be overhauled and simplified. Means-testing social security benefit payments would be unnecessary, as the means testing would take place with respect to insurance premiums and plan contributions.

It would not surprise me to hear from a reader explaining that all of this was proposed years ago by someone no less, and perhaps more, creative than am I. And, the reader might point out, the suggestion was rejected. For me, that simply means that those who did the rejection, and their political heirs, now have an opportunity to admit mistake and fix the mess they have created before it swallows all of us.

But, as Andy Cassel points out, these are the debates in which we should now be engaged. Only after these issue are resolved, and only if resolved in certain ways, would it be appropriate to turn to the issues that have grabbed the current headlines. Sometimes spotlight hogs need to be pushed aside and taught patience.

State Taxation of Nonresidents

Yet another nonresident income taxation case has moved into the spotlight in New York, though its impact can and will be felt throughout the nation. Thanks to loyal reader, former student, and Graduate Tax Program adjunct teaching colleague Ryan Bornstein for the heads up, which he sent several days ago, and which Paul Caron just picked up on TaxProf. The ABA has provided a good writeup of the case.

The case involves a Tennessee resident who is employed by a New York organization to do computer work. Thomas Huckaby does about 75% of the work at home in Tennessee and is in New York for 25% of the time. He's not a New York resident. So unless one is familiar with the twists and turns of interstate taxation, one would conclude that New York can tax 25% of Huckaby's income. Of course, most folks would guess that New York tries to tax all of it. On this sort of guess, picking that conclusion is almost always a winner.

New York's approach rests on the assumption that the employee could do the work in New York, and that unless the employer requires the employee to do the work in another state, the employee should be treated as doing the work in New York even if the worker is not in New York. This approach uses what is called the "convenience of the employer" test. New York claims that Huckaby's employer did not require Huckaby to do the work in Tennessee.

Of course, Huckaby's not about to commute to New York from Tennessee. And Huckaby lives in Tennessee, not to escape the New York income tax, but for personal reasons. Tennessee, incidentally, does not have an income tax on salaries.

Huckaby balked at what New York tried to do, and litigated. He lost in the New York Supreme Court (which, here's another law quirk that non-lawyers will find counter-intuitive, is the state's lowest court!), and he lost again on appeal to the appellate division of the state Supreme Court. So now he's up to the New York Court of Appeals, and oral argumentw were heard recently. Here's the cite for those who want to read the appellate division opinion: 776 N.Y.S.2d 125 (2004).

What are his chances? Tough to say. He's not the first to challenge the rule. A law professor who teaches in New York City but who does some of his teaching-related work at home in Connecticut challenged the convenience of the employer rule and lost. Eventually the United States Supreme Court declined to hear the case. The Supreme Court rarely takes up a case the first few times the issue appears, as the Justices appear to prefer waiting until the matter sorts itself out to some extent in the lower courts. Being a pioneer is tough. Take a look: Zelinsky v. Tax Appeals Tribunal, 769 N.Y.S.2d 464 (2003).

New York and only a few other states use the convenience of the employer rule. It is politically easy to adopt, because nonresidents don't have a vote. Taxation without representation, eh? Most states tax income that is earned while a person is physically present in the state. A physically present nonresident imposes a burden on the state by being the beneficiary of police protection, street cleaning, emergency services, and similar municipal services. The issue is not unlike that raised by Pennsylvania localities implementing the emergency and municipal services tax, which I discussed in this recent post. The court in Zelinsky, though, asserted that the employee's decision to reduce the time he spent in New York "did not diminish" what New York provided. That is flat-out wrong. If Zelinsky reduced his physical presence in New York to zero, would New York have a right to tax him in perpetuity because he worked there at some previous time? Lee Sheppard's suggestion that judges be required to attend business school, discussed here, jumps into my brain. If the judges' in-laws visit only twice a year and not once a week, there's no reduction in what the judges provide to their guests? There are times I understand why non-lawyers think lawyers have lost all traces of common sense.

As more and more employees telecommute, the issue of state income taxation will get more attention and generate more litigation. After all, if a person can work from home, why not let that happen, or perhaps require it? It saves energy by cutting down or eliminating commuting, the employer reduces rent or other building costs because less space is required, the need for parking spaces is reduced, and other economic advantages accrue to the employer. The convenience of the employer test will have an ever-increasing "drag" effect on the nation's transition to a digital economy.

But if New York continues to prevail, other states will see the convenience of the employer test as an invitation to revenue enhancement. If the nonresidents live in states that don't impose an income tax on wages, then there is a net revenue flow to the state adopting the test. On the other hand, if the state in which the nonresident lives adopts the same rule, it could cause net tax revenue to flow to that state and away from the state originally adopting the rule. So, in the long run New York might win by losing and lose by winning.

Percolating on Capitol Hill is the Telecommuter Tax Fairness Act, which almost certainly will be introduced again after the new Congress gets its business underway. The Act would bar states from using the convenience of the employer test. My guess is that it will get saddled with other provisions attempting to deal with other interstate taxation problems exacerbated by the emergence of the digital economy. The lobbying will be intense. The ABA reports that at least $100 million in annual tax revenues is at stake in New York alone.

I close with a question that I cannot answer because I don't know all the facts about Huckaby's employment. I have a pretty good idea of the situation in Zelinsky. Any chance Huckaby could set up as an independent contractor? Would it be worth finding a few other clients and thus establishing self-employment status? People doing business or working with New York entities and persons might want to consider the possibilities. I don't think there's much chance that full-time law faculty would set up as independent contractors with respect to the services provided to the University (unless they were full-time in the sense that they provide services to several Universities, a trend that is growing among undergraduate faculty as colleges and universities seek to cut expenses, and even in those situations the question isn't that easy to answer).

Putting the Tax Law to Good Use

OK, suppose I cave in and support the idea that the tax law should be used for non-revenue purposes. What would be on my list of tax-encouraged and tax-discouraged activities?

Well, the list of tax-discouraged activities would be long. At the moment, I'll select one. I choose it thanks to an item on Politech (and thanks to Declan McCullagh).

Take a look at Ben Edelman's Investors Supporting Spyware list. I wonder how many of these enterprises are marketed as tax-savings investment vehicles (to use a euphemism).

So.... here we go, a proposal for a Congress that thinks it can simply declare spyware illegal and all the bad guys will comply. Take away all tax benefits associated with investments in enterprises that engage in Spyware.

Well, I guess I just made some new friends with this post!!!

So What Am I Trying to Teach?

My response to a moderately complicated partnership taxation question posted on the ABA-TAX listserv brought a comment from one of the participants. He expressed a concern that for my students' sake issue spotting was the more important part of the exam and that reaching the correct result is of less importance.

Here's my reaction:

Spotting the issues gets a student to a passing grade. Spotting the issues is often rather easy in tax. Getting the right analysis is what matters most. Correct result is important if there is one.

My exams are a mixture. Some easy questions, with easy issue spotting and/or easy correct results. Some in the middle. And a few tough ones to identify the A students.

I tend not to emphasize arithmetic. There's some, but it's not pervasive. I try to distinguish use of or reference to the wrong number from can't add or divide. The former is serious, the latter trivial (for the exam but not in practice so they lose a point or two at most out of 150).

Generally, I am as demanding of my students as clients are of their advisors and partners are of their associates. No use lulling the students into a false sense of law practice. They have TV shows to do that for them!

It has always been an obstacle to my teaching to encounter students whose educational experience has led them to conclude that memorization and regurgitation, or identifying issues, is sufficient to succeed in practice. It has always been a frustration that there are a few law school faculty who choose not to break first-year students of this misperceptions because they fear the dislike of students and the resulting low evaluation scores, because it means I get an even more difficult task of disabusing students of their years of misimpression, which has been even more deeply imbedded into their mental processes because one or two of their law faculty have enabled the flaw.

One of the reasons I invest a lot of time creating 10 new questions each semester for use in during-semester exercises is that I want the opportunity to identify for each student the sort of question-answering pattern that costs them examination points. I prefer that a student do poorly on one 8 point question during the semester and learn not to respond in the same manner the next time around than to have a student do poorly on 50 points worth of questions when there is no next time around (at least not in that course). Too many episodes of remorse and tears accompanied by "I wish I knew this before the exam" and "Now I know why I didn't do so well on my first-year exams" propelled me into the during-semester evaluation process that is unusual for law school courses other than simulation, clinic and other hands-on small enrollment courses (which generally are small enrollment partly because of the need for during-semester evaluation). I've turned my courses into small-enrollment type courses with enrollments of 50, 75, 100, and sometimes more. I've been told by the Dean that it must be an insane amount of work, and it is. But that is, I am convinced, what I am being paid to do.

The tough questions that my students encounter aren't the ones that ask for issue spotting, or even the ones that ask for result. The tough questions are the ones that give the answer and ask why, that ask which argument doesn't fit with the others, that ask what information needs to be obtained from the client before analysis can begin, or that ask which facts need to be changed to alter the outcome.

A few years ago, one very bright, top-of-the-class student who was struggling with the during-semester exercises and baffled by the inconsistency between those scores and the previously-earned grades, said to me, after a series of conversationd over a several-week span, "I get it. Everyone else says 'Here are the facts, what is the answer?' and you're saying 'If we want the answer to be x, what must the facts be?' You've turned around the process into an analytical reasoning. I get it." Sure did. Exercises scores rocketed back up into familiar territory and the student aced the course. The following semester the student returned to tell me that the change in the thinking process had been carried into writing, and that the law firm for which the student had clerked made an on-the-spot offer because of the excellence of the analysis in the writing. THAT means far more to me than the popularity contest played out in student evaluations, some filled out by students who admit to investing an hour or less each week to the course or who otherwise have failed to get on board and are angry because they have not been spoon-fed and coddled.

The problem exists in other professions. There is such a reluctance to offend a student or hurt a student's feelings by telling it like it is that the pressure to inflate grades continues to intensify. I've seen several stories during the past month about faculty at other institutions claiming they had been terminated for having refused to inflate grades. Society is already beginning to pay the price, the price of having people given responsibilities for which they are not prepared, trained, educated, or ready. In the long run, it is a good thing to identify areas needing improvement and to highlight the message with scores and grades that rattle the student. It also makes sense to explain to students what it is they need to be doing and to give them opportunities to try that aren't an all-or-nothing end-of-semester examination. Teaching requires and demands feedback. When I try to persuade students to work throughout the semester and to ditch the end-of-semester cram silliness encouraged by the all-or-nothing end-of-semester exams (even those who evaluate in that manner do not intend to discourage during-semester work), I emphasize that a failed effort is better than no effort because it teaches.

For the students who do what needs to be done, happily or not, their clients someday will benefit. And I don't care that their clients may never know what went into the shaping of the student's mind that contributed to the successful professional. I know, the student knows, and I suppose Higher Authority knows. Oh, I guess now you know.

ALL of Gross Income?

I'm now starting to roll along my latest major writing project, the revision of TM 501-2, Gross Income: Overview and Conceptual Aspects. That's a BNA Tax Mgmt Inc income tax series portfolio for those of you who don't recognize the "TM 501-2" tag. The 501 is the number (first in the revised series beginning at 501) and 2 means it is the second edition. What I produce will be 501-3.

It's hard to believe that this is the third time through with this one. Back in the late 80s, Tax Mgmt approached me with a plan for an "overview" series of income taxation. There were three goals. First, provide the forest that often cannot be seen for the trees. Second, address conceptual issues that don't get attention in the topic-specific portfolio, which puts its focus on practical implementation. Third, pick up detailed discussion of the "orphan" provisions that aren't addressed in other portfolios because they are too "small" to warrant their own book, and lumping them together without an overarching theme would create a jumble.

So I wrote an "overview" of the income tax, other than procedural rules. Don't be misled by "overview" because it is a thorough discussion of every provision, anchored on the Code and dipping into the regulations. For topics needing that detailed discussion, the overview gets into the cases, rulings, and other authorities.

The scope and extent of the product was overwhelming. The original 501 was too big for the binding process that is used, so it was split into two portfolios. TM 502 deals with assignment of income, claim of right, and the tax benefit rule. The original deduction portfolio was split into three (TM 503, 504, 505), with trade or business deductions and deduction limitations each getting their own portfolio. TM 506 covers tax computations and TM 507 covers tax credits. Then TM 560, an overview of tax basis, was added, followed by TM 590, an overview of the taxation of real estate transactions. Recently TM 597 was put together, though it has not yet emerged. It's close, and it will cover Tax Incentives for Low-Income Areas. Most of these portfolios end up as 400 to 700 double spaced pages of text, with anywhere from 3,000 to 5,000 footnotes. I really do wish I could find a way to compel every member of Congress to read these and then in good conscience continue to do to the tax law what they've been doing to it for the past several decades.

Lest this cause you to think I only do overviews, I have also written and updated TM 525, Deduction for Taxes, and TM 531, MACRS. And then there are a bunch of chapters in the digital Tax Practice Series.

Because tax law is so dynamic (a fancy way of saying it constantly changes), these portfolios need to be updated. The 501-507 series went through a series of updates in the late 90s into 2001. Then I turned to updating 560, 590, 525, and 531. Now it's time to update the 501-507 series again. It's been 8 years since 501 evolved into 501-2. And when I'm done generating 501-3 it will be time to turn to, yes, 502, 503, .......

At some point 501 may need to split yet again. The amount of tax law changes and additions affecting gross income is staggering. It's not just "what is gross income" and "what are the requirements for this specific exclusion" but also a question of describing what gross income affects aside from taxable income (e.g., limitation on other amounts), and how gross income intersects with other provisions. Almost every change adds text to the Code, and the additions pour out of Congress incessantly as the special interests line up for their "absolutely necessary" exception to the exception to the exception.

I do learn a lot. I get to write about Code provisions that are far beyond the boundaries of the courses I teach, and that includes the courses in the LL.M. (Taxation) program. I get to see the "entire fabric" of the income tax law, and must make judgments about the depth to which any specific provision is described. It's not like visiting the sausage factory, it's like setting up an easel and painting a portrait while standing a few feet from the production line. I get to read the complicated stuff that most critics discuss in general terms. I'm only into the third of twelve chapters (the first two being relatively short because they are introductory) and already I've met two definitions of hedging, and definitions of six different types of financial products dealers.

Maybe when (if) the newly-appointed Commission on tax reform (haha) decides to look closely at why the tax law is such a mess, they can call me and I'll gladly take them on a tour. After visiting TM 501 I'll let them know that despite its voluminousness and complexity, they will find even more quantities of even more tangled material in TM 506, TM 507 and to some extent, the rest of the series. And then for dessert we'll dig through TM 597, awash in enterprise zones, renewal communities, empowerment zones, and a whole array of different designations for what essentially could be called by one name.

Anyhow, if you notice my usual M-W-F posting pattern change (as it already has), it's because when I get immersed in a segment of a portfolio I stay there and don't emerge for much else. I'll still be sharing my thoughts, but probably on a more erratic pattern, such as T-Th-Sa, M-T-Th, M-T-Th-F, and the like. So check in each day.

Addendum: This posting is about as close to the sort of items one reads in an "online diary" type of blog as I've published. I thought a behind the scenes look at the writing of TM portfolios would be interesting, especially for those who use them. And, of course, I couldn't resist getting in my jabs at the Congress, at the complexity of the tax law, and at the futility of approaching tax reform with a commission many of whose members aren't tax experts.