Don't Let Flattery Get Them Everywhere

It is said that flattery will get you everywhere. Unless, of course, you are on the receiving end and fall for it. Here's a disturbing story.

Back in October, in a post commenting on the surge in spam inundating my email inboxes, I wrote:

And the Nigerian scam has been so outed that only people who have been living under a rock for the past five years would be susceptible.

So when the news broke late last week about the University of Miami law professor caught in a Nigerian spam scam, I figured it behooved me, a lawyer, to look closely at the facts.

According to this story in the Miami Herald, a person claiming to be an official of the Nigerian government emailed professor Enrique Fernandez-Barros, asking him to review some contracts. Fernandez-Barros, a foreign law expert who holds three academic degrees, explained that it was his international reputation that brought the solicitation. The official offered to pay Fernandez-Barros $200,000 and to send him additional legal work if he would help Nigeria and a Nigerian entrepreneur recover $1.68 million from Penske Truck Leasing.

Fernandez-Barros received a check from Penske for $1.68 million, deposited it in his credit union account, and then wired the money to Nigeria. All in a day's work for a lawyer, but Fernandez-Barros ended up involved in a Secret Service investigation that triggered a lawsuit. To make matters worse, Fernandez-Barros explains that he was not paid the promised $200,000.

Apparently Penske owed $1.68 million to Freightliner for trucks that the latter manufactured and sold to Penske. Penske mailed the check but it never reached Freightliner. No one seems to know why. Instead, a check in the same amount was mailed to Fernandez-Barros. According to the complaint in the lawsuit, the check received by Fernandez-Barros had the same check number, date, and signature as the original check but was altered in several noticeable ways. So perhaps my guess is wrong. Perhaps the Freightliner check was mailed to another address, altered, and sent on to Fernandez-Barros, or perhaps it was altered by a Penske employee before it was mailed to Fernandez-Barros. All signs do point, though, to someone at Penske being involved. Perhaps that person, too, was suckered in by the same Nigerian spammer-scammer. Fernandez-Barros explained that the Nigerian business man claimed Penske owed him money for a stock sale, and that the check was sent by an associate of the business man in Atlanta. Fernandez-Barros says that he did not alter the check nor did he know it had been altered.

Penske, instead of suing Fernandez-Barros, is suing its own bank, Fleet, and the credit union into which Fernandez-Barros deposited the check and from which he wired the funds to Nigeria. Allegedly Fleet refused to seek reimbursement from the credit union. The credit union claims it suspected the check had been altered, and held the check for seven days while it contacted Fleet, which allegedly told the credit union that the check was authentic. The credit union claims it held the check for four more days, contacted Fleet again, and received the same reply. The credit union cleared the check after Fleet provided funds from Penske's account to cover the check. No one contacted Penske.

Fernandez-Barros said he "felt flattered" when he was approached by the Nigerian government. He also claims that the Nigerian government got him into the "mess" and that "they used [him] like a ches piece to steal the Penske money."

It seems clear that Fernandez-Barros is innocent. But he was duped. A law professor, an internationl law expert, a highly educated man, was duped. How? He neglected to follow some basic principles.

1. Do not engage in business with a person who solicits you via e-mail and who is a stranger, until you check out the person through other sources. Ask for references who you know. Make inquiries.

2. If the person is from a country known for spammer scammers, contact the embassy or consulate of that nation. In this instance, it would probably have come out that the spammer scammer was not an official of the Nigerian government.

3. Don't let yourself be flattered. Expert or not, be suspicious. In a post-modern world based on selfishness, self-centeredness, rationalization, and greed, it is prudent to be suspicious.

4. Law professors should be teaching and writing. If they are practicing law, they should do so with the permission of their deans, and under circumstances that do not adversely affect their teaching and that safeguards the school's reputation. That's why law professors should not be litigators, because it leaves the class schedule subject to the vagaries of the court schedule. It's one thing to be of counsel to a reputable law firm, and to provide consulting services. It's another thing to embark on a huge project involving millions of dollars with six-digit fees. Had Fernandez-Barros talked to his dean or to a practice-connected trustee of the school, he may have been the beneficiary of their reluctance, suspicion, or need to ask more questions.

5. Think like a lawyer. If Penske owes money to someone it will pay that person directly. If Penske claims it does not owe the money, it has a reason. Contact Penske. A lawyer should, and if competent would, suspect something wrong when asked to receive money from one party and transmit it to another party without having had an explanation and agreement from both parties.

6. Think like a lawyer. The arrangement of taking money from one party and remitting it to another party overseas waves the red flag of money laundering. That's not to say every such transaction is illegal, but a person, lawyer or not, should not participate in it without a full and thorough investigation. Relying on the second party's representations about the first without checking them out is bad lawyering.

What troubles me is the energy that this story gives to the "those who can't, teach" part of the misguided slogan, "those who can, do, those who can't, teach." It insults good teachers. It presumes that lawyers in practice would not have made the same mistake, but in fact lawyers in practice have also been caught up in these scams. Hopefully some good will come out of this story, as it causes more people to be aware of the risks. The spammer scammers will stop only when they receive no replies for months on end. At the moment, I fear, word is spreading in Nigeria, "Americans are easy to dupe. They're gullible. Even their hot-shot law professors can be had." Let's prove them wrong.

The Bad Idea Gets Enacted, So Now What?

Well, Congress enacted the bad idea I described in a posting the other day. Congress decided that letting people deduct on their 2004 tax returns contributions made in January 2005 for tsunami relief would be a good idea. I suppose the incentive is as follows. A $100 deduction made in January reduces taxes by, say, $20, but that wouldn't be "seen" until early 2006 in the form of a larger refund, or a lower additional tax due. Theoretically, it could be "seen" during 2005 through a reduction of quarterly estimated taxes or a payroll adjustment, but a $20 amount doesn't really work out for those purposes. By letting the deduction be claimed on the 2004 return, the $20 tax savings is "seen" in early 2005. So, at best, the $20 is "seen" a year earlier. What is the value of $20 a year from now? Probably, at current interest rates, about $19.50. So, in theory, someone will decide to make a contribution because the tax law provides an incentive of FIFTY CENTS for every $100. ANYONE who lets THAT be the factor that tips the decision to contribute is, never mind.

And, as I pointed out, for folks who don't itemize, this "incentive" does nothing. A better incentive, that might have had some effect, would have been to make the deduction allowable in computing adjusted gross income so that folks who don't itemize would get a tax benefit.

So let's look at the language of the window dressing that doesn't do anything, really, to spark donations but that will add complexity and compliance issues. It's in H.R. 241:

SECTION 1. ACCELERATION OF INCOME TAX BENEFITS FOR CHARITABLE CASH CONTRIBUTIONS FOR RELIEF OF INDIAN OCEAN TSUNAMI VICTIMS.

(a) IN GENERAL- For purposes of section 170 of the Internal Revenue Code of 1986, a taxpayer may treat any contribution described in subsection (b) made in January 2005 as if such contribution was made on December 31, 2004, and not in January 2005.

(b) CONTRIBUTION DESCRIBED- A contribution is described in this subsection if such contribution is a cash contribution made for the relief of victims in areas affected by the December 26, 2004, Indian Ocean tsunami for which a charitable contribution deduction is allowable under section 170 of the Internal Revenue Code of 1986.

Subsection (a) isn't too difficult to understand. But what of subsection (b)? What is the meaning of "a cash contribution made for the relief of victims in areas affected by the ... tsunami"? Is it a contribution made to a fund set up for that purpose? Is it a contribution to a charity that is designated for such relief under a protocol set up by the charity? Does it include a contribution designated for such relief made to a charity that doesn't accept such designations? Is it a proportionate share of a contribution made to a charity that expends a portion of its contribution receipts on such relief?

Will the IRS need to issue guidance? Will it be able to do so by January 31, a day only 24 days away? Surely it can't issue regulations that quickly. It can issue an Announcement, but I doubt it would be out next week.

Tax return preparers, including taxpayers who do their own returns, need to remember to add their January contribution to the contributions total spewed out by their Quicken or other checkbook program. Worse, they need to mark the entry so that in early 2006, when the checkbook program spits out the total for 2005 contributions, they back out the amount deducted on the 2004 return. I am guessing that the IRS will want some indication on the 2004 return that this is being done so that it can set itself up to catch the erroneous second deduction on the 2005 return. I am sure there will be a LOT of those, for unlike the accelerated casualty loss deduction that I described in the previous post, the charitable contribution deduction amount is generated out of checkbook summaries and thus poses a duplication risk that the accelerated casualty loss deduction does not present.

So here we are. It looks good. It doesn't do anything, really, to help anyone, except members of Congress who can crow about their "sensitivity" to the plight of the victims. I have far more admiration for the two former Presidents (interestingly, one from each party) who are making the rounds encouraging contributions than I have for a bunch of politicians who have rarely, if ever, done tax returns and who don't understand tax administration, enacting a concocted theory that doesn't make a difference or have an impact. Once again, underneath the hype, the Congress does more harm than good.

Privatizing Mass Transit: Solving the Opinion Poll Puzzle

The Pennsylvania Economy League has released results of a poll taken by IssuesPA/Pew, that indicates a majority or Pennsylvanians support new dedicated funding to finance local mass transit systems, but don't show nearly the same level of support on identifying the financing. Although more than two-thirds think there should be "new funding" for local mass transit, only 25% favor a new state tax, only 32% prefer an increase in auto registration and license fees, 41% want to use portions of current sales tax revenue, 45% would use existing gasoline tax revenues, and 46% would give county governments power to create new local taxes.

Pennsylvania is in the midst of a furor over the financing of the Southeastern Pennsylvania Transportation Authority (SEPTA) financial mess. The problem is simple to describe: its expenditures exceed its revenues by many tens of millions of dollars each year, and the trend lines are bad, portending serious cutbacks or even total shut-down if nothing is done. The state legislature, which is involved because it created SEPTA when it commandeered private companies and brought them under government control, has been unable to work out an acceptable solution. The governor crafted a temporary plan that puts a band-aid on a gash, and his request for a special session of the legislature has not been well received by some legislators.

The economics are simple. Either revenues going into SEPTA must increase, or expenditures must decrease. The SEPTA board, even after raising fares yet again (they are among the highest in the nation), also proposed service cutbacks. But even that combination doesn't make the numbers balance.

Expenditures can be cut in one of three ways. The first is to cut back on service, and the howls of protest, from the mayor of Philadelphia, through public advocacy groups, down to the daily rider, have been loud and intense. The second is to cut jobs and ask the remaining workers to do more. Guaranteed, that won't get smiles out of the union. The third is to cut wages or benefits or both. If the second method doesn't get smiles from the union, the third will bring work stoppages and legal action.

So, perhaps the practical solution requires increasing revenues. There are three sources of revenue: users, taxpayers, and private enterprise. The user source is pretty much tapped out, because fare increases push people out of public transit and into cars, and there isn't any way fares could be increased beyond the proposed increases that already are being criticized as excessive. The taxpayer source is the one getting attention in the polls, and it poses the conundrum that the poll reveals. Taxpayers want to provide public (taxpayer) money to mass transit but they cannot agree on where to find that money. New or increased taxes or fees are the poll's biggest losers. Using existing revenue gets a little more support, but who will stand up and identify the programs that get cut? Already there have been proposals to cut highway projects, an idea that is a long-term stupidity. The third source of revenue, private enterprise, deserves some attention.

Understand that although the poll deals with mass transit generally, and there are mass transit systems throughout the state, it is SEPTA that has the biggest problem, in terms of dollars, in terms of number of riders, and in terms of geographic impact. How did it get into this mess? The answer is, government got involved where government didn't have expertise, enterprise became politicized, bad decisions were made, and a hole was dug so deep that it may be impossible to solve the problem.

Years ago, there were several private enterprises operating mass transit in the Philadelphia area. The Philadelphia Transportation Company (PTC) operated subway-elevated lines, busses, and trolleys in the city. Red Arrow Lines operated busses and trolleys in the suburbs. Frontier (whose exact name I don't remember) also operated busses in the suburbs. There were a few others. Commuter rail lines were operated by the Pennsylvania and Reading Railroads, and these lines ran from the suburbs into the city.

As Philadelphia's economy deteriorated and people fled the city for the prosperity and security of the suburbs, during the 50s and early 60s, PTC's ridership went down. A few years later, the Pennsylvania Railroad made some bad decisions that led to its bankruptcy. The suburban companies were financially successful though not wildly so.

Had the free market been permitted to play itself out, PTC would have cut back service on routes no longer needed, and would have re-arranged routes to reflect the changing commuter patterns. As the 60s evolved into the 70s, more and more jobs also left the city, for the suburbs. Instead, PTC started eliminating trolleys. So did Red Arrow. When the trolleys along Route 3, from Philadelphia's western terminal to West Chester were replaced by busses, mass transit forfeited one of its advantages, that is, the ability of a trolley rider to zip along tracks in the median of the highway while ever-increasing traffic snarled at traffic lights. In the meantime, surface routes duplicating the few remaining rail routes were protected from elimination because of protests from riders afraid to go on the subway.

So in step the politicians. They bundle all these systems into one huge bureaucratic mess called SEPTA. City and suburban representatives on the board, speaking for constituents with totally different goals, sniped and quarreled. Year after year, the state would step in with funding, and SEPTA would cry for more. Occasionally something good would happen, such as the construction of the center city rail tunnel that connected the old Pennsylvania and Reading terminals so that regional rail trains could travel from one suburban terminus to another. A line to the airport from center city opened.

In the meantime, automobile traffic grew tremendously. People votes with their tires, or their steering wheels, however one wants to put it. Highway projects were scuttled or scaled back, most long-delayed. If anyone was looking at Los Angeles for an example of what happens when mass transit does not adapt to the needs of the citizens, their voices did not get much attention. So compounding the stupidity of shutting down trolley service was SEPTA's inability or unwillingness to open routes that reflected commuter preferences. When an occasional route was added, it was in the form of a bus that sat in the same backed-up traffic. So what do we have today? Huge busses, with few riders. Take a look, if you live in this area, next time you pass a SEPTA bus.

In recent years, talk of a rail line along the Route 422 corridor has been just that, talk. The cost goes up and up and up as the talk goes on and on and on. That happened with I-476 (the Blue Route) and it now is an unavoidable element in every mass transit improvement project. SEPTA, or more likely, taxpayers, are paying the price for all the bad decisions made during the past several decades. It has become a black hole that will suck more and more money out of the public arena until it goes kaput.

Then what to do? Auction off route rights to private enterprise. Let investors put their money into projects just as they have been putting them into private toll road projects. Let them operate efficiently, without the cumbersome labor protection and politician enhancement syndromes that have burdened SEPTA. Identify commuting patterns and generate route plans that compete with the car. Arrange schedules to meet commuters' needs. Abandon the 9-to-5 live-in-the-suburbs-work-in-the-city foundation that still characterizes SEPTA's operation. Put a trolley back onto the median of Route 3 between the western terminal at 69th Street in Philadelphia and West Chester. Put one on the median of I-476. Put one on the median of Route 422. Put one on the median of Route 202. Make it convenient to use mass transit, and make it economically viable.

And that brings me to the next point. As painful as it may be, it is necessary to impose on cars, trucks and other highway vehicles the true cost of their operation. The gasoline tax needs to be raised. Not to fund mass transit, but to make mass transit comparatively cheaper. So long as the gasoline tax is artificially low, mass transit faces a competitive disadvantage. Use the gasoline tax revenues to fund highway safety, repairs, security patrols, etc. and to fund health care on account of the impact of highway vehicle pollution on individual's health.

And if people vote with their feet and cars, and mass transit doesn't work when it is privatized, then let it die. If democracy means that the voters decide, it means that the voters can decide to do things that aren't all that sensible. It isn't for a few, grabbing power, to dictate to the rest that what the few think is best is what ought to be done. If Philadelphia citizens decide that they want to sit in cars for an average total of 4 work weeks a year rather than use mass transit, so be it.

It is far more likely that private enterprise will create an efficient mass transit system than it is that government would. Government helped create the current mess, particularly by supporting labor demands that would not fly in a free market, and then by amalgamating corroding systems with good systems so that in the end, as a rotten apple does to the good ones in the barrel, the entire system became a mess.

A personal anecdotal note. I have used mass transit, in Philadelphia and in other cities, including several cities abroad. Philadelphia's system is the worst. There is a regional rail station down the hill from the law school. In theory, if I need or want to go into the city it should take 25 minutes. Now, I go into the city only when I absolutely must do so. Why? Using the train became an absurd waste of time. Trains were late. They got stuck. They were cancelled. As much as I dislike driving in or to the city, I'd rather do that than miss yet another appointment. I would use mass transit for my other commutes, but it doesn't exist. I reached deep to buy a home near my workplace so that my commute would be short, and thus less polluting, less expensive financially, and less demanding in terms of time (to say nothing of less imbued with the stress of driving on a road system that also has its flaws).

So, in short, SEPTA is meeting the needs of very few people. That's why it doesn't surprise me that there isn't majority support for a public funding method. My guess is that the support for public financing generally is a recognition that there are some people who have no choice but to use SEPTA. I'd like to see another poll that puts private enterprise as an option. I think it might do well. And it would erode the preconceived notion held by so many that mass transit is and can only be a government endeavor.

Maybe We Are Part of the Project, After All

In yesterdays'post about the Comcast deal, I stated

Anyhow, I'm grateful to Andy Cassel for putting this issue in front of taxpayers as he has, bringing to them the facts and analyses so conveniently left out of the champagne-popping gala press conferences that the developers and Comcast hosted the other day. Oh, I wasn't invited. Were you? After all, we're not part of the project. Other than paying for part of it. Some might say we were mugged for it.

Well, perhaps I was a wee bit wrong. As this wonderful editorial cartoonfrom Signe Wilkinson of the Philadelphia Daily News shows, surely we are. And will be.

"Gimme All Your Money ... Oh, OK, Then Gimme Some of It"

In his column in today's Philadelphia Inquirer, Andy Cassel notes that after considering the mayor's criticism of people who are "less than appropriately grateful" for Comcast's decision to build a new skyscraper in center city Philadelphia, he has concluded that he is "quite grateful" that the building will cost taxpayers $43 million rather than the much larger amounts that would have been required had Comcast succeeded in gtting the new building designated as a Keystone opportunity zone. Readers of MauledAgain know that I was among those who criticized Comcast's attempt to shift its costs onto the public, as this February discourse and this Thanksgiving praise for its rejection by the legislature will attest.

Consider a mugging in which the criminal says, "Gimme all your money." The victim, foolishly but courageously explains, "But I'm on my way to buy food for my babies." The mugger replies, "Oh, OK then gimme some of it." Is the mugger any less a criminal? Should the victim thank the mugger for the mugger's generosity?

Anyhow, considering the title of his column ("Let's be grateful for Comcast pork"), I do think Andy is having fun with this one. After all, he points out that far more tax dollars went into the two sports stadiums recently constructed in South Philadelphia. He explains that rents in the new building will need to be at rates far higher than those being charged for existing buildings, and that with current space only 80% occupied, it's a bit difficult to figure out where the tenants will be found. He notes that Comcast can afford the rent, a mere drop in its $20 billion annual revenue bucket. And he asks how would any of us react to the government dropping a $43 million subsidy on a competitor?

He concludes by highlighting the basic issue, namely, not whether the building would be built, but who would pay for it.

My response to that question remains as it has been. The owners and developers can pay for it. And they can recoup their costs by finding tenants willing to pay a 60% rental premium to locate their businesses in it. And if it falls through, the owners and developers can pay the price for their bad decision. Taxpayers haven't had a say in the making of the decision, so they ought not have to pay for the consequences of it. Alternatively, each taxpayer can be given $43 million to subsidize his or her pet project, and we'll be so kind as to cut the government in for a big chunk of our profits. If there are any. How's that for fairness? Or are most taxpayers, unlike Comcast and the developers, unworthy of such assistance? Why?

I wonder how much SEPTA and its riders would benefit from a $43 million subsidy. Considering the mayor's pleas for taxpayer bailout of the SEPTA mess, I wonder if he, the mayor, doesn't have his priorities in the right order. I wonder what happens to the value of the new building if SEPTA curtails or ends its operations?

Anyhow, I'm grateful to Andy Cassel for putting this issue in front of taxpayers as he has, bringing to them the facts and analyses so conveniently left out of the champagne-popping gala press conferences that the developers and Comcast hosted the other day. Oh, I wasn't invited. Were you? After all, we're not part of the project. Other than paying for part of it. Some might say we were mugged for it.

Complicated Acceleration: Good Intentions, Bad Idea

According to an AP new report, two Senators are sponsoring a bill that would amend the Internal Revenue Code to permit taxpayers to claim as charitable contributions on their 2004 tax returns amounts that they contribute during January 2005 for tsunami relief. This would change the long-standing rule that charitable contributions are deducted in the year in which they are paid. That rule applies to most deductions; there is an exception that permits taxpayers to claim casualty loss deductions in an earlier year if the loss arises from a casualty occuring in the later year.

My question is "Why?" The Senators' response is that they hope the legislation would bolster support for private contributions for tsunami relief. Considering that private contributions are flooding (sorry) into charitable organizations, is there really any need for more incentive? Even if it is true that some people give only because there is a tax break, many people (most people) give for other reasons, and surely the advancing of a deduction from 2005 to 2004 is not the sort of thing that would generate a surge (sorry again) in giving.

Even if the proposal did spark an increase in giving, it isn't worth the cost. The proposal complicates the tax law. It presents at least two serious practical problems.

The first problem is that taxpayers would need to identify giving for tsunami relief. Must the contribution be to a tsunami relief organization? Can it be to any qualified charity, so long as it is designated for tsunami relief? What if it is made without such a designation, as some charities have been requesting, but the charity provides tsunami relief? Does the taxpayer treat x% of the donation as tsunami relief if the charity spends x% of its outlays on tsunami relief?

The second problem involves the reporting of the contribution on the tax return. When a taxpayer sits down in early 2006 and adds up charitable contributions, will the taxpayer remember that a few of the January checks were deducted in 2004? Maybe, maybe not. How will the IRS develop information for auditing the potential deliberate or mistaken double deduction, assuming Congress gives it funds to deal with the issue? Presumably, Schedule A would need a separate line showing "Jan. 2005 tsunami relief contributions." Yet Schedule A for 2004 has already been released. Changing it requires a several-week process, at the best (and usually takes months), because all sorts of agencies and reviewers get involved in a tax form development or revision. The downside of waiting for the revised form, thus delaying filing and delaying receipt of the refund, well may offset the benefit of accelerating the deduction into 2004.

There is one other observation that needs to be made. The proposal has no effect on taxpayers who do not claim charitable contribution deductions because they claim the standard deduction rather than itemized deductions.

Even though the Senators' aides predict quick passage, I have my doubts. There are other, less complicated, less chancy, and less questionable ways to assist those in need and to encourage others to do so.

Sorry I Wrote....?

Time to wander from tax into another area of interest (and one in which I also teach), that of wills and trusts. Specifically, time to explore the application of superficially simple legal principles to practical application in a context often overlooked by people when they are looking at their estate planning and setting things in order.

Last month, the medial outlets lit up momentarily on a story that quickly faded into the background as other, more pressing and serious developments moved onto center stage. The story involves the family of an American soldier who was killed in Iraq and who want Yahoo to turn over his emails. The soldier had used Yahoo to send emails to members of his family.

Yahoo refused, citing language in the contract that the soldier had with Yahoo. It states: "No Right of Survivorship and Non-Transferability. You agree that your Yahoo! account is non-transferable and any rights to your Yahoo! I.D. or contents within your account terminate upon your death. Upon receipt of a copy of a death certificate, your account may be terminated and all contents therein permanently deleted." This language, and the entire contract, can be found at Yahoo's web site. Yahoo risks all sorts of legal problems, including actions by the FTC or a state's attorney general, if it violates these privacy provisions. The soldier's family could seek a court order directing Yahoo to turn over the emails, and that would absolve Yahoo from the risks it sensibly has tried to avoid.

There is, though, a lesson for all uf us in this unfortunate situation. Whether one's correspondence is digital (email) or pre-digital (paper letters), a person needs to consider what happens to that material when the person dies.

One view is that the correspondence is property, and as such becomes part of the decedent's estate. In the case of the Yahoo email, the contractual provision does not so much make the email Yahoo's property as it prohibits Yahoo from releasing the property to anyone (because there is some question as to the ownership of the property). Of course, emails and letters in the possession of recipients are not the decedent's property, and thus could not be the estate's property, but those items raise a totally different issue that transcends death. After all, a recipient of a letter or email who is not otherwise bound to confidentiality faces few legal obstacles to releasing the correspondence (and as a practical matter, the biggest obstacle is that the recipient usually has little to gain and much to lose by doing so, but if that's not the case, the tabloids and others can have a feeding frenzy).

If this view is correct, then the decedent's will dictates the disposition of the letters, subject to some restrictions. How many people deal with this issue in their wills? Few. If there is no will, the intestacy law applies. Does intestacy law deal with this issue? Not really, other than through some tortured analogies that are great efforts to deal with an overlooked problem. So what is the executor to do? Technically, absent a provision in the will, the correspondence goes to the residuary beneficiary. What if the residuary beneficiary is a charity? Or a distant relative? Or a casual friend? The information in the correspondence could easily be on the market within weeks.

Can the executor claim that the fiduciary obligation imposed on executors require or permit destruction of the emails and letters? No. In fact, even if the decedent directs the destruction of the correspondence it is questionable whether such a command will be followed. The law in this area is confusing and fascinating.

Courts have long held under principles of public policy, that a decedent cannot direct the destruction of property after death. Thus, even though a person, while alive, can light a proverbial cigar with a proverbial rolled up $20 bill, one cannot order one's cash burned after death. Nor, according to several cases, can one order the razing of one's home (even if one could do so during lifetime), and this is an issue aside from permits and environmental concerns.

So in the classic hypothetical, when the decedent dies, love letters written to the decedent are found. Make the hypothetical interesting by identifying the writer as either a famous person or, better yet, someone whose position and status makes those letters scandalous (as if today there's much left that can fall within that term). So, however one wants to set up the facts, do so in a way that gives the love letters value. In our world of Warhol minutes, reality TV, and gossip run amok, it's unlikely that any love letters would lack value. The same is true of any other sort of letter (though love letters makes the hypothetical more interesting and gets the students' interest). The more secrets, the deeper the secrets, the more widespread those impacted or interested in the secrets, the higher the value of the email or other correspondence. I suppose that for celebrities' correspondence, the value reaches a peak and the issue is more likely to be litigated.

So if a decedent cannot order the burning of cash or the razing of a home, should a decedent be permitted to order the destruction of correspondence that has value? If the answer is yes, then those carving out an exception need to define the line, and I'm not convinced that the line can easily be drawn. Would it extend to home movies? Audiotapes? Photographs? Art work?

Surely one can think of reasons that the decedent would want the material destroyed, but then again, the decedent could have destroyed the material while alive. Except that destroying email on the email server of a commercial internet provider isn't easily accomplished, and might not be possible with emails less than 30 or 60 or 90 days old. But one also can think of reasons OTHER people would want the decedent's email and other materials destroyed: as one person pointed out (archived at Politech), "the emails might reveal the secret abortion of the sister or the secret first marriage of the father."

Digital technology puts yet another wrinkle on the issue. Paper correspondence sent to another person is in that other person's hands, and unless a photocopy was retained, it is beyond the reach of the decedent. The decedent cannot destroy it. Nor do the decedent's executor and beneficiaries have access (though, of course, the recipient's executor and beneficiaries might get their hands on it). With email, not only is the incoming correspondence on the server or computer, so too is the outgoing correspondence, or at least some of it is. Keep in mind that email is far more voluminous than is paper correspondence, perhaps by an order of magnitude.

Putting a direction in a will to destroy "love letters" could be counterproductive because wills aren't private. They become public when probated. "Destroy the love letters ....." or "Burn the letters received from ...." language would create all sorts of an uproar, and even if the contents never became public, the existence of the material would fuel the rumor mill for a long time, even if the decedent was not a national or international celebrity. After all, each one of us is a celebrity in our own little world. And, of course, "burn all correspondence" is overkill that by reaching legitimately retained financial and other information necessary for tax return and other compliance would give a court even more reason to hold to the principle that one cannot order the destruction of property after death.

It makes more sense to direct all property to a pre-existing trust and to give direction to the trustee (assuming, of course, that there is a right to order destruction of property). If the will inadvertently or deliberately incorporates the trust by reference, all bets are off because the trust is part of the probated will rather than a separate entity.

This is a huge issue for estate planners, but I don't think it gets enough attention. Perhaps, in days long gone, it wasn't an issue because there wasn't as much material, it was confined to letters, destruction could take place without anyone's knowledge except the executor or close family member, and the world wasn't as interested in the information. The digital world of email bring internet service providers into the picture, technology has opened the door to audio and video, the culture has become one very interested in the doings of other people, and the lure of money has become even stronger. All of those factors combine to make this issue one of growing, not lessening, importance.

Let me prove my point this way. When I teach this issue (and unfortunately it gets about 10 minutes), I ask my students to think about a possible premature death and the contents of their laptops and email accounts. A hush settles over the room, broken by sighs and groans. Clearly I have disturbed them, or at least their comfort zones. Then I point out that deletion of a file on a computer really isn't deletion (proving yet again why it is extremely difficult to practice or teach law effectively without having a good grasp of current and future technological developments).

I will close with a bit of theological insight that I don't share in my class (not only because of time constraints but also to spare taking the students on too wide of an analogy). In some of the theologies that include belief in an after-life, knowledge is universal. In the afterlife, everyone knows all things and all people, because everyone fully knows God, and by knowing God one knows all God knows. I don't profess an ability to explain this, though I can aver it was taught to me though not in those precise words. So if it does turn out that way, the only advantage to hitting the shred (not delete) function, and burning letters, is an information delay in the present temporal sphere. None of that, however, is going to reduce the tribulations of those whose secrets and private goings-on end up publicized among a small or wider audience because someone's email or letters were property with value that could not be destroyed.

Though I cannot give an "answer" to these questions, I can return to the tax world and share this conclusion: if the executor destroys the correspondence, there is no casualty loss deduction for the estate. Query whether the beneficiary who fails to recover damages from the executor for an unauthorized or illegal destruction has a casualty loss deduction.

So, estate planners and will drafters, what have your clients been asking you to do? And, for everyone, if you've thought about this question, what have you decided to do?

Avoiding a Triple Whammy

A question was raised about the tax treatment of transactions in which the SEC refunds to the shareholders of a corporation fines that the SEC imposed on the corporation for securities law and Sarbanes-Oxley violations committed by the corporation's officers, directors, and others. As is often the case, analyzing the tax consequences requires an understanding of the underlying transaction (which is why the tax lawyer is the last of the general practitioners: tax affects everything, so tax lawyers need to understand everything, and I'm here to help out, ha ha).

A policy question is simply why should the shareholders get a refund of fines imposed for illegal activities. The answer, I think, is that usually some of the shareholders are innocent of the wrong doing and in most instances have suffered economic harm. A good criticism of my analysis, though, is that the SEC doesn't make that distinction, so culpable shareholders end up sharing in the refund of the fines, a result that does not make much sense and is difficult to justify.

Yet I can understand treating all the shareholders as culpable if the fine is for activity that harms outsiders and not shareholders. One example offered to rebut one of my arguments is the fine imposed on a corporation because its trucks are overweight. In some respects none of the shareholders are responsible except for those who are officers, and yet in other respects all the shareholders are responsible because it is THEIR corporation that "misbehaved." In contrast, though, I distinguish the types of cases involving the SEC fines, because those are instances in which SOME shareholders deceive outsiders AND the OTHER shareholders. Analogies to partnership law support this distinction (which apparently isn't applied by the SEC when it makes the refunds, and note I use "apparently" because I don't know with certainty and wait to be enlightened).

Another question: why not refund the fines to the corporation? If that happens, the corporation's creditors get to the funds before the shareholders do. Why give the shareholders a financial advantage that they would not have under state law? I don't know. I need someone expert in securities law and in the nuances of Sarbanes-Oxley to explain this to us.

Now to the tax issues. Remember, the shareholders, innocent and culpable alike, almost surely have suffered a loss from the decline in the value of the stock. Then the stock value is further reduced when the corporation pays the fines, because that reduces the corporation's net asset value. When the shareholder receives the "refund," does the shareholder have gross income? Yes, unless an exclusion applies or unless the transaction is recharacterized in some manner. It is possible, to make things more confusing, that the shareholders receiving the refunds are not the shareholders who owned the stock at the time of the wrong doing or at the time the fines were paid.

If there is income, can shareholders increase their adjusted basis in the stock? There's no authority for doing so. What if the shareholder already sold the stock? Can the refund be treated as additional amount realized, thus reducing capital loss or increasing capital gain on the sale transaction?

If the SEC is refunding the fines to the shareholders because it doesn't think that the corporation would take the refund and distribute it to the shareholders (which, of course, the corporation very likely would be prohibited from doing because there are creditors lined up waiting to be paid), then why not treat the transaction as though that had happened? If that recharacterization applies (treating the one step transaction, refund from SEC to shareholders, as two steps, refund from SEC to corporation, and distribution from corporation to shareholders), then the refund to the corporation would be excluded from gross income under the tax benefit rule because the fines were not deductible. The deemed distribution to the shareholders would be treated under the usual rules, namely, dividend gross income to the extent of earnings and profits, and then reduction of basis in the stock, and then capital gain.

I like this question for three reasons:

1. It's a current issue with respect to which tens of thousands of shareholders, with assistance from their tax advisors, need to determine an answer so that they can report what ought to be reported on their income tax returns.

2. It's yet another example of transaction recharacterization, which law students, at least, find annoying. Years ago a student expressed annoyance at the "deemed this and deemed that which doesn't happen but which we pretend has happened." Though the deeming technique seems inconsistent with my dislike of the pretense approach, it actually works the other way around, namely, taking what appears to have happened and treating it as though what really has happened has actually transpired. The SEC, in other words, is refunding fines to the only person to whom it can refund the fines, namely, the payor corporation, and the only way the money ends up with the shareholders is a corporate distribution. I introduce students to the deeming technique with a problem in the coursebook that I use: an employer transfers an automobile to the spouse of an employee to induce the employee to remain with the employer and not take another job. What appears to be a transfer from the employer to the spouse is compensation from the employer to the employee and a tax-free marital gift from the employer to the spouse.

3. It's yet another wonderful example of the fallacy in the statement, "Oh, tax is just plugging numbers into a formula and it really isn't law like everything else we teach" and in similar assertions. Students who demand "Just give us the answers" are again exposed to more proof that the reasoning is more important, sometimes, than simply the answer. I say sometimes because when the answer is clear, the reasoning in support of the wrong answer isn't worth much. After all, the computer programmers can't do a thing until the tax lawyers explain what the transaction is and how it should be treated.

Now I'm going back to my other numbers-type project, which is rebuilding my ahnentafel. I may share some thoughts about some of the interesting challenges I've encountered and observations I've made. Later.

Making the New Year Happy

It's the end of the year, but unlike most media outlets, this blogger isn't going to do a recap. Imagine. "The Year in Taxes." or "Highlights of MauledAgain 2004." Nah, no point in making it tough for people to stay awake tonight.

I was going to create an index to the blog, mostly for my own use, but also as a convenience to readers. But it didn't get done. I might get to it, but other responsibilities take precedence. Things like teaching. And writing. And blogging. Plus some posts seem to have disappeared so I want to figure that out before I create an index or table of contents.

What's a nice way to bring the year to a close, blog-wise, and to usher in a hew year? Simple. To extend a grand "YES!" to the folks on the ABA-TAX listserv whose responses to yet another "dilemma" resonated with what I would have said and that maintain the hope that the good practitioners will resist being driven out by the bad practitioners. Yes, that is something that makes me happy.

A client applies for a loan. The bank wants proof of income. Best place to look? Prior year tax returns. The bank loan officer asks the tax practitioner to write a letter verifying the client's income sources but asking that the client's business loss deductions not be mentioned.

Huh?

The practitioner responded with a letter that recited the practitioner's status as return preparer for n years and that referred to attached copies of the client's tax return.

The loan officer reacted angrily. He didn't want the tax returns in the file because they disclosed business losses that would prevent loan approval. When the client called the practitioner and begged for the requested letter (the one that failed to mention the losses), the practitioner refused and suggested that the loan officer was having ethical difficulties. The practitioner offered the client a referral to another bank. The client calls the loan officer, tells the loan officer the practitioner thinks the officer is unethical, and the loan officer calls the practitioner and screams at the practitioner's employees.

So the practitioner asks, "Am I being an ultra-conservative prude or is this practice of hiding business losses on a loan application common practice?"

Though I didn't respond, I would have asked, "So for whom does the loan officer work? Why is the loan officer anxious to process a loan that the bank's guidelines say should not be made? Doesn't that put the bank's shareholders and depositors at a higher risk? What's really going on? And, I would have done the same thing. I would not have become complicit in what is destined to be a big mess."

Respondents pointed out that it wasn't just a matter of ethics. Among their comments: Perhaps Sarbanes-Oxley applies. Other criminal statutes might apply, such as bank fraud. Consider the high likelihood of conspiracy charges because there are two or more persons involved. On the civil side, there is a risk of personal liability alleging failure to disclose material facts knowing that the facts are material. Malpractice carriers would deny coverage. Maybe it is the client, and not the loan officer, trying to get such a letter, but nonetheless, the practitioner did the right thing. Losing a CPA or other license because of an unethical or illegal act to help one client ends up violating the practitioner's obligation to be responsible for all of the clients.

One practitioner said, "Personally, I'd rather be known as a person of integrity that is beyond reproach rather than one with questionable ethical motives. I really don't care if a client leaves because I was "too" honest...I know I'll sleep really well at night." Apparently he isn't going to cave to the fear that the bad practitioner will take the clients. (The practitioner who faced the issue expressed a lack of concern about losing the particular client, who apparently is a bit or more of a "challenge" to represent.) Does "let the bad practitioner have the bad clients" become a slogan? If the IRS would pound on the bad practitioners and bad clients, having them hooked together would make it easier for the IRS to accomplish its goal.

Several respondents said to the practitioner, "You've done exactly the right thing." One described having had similar requests and having handled it the same way. Most loan officers seem to get it, but a few apparently don't. Well, as I've written previously, every profession and occupation has its bad apples and it isn't just the tax practitioner who must deal with the challenges presented by others in the same profession who think they're above the rules or too special to comply.

One respondent added, "Your integrity and your livelihood are worth more than any client." Excellent point. After all, even if the bad practitioners are likely to take the clients who aren't hearing what they want to hear, catering to those clients (or to their loan officers) is just as likely, in the long run, to take away the practitioner's livelihood, and a whole lot more, such as integrity, respect, and perhaps even one's family and friends.

I continue to insist that the problem is rooted in how this nation raises its children. Too often, when a child acts improperly, there is too much concern about avoiding "hurting the child's feelings" and too much parental resistance to other authorities (chiefly school teachers) reprimanding the child. When a child grows up thinking he or she is always right, that it is someone else's fault, that teachers and other authority figures are the enemy or at least obstacles to getting the rest of the world to cater to the child, that child ends up as an adult who doesn't hesitate to break the rules to get an advantage.

And they will continue until they are called out on it, they will persist if they get away with it, and they will stop, as bullies stop, when the hammer comes down. After all, in some ways, these folks are bullies in a non-physical sort of way.

Well, with all of that, Happy New Year. To paraphrase and old and worn-out joke, I'll return to this blog next year.

Does Tax Compliance Create Value?

Digging through my email files, I came upon some ABA-TAX listserv discussions that I had set aside for further exploration. The topic touches on the larger question of tax compliance that impacts the "cleverness" discussion of a few days ago. It is yet another situation in which the concern over another tax practitioner gaining clients at the expense of the compliant practitioner poses a dilemma for those trying to survive in a tax practice world in which values are shifting in dangerous ways.

The question this time involves the tax treatment of frequent flyer miles earned by one taxpayer but transferred to someone else. Even though frequent flier miles have been around for more than a few years, the IRS has not issued any formal administrative issuances with respect to their tax treatment. Two years ago, in Announcement 2002-18, the IRS noted the lack of guidance and took the position that it would "not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel." Note the rather backhanded way in which the IRS blesses the disregarding of frequent flyer miles by the person who "earned" them. Of course, the IRS has promised that if and when it does issue additional guidance, it will not be applied retroactively.

The IRS position on this specific question makes sense. In some situations, a frequent flyer mileage allowance is like a rebate. Rather than discounting the fare, the airline issues allowances that encourage additional trips with the airline. In these situations, it's almost a "buy 12, get 1 free" arrangement. And no one has ever seriously asserted that the purchase of a bakers' dozen of eggs for the price of a dozen generates gross income. Rebates, the IRS ruled several decades ago, are simply purchase price adjustments. In other situations, a vendor or provider of services other than air transportation will award mileage allowances under an arrangement with an airline. A person pays $400 for a hotel room and earns, say, 50 frequent flyer miles. Isn't this in substance the same as charging the person $350 and letting the person spend the $50 savings on airfare? From the IRS perspective, it is. One could argue otherwise, but the IRS hasn't, to date, pushed the point.

The tough question arises when the frequent flyer miles are transferred to another person. Does the other person have gross income? It depends. Surely if the allowances are transferred as a gift, the donee has no gross income. Unless the transfer exceeds $11,000 (or $22,000 in the case of a married couple splitting gifts), the donor has no gift tax concerns. Suppose, however, that the person making the transfer does so to compensate someone else for services rendered. Unquestionably there is compensation gross income, unless the transfer fits within a gross income exclusion. Only two are realistic candidates. One, de minimis, would apply if the value of the transferred miles was so small as to make accounting for it unreasonable. A certificate for 100 miles? Perhaps that would be excluded. But that's not what usually happens. The other exclusion, working condition fringe, applies if the recipient would be permitted to deduct the cost of the airfare if the recipient had to pay for it out of his or her own pocket. So if an employer requires employees to pay for their business travel with their own funds, then when an employer decides to transfer frequent flyer miles earned by the business to employees for use in business trips, the receipt of the mile allowances by the employee should be excluded (and, of course, there would be no deduction). The thinking behind the exclusion is that inclusion of the amount in gross income would be offset by the deduction (even though, technically, the complexities of the income tax law prevent such a perfect match in most situations).

If, however, the employer transfers the mile allowances to an employee for the employee's personal use, finding an exclusion is impossible. The employee is wealthier, that wealth is clearly realized, and thus the employee has gross income. In the same Announcement, the IRS added "This relief [namely, not asserting understatement of income tax] does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes." So in this hypothetical, there is an answer, at least in the form of an IRS announcement that takes us to the same place that a logical analysis of the tax law takes us.

When someone question how to set a value for the mile allowances transferred to employees for personal use (so that it could be included on the W-2 issued by the employer to the employee), someone else asked if it was a matter "worth worrying about" because the "dollars are small, [t]he risk of detection on audit is small" and it is "immaterial," adding, "Am I playing too fast and loose with the rules? I just don't see how I am adding value to my clients by getting bogged down in issues like this" and asking, "Could you argue that this was a gift?"

It was heartening to read the responses. The person posing the original question disagreed on the materiality point, explaining that 5,000,000 miles were involved. Someone else pointed out that there are independent sources of market value, so valuation can be accomplished. Responses also noted that audit detection risk should not be a factor and that ignoring the mile allowance transfer for tax purposes would be playing fast and loose with the rules. I loved the logic in this comment: "If it's immaterial, it doesn't matter, so if it doesn't matter then do it according to the regulations." A rather nice way of pusing immateriality as a determinative factor aside even if the situation was immaterial (which it isn't).

Understand that the person who initially responded to the valuation question wasn't advocating omitting the transaction from gross income but playing devil's advocate to see how serious a matter the issue is. The question apparently came from the client. It is easy to see, however, why it is so tempting to impress, satisfy, and retain tax-disliking clients by tossing aside something that probably would go undetected because, as was pointed out by the correspondent described in the earlier "cleverness" post, the IRS simply is unable to police the tax world.

As for "is it a gift?" the answer is no, not if the recipient is an employee who has no other relationship with the employer (because the tax law prohibits classifying employer to employee transfers as gifts, with a regulatory exception designed to deal with transactions between family members one of whom is an employee of the other). Cleverness would arrive on the scene when and if someone attempted to characterize the relationship between the employer and employee as one "like" the family member exception in the regulations, another instance of trying to make something appear to be what it isn't.

One last comment. Even if a tax issue requires "getting bogged down" (and I don't think this one is a bogger.... trust me, there are many many tax issues far more complicated, far more difficult to analyze, and far more difficult to handle logistically than this one), the compliant tax practitioner is adding a lot of value to the client by doing the right thing. Imagine what happens if the advice is to ignore the mile allowance transfer and the client DOES get audited. Ooops? With a compliant tax practitioner, the client gets proper tax advice, a compliant tax return, and a quality job. Understandably, some clients don't value those things and prefer dollar savings at all costs. And that brings us back to the followup discussion on cleverness, in which the challenges of catering to a clientele with inappropriate tax values can threaten the professional survival of the compliant tax practitioner.

A Cheaper Way to Play?

My recent series of postings on the use of taxpayer money to pay for the ballparks used by wealthy club owners and their highly compensated athlete employees (e.g, here, here, here, here, and here) inspired Tom McMahon to point me to one of his late October blog postings in which he makes an interesting suggestion. Wouldn't it be cheaper, he asks, for the city to buy the team, considering the team's value is less than the cost of the stadium? A look at his numbers suggests to me that for a 50% increase in the outlay, D.C. could end up with the entire revenue stream from the operation. It makes economic sense from the perspective of a private investor. But there are two problems. First, should a government be in the business of running a sports team? Second, does anyone think that baseball owners would open their exclusive money-making club to a government or a similar consortium of citizens? Forget the Green Bay NFL example because that situation arose in pre-television days and there's no way it will ever happen again in the NFL, or any other league. No, baseball owners know they have a good thing with the deals they strike with politicians, to get taxpayers to fund their game, and they're not letting governments or citizen groups cut in on the action.

Oh, and reading the Trivia section of Tom's blog is a must. I like it, a lot, especially because much of what's there is new to my already crammed with trivia brain. So I'm going to venture a guess that many of you will also enjoy it.

Me? Opinionated?

In his most recent column, Bruce Bartlett, affiliated with the National Center for Policy Analysis, highlights four tax blogs in an article about specialized blogging.
In The Blogger Take on the Issues, Bruce writes

Other tax professor bloggers are James Maule of Villanova University and Daniel Shaviro of New York University. They tend to talk more about current tax policy issues from an academic point of view. What I like about both of them is that they are highly opinionated. Neither pulls any punches in saying what they think is stupid about recent or proposed tax legislation. I don’t always agree with them, but they always make me think.

Imagine that. Highly opinionated. Me??? :-)

More on that Hawaii Vacation

Paul Caron noted my Hawaii vacation item after enduring what he calls his worst snowstorm in 15 years. Check out his post and the pictures.

Well, Paul has upped the motivation for folks in his area and other places that tend to get swamped with the white stuff (or, worse, ice) to find a way to deduct a vacation in Hawaii or some other warm place. No offense to the folks who enjoy snow and winter sports, because they'll get their chance in the heat and humidity of August when they decide shareholder meetings ought to be in some frigid Southern Hemisphere deep freeze location.

A practitioner emailed me and posed the conundrum that afflicts those giving tax advice. He pointed out that if someone took my approach and counselled the client to not claim the deduction, the client would most likely go and find some other tax advisor who says what the client wants to hear. In other words, the bad practitioners will drive out the good. So, does that mean the practitioner is compelled to give bad advice to stay in business? Perhaps. Unless there are clients who prefer doing the right thing. Are there enough of them to keep the good practitioners in business? Will most of the good practitioners imitate the bad so as to maintain income?

The same practitioner also pointed out that the problem would be eliminated, or at least severely curtailed, if the IRS would enforce the tax law and in effect, put the bad practitioners out of business. The IRS would love to do so, but it needs money, which Congress won't provide because too many members of Congress think it is awful that the IRS would consider requiring people to obey the tax law.

When I was a child I often heard the comment that "one bad apple spoils the entire barrel of apples" and it surely is true, both literally and figuratively. I've had it happen recently with oranges, so it appears no fruit and no profession is safe. Values are dropping to the lowest common denominator, just as standards have fallen during the past few decades, as a consequence of an inability to accept that sometimes there is a right and a wrong and sometimes there is an accomplishment and a failure.

When will it stop? If one person is willing to do something that is wrong, is the only prevention of it spreading to the rest of that person's profession? Yes, some government agency like an IRS can step in (if funded) but how effective is that when "everyone is doing it" becomes true because it is believed?

Ultimately it is the citizenry that must respond. Taking inappropriate positions on tax returns, even if it has the effect of increasing some other person's tax, apparently sits well with so many people that good practitioners risk losing clients because bad practitioners stand ready to help with those inappropriate positions. Anyone who doubts the cumulative effect need only ponder what would happen if the more than $2 trillion of accumulated unpaid taxes (not including interest and penalties) were collected. Think about the possible tax cuts and deficit elimination, both of which could be accomplished.

"I'm entitled to deduct a vacation because everyone else is doing it" (which isn't true) may become a mantra that evolves into "I'm entitled to go straight from the left turn lane." If that becomes an "everyone is doing it" pattern, the outcome will be as deadly in a literal sense as deducting vacations is in a figurative sense.

I replied to the practitioner that it's easy for me to preach "do the right thing" when I'm not the one facing economic deprivation as a cost of doing the right thing. Yes, I've turned down offers and work because of principle, but I've been lucky. So I do not envy those who face the conundrum. I do hope that America steps up and backs the good practitioners and shuts down the bad ones. Soon.

A Milestone

I didn't notice this when it happened, partly because email from SiteMeter isn't getting through, but total visits to MauledAgain reached 10,000 sometime last week.

On Dec 14, total visits for the day topped 150, and October remains the month with the highest total (over 2,100 visits), with a drop-off in November and December to 1,800.

I've given up trying to track all the web sites that link to this blog, though it was fun to find a link on a Japanese site despite my inability to read what the site was saying about MauledAgain. At one time there was a website that permitted "share" trading in blogs, but I cannot find that site now. MauledAgain stock was worth about a penny. Hence, a penny for my thoughts.

Thanks to all of you who return time and again to read my explications, opinions, stories, and rants. SiteMeter doesn't track who had visited the most times, so no contest, no prize, no identification.

Cleverness? Trying to Deduct the Hawaii Vacation

I've been questioned at different times about my use of the word "clever" or "cleverness" to describe the plans, or the designers of plans, that stretch application of the tax law beyond its intended boundaries. This is not a question of statutory interpretation, which raises a different issue in terms of the extent to which a court should "read into" a statute terms that Congress has presumably omitted through carelessness or oversight. In contrast, this is a question of how far one can go in massaging the facts to make something appear other than what it is.

On of my favorite examples, as my students know, is the attempt to treat a loan as recourse for purposes of the bank making the loan but as nonrecourse for tax purposes. Usually this requires masking guarantees or other provisions that make a loan that is nonrecourse on its face (as it appears to the IRS) recourse in application (as it is for the bank). My disapproval of such tactics is totally undisguised.

A question raised a few days ago concerning the deductibility of a corporate shareholder meeting in Hawaii, and an email from a correspondent asking me to be more expansive in defining the limits of "acceptable cleverness," made for a happy blogging match. Let's begin with two fairly simple tax law principles, and then demonstrate that mere knowledge of those principles is insufficient (both for successful tax practice and for earning an A on a tax exam), because it's the application that matters.

Principle 1. There is no tax deduction for personal vacations.

Principle 2. There is a tax deduction for the ordinary and necessary expenses of carrying on a trade or business, subject to a vast array of limitations that don't need to get in the way of the present issue.

A family wants to vacation in Hawaii. No deduction. Thus, if the vacation costs $5,000, the family needs roughly $7,000 in pre-tax income to fund the vacation (using a rough 30% marginal rate just to keep the numbers manageable).

Across the street, a major shareholder in a Fortune 500 corporation, who is contemplating making additional stock purchases in the company, decides to attend the annual shareholders' meeting, which happens to be in a warm place in February. The person flies to the warm place on a Monday afternoon, enjoys the evening, spends Tuesday in the meeting, enjoys Tuesday evening, spends Wednesday morning meeting with corporate officers, and flies home that afternoon. Although the person's cost of attending a theater show presumably isn't deductible, the bulk of the expenses are deductible (subject to a variety of limits). The purpose of the trip was the business meeting, and the time spent on personal "enjoyment" of the warmth was incidental to the trip's purpose.

On the next block lives a family that owns a small business that conducts operations in the local area. The shareholders are members of the family. The corporation decides to hold its shareholders' meeting in Hawaii. Isn't this similar to the preceding example? The cleverness is the attempt to show that it is. The cleverness says, "Both are shareholder meetings, both involve discussions of corporate business, both involve travel to a distant place that happens to be warm, and both allow time for personal enjoyment of the warmth." The cleverness detective, though, responds, "it is not ordinary and necessary to go to Hawaii to hold the shareholders' meeting of a Minnesota company doing business in Minnesota."

Cleverness responds, "But the Fortune 500 company went to a warm place." The detective responds, "The reality is that the Fortune 500 company either has its headquarters there, conducts substantial amounts of business there, has shareholders most of whom live near there, or has a business need to have its shareholders see its operations in that area even if those operations are only a small part of the business."

See, the upshot of the matter is that someone involved with a small business (its accountant, its lawyer, or one or more of its owners) grabs a resemblance to a Fortune 500 situation as a contrivance to turn a non-deductible family vacation into a deductible business expense, which it is not. If deductible, the $5,000 vacation requires only $5,000 of pre-tax income. If successful, it puts this family into a position that cannot be attained by families lacking family businesses.

Left out of this core discussion is the difficulty of demonstrating that the travel and accommodation expenses of family members not involved in the busines can fit within the deduction. Difficulty is the wrong word. Impossibility is the appropriate term.

If the small business had Hawaii connections, such as conducting business there or perhaps having exclusive supply contracts with a pineapple or sugar cane grower in Hawaii, then it would be possible to construct an argument supporting the deduction, at least with respect to the travel and other expenses of the shareholders. But such a situation would be rare.

One person suggested that although he doubted that the family vacation in Hawaii masquerading as a business trip would meet the ordinary and necessary test, one could still take the deduction and then "fight the IRS, if necessary" if the deduction was ever questioned on audit. Sorry, but I don't subscribe to that philosophy. That approach would be appropriate if it were even a colorable claim, such as the existence of suppliers in Hawaii with exclusivity contracts with the company. There is a difference between "run the red light carefully if taking pregnant wife to hospital and argue if stopped" and "run all red lights and argue if stopped." The first situation presents plausible excuses and defenses, and the second doesn't.

It is this "grab the advantage that isn't deserved if the chances of being caught are low" mentality that contributes to the erosion of American civilization. I daresay it is an element in the vision of America that some (though not all) foreigners have of us that contributes to the disdain that some have toward us. That's not to say we have a monopoly on corruption (and surely this sort of "deduct personal vacation by pretending it is business" scheme is) but that we are so hypocritical about it.

Another person tried to be more sophisticated than "take the deduction and fight later" approach. He would not advise the meeting in Hawaii, but if a client did so without consulting him and got audited, he developed a plan of defense. First, he would argue that it was "ordinary" because other small corporation shareholders who do the same thing. Although I've seen no empirical data, I'll assume, for purposes of argument, that there are other small corporation shareholders who hold their annual meetings in warm places in winter. Without that data, this argument goes nowhere. But in some sense the analysis begs the question. "Ordinary" in the phrase "ordinary and necessary" means something more than "lots of people do it." It requires that for the type of business in question, the practice is common. Even so, the stumbling point is "necessary" and the same proponent asserted that he would "argue that [the shareholders] needed to go to Hawaii to get away from the hub bub of the business itself so an efficient meeting could be held and that the related R & R would help the owners be more relaxed, focused, and productive once they returned." He added, " Would a therapist's recommendation to this fact help?" Sorry, but even if it is necessary to get away from the office, a meeting place ten or fifty miles away will serve the purpose. And there are tons of cases holding that vacations generally, even though providing restorative and other psychological benefits, are not ordinary and necessary trade or business expenses, but fall within the provision specifically prohibiting deductions for "personal" expenses. The argument is valiant, but when the client who holds the meeting in Hawaii without having consulted the tax advisor is audited and seeks advice the more noble thing to do is to advise concession.

The Quiz Expands, in Several Ways

So how are we doing on that state sales tax table quiz from the other day?

None of the choices have been selected. Instead, additional choices have been proposed.

G. The sales tax rate in Washington isn't 8.4%, but 6.5%, with the other 2.1% reflecting local sales taxes that are added to the table amounts, plus the Washington state sales tax isn't imposed on groceries, so that's why the table amount for Washington is lower than the table amount for Idaho. (thanks to former student and current Grad Tax Program colleague Ryan Bornstein):

H. The difference is attributable soley to the fact Washington does not tax food and Idaho does. (thanks to Lew Wiener of Corte Madera, California)

I. The difference is attributable to the .5% difference between the Washington rate of 6.5% and the Idaho rate of 6% (thanks to Ed Melia of Sacramento, California).

J. The larger Idaho deduction reflects the large amount of potatoes grown in the state and the fact you can make Mr. Potato heads out of them, something to which Congress can relate. (Thanks to Victoria Delfino of Portland, Maine)

K. Perhaps Washington exempts food from sales tax and Idaho does not and perhaps Idaho taxes services and Washington does not. (Thankst o Prof. Bryan T. Camp
of Lubbock, Texas)

L. Even though the state rate is 6.5% and the local rate as much as 2.1%, the entire 8.4% is built into the tables, and even if it is not, the Washington 6.5% rate exceeds the Idaho 6% rate. (Thanks to Greg Stewart of Spokane, Washington).

Even more confused? Well, welcome to one of the disadvantages of the restored sales tax deduction. At least I'm on record, many times (here, here, here, and here), as having opposed its return to the tax law.

It doesn't end with this Washington-Idaho puzzle. Ryan Bornstein also pointed out a quirk with respect to the tables for our state of Pennsylvania. Because Pennsylvania's state sales tax rate (6%) is roughly double the state income tax rate, and because the state income tax is imposed on essentially gross income, one might imagine that if, on average, people spent more than half of their income on items subject to the state sales tax the sales tax deduction, in lieu of the state income tax deduction, would be the better option for Pennsylvanians. Apparently Pennsylvanians spend a tiny fraction of their income on items subject to the state sales tax. Ryan did an analysis for a client. He took the figure from the IRS sales tax deduction table for Pennsylvania, added in a $2,400 sales tax paid by the client on a new vehicle, and ended up with a total that was less than the client's state income tax.

So, as Ryan points out, the only alternative is to return to the practice some people followed back in the previous period when the sales tax was deductible: save all receipts and add up the sales taxes. This practice gathered some discussion time on the ABA-TAX listserv, and it doesn't have many advocates, perhaps because it is not customary to increase one's fees when the client walks in with the proverbial "shoebox" or "bag" of receipts. It was interesting to see memories of this practice serve as a "years in tax practice" divisor: some people remember having done this, and for others, it's the resuscitation of a dinosaur.

One nice side-effect to this discussion was the addition to my memory banks (or perhaps the re-awakening of some of them) of the names used for residents of some states. Note that I referred to Pennsylvanians. Someone had referred to sales taxes paid by "Idahoians" which prompted someone else to research the question and to discover that the term is "Idahoan." A person living in Michigan is a Michigander. The same person quetions if a female resident of that state is a Michigeese. Strange none of the colleges in that state use Geese or Ganders as the team nickname. The closest is Ducks, and they're back out in, yep, Oregon (a neighbor of our attention-getting states of Washington and Idaho). For those with nothing better to do today, or whenever, the information came from this site. Thanks to Prof. Sam Donaldson of Seattle, Washington, who reluctantly had to return to the grading of the exams. That's why we need to go look up for ourselves the term used to describe residents of Maine. It's not Mainelanders.....

Perhaps this is all very boring. After all, I have a friend who says this blog is boring, a natural consequence of her view that tax is boring. How can something that comes at us from every direction at every moment be boring? Annoying, yes. Frustrating, yes. Confounded, yes. Confusing, yes. And think of the utility of knowing residents of Michigan are Michiganders and that residents of Idaho are Idahoans. Great conversation starter and/or pick-up line for your next social event. With that in mind, happy holidays all.

Sales Tax Quiz Time

One of the folks on the ABA-TAX listserv has alerted us to what may be a mystery, though, as with most mysteries, some digging around should tell us what happened.

Recall that the recent tax legislation re-instated the deduction for state sales taxes, though in lieu of rather than in addition to state income taxes. The legislation provides that a taxpayer has a choice between adding up sales taxes paid during the year or using tables issued by the IRS to which sales taxes paid on large purchases, such as automobiles, can be added. The issuance of sales tax tables by the IRS is not a new concept, because sales tax tables were issued when the former sales tax deduction was in the Internal Revenue Code.

The sales tax rate in Washington state is 8.4% and the tax is imposed on goods and certain services. The sales tax rate in Idaho is 6% and the tax is not imposed on services. So one would assume that when comparing the results in the table for a person living in Idaho and an identically situated person living in Washington, the deduction for the person in Washington would be higher.

No.

For someone with income of $50,000 and five people in the household, the table provides a $1,058 deduction for the Idaho taxpayer and a $913 deduction for the Washington taxpayer.

So, multiple choice test time. Excuse me for this, but we're on semester break, exams are graded, and I'm on testing withdrawal ha ha. With thanks to Greg Stewart of Spokane, Washington for bringing us the news and sharing the first five choices, to Amber Yates of La Grande, Oregon for the sixth, and to Ed Melia of Sacramento, California for the seventh. Here goes:

A. Folks in Idaho buy more "taxable" items than folks in WA.

B. It is a gross mathematical error by somebody at the IRS.

C. It reflects a conspiracy and has to do with the fact that Idaho is a "red" state and Washington is a "blue" state, though only three counties in Washington are blue.

D. It reflects a decision by the Administration to reward residents of Idaho because not a single one of them voted for Kerry.

E. The IRS employee who created the tables for the IRS lives in Idaho.

F. The IRS pulled out the old tables, not in use for many years, and did not adjust the tables for inflation and did not check to ses if there has been a change in the Washington or Idaho sales tax laws (or both) (and I don't know if there has been).

G. Something has changed with respect to local sales taxes.

I don't know the answer. Seriously, I can rule out A, C, D, and G. That leaves B and F, both of which fall into the general category of "Oh, no, we did it again."

Bonus question: so what is Turbotax plugging into its software?

They Blinked, and Presto, No Third Strike?

The headline to this New York Times story says it all: Baseball Deal Back as Washington Council Blinks. Council surely did. So once again a bunch of wealthy folks found a way to get not-so-wealthy folks to pay for the wealthy folks' hobby.

What happened?

The official line is that the demand for private financing was abandoned because major league baseball agreed to reduce the penalties imposed on D.C. (read, its taxpayers) if the stadium wasn't built in time. There's no way the stadium could be built by the scheduled due date, so the risk of penalties was high.

The official line makes no sense. The District negotiates for relief from penalties that would be imposed because it didn't GIVE to private industry, namely, major league baseball, a stadium within the time set by baseball when it forced the agreement on the District's mayor. Doesn't major league baseball understand that one doesn't look a gift horse in the mouth?

So major league baseball gives up what it ought not have had in the first place, namely, penalties for late delivery of an extorted gift, so that the District's Council relents on its demand for private financing. Of course, the plans for the private financing were anything but private.

Part of the deal is that D.C. will issue bonds to pay for the stadium. Cute. Who pays off the bonds? Taxpayers.

On top of this, anorther story, this one in the Washington Post, predicts that the stadium will cost the D.C. taxpayers $540 million rather than $440 million. They call that "price overrun" and they're not a problem when someone else is paying. At least not for the wealthy baseball owners who are getting themselves another freebie.

The same story reports that nothing is set in concrete because three newly elected members of Council, all opposed to the deal, are sworn in a few weeks from now. The vote, by the way, was 7-6 so it's not unlikely that the new Council will want to undo the embarrassing turnaround by present Council. Present Council has attempted to install procedural roadblocks to a future Council's undoing of the deal. However, it is fairly well settled law that a legislative session cannot bind a future legislative session. Those who think this is over, and there are a few, but only a few, who do, ought consider the likelihood that this will end up in court. Perhaps even the Supremes will get to play with this one.

The deal remains a bad deal, for many reasons, such as those described in this story. The bottom line is that baseball is getting a stadium without paying for it.

Somebody sold out. That's all there is to it. Voters have long memories, especially when the cost overruns will be making the news as campaigns crank up for the next set of elections in D.C. Suckered in by the "baseball is good for you, the public" and the "baseball is a public trust and America shares in its success" propaganda issuing from an enterprise that can't keep its game honest and its athletes clean, D.C. politicians, or at least 7 of them, caved in. To what? Cogent arguments? Ha ha ha.

As someone pointed out, the big question remains unanswered. Why can't baseball pay for the stadium? No one has given an answer. Claiming that baseball is good for D.C. does not answer the question. Why should the taxpayers of D.C., many of whom live in poverty or in near-poverty conditions, be tagged (pun unintended) for the needs of the rich who have baseball teams as their playthings?

If, as baseball contends, it is more than private enterprise because it is a public institution and an integral part of the American fabric, then I say this to baseball: "Fine. Then give us back a public Commissioner and stop with the 'owner as Commissioner' debacle. I know someone (not me) who would excel in the position. He actually is sympathetic to the continued existence of the sport. Unlike most Americans."

Or, better yet, if the public pays for your game, the public gets to keep some, most, or all of the profits from your game. How's that for sharing?

Pass this one around. Maybe it will come to the attention of someone in baseball who is willing to answer my challenge. That would be fun. For me. Not for major league baseball.

Student Pre-Exam Questions

At the end of every semester, when examinations loom like stormclouds over the heads of the students, there is a surge in questions presented to the faculty. Some questions reflect careful thinking by the student that takes the student to analyses beyond the scope of what was covered in the course. Other questions are as mundane, and troubling, as the not uncommon "can you repeat what you said two months ago about topic D?"

The surge of questions before the examination presents several problems. One is educational. In the courses I teach (and in most others), waiting until the end of the semester to cement a concept from early in the semester is counterproductive, because learning the concepts encountered in the middle or end of the semester requires a cemented understanding of the concepts addressed in the beginning. Another is logistical. Usually there are 150 to 240 students in the two or three courses that I teach in a semester. When even 20 percent of them decide to visit my office, there can be lines, or students jumping into the middle of existing conversations, requiring "re-starts" of the discussion. I could find myself answering the same question repeatedly.

The arrival of digital communications technology, especially e-mail and the discussion board forums on the Blackboard classroom (a digital resource available through web browsers) has changed the landscape. Recently, in a discussion about handling student questions, I had an opportunity to share the reasons I welcome the use of digital technology to manage student pre-exam questions. Keep in mind that I have implemented other course features to discourage the "wait until the end and cram" mentality that, to the dismay of professional educators, continues to dominate legal education. Also note that the issue triggering the discussion, namely, at what point in time does or should a professor stop answering questions, isn't addressed by my pro-technology piece, which I republish here:

The reasons I think email is relatively efficent and office visits
relatively inefficient.

1. In the office visit, too many students (including a few who came by this semester) page through their outlines looking for places where they marked up questions they wanted to ask. Email permits them to send the question when it arises.

2. In the office, too many students look at their notes to themselves and struggle to remember what it was, exactly, that they planned to ask. Email permits them to send the question when it is in their head.

3. In the office, too many students struggle to get back "into" the topic. Email permits them to send the question when they are immersed in the context of the topic.

4. In the office, students repeat questions asked by other students. Email permits me to copy and paste the question, and my answer, to the Blackboard classroom. End of repetition.

5. In the office, students come by when I am with another student, who invites them in, requiring a re-start of the discussion, which though not as bad as a full repetition, is inefficient. Email permits me to avoid re-starts.

6. In the office, a student gets one-on-one advice that causes other students to have the perception that the student visiting the office is getting an academic advantage. Email (or discussion board conversation) permits me to open the exchange to all students, thus negating any academic advantage, real or perceived.

7. In the office, student presence can conflict with phone calls and emails, and has at times caused me to go an entire day without getting lunch. Email is asynchronous and I can respond when it is convenient, though I rarely let an email sit for more than an hour or two, other than in the evening and overnight.

8. In the office, I reply "on the fly" and might not use the same metaphors or structure when a question is repeated. Email compels me to think about what I am saying, to organize it well, and to reach back to previous semesters if I have on hand an earlier response to a similar question that "works."

9. In the office, a 10-minute visit by each student consumes many full-time days. Many students need 30 minutes, an hour, or more to work through their "lists". Email permits compression of the time to an efficient "no repeat" manageable number of hours.

10. In the office, my answers go into vapor unless I write them down. Email memorializes my answers and gives me material to incorporate into the next semester's notes, slides, etc, where appropriate and useful.

The difference between "pre email" and "email world" has been stark. Student learning has benefitted from the email/discussion board virtual community and extension of the classroom. With 100 to 250 students each semester, and as many as 340 students a year, email has freed up time that I can devote to constructing powerpoint slides, CATLI exercises, CPS system questions, semester exercises, etc.

This is one of those instances in which the technology has made a huge difference, and for the better.

Though not all of my colleagues in the law teaching world agree with me, most agree with some or all of the points I make. My students might be tempted to interpret this "defense of digital communication" as a dis-invitation to make office visits, but that's not the intent. There are times when office visits are more effective in helping a student deal with a concept with which the student is struggling. For example, it's easier to map out a flowchart or grid while the student watches than to create some step-by-step powerpoint slide that shows the same thing and to send it via email. But office visits are most useful to students during the semester, in contrast to the afternoon before the exam, and are more likely to generate a "share insights with class" discussion board posting than is the visit late in the game just before the examination. Thus, by encouraging "during semester" office visits, I contribute to my goal of demolishing the inefficient "wait and cram" philosophy. After all, if several students want office visits during the semester, scheduling is much easier than it is when three people show up at 4:30 in the afternoon the day before the examination. The good news in all of this is that it works. There is much more feedback available to the entire class, students are working during the semester at levels higher than those attained in pre-digital versions of the course, and their work is more purposeful.

The nice thing about the discussion was that it inspired me to sit down and think about what I've been doing, and this is the first time I've compiled a full analysis of my reasoning. Perhaps it will be of interest or use to you.

Booing the Third-Strike Argument

One advantage that real-time blogging (and similar instantaneous communication such as chat and text messaging) has over traditional print press is that it is faster.

In today's Washington Post, Tony Kornheiser rips into the curbside parking fee "private" financing plan proposed as a means of solving the problems that will keep baseball from returning to D.C. He also takes a shot against the "tall building" fee. His disbelief is more than matched by his sarcasm, wit, and annoyance. And he's an advocate of baseball's return, no less.

Of course, two days ago, in this post, I provided my own MauledAgain version of mockery, pointing out the silliness in using "private" as an adjective to describe funding that comes from the public. Two days ago.

Of course, my reader base is much smaller than Tony Kornheiser's. But at least they're 48 hours ahead.

Incidentally, a survey, described here, shows that 56 percent of D.C. residents support the private financing requirement, and 53 percent hold to that position even if it means no baseball in D.C. On the other hand, 40 percent want baseball at any cost, even if it means total public financing. There are a lot of unhappy folks in D.C. Blame is cast at the mayor, the head of Council, and major league baseball, and some people are annoyed or angry with all three. What a mess.