As I Expected, Tax Deform(ity)

Well, the press has released enough news about the Tax Reform Panel's upcoming report to trigger reactions not only from tax pundits but also from political commentators. Of course I'm going to join in. I will try to bring a different perspective to the analysis that does the rest of the tax blog world. For example, Dan Shaviro has shared some predictions on the political viability of the proposal, along with a short commentary on each of the major components. Joe Kristan sees "business as usual" in his initial reaction to the plan. Vic Fleischer thinks that the plan could fly, if particular political forces think past their traditional positions and array themselves in a tax reform alignment.

From my perspective, the question is whether the Tax Reform Panel has lived up to its charge.

When the President established the panel in early January of this year, it was, to quote from the Panel's web site, to "advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans." The policy options, as a group, were to be revenue neutral. More specifically, the options were to meet these three goals:

simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;

share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and

promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

How can anyone take issue with these goals? Simplification, reduction of compliance burdens, job creation, and all those other lofty ideals. So let's see how the Panel fared.

The panel's suggestions consist of these proposals:

* Cut back, but do not eliminate, the exclusion from gross income of employer payments for employee health insurance premiums and health care.
* Widen and simplify tax-free savings plans.
* Increase and index for inflation the limit on gain excluded from gross income because it arises from sale of a principal residence.

* Eliminate the deduction of state and local taxes by individuals.
* Make the charitable contribution deduction allowable in computing adjusted gross income, but only for contributions exceeding 1% of income.
* Reduce the home mortgage interest deduction limitation from interest on the first $1,000,000 of mortgage loans to interest on the first $x of mortgage interest, where $x is the maximum amount that can be insured by federal mortgage insurance programs, an amount that varies by county. In the Philadelphia area, $x is approximately $235,000.
* Permit all individuals to deduct health insurance premiums.

* Eliminate the alternative minimum tax.
* Reduce the number of tax brackets from 6 to 4, with the top rate at 33% rather than 35%.
* Reduce the tax rate on interest income to match the rates currently applicable to dividends and capital gains.
* Reduce the tax rate on domestic dividends to zero.

* Enact a simplified family credit that expands the existing child credit.
* Replace some deductions with credits.
* Replace the personal and dependency exemptions with credits.
* Create a refundable savings credit for low-income taxpayers.

In general, one does not need a detailed analysis of these provisions to evaluate the package. Those who want more detail should take a look at Dan Shaviro's helpful summary.

So here I go:

Simplification

1. This is not simplification, aside from elimination of the alternative minimum tax and elimination of the deduction for state and local taxes by individuals. However, this deduction is one of less complicated provisions in the code, or at least it was until the sales tax deduction was restored, so its repeal isn't quite cleaning up the tax code mess.

2. Reducing the limitation on mortgage interest deductions is more complicated because of the tie-in to the variable mortgage insurance limit.

3. Changing a full exclusion for employer-provided health care to a limited exclusion necessarily adds complexity.

4. Shifting the charitable contribution deduction from an itemized deduction to one allowable in computing gross income adds complexity.

5. Expanding the deduction for health insurance may or may not be complicated, depending on how it is drafted. My guess? It will be complicated.

6. Reducing the number of tax brackets doesn't do anything with respect to simplification.

7. Reducing the tax rate on interest income adds complexity because it will be necessary to define interest income that qualifies for the reduced rate. The definition will not be one sentence.

8. Eliminating the tax on domestic dividends also adds complexity because, again, it will be necessary to define domestic dividends qualifying for this zero tax treatment.

9. Guaranteed, simplification of the family credit will not be simple.

10. Replacing deductions with credits in and of itself does not affect the complexity built into the definitions and requirements for the deduction or credit benefit.

11. If the refundable savings credit is anything like the parade of other credits recently added to the Code, it will not be a victory for simplification.

12. And what about the complicated, inconsistent, bewildering array of provisions affecting education of which the panel made a big deal a few months ago?

Score: F, and I wish there were an F- grade.

Reduction of the Cost and Burden of Compliance

1. Let's see. OK, the alternative minimum tax form disappears, so that's a plus. And the 2 minutes required to compute the deduction for state and local taxes gets added back to the lives of tax return preparers and to the lives of taxpayers who would be digging around for the check or receipt. That's a tiny plus.

2. Employers will need more time and money to figure out how much gross income must be reported to employees on the W-2 on account of employer-provided health plans, and there will be one more line on the return for that.

3. New and enlarged forms for the savings credit, tax-free savings plans, and the family credit adds to the cost and burden of compliance.

4. A deduction for health insurance premiums means more record-keeping and another line on the return.

5. Figuring out what is interest and what is a domestic dividend takes time, records must be kept, Schedule B must be modified to separate one kind from another, so it grows. Pages of special rules meshing these proposals with pass-through entities will do nothing but complicate tax planning and compliance for partnerships, S corporations, trusts, REITs, etc.

If all of this happens, there will be more forms, and more lines on existing forms, despite the removal of the alternative minimum tax form from the inventory.

Score: F.

Share the Burdens and Benefits of the Federal Tax Structure in an Appropriately Progressive Manner

Do any of these proposals heighten progressivity?

Yes, these appear to have that impact:

Cutting back the exclusion for employer-provided health care, eliminating the deduction of state and local taxes, reducing the home mortgage interest deduction cap, creating a refundable savings credit for low-income taxpayers, converting deductions to credits.

Do any of these proposals reduce progressivity?

Yes, these have that impact:

Eliminating the alternative minimum tax, reducing the top rate and the number of tax brackets, reducing the tax rate on interest, eliminating the tax on domestic dividends.

Putting these together, it's more likely to decrease than increase progressivity. So the challenge is to define the word "appropriately" in the phrase "appropriately progressive manner." Considering that I consider lower rates for dividends and capital gains to be inappropriate, more of the same also is inappropriate.

Score: D

Recognizing the Importance of Homeownership and Charity in American Society

The proposals do not eliminate the deduction for mortgage interest, and by turning it into a credit, the panel suggests something that, at least in theory, will make home acquisition economically easier for those most under-represented in the housing market, namely, low-income taxpayers. Adjusting the exclusion amount for home sales helps, but perhaps the amount should not be so high?

Making charitable contribution deductions available to taxpayers who do not itemize deductions might encourage more charitable giving, but will it? Most taxpayers who do not itemize are low-income taxpayers, and those taxpayers might not be in the best position to increase their charitable giving. And why not make the charitable contribution deduction a credit?

It would have been nice to see a wholesale re-write of the charitable contribution deduction. It is a forest of tangled threads, a contraption with which almost every Congress has tinkered, and a trap for the unwary.

Score: C

Promoting Long-Run Economic Growth and Job Creation

When was the last time a tax bill was not tagged as promoting economic growth and job creation? When was the last time a tax bill in fact triggered economic growth and job creation? Get out the tea leaves, the cards, the crystal balls, and the palms of your hand. This one will be debated until debating the proposals is moot, and then the debate will morph into more law review articles and commentary.

Score: Incomplete

Better Encouraging Work Effort, Saving, and Investment

Now, seriously, who is going to undertake or increase work effort because taxes on capital gains, dividends, and interest are lower? Or because the top rate would be 33%? Or because there would be 4 rather than 6 tax brackets? Or because a portion of employer-provided health insurance would be taxed? Or because deductions become credits? I don't see it.

Yes, those with money to spare might be tempted to invest rather than consume. Eliminating the tax on domestic dividends and reducing the tax on interest might have that effect. The problem at the moment is that most Americans don't have money to spare. Some could, if they cut back consumption, but is cutting back consumption the answer? Wouldn't that make the economic status of those producing the consumed goods and services a bit less pleasant?

Score: D

Strengthening the Competitiveness of the United States in the Global Marketplace

Perhaps what is contemplated is the following. The proposals will encourage investment, and that investment will be plowed into domestic production, creating domestic jobs. Consumption would be discouraged, and somehow that means China sells less stuff here, so that China acquires fewer American dollars. In the meantime, the new domestic production has Chinese citizens falling over one another trying to buy American products. Something like that.

Well, guess what? The Chinese prefer to either pirate the American product, counterfeit the American product, or purchase the source of the raw materials used by Americans to create product. Guess what? Even if the rest of the world wanted American-produced stuff that it currently isn't purchasing, where will Americans find the labor force to create it? The tool and die industry is withered, for every petroleum engineer coming out of college there are 100 lawyers coming out of American law schools, the number of American students majoring in science and engineering has dropped almost off the face of the earth, and energy costs threaten to make the entire economy go under.

Score: F

What Would I Do?

I'd make taxes as much of a non-factor in business and personal economic and social decision-making. I would repeal most exclusions and deductions, retaining deductions for the cost of generating income. I would eliminate depreciation on property that typically does not depreciate, such as buildings. I would index adjusted basis for inflation. I would include unrealized appreciation in the final return, and eliminate the estate tax. I would provide a flat exemption equal to a percentage (100% or higher) of poverty-level income. I would create more, not fewer, tax brackets, so that there would be less incentive to manipulate taxable income from one bracket to the next. I would require that any attempted use of the tax law to encourage or discourage specific non-economic behavior be proposed as a credit, and be advertised to all citizens in full-page newspapers, and through radio, television, cable and internet messages, with the words, "Senators A and B and Representatives C, D, and E propose to give credits of $x to people who do (or don't do) y, and this credit will require increasing the taxes of other taxpayers by $z," limiting the passage of such legislation to instances where there was overwhelming support. I might be persuaded to tack on a referendum arrangement. You get the picture. No more tax games because the tax playing field gets closed. The panel wants to mow the grass a little shorter. Ho hum.

And So?

The bottom line? I'm not impressed. That's no surprise. I saw this coming. On January 12 of this year, days after the panel was appointed, I wrote, "So back we come to tax reform. I hold out little hope." On April 25 I pointed out that it would have been "far less expensive, and far less time consuming" had the Tax Reform Panel "Simply ... Read My Books" after the panel concluded that there were "too many deductions [and] credits" in the code. As I predicted, "It's time for change. It probably won't happen." And just last week, when the first of the proposals began to see the light of day in the press, I wrote:

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

The rest of the proposals don't change my opinion.

My prediction is that the combination of the erosion of the Administration's political capital and the power of the vested interests will combine to do one of two things. Either the proposal will collect dust somewhere, probably in the Congress, or the subset of Republicans who are anti-tax will join forces with certain vested interests to enact what the powerful want, namely, reduced or no taxes on investment income, modification of the alternative minimum tax so that it applies to the middle class but not the wealthy, and reduction of the top rate, in exchange for a refundable credit of some sort directed to low-income families. In other words, more of the same, at least so long as the same chefs are working in the tax kitchen.

Pay the Tax or Go to Jail

A long-time reader sent me a tip for this story. It seems Deborah Combs of Loveland, Ohio, did not pay $1.16 in local income tax that she owed to the city of Loveland. Apparently she also had not filed city income tax returns for five years. Although it is unclear from the story if the city communicated with her in an attempt to collect, though her reference to how much the city had "spent in stamps" suggest that it had, the city obtained an arrest warrant and had her arrested. The tax amount of $1.16 is small, but according to the report she also faces "hundreds of dollars" in fines, though at the moment she does not owe any fines because none have been imposed.

So she's arrested for not paying $1.16 in taxes. The city manager, though, argued that it's a matter of principle and not quantity. "We have laws. The laws have to be complied with. At what cost do you stop enforcing the law?" That's a question that police and prosecutors answer every day as they exercise police discretion and prosecutorial discretion.

Curious, I began digging around, using google, to see if there was more to the story. Searches turned up dozens of websites with the same story, picked up from the same news distributor. Even most Ohio-area news web sites carried the same release. But on the web site of the Dayton Daily News, more information appears.

Combs faces up to 18 months in jail and $4,000 in fines, far more than "hundreds of dollars." She has been ill and out of work. So she concluded she did not owe taxes. The $1.16 relates to tax year 2003, apparently before she became ill.

Her trial is set for October 20 in Mayor's Court. If she was recuperating from her illness, this might just set her back.

There's no indication Ms Combs poses a threat to anyone. Clearly the city is sending a message. But what's the message?

Perhaps it is this: "Don't forget. If we're willing to arrest someone who owes $1.16, what do you think we will do when we discover YOU owe hundreds or thousands of dollars?"

Somehow, I think it would be cheaper in this instance to levy on her property. If the goal is to send a message, of any sort, it would be cheaper to rent space on a billboard. It's not as though the unpaid tax and the fines will cover the cost to the city of the trial.

Hopefully we'll get news of what happens when she goes to court.

Tax Charts By Topic

Readers of this blog know that I've been touting Andrew Mitchell's tax charts because they are useful, visual, and well-done. My previous postings are numerous: here, here, here, here, and here.

Andrew has announced there now exists a Tax Charts by Topic access point. And of course the main tax charts entry page continues to provide an entry.

I suppose this email from one of my readers, a former student, will persuade tax students, faculty, and practitioners who appreciate visualization that Andrew's efforts are well worth a visit:

After reading your blog yesterday, I was checking out Andrew Mitchell's website. I had never looked at it before. Well, it didn't take me long to realize this was a great resource. My learning is always enhanced through visual representations of transactions. I forwarded the site to my M&A partner and he loved it. He forwarded it to the other M&A associates and recommended that they save it as good resource. See how you continue to help me along even when I am not in your class - thanks!

Indeed, the whole point of this blog is to help people. Oh, OK, and to give me a space in which to express myself. Which often, though not always, helps people.

Anyhow, quoting Andrew, here is the list of tax chart topics:

• 1. A Reorganizations
  
• 2. B Reorganizations
  
• 3. C Reorganizations
  
• 4. D Reorganizations
  
• 5. F Reorganizations
  
• 6. Triangular Reorganizations
  
• 7. Spin-Offs
  
• 8. Continuity of Interest
  
• 9. Section 351 Exchanges
  
• 10. Section 338 Elections
  
• 11. Pre-Sale Distributions
  
• 12. Liquidations
  
• 13. Redemptions
  
• 14. Entity Classification
  
• 15. Form vs. Substance
  
• 16. International

Tax Return Deadlines and Procrastinating Clients

Yesterday a member of the ABA-TAX listserve raised a question about the proper, or at least appropriate and effective, response to clients who fail to provide tax return preparation information in a timely fashion, and yet who expect the return to be finished and ready for signature almost instantaneously so that the filing deadline can be met. Understandably, clients who approach their responsibilities in this manner are frustrating. Because the tax law has no monopoly on such clients, it is interesting, and perhaps useful, to consider whether the suggestions proposed for dealing with tardy tax clients work with tardy clients in other areas of the law.

For many tax practitioners, it seems that it's the same people who wait until the last minute to get their information to their tax return preparer. The issue popped up at this time of the year because October 15 is the deadline for taxpayers who have obtained a two-month extension to tack onto the automatic four-month extension of the April 15 due date to August 15. Although sometimes there are extenuating circumstances such as disasters, deaths, illness, or another person's failure to provide a K-1 or similar information, in most instances these clients fit the stereotype of disorganized, procrastinating, and unfocused.

The stories would be legends were they not so common. A taxpayer who not only has an individual return to file but also has a corporation and limited liability company whose returns are past due, calls a tax return preparer on October 13 and asks her to "file something so we can deal with it later." Another practitioner had a client who he had been "nagging" for three days to bring in his information. At 2 in the afternoon of the due date, he faxes some information to the practitioner, and while the fax continues to print the incoming data, the client calls the practitioner and announces, "I just faxed the info you needed. I am on my way to pick up my returns."

One practitioner has proposed a plan under which clients receive letters explaining that if they fail to provide all information required to complete the return by a specified date, a surcharge will be added to the fee. If the information does not arrive by the specified date and arrives by a later date, the surcharge is doubled. The same practitioner explained that rather than using a surcharge, she simply raised her fees. The consensus of other respondents is that premium fees are applied to clients who create time-pressured situations by their procrastination. One practitioner suggested taking a retainer. Perhaps this would work as an incentive for these clients. Another practitioner explained that in addition to using surcharges, his firm also imposes rush fees if the information arrives very late.

Considering that in the experience of the practitioner proposing surcharges, these clients also are the ones who are slowest to pay their bills, the impact of this approach may not be as effective as desired. Another practitioner noted that the procrastinators are disorganized but not necessarily late in paying fees. Yet another practitioner explained that until the fee is paid the return is not released to the client, a practice that is fully explained in the engagement letter. This practitioner compares leaving with a completed return without paying to shoplifting.

The practitioner who raised the question noted that if surcharges cause clients to go elsewhere, so be it. Another practitioner informed the group that the process of making September 30 the drop dead date for October 15 returns caused the loss of only one client, a grouch whom they were not unhappy to see go. Yet another practitioner who uses surcharges explained that the clients paid, and that most clients do not incur the surcharges two years in a row. So perhaps the attempt, as another practitioner phrases it, to wean clients from their expectation of 24-hour service is working. In response, still another practitioner explained that she perhaps had not raised her fees enough for late clients because "even [her] brother" brought in his information at the last minute, but at least she got dinner, Godiva chocolates, wine and flowers as "kiss-up gifts." Well, I suppose we make allowances for family!!!

What does appear to happen, though, at least with some clients, is that they "throw temper tantrums" when they show up on October 14 with their boxes and bags of paper and expect that the return will be done in time. Clients have been known to be abusive with receptionists, secretaries, and the preparers. To me, this is a clue that if people have a history of getting their own way, through bullying or parents giving in to tantrums, they will continue to do so until someone stands up to them.

But does this work with other clients? The primary determinant is the existence of a deadline. What happens if a young married couple stop by for a will, but never follow up with the necessary information? My guess is that unless the attorney reminds the clients of the need for the information, the will won't be completed. If the attorney is otherwise busy, these clients' planning may fade into the background. But suppose there is a deadline? What does a criminal defense attorney do if the accused isn't cooperative? At what point does the attorney jettison the client, and is that even a possibility in most situations? Ultimately, the attorney will explain to the court that he or she does not have the required information. It might mean a client does not make bail. But it could be worse.

Rather than launching into another commentary on how folks come to be disorganized procrastinators who expect the rest of the world to serve at their beck and call, I hasten to add that sometimes it works in reverse. Sometimes it is the client who is frustrated by a practitioner who does not get back to the client, fails to get pleadings or other documents filed on time, lets tasks slide, or misses statutes of limitation expirations. And before this becomes an invitation to jump all over the legal profession, or tax practitioners, this phenomenon of the unresponsive professional extends to contractors, medical personnel, civic organization organizers, and a long litany of either overworked or under-organized business entrepreneurs.

Unfortunately, because too many students leave the K-12 systems bereft of organization skills, respect for the calendar and clock, and consideration for others, it's left to the rest of the educational system to try to pound the point home. Yet, at least from the vantage point I have teaching in a graduate and post-graduate school, the rest of the system also fails. What are students to think when deadlines are waived? They learn that the world revolves around them, when in fact, in practice, it does not. Whether it is medical school, business school, or some other institution doing the teaching, it is important to remember that some of the clients who are late with their tax information are at the same time complaining about the fact that the plumber hasn't yet returned a phone call from the previous week.

I wonder how much of the procrastination and disorganization is a subconscious rebellion against the fast pace of life today. If life today is so much more hectic, pressure-packed, and overwhelming than it was, say, one hundred years ago, why is that? Too much to do and too few people willing to do it? Or is the notion that life has become more frenetic simply an illusion? Yes, our great great grandparents did not face daily commutes of 2 hours a day, but on the other hand they rarely left their villages, had to deal with perpetual illness and medical emergencies, needed months to cross the continent, expended hours making meals rather than grabbing "fast" food, and probably complained that life had become too complicated, too demanding, and too busy when compared with the lives of their great great grandparents.

So perhaps, even if there are societal overtones, it is a question of individuals' personalities. Some people can get to appointments on time, some can't. Some people can organize things, whether thoughts, paper, or digital files, with little effort, while others simply stare at the piles. It's not a congenital defect. People can learn how to organize. They can become disciplined with respect to day and time so as to minimize the inconvenience they impose on others. But these remedies require education, from every direction, be it parents, schools, places of worship, or legal authorities. What gets in the way are those who see these remedial efforts as unjustified intrusions on an individual's "freedom" to behave however he or she sees fit. At least with respect to tax return preparation, this is one instance where the forces of a "free" market might accomplish what formal education cannot or will not do, and that is to break people of bad habits.

Yes, there are many reasons I no longer have clients other than those with whom I relate vicariously through my communication of advice to practitioners. The behaviors described by the folks on the ABA-TAX listserve are among those reasons. I salute the practitioners who shared their experiences and coping devices, for they demonstrated creativity and again permitted me to engage in vicarious practice.

Paying the Tax Shelter Price

Although there are other types of tax shelters, one of the more common arrangements is an investment in a partnership which borrows money, uses the loan proceeds to acquire assets, claims depreciation deductions, and passes those deductions out to the partners. Assuming either additional facts that make the passive loss limitations not apply or assuming that the partner can make use of passive losses, the arrangement usually is "sold" with promises of immediate tax-savings benefits. Because under section 752 the partner is treated as having a share of the liability (and even a limited partner can have a share of a nonrecourse liability) and thus acquires additional adjusted basis in the partnership interest these sorts of shelters will pass out more deductions than the amount invested by the partner. This is why this sort of tax shelter is more attractive than a straight-up charitable contribution (even assuming that the charitable contribution limitations don't apply).

But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.

So what's a tax shelter partner to do?

1. The partner could sell the interest to a new partner who does want income, passive or otherwise. But because of the low or zero adjusted basis, the selling partner will be compelled to recognize gain. The deficit capital account will pass to the new partner. In some states, a transfer tax may apply to the sale. It's easy to understand why this option isn't popular.

2. The partner could seek a liquidating distribution from the partnership. In most instances, the partnership agreement does not allow for this transaction and it is unlikely that the partnership or other partners would agree. No matter, for if they did, the same problem would exist, namely, a distribution to a partner with low or no adjusted basis in the partnership interest. There would be gain. Another option gets rejected.

3. The partner could make a gift of the partnership interest. Because the donee takes the donor partner's adjusted basis, this simply passes the problem along to a natural object of one's bounty. If that person happens to have need of the income, in both an economic and tax sense, there might be some sense in doing this. However, the gift tax looms if the value of the partnership interest exceeds the annual exclusion, and though the unified credit may be available to negate a tax, its use has long-term adverse consequences on future estate planning. Additionally, many partnership agreements and federal and state securities laws stand in the way of many such gift transfers, because the donee does not satisfy the requirements for transfers of private placements or other restrictions.

4. If the interest is donated to a charity, which pretty much eliminates the gift tax problem, there would be gain to the extent that the partner's share of the partnership liability exceeds the partner's adjusted basis in the partnership interest. Because the partner's adjusted basis is low, or even zero, the likelihood of gain is high. Some charities would reject the gift because of state law or charter restraints. Others would reject it because it would open the door to unrelated business taxable income. So this is an option that is very limited.

5. Once upon a time, domestic relations lawyers who understood why the basic tax course is a prerequisite for practicing domestic relations law advised divorcing clients to pass the burned out tax shelter interest to the other spouse. Aside from interesting ethical questions, which arise if the other spouse is not represented, this maneuver became obsolete once the rest of the domestic relations bar caught on and fended off the attempt to leave the recipient spouse with a ton of gain that exceeded the cash outlay of the interest.

6. The classic advice was to hold the partnership interest until death. Then the step-up in basis that occurs at death in effect would "wipe out" the gain. That's true in theory. But because of the intricacies of partnership taxation, the heirs' high adjusted basis does nothing to help negate the impact of tax income that the heirs, as partners, must report, even if there are no or few distributions. One way of dealing with this discrepancy between the partnership's inside operations and the heirs' outside adjusted bases is the section 754 election. However, that election requires consent of the partnership (other than when it is required in situations that do not apply to these sorts of tax shelters). Where is the guarantee that the partnership, or, technically, the other partners, will agree? Often, they will not agree. Although I suggest to my students that when dealing with a business partnership (or LLC treated as a partnership), they put a provision in the partnership requiring that the election be made the first time the issue arises, because at the outset everyone is neutral in terms of what event may take place to set up the possibility, it is far less likely that an investor in a marketed tax shelter partnership will be in a position to bargain for such a provision. A tax shelter partnership agreement that is well-crafted from the promoter-general-partner's perspective surely also contains language that prevents the limited partner investor, or the heirs, from dissolving the partnership.

So, perhaps the answer is that sometimes the price must be paid. All those tax-reducing deductions reported by the investing partner generated savings. Eventually, offsetting gain must be reported. Even so, from the perspective of time value of money, deductions in one year offset by income in a later year is a good deal unless the applicable rate in the later year is so high that it offsets the interest factor. If the delay is five, ten, or more years, it would take a huge increase in rates to offset the time value of the tax savings.

What is troubling is the reaction of taxpayers who throw fits about the income, though they (or their decedent) basked in the joy of the deductions. What the taxpayers want is a deduction for nothing. When cleared of the subchapter K partnership taxation haze, the request is equivalent to a claim for a charitable contribution deduction when nothing was transferred to a charity. The latter is easy to see as an outrage, but the former, masked by the complexities of partnership taxation, isn't so easily understood as indefensible. Even when told that the income would be taxed at low capital gains rates, as sometimes would be the case, even though the deductions reduced ordinary income, taxpayers balk.

Yet I do understand how taxpayers get to this point. The person marketing the tax shelter talks up the tax-savings, and brushes aside as "no big deal" or as "far in the future" the issue of the eventual income and gain that will be taxed. Oh, it's there in the fine print, but how many taxpayers read the fine print? Very few. How many take the deal to a tax advisor who reads the fine print and explains it to their client? Some. But afflicted with the short-term vision so prevalent in today's culture, most taxpayers will not, no, cannot, juxtapose the immediate benefit with the long-term consequence. In this respect, tax shelter investing isn't all that different from many other activities in which individuals, institutions, and governments play to the short-term at the expense of the long-term. The problem is that today's future becomes tomorrow's today. The future is now, and the piper asks to be paid.

So pay. Ultimately, there just isn't something for nothing.

(Not) Tax Timing

Shortly before 11 this morning, I questioned the wisdom of leaving five tax policy positions in Treasury vacant and criticized the slowness of the confirmation process that caused one nominee to withdraw.

Later in the day, Treasury announced that it had appointed a Deputy Assistant Secretary for Financial Institutions Policy. It then announced that it had appointed a Legislative Affairs Deputy Assistant Secretary for Banking and Finance.

Interesting timing.

The tax positions remain vacant.

Vacancies, Snails and Tax Policy Gridlock

It seems that the tax world clock ticks at a faster rate than do those marking time for many, if not most, other areas of life. The Bankruptcy Code gets amended every several decades, the copyright statutes gets a major change several times a century, the law of future interest changes in a big way once every several centuries, and yet the Internal Revenue Code is amended multiple times each year, with major changes coming every year or two. The IRS cranks out administrative material, in the form of regulations, revenue rulings, private letter rulings, revenue procedures, announcements, news releases, and a flood of at least four dozen other types of issuances, at a pace that compels Tax Notes, BNA Daily Reports, and other commercial tax reporters to publish sizeable daily updates.

Law faculty who teach tax and seek to publish in that area face a tough decision, because the student-edited school-affiliated law reviews usually are months or years behind, and can cause an accepted tax article to become obsolete while it crawls through the editing and publication process even though publication in those law reviews is, for many tenure reviewers, the hallmark of "scholarship." In contrast, the tax journals that take a realistic approach to keeping readers current can crank out an article in a matter of weeks, but yet are held in some disregard by certain academics who view them as somewhat inferior. Perhaps it's because there are no third-year law review students doing the editing? And how long does it take to edit an article? The answer is "not very." What happens in most law reviews is that the article sits in a series of "waiting to be examined" piles for much of the time.

This lack of any sense of urgency also afflicts many bureaucracies, including government processes. And although the foot-dragging usually afflicts an individual person or entity, sometimes, as in the case of Katrina, it affects large groups of people, almost always to their detriment. And occasionally, it affects the entire nation, even if it doesn't quite get the headline in the mainstream media.

About six days ago, the mainstream media barely picked up on Philip Morrison's withdrawal as a nominee for the post of assistant secretary of the Treasury for tax policy. This MSNBC report was the only one I could find, and it simply announced the withdrawal in three short paragraphs at the end of another story. It noted that the reason Morrison withdrew was that the process was taking too long, and that the Treasury would be without someone in its top tax position when the tax reform panel's recommendations are issued.

Three days ago, BNA issued a far more comprehensive report on the story, in which it not only reported the withdrawal, but also put the story against a much larger backdrop. Morrison, who was nominated on May 26, explained that he had cleared FBI investigation, IRS review, and Office of Government Ethics requirements before he was nominated and that four months was too long a time to hold things in abeyance. Morrison will turn his full attention back to his tax practice at Deloitte Tax. A spokesperson for the Senate Finance Committee, which needed to issue a report before the full Senate could consider the nomination, explained that the question was on the agenda for an Oct. 18 hearing and that the committee "reject[s] the claim that the nomination process took too long" without giving any further explanations on account of alleged "confidentiality constraints."

The BNA report also noted that, according to a Treasury official, the nomination had "boosted morale" at Treasury and "might help Treasury recruit new workers." In his remarks this official characterized the nomination as giving the Treasury's tax policy division "stability." The BNA reporter, putting together other information, then summed up the report by pointing out that ALL of the following positions in Treasury are vacant:

• Assistant Secretary of the Treasury for Tax Policy
  
• Deputy Assistant Secretary of the Treasury for Tax Policy
  
• Tax Legislative Counsel
  
• International Tax Counsel
  
• Benefits Tax Counsel
  
• Assistant Secretary for International Affairs
  
• Assistant Secretary for Public Affairs

Whoa!! So who's minding the store? According to the BNA report, Eric Solomon serves as Acting Deputy Assistant Secretary of the Treasury for Tax Policy while also fulfilling his responsibilities as Deputy Assistant Secretary for Regulatory Affairs. I must admit that until I read this BNA report I was unaware of this problem. I am confident that few, and I mean very few, Americans know that one officer is piloting a tax policy ship that calls for a much larger crew.

Something is very wrong with this picture. Actually, I think some things are very wrong. There are two very serious issues, one that may be somewhat more momentary and one that is systemic and far more dangerous.

The first problem is that one person is trying to do the work of two people while five, count them, FIVE senior tax positions of leadership with responsibilities for guidance, approval, review, and management sit unfilled. The people who hold these offices are the people who bring the views of the executive branch to bear on the development of tax law. Often, even if the same political party controls the White House and one or both houses of Congress, the Treasury serves as a counter-weight and devil's advocate to the proposals of the legislature and its staff. Treasury usually brings a collective "tax practice with taxpayer clients" experience when it visits the Hill that for many years has been in short supply on the east end of Pennsylvania Avenue. With no intent to comment on the efforts of the overworked Eric Solomon, who according to the BNA report has earned genuine praise for holding down the fort while his superiors leave him unreinforced, the nation and its taxpayers are not being well served when this sort of vacuum exists.

There are all sorts of reasons for this problem. One may be that it's difficult to find willing appointees, but, hey, if they need a list, I have one. Another might be that those who do accept and get confirmed discover that Administration tax politics permeate the Department to the point of making the position one of total frustration, and so they resign, so on second thought let me rethink that list. Yet another may be totally unavoidable circumstances such as health or family issues. And now it appears that still another reason is the adverse consequences of sitting around waiting for the nomination process to get going.

And thus the second problem, which is the slow pace of the nomination process. Unquestionably, the need to do thorough background checks means that some amount of time must elapse before a person can be confirmed. However, according to Morrison, he already had his background clearances by the time he was nominated. So what's going on? My guess is that it's the endless recesses and home visits that keeps Congress and its staff from getting to their duties, while nominations sit on desks or in computers much the way tax articles cool their heels on the desks or in the computers of student law review editors. Like those law reviews, Congressional Committee staffs are afflicted with a high rate of turnover, which often causes a "start over" mode to kick in. That, coupled with another shared characteristic, namely, learning on the job, contributes to the slogging pace with which tasks are accomplished.

Yet when the Administration and the Congress really do want to move a nomination or a piece of legislation, they do so. Between the time Morrison was nominated, with background checks in hand, and the time a hearing on his nomination supposedly was going to be held, the White House managed to nominate two people for the Supreme Court and the Senate found time to confirm the first of the two. Yes, I know the Supreme Court is important, and even supreme, but the country is in no less need of a fully staffed tax division at Treasury. It's not as though the Finance Committee handles Supreme Court nominations.

There's a lot of blame to go around, but that's not important other than in giving clues as to the more deserving question: what should be done? The answer, perhaps to the chagrin of many, is that elected officials and their staffs need to get their act together. Priorities need to be reset, something that many Administrations and Congresses have not demonstrated an ability to do. Considering all that looms ahead, especially matters with respect to which tax policy decisions need to be made, the folks in Washington need to develop and embrace a sense of urgency. Otherwise, for which one or more of these issues will resolution remain on a distant horizon while the gates are besieged: Katrina relief, tax reform, energy shortage amelioration, energy supply and delivery remediation, health care maintenance, mutant avian flu pandemic, future natural disaster relief planning, .....?

Until and unless Washington, and most, if not all, state capitals, streamline and update their procedures and culture, the increasing flood of crises, disasters, and citizen needs will slowly overwhelm the political system. As citizens increasingly come to understand that not only are offices vacant but things aren't getting done, there is a higher likelihood that they will react in ways not limited to the ballot box. Increasingly I strengthen my belief that neither major political party has lived up to its duties, promises, or voter trust. After gridlock comes collapse.

The Tax Reform Fiddle-and-Fidget Dance

The Tax Reform Commission is entering its home stretch, and news of its first few decisions is beginning to show up in various places, including this Philadelphia Inquirer story picked up from Bloomberg News. There are several highlights, which for some folks, and in some instances, for me, could be called lowlights.

First, the panel chose to reject a national sales tax. I know folks who will be very disappointed by this decision. I'm not. A national sales tax, unless it is modified to become another engine of complexity, shifts the burden of financing government from those with moderate to tremendous wealth to those who have little or no wealth.

Second, the panel "expressed reservations" about a value-added tax. I'm not sure what that means. The reservation expression, that is. It's not a rejection, because the panel knows how to indicate, and did indicate, rejection. Is it a warning? Is there a delay in rejection because there is some support on the panel for such a tax that its opponents want to quiet so that the panel can appear to be unanimous? Stay tuned.

Third, the panel agreed to reduce the $1,000,000 limitation on the amount of mortgage debt interest on which is deductible. I noted that the news story didn't report it this way, and was written in a manner that suggests $1,000,000 is the cap on the deduction, which it is not. Nothing, it seems, was said about the additional $100,000 of mortgage debt interest on which is deductible under current law if that debt qualifies as home equity indebtedness.

The point of this limitation reduction is to remove tax benefits for acquisition of expensive (read, more than $400,000) homes. Unfortunately, this proposal seems to be made by folks who don't understand that in today's real estate market, $400,000 doesn't purchase much of a home. Worse, in some markets there are no homes available under $400,000 other than shacks. In other markets, $400,000 might purchase a residence in a rather nice upper-class neighborhood. Is it time for geographic-based indexing?

The recommendation, however, goes further, and proposes to add more absurd complexity to the Code. The deduction would be limited so that it would reduce taxes by no more than 25% of the deduction. This will require another form, separate computations, dozens more lines of text in the Code, and the hiring of additional IRS employees to focus efforts on compliance with this creature of theoretical musings. Has anyone on the panel done their own or anyone else's tax returns? It is beginning to appear, as I feared, that this panel will do more of the fiddle-and-fidget dance that has afflicted tax legislation for the past 20 years.

If the goal of this proposal is to reduce investment in energy-consuming McMansions with those heat-wasting, brutally difficult to clean or reach the light fixtures for replacement 20-foot ceilings, it will fail. Limitations on mortgage interest deductions do nothing to affect the purchase of homes by the ultra-wealthy who plunk down cash or its equivalent when their "I want it" impulse takes charge of their checkbook.

The proposal, though designed to "clearly redistribute" tax benefits for home ownership to lower-income Americans, does so at the expense of the middle class, not the ultra-wealthy. This flaw in the proposal is especially galling when considering the panel's claim that it is being done to finance reform of the alternative minimum tax which was designed to end tax avoidance by the ultra-wealthy. In other words, alternative minimum tax relief for the middle class will be accomplished by cutting back on tax breaks for the middle class. It's becoming quite apparent whose agendas are driving the panel.

The panel also announced agreement on a deduction limitation for employers who pay medical plan premiums for employees. The existing exclusion of this benefit from the employee's gross income apparently would not be changed. The panel is considering a cap equal to the $11,000 maximum health care premium paid by the federal government for its employees. How a deduction cap would have an impact on the millions of employees who work for tax-exempt organizations (governments, schools, research facilities, charities, churches, etc.) is not described.

Again, though this proposal also was included in the statement that the change would finance alternative minimum tax reform by redistributing tax benefits for health care to lower-income Americans, it makes no sense. Employers who have expensive plans will cut the benefits back, or cut back their contributions, and who's in better financial shape to absorb the increase in the employee-funded portion? Yes, the ultra-wealthy and the upper middle class. How this assists lower-income Americans is beyond me.

If the goal of this proposal is to cut health-care costs, it won't work. People don't behave in logical patterns that generate healthier lifestyles because employer financing of health care has been cut. People will continue to patronize fried fast food joints, tobacco sellers, and tanning booths while avoiding gyms, outdoor recreation, and adequate sleep.

The root of the problem is exposed by this statement from the panel's vice chair, John Breaux, a veteran of the fiddle-and-fidget approach to tax legislation: "We have a concept. We know where to go. We just don't have the details." My advice to the panel, not that it will be heard or followed, "A concept is no more valuable than the quality of its application to reality in the form of details." In other words, the panel could just as easily announced that it would make deductions for time travel part of the tax code, and then explained that, "We have a concept. We know where to go. We just don't have the details."

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

So Where's the Secret Oil Cache?

I'm amazed. Startled. Bewildered.

They just don't get it.

Why?

An editorial in this morning's Philadelphia Inquirer, written by no less than the seemingly eternal and ever-present Larry Kane, simultaneously decries the failure of this nation to deal adequately and appropriately with energy management and conservation, and yet suggests that oil-producing nations which have received the benefit of U.S. military protection against terrorism, get an invoice stating: "Total Due: a reasonable schedule of oil production that will avoid gouging, maintain profits, and protect the sanctity of the world economy." Huh? Yes, I agree that this nation, and its politicians, have been about as successful with energy management as they have been with tax reform, hurricane relief, and just about everything else they have succeeded in trashing. But what's this notion that oil-producing nations can jack up oil production at will? Larry, oil is a finite resource. More is used each day than is discovered. Arguments among the peak oil crowd aren't about the truth of the "we're running out" problem but about the date (or year) that oil production has or will have peaked. Anyone seriously interested in this issue ought to visit the Oil Drum website.

It's this simple: There is not enough oil and gas to support the current demand, even if natural disasters, accidents, and other events do not arise and damage the energy infrastructure. There is even less capacity to support projected future demand as China, India, and other nations jump on board the oil and gas consumption train.

It's that simple.

Larry Kane specifically points to Saudi Arabia, but the chatter is that it has passed the peak with most of its fields, and that is why it is beginning to drill offshore. Much of what's left is so-called "sour crude" which does not refine as easily as "sweet crude" and which cannot be refined in existing refineries without major alterations to the equipment. The pipe dream of endless supply, whether oil, water (shortages of which I continue to believe will trigger a global conflict), or food (another report in today's news talks about the tens of thousands of farms that have disappeared in recent years) and the advocates of that pipe dream need to be exposed.

Sensibly or not, we've environmentalized ourselves out of coal and nuclear. We've underfunded ourselves out of solar, wind, and biomass. The nation has stuck to its "don't look past the end of its nose" outlook while condemning or shunning long-term planners and thinkers as "Jeremiahs" intent on breaking up the party. Well, I (and others) do think the party is over. So the anger that Larry Kane saw on his most recent gasoline station visit, and which he describes in necessarily masked quotations, reflects a genuine ignorance (i.e., "a not knowing") on the part of the consumer. Who's to blame? That's easy. The education system, the government, and the main stream media. Rather than telling the truth, they'd rather sugar-coat the news, and they defend their decision because the truth might generate panic, as though it's better to foment anger than panic. A little panic might not be a bad thing. I know I'm alone, or in the minority, on this point. There are times when it is foolish to put comfort above common sense and reality.

Larry Kane is right in pointing his finger at politicians. But they're not alone. They've been enabled. And the enabler is no less "guilty" than are the politicians. The energy crisis is simply a symptom of a deeper cultural failure, namely, the decades-old message that life comes without cost. It is time to start electing public servants who will take their servant-leadership skills into the public arena. Easy to propose, tough to do. After all, the powers-that-be will need to be pulled out of office, kicking and screaming, because with only a few exceptions they continue to believe in their own majesty.

But perhaps I am wrong. Perhaps tomorrow or the next day some exploration company will announce the discovery of an oil and gas field with several hundred million hypergigagazillion barrels of product that will meet the needs of a 15-billion person world for the next 10,000 years. Nah, this is one time I'm very certain that I'm not wrong. Wish I was.

Tax Rate Preference Supporters Remain Persistent

Last month, I pointed out the challenges of coming up with the dollars to rebuild the Gulf Coast. Early in the month, in a posting that drew more than the usual attention, I argued that with an expected demand for federal spending in the wake of Katrina, it was time to eliminate the capital gains and dividend tax rate preferences, and to postpone a vote on eliminating the estate tax. Within a few days, as I reported in this post, the estate tax permanent repeal vote was postponed. No news appeared about the proposed extensions of the capital gains and dividend tax rate preferences.

So, a few days later, I expressed hope that Congress would postpone any votes for extending the tax cuts for dividends and capital gains. Later in the month, I penned another post, one in which I criticized the idea of increasing federal spending while holding fast to, or extending, existing tax cuts.

Not that I dare take any credit for the postponement of the estate tax permanent repeal vote, but surely the powers-that-be in the Senate aren't listening to my advice with respect to capital gains and dividend tax rate extensions. This latest bit of news is enough to assure me that my opinions about estate tax repeal either weren't read by Senators and their staffs, were read but ignored, or were read and embraced by those who at the moment are powerless to do anything with them.

The news that triggers this dismay comes from a BNA Report, the headline of which evokes concern. When I read "Senate GOP Leaders Confident Tax Cuts Can Go Forward" I begin to wonder whether the Twilight Zone's parallel universe concept is playing out in some sort of hazy way. According to the report, Senate Republican leaders and the Finance Committee insist that legislation extending the capital gains and dividend tax rate preferences will move forward, even though members of both parties are urging that Congress re-think the wisdom of doing so. Hmmm. Maybe some folks are reading my ideas. Or perhaps, knowing that I don't hold a monopoly on them, they are reading the commentary of folks who share my disdain for taxing capital gains and dividends at lower rates. In Washington, the buzz is that Senator Rick Santorum is the architect of the idea that the revenue attributable to not extending those preferences be used for Katrina relief. Whodda thunk? Hmmm. But within days, he relented, because he was "assured" that the "cost" of extending the tax rate preferences would be "offset" which he said makes him "feel a lot more comfortable."

Well, it doesn't make me comfortable and I doubt it makes very many Americans comfortable. After all, where does the offset come from? Leaving the alternative minimum tax hidden tax increase in place? Raising taxes on someone? Who?

The silliness of the argument supporting these rate preferences and their extension is evident in the statement made by Senator Charles Grassley. He "fears" that failure to extent these rate preferences "could cause a ripple effect and discourage investment in the wake of Hurricane Katrina." Excuse me, Senator, are you saying that without these rate preferences the investors who are swimming in funds to invest would invest in China? In Europe? In oil refineries? In anyplace but the Gulf Coast? In jars buried in the backyard and paper bags in the mattress? You see, Senator, these folks who have amounts to invest need to invest somewhere, and even if they plunk their money into bank certificates of deposit, the banks can in turn loan the funds for the construction that needs to be done. Why reward investors for doing what they would do in any event? Your logic, sir, suggests that if we don't lower the tax rates on earned income to as low as those on capital gains and dividends, that everyone with compensation income would simply stop working.

When the buffet table is loaded up, we often don't notice, or if we do notice often don't mind or say anything about, the person who is loading up his or her plate to the breaking point. But when the buffet table is lean on supply, we do expect the loaded plate crowd to back down and to have some sense of balance and equity. In polite society, we ask kindly before taking the last serving from the bowl. Why is it that some folks, especially folks who seem to be getting their way so often in how things are done, seem unaware of, or willing to ignore, the sort of civil behavior that is at the root of the orderly society they also claim to admire?

That, of course, is a rhetorical question.

Alleged Tax Court Judge Bias: The Topic That Will Never Die

As many people in the tax world know, one of the tax topics in which I have serious interest is the question of alleged Tax Court bias. Six years ago, in response to an article that challenged a letter to the editor in which I asserted that the Tax Court was not biased in favor of the government, the University of Tennessee Law Review published "Instant Replay, Weak Teams, and Disputed Calls: An Empirical Study of Alleged Tax Court Bias," (66 Tennessee Law Review 351 (1999), see here), in which I presented carefully culled empirical evidence that demonstrated that the Tax Court was not biased in favor of the government, and that if there was a bias, it was a slight bias in favor of the taxpayers.

In the intervening years, other commentators have explored questions that space limitations kept out of my 1999 article. For example, in "Political Affiliation of Appointing President and the Outcome of Tax Court Cases," (84 Judicature 310 (May/June 2001), available here), the quartet of Mark P. Altieri, Jerome E. Apple, Penny Marquette and Charles K. Moore explored in detail the impact on tax court decisions of the political party of the president who appointed the judge. In "Empirical Research on Judicial Reasoning: Statutory Interpretation in Federal Tax Cases," (31 N.Mex.L.Rev. 325 (2001), see here), Dan Schneider explored whether judges favored any one method of interpreting the Internal Revenue Code over other methods, and whether specifically identifiable personal characteristics nudged judges to use a particular method. In "Assessing and Predicting Who Wins Federal Tax Trial Decisions," (37 Wake Forest L. Rev. 473 (2002) and 96 Tax Notes 1147 (2002), see here), Dan Schneider explored whether the outcome in a tax case was affected by a judge's gender, attendance at an "elite law school," previous work experience, race, years as a judge, or appointing president's political party affiliation.

The topic continues to fascinate researchers, commentators, and, I would hope, taxpayers and their advisors. Recently, Robert Howard, of Georgia State University's Department of Political Science took on the question of whether, and if so, why, tax decision outcomes in Tax Court cases and District Court cases might differ. In "Comparing the Decision Making of Specialized Courts and General Courts: An Exploration of Tax Decisions (26 Justice System J. 135 (2005), available here), he concludes that the Tax Court, as a specialized court, is "free from any practical structural constraints" and "uses its expertise to allow a much freer hand in decisions for its judges' policy preferences." He finds that this is not what one would have expected from a goal of having an expertised court decide cases without ideological influences. He also concludes that "while there has been some concern that, like the tax court, specialized courts would be no more than extensions of the IRS and thus likely to exhibit bias in favor of the agency, and while the U.S. Tax Court might issue more rulings in favor of the IRS than the U.S. District Court, the reason might be as much due to ideology as any bias based on structure or experience."

Howard bases his conclusion on the results of his empirical research. He discoverd that the Tax Court and district courts are "slightly conservative in their decisions, ... confront roughly the same types of cases, [and that] more than two-thirds in both courts are from individuals, with roughly one-fourth of the dockets of each composed of business matters." He also notes that in Tax Court 36% of taxpayers act without counsel, whereas only 10% of taxpayers do so in the district courts. In addition, "more than twice as many tax-shelter and tax-protester cases are heard in the tax court (21 percent) than in the district court (10 percent)." Finally, his data showed that "the taxpayer ...l won 20 percent of the time in the tax court and in 32 percent of the cases in the district court."

From this data Howard generates some interesting observations. "As expected, the more liberal the judge, the greater the likelihood of support for the Internal Revenue Service, while the more conservative the judge, the greater the likelihood of support for the taxpayer. Tax court judges are more ideological in deciding cases than are district court judges. Finally, the hypothesis that liberal judges would react more negatively, and conservatives more positively, to tax-protestor or tax-fraud issues was confirmed for both courts." He also notes that when taxpayers in the Tax Court have an attorney, it is more helpful to them than in the district court, suggesting that the district court relies more on the IRS whereas the Tax Court judge can "appreciate and understand the arguments of counsel." He also noted that "the district court was more sensitive to the type of litigant, being more likely to support a business or a trust or estate, than was the tax court."

What this does to the oft-repeated thought that taxpayers have more success in district court because the judges, and their clerks, are far from expert with taxation, and tend to be more sympathetic to taxpayers, remains to be seen. Howard concludes that Tax Court judges indeed are more expert. Yet he also concludes that the judges in both forums are roughly the same, ideologically speaking.

There is good news. Affirming one of the conclusions I reached in my 1999 article, Howard states, "prior IRS experience does not matter for type of judges." He also refers to me as a "scholar" and as a "tax scholar," and brands my 1999 article as a "scholarly examination" of the issue. Note to self: photocopy, enlarge, and hang on office door.

As Howard points out, more research comparing specialized and general jurisdiction courts is necessary. A particular question worth exploring is "the issue of congressional and executive control[, because t]he fifteen-year tenure of nineteen tax court judges, as opposed to the lifetime tenure of more than 600 district court judges, allows Congress and the president to modify and alter the small tax court's ideology more quickly than the ideology of the district courts[,and g]iven the volatile and highly politicized issue of taxes, the ideological rulings of the tax court might be due to congressional design, and the decisions might deliberately match congressional and executive preference."

It is gratifying to see that my 1999 article, the first in which a comprehensive, systematic, extensive, and thorough empirical exploration of Tax Court decisions was the basis of the arguments (in contrast to articles such as the one in which the author "flipped through" several volumes of Tax Court decisions), has inspired other scholars to examine other factors. I'm told that this is the way tax commentary and dialogue ought to work. Propositions are made, debated, affirmed, or discredited. Mine appears to have survived.

It is an important question. Despite the seeming "academic" tone to most of these articles, and despite the fact that this is one work product I sent to student-edited law journals rather than the usual places I send my manuscripts, it deals with an issue of serious practical concern to taxpayers and tax practitioners. The decision to contest an IRS deficiency in Tax Court or district court, which is affected by a variety of factors, not the least of which is ability to pay the tax so that a refund can be claimed and suit brought in district court, is one that has faced taxpayers for decades. Frequently affected by anecdote, tax "lore," and personal experience, these decisions can now be considered against the backdrop of empirical research and conclusions offered by an ever-growing body of analytical works that inform those dealing with tax litigation issues.

A Six-Part Tax Chart for Tribune Co. v. Comr.

He's at it again. Andrew Mitchell, that is. Or TaxChartMan as he could well be known.

This time, he's cranked out a six-part chart of Tribune Co. v. Commissioner, 125 T.C. 8 (2005), which involves a failed reverse triangular merger. Aside from assisting tax practitioners in analyzing the decision, it also serves as further proof of a point I often make to law students who struggle as they tackle tax law, namely, that sometimes it is the complexity of the transaction that overloads the brain's neural circuits. One look at Andrew's most recent chart demonstrates that complexity, but it also arranges it into digestible, sequential pieces. Breaking things into pieces and illustrating them, figuratively speaking, is a very useful way to learn.

Take a look at my previous postings about the various tax charts from Andrew (here, here, here, and here) for additional kudos for this rapidly growing project. To see the other charts, start at the main tax charts entry page.

Try Being Jim Maule for a Day: BlawgThink 2005 Is Calling You

I received an invitation to an event that I'd like to attend but cannot attend. I knew I'd regret not starting sooner or making better progress on the cloning project. It wouldn't surprise me to discover that some other event I couldn't attend would have moved me further along the "clone myself" path.

Anyhow, Dennis Kennedy, who is hosting this event (no, not a cloning event) also invited me to invite others, and so I am sharing with readers of MauledAgain an invitation to what should be an educational, thought-provoking, and fun event.

The event is the LexThink BlawgThink conference being held on November 11 and 12 in Chicago.

This year's conference is built on three questions that Dennis raised after attending BlogWalk 6, an day-long conference on knowledge management and blogging that used the Open Space Technology scheduled for use on BlawgThink's second day. Question One: If blogging is a world-changing technology, when and how do we start to change the world? Question Two: Is it the technology or is it the bloggers? Question Three: And, what happens if we bring bloggers together, turn them loose, and see what projects and collaborations grow out of
that combination?

Thinking about those questions inspired Dennis Kennedy and Matt Homann, the other co-organizer, to try to get a group of legal bloggers together, in person and face-to-face. Dennis and Matt believe that despite all the advantages of email lists, wikis, collaboration software groups, IM sessions and conference calls, "there's nothing like being together in person if you want to have collaboration happen." One of the reasons that I'd attend if my schedule permitted me is the lure of this assertion from Dennis: "In fact, I believe that, in the future, some of the most important innovations that happen in the practice of law will be traced back to conversations that began at BlawgThink." I don't think he is reaching beyond credulity when he makes this claim.

Among the readers of MauledAgain are folks who don't have a legal blog, folks who have one, and some who have one that is connected with their law practice. There's something in this conference for everyone.

BlawgThink's first day has three tracks, one for each of those three groups I mentioned. Track one, which would have been useful to me back when I was getting started with blogging and surely will be of value to the lawyers, judges, law students, and law faculty who are thinking of "getting on board the blog train," will focus on "Blogging Basics" such as blogging tools, how to write a post, blog etiquette, news aggregators, and blogging tips and predictions. Track two, for legal bloggers with a law practice to promote, will focus on "Marketing and Client Development" that digs into using blocks to market a practice, builiding reputation with blogs, the ethics of blogging, tying the blog into practice areas, and more tips and predictions. Track three, directed at those who have figured out the basics of blogging, is simply called "Blogging 2.0" and addresses advanced RSS, podcasting, collaboration, blog design, Flickr, OPML, De.licio.us, Rojo, other cutting-edge blog-enhancing tools, and yes, still more tips and predictions. Anyone want to guess which of these tracks caught my eye?

BlawgThink's second day has no agenda as such. Scary proposition for a conference planner, but I like the idea. Rather than more panel presentations, PowerPoint slides, and keynote speakers, the proceedings get turned over to the attendees. Not unlike a law school seminar. Small group meetings are anticipated to highlight the day, along with opportunities to go one on one with others, and brainstorming should overshadow the proceedings. Can't get to all of the small-group sessions because your clone project also hasn't gotten untracked? No problem: Notes from each small group discussion will be circulated to attendees later in November.

I wish I could be there. It would be fun, and educational, to meet the people behind the other law blogs and to pick their brains about the technical and substantive aspects of their blogging. Goodness, maybe some of the people attending BlawgThink 2005 would want to ask me some questions. Yeah, I know, that can be dangerous.

For more about BlawgThink, go to the LexThink website, and then click on the link to BlawgThink 2005. To register, follow the "contact us" link on that website.

If the outcome is even one blogless reader cranking up his or her own blog, or even one reader who is a blogging practitioner ramping up his or her blog, this extension of the invitation will have served well. If you do attend, I surely would like to hear from you, and I'll share your comments. Oh, no, wait, you'll be doing that on YOUR blog, so I'll post a link.

Want to Be a Lawyer? Just Say That You Are!

In a Law.com article, "Law School: Make It Optional?," Professor George B. Shepherd of Emory University School of Law proposes a radical change not only in the requirement (in almost all states) that lawyers must have attended law school but also in the use of a bar exam to identify those who are qualified to practice law. After outlining each of his proposals and arguments, I will analyze them. Prof. Shepherd's points are numbered and my reactions are prefaced with "JEM:"

1. Law schools are very similar in terms of the number of years required (three), the size and cost-per-student of libraries, and the retention of full-time faculty who are more expensive than part-time teachers.

JEM: Essentially, this is true. However, the size of libraries is changing because the adoption of less expensive digital resources in place of more expensive paper volumes is progressing at different speeds among the various law schools.

2. Law schools are very similar because they comply with accreditation standards established by the American Bar Association (ABA), which are followed because almost all states require lawyers to have graduated from an accredited law school.

JEM: This, too, is pretty much true. Most law schools also belong to the American Association of Law Schools (AALS), which sets even tougher requirements for membership.

3. The accreditation standards, though defended by the ABA as "necessary to train students properly and to protect the public from law schools producing incompetent lawyers" do less in protecting the public interest and more in protecting the interests of law professors, law librarians, and the lawyers serving on the ABA accreditation committee.

JEM: I would like to see empirical data supporting this claim. The accreditation standards ensure that legal education will satisfy minimum requirements geared to developing competent attorneys. For example, it is a worthy goal to require that faculty have satisfied certain requirements so that students are properly educated. If there is a problem, and I tend to think that there is, it involves the failure of accreditation standards to require that law faculty bring not only outstanding educational achievement to the classroom but also meaningful practical experience.

4. Law faculty and librarians have an incentive to extend law school to as many years as possible in order to increase the number of full-time faculty who must be hired.

JEM: Much of the need for additional faculty reflects the increased enrollments in most law schools. If the number of students increases by 20 percent, the number of faculty must increase, especially for courses that are limited in enrollment size. Although the cost of adding a faculty member is marginal in terms of salary, it is significant in terms of office space. Most law schools, absent a building expansion, face finite constraints on faculty size. Another cause of the need for more faculty is the expansion of the number and types of courses that must be offered, but most law schools address a substantial portion of these needs by hiring adjunct faculty.

5. Lawyers serving on the accreditation committees are motivated by a desire to minimize competition by curtailing the number of persons admitted to law practice each year.

JEM: Even assuming one can determine motivation, the facts suggest that if this is indeed a goal, the accreditation committees are failing miserably. During the past decade, more than several law schools have been accredited, and enrollments have increased rather than decreased. Law school enrollment tends to increase when applications increase, and applications are dependent in part on the hiring rate of law school graduates. This semester, it seems as though all the students in my basic tax class are getting interviews and call-backs by the boatload, suggesting that lawyers in practice are trying to hire more lawyers.

6. Practicing lawyers manipulate bar examination pass rates to limit competition, taking advantage of a system installed during the Great Depression to prevent an "oversupply" of new lawyers.

JEM: Bar examination pass rates have been manipulated in certain instances, such as happened some years ago when Pennsylvania lowered the minimum passing score in order to increase the number of minority lawyers passing the bar examination. Pennsylvania has since raised the minimum passing score. There is no evidence that I have seen suggesting that the passing score is adjusted after some sort of determination by practitioners of how many attorneys ought to be admitted after a particular bar examination.

7. Students should have the choice of two, three, four, five, or more years of law school.

JEM: I'm all for increasing the number of years of law school, though I think the fourth year should permit changing the third year to year-long externships in the law practice world. The fifth year would then exist in the form of matriculation in an LL.M. Program. If three years of law school are more than enough, and two years is supposedly sufficient for some lawyers, then why are enrollments in LL.M. programs, and the establishment of those programs, mushrooming? Could it be that lawyers graduate from law school only to discover that they did not learn enough, do not understand enough, were not pushed enough, and suffer from trying to do six years of bachelors', masters' and doctoral work in three years because they did not come into a J.D. program with a prerequisite LL.B, and LL.M.?

8. Students should have the option of attending law schools with no libraries or small libraries, and only part-time faculty.

JEM: I was waiting for the option of attending law schools with no classes, but that comes later. I do agree, however, that there must be ways to reduce library resource costs by taking advantage of digital technology. What has been happening is a reduction in the space need to store paper materials, with the resulting space savings being transferred to computer facility and study room areas.

9. Law school should be optional, and the lawyering profession should be open to those who have not attended law school.

JEM: I'll agree if Prof. Shepherd agrees that medical school should be optional and that he'll be the first patient of a physician trained in some other manner. I could be persuaded, though, that a person without law school education should be permitted to take a bar examination, of the type I think it ought to be, and if the person passes, excellent. I predict, however, that almost no one without a law school education could pass the practice-focused, think-on-your-feet bar examination that needs to exist.

10. The bar examination should be eliminated because it is a "relatively recent experiment that has failed."

JEM: I totally disagree. If anything, bar examinations need to be toughened. Steps have been taken to make them more useful predictors of practice success, such as the "case project" that is part of the New Jersey bar examination. To the extent that the bar examination reflects the "memorization and spit back out" approach of many law school examinations, it simply separates good memorizers from bad memorizers and disadvantages those who are great problem solvers and problem preventers so long as they have access to the information. The bar examination, as deficient as it is, has not failed, because it has kept a lot of unqualified people from heading out to make other people's problems worse.

11. The unaccredited law schools in California offer a model that could be put in place in order to provide low-tuition legal education.

JEM: The California system is tied to one of the most brutal bar examinations in the country. The pass rate for the July 2004 examination was 69.4% for those graduating from ABA-accredited law schools in California, 65.8% for those graduating from ABA-accredited law schools in other states, 28.6% for those graduating from law schools not accredited by the ABA but approved by the California State bar Committee of Bar Examiners, and 9.1% for those who graduated from unaccredited law schools. See this site for more details. With this sort of track record, how are unaccredited law schools going to "sell themselves" to prospective students? Even if a student is seeking lower tuition, can the student safely assume that his or her intellectual skills are sufficient to beat the odds, or should the student assume that there is something about the program at an unaccredited school that will reduce the student's chances of passing? I'm all for reform of legal education, but I'm not for its destruction.

12. Students seeking to do sophisticated legal work at "elite law firms" could select "expensive, full-service law schools" and students seeking to "work with individuals on simpler matters, or ... to work as lawyers in local business or government" could select "a more basic law school."

JEM: This proposal assumes that one can do "simpler" legal work with less sophisticated legal education. The twist in this notion is the idea that legal work can be simple. The past several decades has brought an explosion of legislation, administrative regulation, and judicial decisions that have complicated every area of practice. A fine example can be found in the experiences of law students who, seeking less demanding and complicated legal education for reasons other than cheaper tuition, namely, preservation of G.P.A. and minimization of course load demands, decide to "not take tax." What happens? They discover that just about every area of practice requires an understanding of tax. Ask those domestic relations lawyers whose clients were disadvantaged because the spouse's lawyer, understanding tax, transferred burned out tax shelters in the property settlement after their clients succeeded in getting the transferee spouse almost to beg for the property. It's no wonder that domestic relations lawyers are among those enrolled in the Graduate Tax Program. Or perhaps one can propose that "simpler wills" can be drafted by those with more simplistic legal education. The common misperception that will drafting for clients with assets less than the applicable federal estate tax cut-off can be done without understanding tax overlooks several important factors. First, it is possible that between the day the "simple" will is drafted and the day the client dies that the client become wealthier and subject to estate tax. Second, almost all clients, even those with modest assets, need living trusts, powers of attorney, health care powers, etc. etc. Third, the income tax issues involved in estate planning exist for all clients. Estate planning and will drafting is an area of practice for which malpractice claims are among the highest. Unfortunately, there's not much left in law that is simple. I don't like that, but if I'm designing a system for educating and admitting lawyers to practice, I must accept the reality of complexity. And the idea that government lawyers can or should do their work with a "more basic law school" education is a scary thought. Very scary.

13. Eliminating accreditation would permit competition among law schools, causing some of the new, less expensive schools to offer higher quality education.

JEM: I've tried to think of the things that a law school would do that would cause it not to qualify for accreditation but yet cause its education to be of higher quality. Remove all paper materials from a library? Sorry, but until everything from the past is digitized, that's very bad. Remove all of the "library" in the information supply sense? Even worse. hire fewer faculty and increase class size? All education experts agree that educational quality diminishes as class size increases, no matter where one is on the spectrum whether K-12, undergraduate, or graduate. By increasing faculty size, we have been able to tri-section courses that once were bi-sectioned, thus cutting class sizes in the big courses from roughly 120 or 130 to 70 to 80. Having taught classes as large as 160 and as small as 15, I can vouch for the difference in quality of education for the student, because in the large classes they are less likely to ask for, and get, individual attention. Hire only adjuncts? That's a possibility, but remember that despite finding excellent adjuncts who remain affiliated with the school for years, law schools also have had to deal with adjuncts whose client demands prevented exam grading, too many canceled or rescheduled classes, and similar problems. Although digital technology has made it easier for students to interact with an adjunct professor, they still do not get from adjuncts the same educational mentoring they can obtain from faculty whose full-time responsibility is, at least theoretically, caring for the education of law students. About the only thing I can think of that would, perhaps, increase educational quality is the assignment of more courses to faculty members, cutting down the size of the faculty, but also cutting down or eliminating faculty "scholarship." There is a serious question of whether student tuition ought to be devoted to funding "scholarship," especially when the faculty member is teaching few students and publishing theoretical pieces of questionable value and interest to the legal profession. If, underneath all of Prof. Shepherd's proposals is a plea for a teaching-oriented law school, that's something that can be accomplished without eliminating law school as a law practice prerequisite and without eliminating the bar exam. On the other hand, it is essential for law faculty to research and write at least with respect to practice-oriented issues so that they remain competent in their areas of expertise. At best, we're talking about a slight reduction in faculty size and a slight reduction in costs, surely not of the magnitude Prof. Shepherd seeks.

14. States that choose to eliminate the requirements of bar exam passage and attendance at an accredited law school could offer other pathways into the profession, such as apprenticeships.

JEM: Been there, done that. I was fortunate to know, and still know, lawyers who made their way through the preceptorship requirement that Pennsylvania had in place "back before my time." It was a relic of the pre-1920s era for which Prof. Shepherd pines. It was abandoned. Why? It didn't work. If anything failed, as Prof. Shepherd claims is the case with the bar exam, it was preceptorship. Great concept. Inadequate in practice. True, sometimes the match was excellent, and worked to the benefit of attorney and new graduate. But often it was a case of "make work" or tagging along. Today, the experience that comes closest is the judicial clerkship, and if there were some way to have every law graduate do one I could be persuaded to go that route. The advantages of clerking are so well-known and so universally acknowledged that I'll omit singing the praises. Unfortunately, the business environment that permeates today's legal practice makes it difficult, if not impossible, not only financially but logistically, to re-create an apprenticeship program. Even assuming that the mentoring attorney is of high quality, there's no guarantee that the apprentice would be getting experience relevant to what the apprentice ends up doing in practice.

15. This proposal is a return to the system that existed before the 1920s, which was characterized by easily passed bar examinations such that an Abraham Lincoln could become a lawyer by passing a 10-minute oral bar exam.

JEM: When Abraham Lincoln was alive, it probably was possible to manifest one's knowledge of the law in 10 minutes. There was no income tax. There was no environmental law. There wasn't much of domestic relations law. There was no civil rights law and not much in the way of employment law. There was no aviation law. There were few statutes, hardly any regulations, and only occasional cases. Abraham Lincoln could handle a will or a land transfer with far less effort than is required of today's lawyers, some of whom sadly think they can get away with 19th century practice skills in a 21st century world. The transfer of land involves familiarity with a wide array of legal topics. My fourth cousin several times removed Abraham Lincoln would struggle to practice in today's world unless, aha, he went to law school and studied far more than he could hanging out in a law office. And it surely would take more than a ten-minute conversation to determine if he was up to par.

16. This proposal would create a system like those used in other "responsible professions, such as business and accounting."

JEM: Prof. Shepherd, why did you use as examples two of the most maligned professions of the late 20th and early 21st century? With apologies to the capable and honest accountants and entrepreneurs that I know, the last thing I, or others, want to see, is business and accounting being held up as models for lawyers.

17. Employers would have the choice of hiring lawyers with J.D. degrees or lawyers without J.D. degrees, depending on need.

JEM: About the only thing this would do for employers would be to pay lower salaries to these hypothetical un-degreed lawyers. But employers already do this. They hire paralegals. And that's pretty much the sort of work that un-degreed lawyers would be trusted to do.

18. This proposal would generate a "large increase in the number of lawyers," of which a "large proportion ... would be minorities."

JEM: This proposition presupposes several things. It presupposes a pool of qualified individuals who do not go to law school simply because of the high tuition, in spite of numerous scholarship and financial aid programs at almost all law schools designed to assist economically disadvantaged applicants, especially minorities. I don't think that pool of applicants exists. It also presupposes that individuals lacking the requisite intellectual skills for admission to, and successful completion of a law school education, or for the successful completion of a bar examination, would somehow become good lawyers by investing time being apprenticed. It would be helpful to have proof of such an outcome. I don't see it.

19. There are not enough lawyers in the nation, and this shortage causes high fees ("$60 per hour or more"), which blocks the poor and middle class from obtaining legal services.

JEM: I tend to agree that there are not enough lawyers. I do not think $60 per hour is a high fee. I pay that much or more for my auto mechanic, my lawn cutting service, my physician, my plumber, my heating and air conditioning specialist, and I would pay that much or more for snow removal services if I went that route. Legal fees are high, not because of the per-hour rate, but because of the number of hours required for a task. If an estate plan could be put together and all the documents drafted in two hours, $120 would be a bargain. Unfortunately, living in a highly regulated, complex, and litigious society, in which every possible outcome needs to be, and probably ought to be, taken into account, the simplest of estate plan arrangements is going to cost $250 or more, unless someone is trying to get by "on the cheap" or deliver less than what is being promised. Generally, we get what we pay for.

20. Increasing the supply of lawyers would drive hourly rates "down to $25 per hour or less for simple tasks." This rate is comparable to that charged "by qualified professionals with similar training ... in other fields, such as management of small businesses, bookkeeping, tax preparation, nursing, carpentry, plumbing, physical therapy and chiropractic."

JEM: I haven't paid a plumber $25 or less for many years. I haven't paid a nurse, physical therapist, or chiropractor, but from what I see, $25 is on the very low side. Nurses, for example, are in such demand, that those acting as independent contractors can charge more, except when Medicare or health care plans artificially push down their rates. Interestingly, reference to such plans brings to mind the pre-paid legal services plans, which have been, pretty much, dismal in their success.

21. Even though it admits lawyers with degrees from unaccredited schools, "California does not appear to have higher levels of lawyer malpractice or dishonesty."

JEM: If that is true, and I haven't been able to find statistics, probably because of confidentiality issues, it's because California admits very few lawyers from unaccredited schools. See the statistics under point 11, above.

22. Many people needing legal services do not need accreditation protection, because they are sophisticated. A lawyer's status as a graduate of an accredited law school has little influence on the hiring decision of a corporate legal department, because the decision will reflect the applicants' reputations, experience, and referrals. Admittedly, accreditation requirements do help protect the poor and unsophisticated, yet at the cost of reducing the supply of lawyers and raising legal fees.

JEM: I think there are too few graduates of unaccredited law schools to permit a conclusion as to what corporate legal departments, or other legal employers, would do if there were a large supply of such graduates. My guess, based on employer reaction to factors such as G.P.A., identify of school, and other characteristics, is that employers would hold a bias in favor of accredited law schools, whether that accreditation were mandatory or, as indicated in point 27, below, optional.

23. The risk of consumer harm posed by removing the accreditation and bar exam requirements would be offset by the establishment of reputable enterprises, with H&R Block as an example of how exploitation by unscrupulous tax return prepares is eliminated by the market.

JEM: The existence of H&R Block, even if one accepts Prof. Shepherd's description of it as the be-all and end-all of tax return preparation, has not done much to remove dishonest tax return preparers from the scene. Not that H&R Block should have the responsibility for doing so, but absent a controlled gateway, there's no guarantee that the honest will drive out the dishonest. It's for this reason that Congress passed legislation regulating paid tax return prepares and the IRS continues to seek ways to enforce those rules and to advocate additional protections. Oh, and as for H&R Block, visit, for example, this site, and make up your own mind. I worked for H&R Block years ago, and I am not convinced that being an apprentice there is the best way or even a good way to learn how to do tax returns as well as they need to be done.

24. Lawyer incompetence and dishonesty should be punished "more severely" and punishment should not be limited to the most egregious violations.

JEM: I totally agree. But this can be done without eliminating the bar exam or removing accreditation of law schools.

25. Lawyers should be policed not by other lawyers but by others, perhaps detectives and attorneys hired by state governments to investigate and prosecute lawyer misconduct.

JEM: I'm a wee bit confused by the rejection of self-policing coupled with the idea of hiring attorneys to investigate lawyer misdeeds. Perhaps it has something to do with moving lawyer regulation from the lawyers who now handle it to a different government agency. If so, there are serious issues, because the courts regulate who practices before them, and so moving that task to the executive branch of a state government might raise separation of powers issues in states where the constitutions resemble the U.S. Constitution in this regard. On the other hand, if the proposal is to add non-lawyers to lawyer disciplinary boards, why not? I think it's been done in some states, and it might advance the goal of cracking down on lawyers who violate the rules.

26. States without mandatory bar examination passage requirements could set up voluntary bar examinations through which lawyers could obtain specialization certificates. Uncertified lawyers could be hired to do simple tasks.

JEM: And what would the un-certified, non-specialist lawyer do? Tax? Nah, need a certificate. Criminal law? Best not, for mistakes here can be a matter of life and death. Environmental law? Whoa, almost as complex as tax. Securities work? Ditto. Will drafting? No way, considering how prone this area is to malpractice. Admiralty? Ha. Wait. They'd do "simple tasks." What simple task? Does that mean practicing law as would be done by someone who wanted courses limited to "main rules," as I roundly criticized a few months ago? If anything, in addition to three (or an externship-enhanced four) year law school education, most lawyers need additional education and specialization. That, however, is a matter of making continuing legal education a rigorous exercise that is accompanied by tests and examinations. After all, with the removal of law school (and its examinations) and the bar exam, legal education under Prof. Shepherd's vision would become one giant CLE, which too often is characterized by attending lawyers who are reading novels, knitting, doing crossword puzzles, sleeping, and otherwise not digging in. On this I speak from personal experience both as an attendee and as a provider.

27. Law school accreditation could continue as an option for law schools not concerned with reducing costs and setting lower tuition.

JEM: And every university-affiliated law school would continue to seek accreditation. Why? In part because of university requirements and accreditation of other programs (unless Prof. Shepherd also wants to remove accreditation of other university schools, such as medical schools, which, after all, following his logic, would make sense because there are insufficient doctors, medical costs are high, and many people fail to get adequate medical care, and which would make available physicians with only "basic medical education.") And in part because of the prestige, the same motivation that has brought most law schools to membership in the AALS.

28. Those seeking to become lawyers could choose among accredited and unaccredited law schools.

JEM: Those seeking to become lawyers have that choice today. They vote with their feet. They seek admission at the accredited schools. Those who end up at the unaccredited schools have all sorts of difficulty becoming lawyers, not because the schools are per se deficient but because the students haven't quite put together what it takes to practice as a lawyer in 21st century America.

In conclusion, though Prof. Shepherd makes some good points, and I agree that student tuition ought not be funding some of the "scholarship" being generated by law schools through the efforts of those whose focus is insufficiently directed toward good teaching, I nonetheless think it would be ill-advised to urge states to follow California's example and not require attendance at an accredited law school. The nation does not need 49 more states doing what California does. And I think it would be disastrous to eliminate bar examinations as a prerequisite to admission to practice. To the contrary, there ought to be continuing bar examinations coupled with continuing legal education requirements. After all, the law changes, and I've seen enough incompetence among practitioners to fear the reduction of, rather than an increase in, education and testing. Ultimately, the effort should be to reform legal education rather than tossing it into the dust-bin of history to be replaced by antiquated practices long past their time.