Congress Invites My Ideas for Improving Tax Compliance and Of Course I Respond

Several days ago I received a letter from Senator Max Baucus, chairman of the Senate Finance Committee, and Senator Charles E. Grassley, ranking member of that committee, in which they asked for "suggestions on ways to improve compliance with our tax laws, including specific recommendations to reduce the tax gap." The letter was sent to the tax professors who joined in a letter to Senator Baucus last summer, requesting that he stop blocking the appointment of Eric Solomon to the position of Assistant Secretary for Tax Policy. Baucus had been blocking the nomination because he wanted Treasury to produce a specific plan for closing the tax gap. I was one of almost 100 tax professors who signed the letter. Eric has since then been approved for the position.

The letter that I and my many colleagues received has been posted by Paul Caron on his TaxProf Blog. Take a look at the letter.

The tax gap is a serious problem. Having reached several hundred billion dollars a year, the cumulative unpaid tax liabilities probably would wipe out a huge chunk of the federal debt. No, it would not wipe it out, and the tax gap ought not be an excuse for unwise tax and spending policies that contribute to the federal deficit, but there's something seriously wrong with the nation's collective sense of civic duty when compliance rates on certain types of income fail to reach 60 or 70 percent.

The tax gap has been the subject of several posts on MauledAgain. In January, I pointed out that Closing the Tax Gap Requires Congressional Introspection. In March of 2006, I wondered what would be important in Closing the Federal Tax Gap. In December of 2005, I noted that theTax Gap [Is] Becoming a Tax Chasm. Earlier, in April of 2005, I asked, The Tax Gap: BIG. Wonder Why?.

The tax gap, for some reason, never recedes into the background. In every one of the 31 sections of basic federal income tax that I have taught during the past 28 years of law teaching, I have made it a point to turn my students' attention to its existence and causes. Perhaps if they understand how noncompliance impacts them personally, and will impact them during their careers, they may join in the chorus demanding that action be taken to eliminate the tax gap.

When I drafted my response to Senators Baucus and Grassley, I chose to ignore, for the moment, specific proposals and focus instead on developing a unified strategy for improving compliance. Putting specific proposals on the table as the first step invites the sort of process that causes things to bog down or become absurdly complicated. Instead, it is essential that an overarching plan, reflecting a coherent philosophy, be established as the framework on which specific proposals could be attached, with the plan and philosophy setting the boundaries that keep the specifics from becoming unduly complex or misguided. Another reason I ignored specific proposals was to keep my letter short. If my letter, and those that I expect other tax professors to write, are effective, the opportunity to focus on specific proposals surely will be presented.

I close with the text of the letter that I sent in response to the invitation to provide ideas for improving tax compliance:

March 21, 2007

The Honorable Max Baucus
Chairman
Committee on Finance
United State Senate
Washington, DC 20510-6200

The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United State Senate
Washington, DC 20510-6200

Dear Senators Baucus and Grassley:

Thank you for the invitation to suggest approaches for improving tax compliance. The tax gap is a concern that demands attention from the Congress.

There is no one “magic bullet” to solve the problem. Instead, I advocate a six-pronged strategy for improving compliance. Those six prongs are tax education in high schools, tax simplification, increased reporting, expansion of withholding, funding an improved tax audit process, and strengthening the ability of the Department of Justice to prosecute tax crime.

Making tax education a part of high school curricula throughout the nation would go a long way in reducing noncompliance. A significant portion of noncompliance is inadvertent, the result of taxpayers’ inability to understand the nature of the federal tax system and to recognize the flaws in the many inappropriate “tax savings” schemes offered to them by unscrupulous promoters of noncompliant tax reduction plans. The tax education I suggest is not a technical tax return preparation course, but one that blends an understanding of the rationale for taxation and the basic features of the tax system with advice on how to maximize compliance and minimize the aggravations that arise from noncompliance. Educating citizens before or as they enter the taxpaying world is much more efficient and effective than trying to remove their misperceptions after the fact during tax audits and tax litigation.

Tax simplification is essential if rates of noncompliance are to be reduced. There is a direct correlation between noncompliance and complexity. As the tax law becomes more complicated, the ability of taxpayers to comply decreases. Even tax professionals who have every wish to keep their clients’ planning and return filing within the bounds of excellent compliance struggle with the rapidity of change, the dearth of guidance on many issues, and the numerous questions arising from the interaction of multiple provisions. The opportunities for tax simplification are easy to identify, and have been addressed by many commentators during the past decade. At this stage of analysis, the specifics do not matter as much as establishing a commitment to simplification as part of the effort to improve tax compliance.

Increased reporting is essential to improving tax compliance. Although the tax law is theoretically a “self-compliance” system, as a practical matter were it not for reporting compliance would be even lower than it is. The story of the many dependents who “disappeared” when social security numbers had to be provided has become apocryphal, but it teaches an important lesson. Presently, the principal area of reporting deficiencies involves transactions in which cash is paid by a person not required under current law to report the payment, particularly with respect to payments to self-employed entrepreneurs. Although imposing a reporting requirement on taxpayers currently not subject to such a requirement would be burdensome, it may be the only highly effective means of curtailing noncompliance in this area. Reducing the $600 reporting threshold to $250 or $300 would also bring within the tax system many transactions that under current law go unnoticed.

An expansion in the reach of withholding also is essential to improving tax compliance. Not surprisingly, studies show that when tax is withheld, the incentive to file a tax return that reports the income on which the tax was withheld increases significantly. Despite reporting of interest and dividends, compliance with respect to those items remains lower than compliance with respect to wages, for the simple reason that withholding on interest and dividends is not required in the manner it is for wages. Although payors of interest and dividends oppose withholding because of allegedly substantial compliance costs, changes in technology since the failed effort to impose interest and dividend withholding several decades ago make it a much more feasible arrangement. The truly difficult issue is whether withholding requirements should be imposed on the many transactions that escape taxation because they are smaller in amount and facilitated in cash. If imposing a reporting requirement on payments by individuals to self-employed entrepreneurs would be controversial and burdensome, a concomitant withholding requirement would be even more so. Effective alternatives do not appear to exist.

Funding an improved tax audit process would go a long way toward bringing tax returns into better compliance with the tax law. So few audits are conducted that too many taxpayers are willing to play the “audit lottery.” Though audit rates have increased slightly in recent years, they remain at dangerously low levels. Whether the audit rate is 0.8% or an “improved” 1.3%, an overwhelmingly vast number of tax returns go unexamined. Comprehensive audits of every tax return is impossible, but if the audit rate reached four or five percent, taxpayers would notice. The IRS is unable to conduct sufficient audits because it lacks resources. Congress would send a strong message by acting in a manner consistent with the special status of the IRS, namely, an agency in which every dollar invested generates multiples of dollars in return. Though it may be politically expedient to “bash” the IRS, it takes serious courage to support and adequately fund the only agency that stands in defense of tax revenue.

Finally, strengthening the ability of the Department of Justice to prosecute tax crime not only deters other taxpayers from acting in similar ways but also blocks the ability of tax fraud marketeers from continuing their efforts. Those who encourage taxpayers to ignore the tax law should be punished even more harshly than those who commit tax fraud on their own tax returns. A taxpayer who files a fraudulent return damages the revenue to the extent of the unreported tax liability. A person who entices dozens or hundreds of taxpayers into noncompliant filing damages the revenue by amounts that are orders of magnitude greater than the negative impact of the taxpayer who files a fraudulent return. Strengthening the efforts of the Department of Justice to prosecute tax crime requires not only funding but also laws with increased penalties and broader definitions of aiding and abetting tax fraud.

These six prongs of a concerted effort to increase tax compliance are harmonious. In other words, as more success is obtained with the first two prongs of tax education and tax simplification, the need for the other prongs will diminish. The same can be said of the impact of success with the third and fourth prongs on the last two. Similarly, as tax simplification grows, tax reporting will become less burdensome because it, too, will become less complex.

Although the six prongs are harmonious, the first two are the most important. The tax system has evolved into a morass that exceeds the abilities of most taxpayers, and many tax professionals, to understand and comply. If the tendency of taxpayers to think that they must “cut corners” in some way when filing tax returns continues to increase because they sense that the complexity affects them more adversely than it affects others, the tax gap will grow accordingly. Sooner rather than later, the system will collapse. The tax gap concern that you are addressing will pale in comparison to the challenges that would then face not only your Committee but the entire nation. In other words, what you do now is of utmost importance.

An opportunity to discuss my suggestions in greater detail would be welcome if you choose to seek additional explanations. In the interest of brevity I have refrained from writing a treatise. There is much more that could be said when the time is appropriate.

Thank you for requesting my ideas. I am happy to have shared them.

Sincerely yours,

James Edward Maule

I will let you know if I receive a response.

Some Law and Academic Things I Won't Be the First in the Family to Do

Ever since I started digging into family history, I've known that a disproportionately high number of Thomas Maule's descendants were lawyers, teachers, clergy, and writers. There must be a gene for this, but I don't think they've discovered it yet.

The other day, while continuing with a substantial updating project, I discovered some interesting news.

If I ever become a law school dean, I won't be the first descendant of Thomas Maule to do so. Frank E Holman beat me to it. He is my father's seventh cousin. And if I become a Rhodes Scholar, I won't be the first descendant of Thomas Maule to do so. He did that, too. And if I become president of the American Bar Association, I won't be the first descendant of Thomas Maule to do so. Yes, he did that, too. See his Wikipedia entry and his History Link entry.

But there's another gene whose influence pops up occasionally, namely, interest and expertise in the hard sciences. Holman's nephew, Joseph Wiley Ferrebee, who happens to be my eighth cousin, did "pioneering research on bone marrow transplantation [that] led to the first human transplant." His obituary provides more details. And there's the Nobel Prize winner, Theodore William Richards, grandson of Sarah Ann Maule and second cousin of my great-grandfather. I'll write about him later.

The more genealogy I research, the more some things begin to make sense. It does appear, though, that I'm the first descendant of Thomas Maule to be a tax law professor. If tax is a place where law and science intersect, I suppose I'm a suitable fit.

It's Sleeting Tax Charts

The last time I posted about Andrew Mitchel's new tax charts, I titled my comments "It's Raining Charts". This latest chart update posting is titled In honor of the wonderful weather experienced by those of us on the East Coast this past weekend. It was, to borrow a word invented by a local meteoroligist, a slizzard. Don't google it unless you want to find the word's use in a totally different incarnation.

There's nothing cold, windy, icy, or slippery about Andrew's newest batch of tax charts:

1. De Amodio (U.S. Rental Properties Were A U.S. Trade or Business but not a Permanent Establishment)
2. Bollinger (Corporation as Agent of Its Owner)
3. Boulez (Payments for Personal Services or for Royalties?)
4. Donroy (Foreign Limited Partner In U.S. Limited Partnership - Permanent Establishment)
5. Garlock Inc. (Shift of Formal Voting Power to Avoid CFC Status)
6. Housden (Resident Alien Required to Withhold U.S. Tax on Alimony and Interest)
7. Johnson (No Basis Aggregation For Section 301 Distribution)
8. Lewenhaupt (Swedish Count Engaged in U.S. Real Estate Business)
9. Linen Thread Co. (Two U.S. Sales Did Not Create U.S. Trade or Business)
10. Moline Properties (Corporation With A Single Shareholder is a Separate Taxable Entity)
11. Morgan (Liquidation - Reincorporation -- Meaningless Gesture)
12. National Carbide (Subsidiaries Were Not Agents of the Parent)
13. Pinchot (U.K. Citizen Engaged in U.S. Real Estate Business)
14. Sante Fe Drilling Co. (Accrual of Australian Income Taxes for Calendar Year Taxpayer)
15. Unger (Foreign Limited Partner in U.S. Partnership had U.S. Permanent Establishment)
16. Rev. Rul. 84-160 (Section 351 Exchange of One USRPI for Another USRPI)
17. Notice 2005-90 (Foreign Tax Credits Not Disallowed In Certain Back-to-Back Licensing Arrangements)
18. Rev. Rul. 2007-8, Situation 1 (351 Exchange / D Reorg Overlap with Liabilities Exceeding Basis)
19. Rev. Rul. 2007-8, Situation 2 (351 Exchange / C Reorg Overlap with Liabilities Exceeding Basis)
20. Guarantee of Bank Debt Does Not Create A Financing Arrangement [Reg. 1.881-3(e), Ex. 1]
21. Back-to-Back Loan Treated as Financing Arrangement [Reg. 1.881-3(e), Ex. 2]
22. Bank Financing Through Intermediate Entity [Reg. 1.881-3(e), Ex. 3]
23. Related Persons Treated As Single Intermediate Entity [Reg. 1.881-3(e), Ex. 4]
24. Related Persons Treated As Single Intermediate Entity [Reg. 1.881-3(e), Ex. 5]
25. Limitation on Benefits: Example of the Need for the Ownership/Base Erosion Test

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

Andrew continues to welcome comments on his charts. You can contact him through his web site. For direct access to the charts, you can enter by Topic, by Alpha-numeric order, or by Date uploaded .

Ignorant About Tax? It Might Be Dangerous to Life and Law Practice

It was the headline that caught my eye. CNN announced Americans don't know jack about taxes and followed up with this teaser: "Most taxpayers are clueless about changes to the tax code, according to a new survey, but is that a bad thing?"

The news is no surprise. In more than a few previous posts (such as The Snipes Tax Trial: A Circus in the Making?, How Small is Tax Small?, So Explain Again What It Is That Taxes Are to Provide?, Getting It Right: Questions and a Proposal , Taxes and the State of the Union, and The "Stealth Tax" ), I have advocated teaching tax to high school students because no matter what they plan to do with their future surely they should know some basics so that they can follow public debate on serious issues and become more comfortable or even adept with their own tax planning and compliance.

So the survey results reported by CNN article might surprise some, but they're what I would expect. Three-quarters of the respondents tagged Sunday, April 15, 2007, as tax filing day, whereas it is April 17 this year because April 15 is a Sunday and April 16 is a holiday in Washington, D.C. The IRS reports that only 40 percent or so of taxpayers eligible for the telephone excise tax refund are claiming it. Two-thirds did not know the value of the child tax credit, and fewer than half were familiar with the alternative minimum tax.

The article explains why this tax ignorance can be disadvantageous to taxpayers. Though the article suggests that those who rely on tax software might find their ignorance to be bliss, a general sense of the tax law permits tax software users to spot results that are way out of line. It happens. Many years ago, when computers meant mainframes and not desktops or laptops, I was reviewing a tax return prepared by a computer system operated by a commercial return preparation company (no, not H&R Block), and noted it had calculated a refund of close to $10,000,000 for a taxpayer with just a fraction of that income.

The cause of the ignorance is a combination of three things. One is the lack of tax education in most, or nearly all, K-12 schools. Another is the reluctance of citizens to education themselves about taxation, explaining the disproportionately low enrollments in college tax courses and the reluctance of many law students to sign up for the basic tax course. The third is the complexity, courtesy of the Congress and its lobbyist friends, seasoned with constant changes that prevent even those who want to learn and understand tax from getting enough time to let things sink into their brains.

What might be a surprise is the number of law graduates who don't know very much about taxes. Though some law schools require the course, recognizing how it permeates law practice, many law schools do not. Consequently, when faced with a choice between a rigorous and demanding tax course and an array of less challenging courses, more and more students are taking what they see as the easier path to a higher GPA. Several years later come the phone calls. "I'm a graduate but I didn't take tax and I have a question and I was wondering if you could answer it." Sometimes I'm tempted to make the price for my assistance a visit by the caller to the school to explain the consequences of avoiding the road that is becoming less and less travelled. That one-hour review of tax during bar review turns out not to be the solution.

Oh, well, I'm going to try to find the good news. Here's the best I can do: I doubt that state and federal taxes, unlike many other subjects, is a topic on which school students in other countries would out-perform American students on a standardized test. Seriously, that should be classified as good news only by those who think that American superiority in knowledge about the NFL makes us a nation of in-shape athletes.

"Should I Take This Course?"

My suggestion last week in Law Grads: Time to Start Reading Lots of Tax and Law Books, to the effect that practitioners make lists of courses whose appearance on law school transcripts would have positive or negative effects on the practitioner's eagerness to hire the applicant did not go unnoticed. Whether the comments will give impetus to some sort of national survey of practitioners remains to be seen. Getting comments from fewer than 1/100 of 1% of practitioners isn't necessarily going to persuade the ABA Section on Legal Education to pursue such an inquiry.

One comment in particular, which came from a member of a law firm hiring committee, was telling. Courses in "Law and Whatever" tend to generate suspicion that the students, to use my words, "looked for a law school experience lacking in rigor or were ineptly advised to focus on concerns of little relevance to law practice." In contrast, courses in "Something or Other for Lawyers" cause the practitioner to be, again using my words, "confident that the time you invested in academic pursuits have equipped you for a career in which you identify, prevent, and solve problems through legal research, skillful analysis, and proficient writing."

Today's law students usually think that the only important items on a transcript are cumulative average and class rank. They don't seem to understand that most practitioners look behind those numbers, just as law school admissions committees look behind undergraduate GPAs to examine the identity of the school, the student's major, and the number and type of courses in which the student was enrolled. Why are law students given so little advice, or perhaps even bad advice, on this point? The simple answer is that it is a career-killer for placement office personnel to encourage enrollment in some courses and discourage enrollment in others. Law faculty tend to have egos more fragile than people outside the legal world might expect.

As more and more courses are added to law school curricula that fall into the category less favored by practitioners, enrollments in the other type of course will fall. Already law schools are noticing decreasing enrollment in the so-called "bread and butter" courses, the ones that are tested on most bar examinations and that permeate law practice. Some schools are beginning to notice a correlation between bar passage rates and the courses in which unsuccessful candidates were enrolled. Because bar passage rates are a component of those U.S. News and World Report rankings, they are getting attention. Despite a proliferation of "how to pass the bar" programs and courses, ultimately law schools will discover that the best recipe for success is to return to their primary mission, which is the education of successful practitioners.

I've intentionally omitted the names and descriptions of courses that have been nominated for either category. At this stage of the discussion, there's no need to do so. Perhaps I've provided a blog idea for an interested practitioner.

What is a Temporary Absence for Tax Purposes?

From time to time students ask me to suggest tax topics that they can discuss in a directed research or seminar paper. Whether they are in the J.D. Program or Graduate Tax Program, I remind them that although I point out possible topics as we cover material in the class, I do not keep a comprehensive list. I recommend that students, who are adept at maintaining outline banks and class notes collections, begin a "possible tax paper topic list" but my idea falls on deaf ears.

As I prepared to comment on a recent case involving the meaning of temporary absence for purposes of the earned income tax credit (EITC), I thought to myself that the issue would make for at least one good paper topic. I wonder if I will remember this when several months or years from now a student asks for a topic idea. For the moment, students who read MauledAgain will get the added bonus of finding a paper topic in today's post.

The case in question is Rowe v. Commissioner, 128 T.C. No. 3 (22 Feb. 2007). It was a fully stipulated case, with both sides agreeing on the facts. It involved a taxpayer whose claimed earned income credit was denied by the IRS on the ground that, because she was in jail for more than half of the year, she failed to meet the requirement that she and her dependents share the same abode for more than half of the year.

The taxpayer lived with her children from the beginning of the year until June 5, 2002. On that date she was arrested, charged with murder, and held in jail. In 2003, she was convicted of murder and sentenced to life imprisonment. After she was arrested, the children's father moved in with the children, in the home of his mother, and cared for them.

The relevant law is deceptively simple. Four requirements must be satisfied for the taxpayer to be eligible for the EITC. In this case, the parties agreed that three of them - age, identification, and relationship - had been met. The issue was whether the taxpayer and her children shared the same principal place of abode for more than half of the taxable year.

At first glance, one might think that because the taxpayer moved from, or was moved from, the home she shared with her children before June 30, that she failed to meet the requirement. However, as is so typical of tax law, the simple is not so simple.

The first problem is that section 32, which provides for the EITC, does not define "same principal place of abode" or describe what constitutes sharing the same principal place of abode for more than half of the taxable year. It doesn't even provide a cross-reference. Instead, taxpayers, tax practitioners, and the court must dig into the legislative history, where the Congress - or more precisely, its staff -- pointed out that the phrase and requirement ought to be interpreted in the same manner as an identical phrase in the code provision dealing with eligibility to use the head of household filing status and its rates.

The legislative history also put a gloss on the statute similar to that found in other instances where a "sharing the abode" requirement exists. Specifically, it pointed out that temporary absences, such as those for purposes of education or for reasons of illness, ought not be treated as time when the taxpayer or the other relevant parties are not sharing the abode. Nothing is mentioned about absences on account of imprisonment.

The regulations interpreting the abode requirement for purposes of head of household filing status state that temporary absences, generally out of necessity, do not count as failure to live in the abode. The regulations give several examples, namely, illness, education, business, vacation, military service, and custody agreement. Imprisonment is not mentioned. The regulations provide that a taxpayer can have the same abode despite a temporary absence if it is reasonable to assume that the taxpayer will return to the household and the taxpayer continues to maintain the household while absent.

The majority in Rowe pointed out that the list of examples in the regulations is not exclusive. Instead, the list is "only a guide" for distinguishing temporary from permanent absences. The majority concluded that imprisonment after arrest but before conviction is nonpermanent and necessitous. The court concluded that a person in jail after arrest and before conviction "intends to return home" in the same manner as does a person who is away from home because of illness or military service. The court noted that the IRS had advised, in a Service Center Advice, that detention in a juvenile facility is a temporary absence that counts as time lived at home for EITC purposes.

The majority then addressed the question of whether it was reasonable to assume that the taxpayer would return home. The majority analyzed a case from 1957, Hein v. Commissioner, in which the Tax Court held that a person confined in a mental health facility for six years was absent temporarily because both she and her sister, who lived in the abode, intended that the person would return home, even though it was unlikely that she would recover her health and leave the facility. The court in Hein emphasized that there were no indications that the person had chosen a new permanent habitation. Applying this analysis to the taxpayer in Rowe, the court concluded that there were no indications she intended to choose a new home, had not yet been convicted, and referred to her mother-in-law's home as her home. The court declined to analyze factors such as the taxpayer's likelihood of making bail or of being convicted. The court noted that as a practical matter, because income earned by inmates while imprisoned does not qualify for the EITC, the holding would apply to narrow instances such as the Rowe case, where a person was in jail for a portion of the year but had qualifying income earned during the other part of the year.

Of the 16 judges participating in the decision, 4 agreed with the majority opinion. Another 5 concurred in the result. Six judges dissented.

The first concurring opinion preferred to resolve the matter in the taxpayer's favor on very narrow grounds. Specifically, the opinion pointed out that in Revenue Ruling 66-28 the IRS concluded that an absence from the household was temporary due to special circumstances without regard to whether it was reasonable to assume that the person would return. In a 2002 case the Tax Court had prohibited the IRS from arguing against the principle set forth in the Revenue Ruling. The IRS did not cite the ruling in Rowe, but the concurring opinion concluded that because the IRS position was so much at variance with its position in the ruling and the IRS had not cited or distinguished it the taxpayer ought to have the benefit of its conclusion. The IRS did not address the ruling because the Rowe case was submitted without briefs.

In effect, the ruling was an elaboration of the IRS' acquiescence in the Hein decision. The concurring opinion brushed aside the dissent's point that the ruling dealt with the dependency exemption deduction and not head of household filing status on the basis that the two provisions are identical in this respect. It also noted that the ruling had been cited favorably in the legislative history.

The second concurring opinion was written "to emphasize the very limited nature" of the decision. Specifically, "where a taxpayer is involuntarily removed from her principal place of abode and has not manifested any intent to change that abode, her absence shall be considered temporary" for EITC purposes. This opinion pointed out that the criticisms leveled by the dissent against the majority opinion in Rowe apply equally to Hein, and yet the IRS acquiesced in Hein, issued a revenue ruling following its reasoning which the Congress has cited favorably, and gave similar advice in the matter involving the juvenile facility detention. In other words, the IRS and the Congress "seemingly agree" with the result in Hein.

The dissent objected to the holding because the majority and the concurring opinions did not apply the reasonable expectation of return test and looked simply at whether there was a lack of evidence manifesting an intent by the taxpayer to change her place of abode. The dissent preferred to analyze the likelihood of the taxpayer's return and concluded that under the circumstances it was unlikely to occur. The taxpayer, having failed to present evidence that she intended to return, did not meet her burden of so proving. The dissent also devalued the applicability of Revenue Ruling 66-28 because it applied to the dependency exemption deduction rather than head of household filing status.

There are two ways of viewing this case. One is that it addresses a relatively unusual situation, affecting few taxpayers, and thus has limited applicability. The other is to use the case as an illustration of how tax law becomes complicated and convoluted. Why did Congress not deal with the issue in the text of section 32? Why is incarceration not mentioned one way or other in the regulations? Why did the IRS issue a Revenue Ruling that, in all fairness to the dissent, does "by stealth" effectively overrule a portion of a regulation? Why was the case submitted without briefs? Why has the Congress not provided for a uniform definition of the term "temporary" as it applies to occupation of an abode or maintenance of a household?

Those many people who think tax law is simply a matter of numbers would learn much by reading the Rowe opinions. There is nothing in them to deter those with alleged fear of mathematics. They are replete, however, with legal analysis, of the sort demanding sharp logical thinking. That the judges could divide over the result is a consequence of the murky precedents available to them.

I doubt the case will be appealed. I wonder if it will cause Chief Counsel to open a regulations project that settles the entire "temporary absence" issue for purposes of all the provisions that incorporate it. I do not doubt that the case will inspire a law review article or a student paper.

Law Grads: Time to Start Reading Lots of Tax and Law Books

On Wednesday, in Tax Books for the School to Practice Transition, I considered a question posed by Larry Staton, Jr. He is looking for books that will set him "on the path to learning how to practice tax law through research and problem-solving."

From a reader comes a very instructive response. It not only addresses the book search question but also highlights another aspect of the student-to-practitioner transition at the root of Larry's inquiry.

The reader shared these thoughts:

I’ll offer my experiences with respect one area of tax law, partnership tax. A bit unexpectedly, I found myself practicing tax law after law school (long story). I had taken basic tax and corporate tax in law school, but soon found myself deeply immersed in partnership tax, including drafting and reviewing the tax provisions of partnership agreements. Of course I did so under the guidance of more senior folks, and so was not completely on my own. Still, I wished not to look like a complete idiot. My strategy to get up to speed on partnership tax in a practice-oriented way was as follows:

• Read "The Logic of Subchapter K" by Laura and Noel Cunningham. Rinse, lather, repeat. I read this book cover-to-cover at least 4 times. It is only a basic substantive introduction, but it manages to place partnership tax in a conceptual framework so that you can actually digest more detailed substantive research.
• Terry Cuff has written a series of articles on partnership tax, including many that focus on drafting partnership agreements. Read them all.
• Howard Abrams likewise has a series of practical articles on partnership debt, allocations, tax aspects of real estate partnerships, etc. I found them incredibly clear. Read them all.
• PLI does a seminar every year called “Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures, & Other Strategic Alliances” and publishes the associated articles in red books. These books often have practical, in-depth examinations of particular partnership tax questions.
• Liberally consult the McKee treatise, BNA portfolios, and of course the primary sources for answers to specific, substantive questions.
• Find a partnership agreement that you are pretty sure is not completely messed up from a tax perspective. If you are on your own, check out one of the forms in the McKee treatise at your local law library, or look in the SEC filings on Edgar for a partnership agreement done by a well-known firm. Try to understand the deal, and try to think about all possible ways in which money could come in and out of the partnership (debt, income, sale of a capital asset, payments to partners, payments to non-partners, etc.), and in what order the money could come in or out. Try to figure out how the agreement accounts for these things.

None of these sources advises on how to get and talk to clients, or other essential skills for tax practice. However, they may provide a useful bridge between simply reading the primary sources and trying to do something like draft a complicated partnership agreement.

Students in my Graduate Tax Program Partnership Taxation course would rebel at the thought of digging through that much material, but there's really no substitute for digging in (or, as is so nicely phrased, rinsing, lathering, and repeating). What the reader did was to structure a Partnership Taxation course that was surely more challenging because it wasn't arranged or structured as a partnership course would be. Yes, it works. But it takes a serious and time-intensive focus. Note that the reader did have senior practitioners giving advice and guidance. That matters so much, and yet the shift of law practice from profession to business makes finding that sort of mentoring ever more difficult.

Yet all of this effort is for one area of taxation. Even when someone focuses his or her practice on a particular area of tax, it is impossible to avoid other areas. The reader surely had to deal with C Corporations and S Corporations. Needing to understand and recognize estate, gift, and generation-skipping tax issues when structuring partnerships is not unusual. Lurking in the wings are subjects such as income taxation of trusts and estates, tax procedure, taxation of real estate transactions, and international taxation (which, to be fair, is far more than one topic or one course). If I continue I might find myself getting sidetracked into my "12 2-credit courses are insufficient for an LL.M. (Taxation) degree" argument, so I'll stop the litany of tax subjects.

One can compile a similar list of materials to consult for each of the many tax subjects a practitioner will encounter. When put together, the reading load will be immense. Given time, it could be handled by a diligent, focused, determined, and bright recent graduate. Unfortunately, rarely is time given. Note that the reader ended up practicing tax law and being assigned partnership tax matters after law school. It would not be unusual for someone in the reader's position to be assigned a partnership matter, a real estate investment matter, an S corporation stock sale, and several other tax issues within a few months of graduation. An LL.M. (Taxation) program takes one year if pursued full-time, and two to five years if done as a part-time arrangement. Even the most devoted tax devotee cannot read an entire tax program's worth of assignments within several months of law school, whether or not the assigned workload was removed. I wonder how many law students know that within weeks after taking the bar examination they will be immersed, and perhaps in areas of law, such as tax law, that weren't on their radars.

The more I think about Larry's question and the reader's experience, the more I wonder what is happening in the law schools. To those who claim that there is no way three years of law school can prepare a person for the sort of situation in which the reader, and many other law graduates, were put, I suggest that law school be expanded so that sufficient years are available to provide time to do the course work required for the underlying LL.B. and the J.D. To those who claim that most law students do not know what area of law, or area of tax, they will be practicing when they graduate, I suggest that law students be encouraged to enroll in courses that prepare students to "practice tax law through research and problem-solving." That's what lawyers do. They research and analyze materials so that their clients can avoid problems or if, unfortunately, a problem arises, it can be solved.

Here's a suggestion that is in the form of a request. Is it possible for practitioners, collectively or through a committee, to examine law school courses and to make two lists. One list would begin, "If we see these courses on your transcript, we are confident that the time you invested in academic pursuits have equipped you for a career in which you identify, prevent, and solve problems through legal research, skillful analysis, and proficient writing:" The other list would begin, "If we see too many of these courses on your transcript, we suspect either you looked for a law school experience lacking in rigor or were ineptly advised to focus on concerns of little relevance to law practice." In an environment resonating with the stress of loan-saddled law students looking for employment and anguishing about that search, lists such as the ones I propose, coming not from me but from practitioners, would have a most interesting effect on the academy.

Tax Books for the School to Practice Transition

Larry Staton, Jr., who has been following MauledAgain for most of its existence (see More on Gasoline and Free Markets), presented me with a very thoughtful and important question. Larry wrote:

I've enjoyed your recent posts on tax books. * * * I noticed, however, that none of your book recommendations aim towards new law school graduates and soon-to-be practitioners. I searched your blog for relevant posts, but I did not find anything.

That said, I would appreciate if you would recommend some essential books for new tax law practitioners. I took a course in basic federal income tax and I learned a little bit about researching tax law, but I could not advise a client based on this experience. I'm looking for books that will set me on the path to learning how to practice tax law through research and problem-solving. I see many books at Thomson and Lexis, but I really don't know if any of these books will suffice.

I responded to Larry, and I want to share that response, though I am editing it in an attempt to make it better.

It's difficult to identify books that are aimed directly at the law school graduate who wants to develop his or her skills as a tax practitioner. The books I've reviewed in MauledAgain are directed toward people who are not tax professionals, generally to give them a general overview of relevant income tax law and to provide them with ideas on how they can keep records and structure their financial affairs in ways that make life easier for their tax advisors and preparers.

I'm unaware of any book that takes the approach, "ok, so you graduated with basic tax and want to do more tax work." Perhaps it's because going that route takes either practice experience under someone's tutelage, or an LL.M. (Taxation), or both. Tax law is so voluminous and so intricate that someone wanting to practice tax law and advise paying clients on what they should and shouldn't do needs more than just a book.

I shared with Larry what I did, long before I enrolled in law school tax classes. When I was in college I took a job with an accounting firm, because accounting was one of my areas of concentration within my academic discipline. The partners at the firm had me do a variety of tasks, and when the tax assignments came along, I took to them well. Thereafter, the partners funneled a variety of tax return preparation, tax return review, and tax research tasks in my direction. Naturally, I was somewhat apprehensive, because I did not have much in the way of formal tax education or tax practice experience.

My solution was to read the CCH Master Tax Guide. I read it from cover to cover. Some parts made sense. Others required a second or third review. Eventually, I acquired enough of a background that it became possible to understand most of the rules that I subsequently encountered.

When it came time to enroll in law school tax courses, I started to read some BNA Tax Portfolios and student treatises in areas that interested me. I entered law school planning to practice tax, and by the time I was enrolled in my first tax course I had decided I wanted to teach. Along the path of preparing for that goal, I learned that the supplemental materials I had been reading were, and continue to be, among those assigned in LL.M. (Taxation) courses. So in a way I self-taught. Yet what I learned was primarily substantive law.

What Larry describes is a different skill, one that can be described as "how to practice." Success as a tax practitioner requires not only a deep understanding of the substantive law, but also responsibilities such as finding clients, managing cases, matters and an office. It also requires a facility for explaining things to clients and other attorneys, a gift for exercising sound judgment, and a knack for using discretion appropriately. For these talents, I know of no book. Life, in all its fullness, is the teacher. Tax folks will appreciate that feeble twist on words.

Even those of us who think earning an LL.M. (Taxation) is the better path to a tax practice career, it does not provide the intellectual and professional development fostered by time in an office, with clients, and with guidance from more experienced practitioners. Books can bring familiarity with substantive tax law. But they can no more bridge the gap between the academy and the practice world does the academy itself. Perhaps, when and if legal education adapts itself to law practice and loosens its attachment to theory, fewer and fewer law graduates will need to ask the sort of question that Larry posed.

If I am wrong, and there exists a book that addresses the matters Larry described, let me know. I would be eager to give it some time in the small spotlight of this blog.

A Nontechnical Tax Guide for Self-Employed Individuals

Tax season is well underway, and surely there are people who are discovering that starting a business without keeping good records and understanding the applicable tax rules makes for a very time-consuming, aggravating, and expensive visit to the tax return preparer. Self-employed individuals often bring a variety of talents and gifts to their enterprises but all too often organization, record keeping, and attention to detail are not among them. Now, to help these folks make their tax return preparation a far less horrible a time is June Walker's 220-page "Self Employed Tax Solutions."

This is more than a tax book. Although its primary focus is on the federal income and self-employment taxes, among its pages are paragraphs and a chapter addressing business decisions, entity selection, record keeping, and the relationship of various types of expenditures to business activities.

The book begins, not surprisingly, with a chapter that differentiates employment from self-employment. It then turns to a general chapter on business expenses, followed by chapters dealing with start-up costs, advertising and similar expenses, communication costs, travel expenses, business education, rent and office-in-home deductions, inventory and supplies, and a "write-off wrap-up" focus on deductible and non-deductible expenses. Then, because as the author explains, people starting business meet expenses before they receive income, comes the income chapter. The book closes with two chapters on record keeping and one on the tax system generally.

June Walker has designed a variety of charts, side boxes, paragraph icons, examples, and stories to help the reader get a grip on the subject matter. The appendices include a glossary, and forms and worksheets appear throughout. Many of the stories are based on real-life, yes-this-happened-to-someone stories, some of which fall into the and-be-glad-it-wasn't-you category.

"Self Employed Tax Solutions" is not aimed at tax professionals. Tax professionals will find the book too simple. There are no footnotes, no Code cites, no long quotations from regulations, no case synopses. But that doesn't mean the book isn't useful for tax professionals. The book makes a fine gift for clients, particularly those who mention that they plan to start a business and those who somehow can't understand the professional's annual warnings about record keeping. The book, in other words, is not a substitute for a tax return preparer, but a recipe for making his or her job easier and the client's wallet or purse not as lighter as it otherwise would be.

June Walker is a financial and tax consultant to entrepreneurs in the United States and Europe, with a clientele that is exclusively self-employed individuals. She has been featured in Business Week, has been interviewed on national and local radio, has participated in webcasts, and has offered seminars for the self-employed.

To learn more about "Self Employed Tax Solutions" visit http://www.junewalkeronline.com and http://junewalkeronline.blogspot.com/. To order, go to this specific page or call 1-800-243-2329.

Using Tax Revenues for A Welfare Program Benefitting the Wealthy?

Last evening, returning home, I heard a 30-second news story on KYW, the region's news station, but my search for the story on-line was fruitless. According to the report, a California legislator is proposing that the state of California provide a $500 bond to each child born in the state. The story didn't touch on whether "each child" meant each and every child or simply children in need.

As I hunted for the story, I discovered what appears to be the original California proposal. Though it suggested a $300 bond, it appears to be the basis for the plan described in last evening's news story. Here is the explanation from the original California provides the rationale:

How, exactly, would this work in California? The state could launch every California Kids Account with a onetime, $300 deposit, while encouraging after-tax contributions (not to exceed $1,000 per year) into the accounts of children in households below the state's median income. The accounts would build up tax-free. Assuming low-income families managed to save or leverage just $50 per month, this small investment would grow to nearly $19,000 when the child turns 18 -- enough to comfortably cover the first three years of tuition and fees at a public university in California. If the child does not use the account for college, it grows to $34,000 by age 30 and $185,000 by age 65. Besides post-secondary education and training, California Kids Accounts could only be used for a down payment on a first home or rolled over into a retirement savings account; if the account is used any other way, the at-birth deposit must be returned to the state, along with penalties and taxes. The accounts also provide a perfect catalyst and centerpiece to build the financial literacy of all young Californians. At $160 million a year, this relatively small investment -- it's less than three-tenths of one percent of the state's $100 billion budget -- would be transformative.

California could learn from other pioneers on this front. Beginning next year, each of the 700,000 kids born in the U.K. annually will receive about $400 each in a "Child Trust Fund," with the poorest one-third of kids getting about $800. The idea is to create a "stakeholder" society and help ensure that children have opportunities that their parents may not have had. In Canada, "Learning Bonds" will soon be established at birth to help low-income students save for college. In Kentucky, the Republican secretary of state and the Democratic state treasurer plan to launch a "Cradle to College" initiative, which would establish a 529-type college savings account for every newborn in Kentucky so that no residents would need to forgo college because they cannot afford it. Finally, bipartisan legislation called the ASPIRE Act -- led by unlikely U.S. Senate bedfellows Rick Santorum (R-Pennsylvania) and Jon Corzine (D-New Jersey) -- was introduced in Congress last July to create a savings account at birth for each of the million kids born in the U.S. Clearly, the idea is catching on, and California has a great opportunity to lead the nation on this path-breaking idea.

It appears from this Corporation for Enterprise Development reportthat four countries (Singapore, Great Britain, Canada, and Hungary) have implemented similar plans.

The plans are not identical. The differences are critical. The United Kingdom presents money to all newborns, though it doubles the amount for children from the poorest 1/3 of families. Canada limits the program to children from low-income families. Hungary provides additional payments to the children of low-income families. Singapore makes payments for all children, but the amount increases as the number of children in the family increase.

Does it make sense to use tax revenues in this manner? It depends. Putting money into funds to benefit poor children makes sense when the alternative is transferring money to the parents of those children, who don't have the discipline, foresight, or ability to set money aside for the education of their offspring. On the other hand, I just don't understand the rationale for transferring tax revenues into accounts for the benefit of wealthy children or the children of wealthy individuals. It is not the role of government to provide tax revenues to the wealthy. It is tempting to think that even those who advocate government transfer payments for the benefit of the poor would join with those who object to government transfer payment programs generally and oppose plans that fund wealthy families in this manner.

Yet that did not happen in Hungary. Perhaps Hungary, emerging from years of living under communism, has too few wealthy individuals to warrant concern. Singapore seems intent on encouraging population growth, as the economic incentive increases as the size of the family increases. At least the United Kingdom's program does more for the poor, but why transfer public funds to rich children? Canada seems to have it right.

Because I don't have access to the technical language of the newest California proposal, I don't know if it is more like the program in Canada or the one in Hungary. So it's impossible to critique the proposal or predict what will happen. I'm sure this is not the last we will hear about these types of proposals.

Tax Charts and Graphs of An Entirely Different Sort

As strange as it may seem, today I am going to draw attention to web sites that illustrate tax issues with charts and graphs that are not of Andrew Mitchel's making. Andrew, whose latest batch of charts were highlighted in It's Raining Charts, remains king of the tax chart world because his charts are practical, informative, easy to understand, and numerous. The It's Raining Charts post has links to all the previous posts in which I've highlighted his skills, along with links to his web pages.

Two weeks ago, a recent graduate of the law school, who focused on tax and is practicing in the tax field, passed along the URL for a blog called Indexed. According to the blog author, Jessica Hagy, the blog "is a little project that lets me make fun of some things and sense of others. I use it to think a little more relationally without resorting to doing actual math." The graphs and charts that she uses are clever because of the way in which they are used. Most of her drawings, and yes, they are drawings and thus artistic, are wacky, sarcastic and cynical. That's why I like Indexed. Yes, there are some tax observations among the hundreds of visualizations, such as Write It All Off, with the legend "when they walk into a bar, the tab is tax-deductible," Lattes = Higher Property Taxes, What Do You Make? A Mess, and It's Tax Deductible. Most of them don't deal with tax, at least not directly, but some do touch on questions of law, politics, economics, retirement, and money. Give yourself 20 minutes and go visit.

Yesterday, Paul Caron of the TaxProf blog passed along his take on a new blog, Visual Tax. Written by Orval, the blog's objective is "visualizing how tax works by applying engineering methods." What inspired Visual Tax is Orval's re-entry into the world of preparing his or her annual tax return. Orval was very unimpressed with IRS instructions, particularly with their "wordiness" and "almost total absence of explanation for the rationale behind some of the tax rules." Orval is "appalled" to see pages of tables that are "nothing more than a tabulation of simple linear equations." So Orval treats us to graphs and equations.

Orval has tackled the question of tax rates. It is interesting to see what most tax practitioners take for granted undergo an examination by someone with a different educational and experiential background. I don't see, though, how the equations that Orval derives would be a better substitute for IRS instructions. Take a look and try to imagine one hundred million tax booklets being mailed out by the IRS with equations of this sort peppering the pages.

I do take issue with several of Orval's points. First, the instructions are not the place to include the rationale behind the tax law. The traffic sign with the instruction "NO TURN ON RED" would be much less effective if it included the rationale for placing the sign at that particular intersection. Second, Orval lives up to the stereotype of engineers as people who struggle with words. Somehow, from reading instructions and perhaps the Code itself, Orval concludes:

The income used in the tax equation is known as the adjusted gross income, it is essentially calculated as follows for your workpay:
* start with your nominal salary
* remove a number of special items: social security, 401k contributions, ... and you get your taxable income
* remove the exemptions, these are usually amounts that are not directly related to any real expenses
* remove deductions, these are usually amounts that correspond to specific expenses that are considered useful for the society, at least as seen by Congress
* presto, you have your adjusted gross income.

If one of my students did this on a basic tax exam, he or she would earn an F in the twinkling of an eye. The removal of certain items from nominal salary generates the portion of gross income attributable to compensation. Then certain deductions are subtracted to arrive at adjusted gross income. Then other deductions, either itemized deductions or the standard deduction, along with personal and dependency exemptions, are subtracted, and the result is taxable income. I wonder if Orval looked closely at the charts in the instructions, or tracked through a Form 1040 with an engineer's careful scrutiny.

Oral is correct, that the tax law is complex, and thus the equations derived from it are complex, because of special interests that persuade the Congress to enact provisions applicable to tiny segments of the population. Perhaps with a bit of a push, Orval can be moved into the slowly growing group of citizens that understands the true source of tax agony, tax complexity, and tax nonsense: the Congress and not the IRS.

Yet Orval has done me several favors. When the legal philosophers challenge my approach to the law by claiming I'm treating law as an engineering device, I can send them to Visual Tax and say, "No, here is what an engineer would be doing." I do want to be around when they access Visual Tax so I can see their faces. What Orval has demonstrated is the falsity of the propositions that "tax is all numbers," "tax is full of math," and "practicing tax doesn't require subjective reasoning as do other areas of the law."

Orval also gives me an object lesson to share with the students in my courses who bristle at my insistence on accuracy, diligence, and precision. When they continue to complain about the ineffectiveness of generalities as grade-earning expressions, in contrast to some other law courses, I can point them to Visual Tax and explain that if I really wanted to do what they claim I am doing, this is what the powerpoint slides and their notes would resemble. Ouch.

Finally, Orval has inspired me to ponder the possible advantages of a joint law and engineering degree. Surely engineers would benefit from learning to work with words. And lawyers can benefit from approaching problems with an engineer's constructive inspections. Just what the Dean wants: another proposal from me.

Selling Off Government Revenue Streams: Good Idea or Bad?

It's the latest rage in reducing state budget deficits and fending off tax increases. Toll roads lead the parade of state assets that politicians propose to sell to private owners, so that the proceeds can be put to other uses. Even though the sales proceeds dwarf the annual revenue, is it a good idea or a bad one to put these assets into private hands?

As noted in this Philadelphia Inquirer article, no one is certain how much a toll road or turnpike is worth. That makes sense, considering that there isn't a ready market for these items. "I'll be back in a minute, folks, I'm going to run out an buy a parkway." Alarmingly, if some have their way, the idea of buying and selling toll roads on a private market won't seem so bizarre.

An alternative is leasing the toll road to a private concern. Where this has already been done, the leases are for such long periods that they are equivalent to sales.

In New Jersey, where discussion of leasing the toll roads to private enterprises or turning over operations to them is just that, concerned legislators, as reported in this story, have introduced legislation blocking such action. This is an issue that will get attention, and generate loud debate.

Advocates of the sale or lease approach claim that private enterprise could raise tolls without incurring political risks as state officials do when they propose toll increases. Though there is some truth to that contention, isn't the point only part of the story? What happens if the private company wants to raise tolls more often and more steeply? Yes, the sale or lease contract can contain restrictions, but how effective would they be? Private businesses don't operate roads other than to make money. Period.

Does the length of a lease matter? It surely does if it's not revocable. What happens if the private company fails to maintain the road properly? I'd like to quip that most private companies would be hard-pressed to come up short as did the Pennsylvania government last week when Interstates 78, 80, and 81 became ice-bound Arctic parking lots, but I've seen too many critical failures in private industry to have much confidence in it. The mentality that brings consumers the blue screen of death, rats partying in fast-food restaurants, foreign objects in restaurant food, and a long list of other slip-shod product and service deliveries easily can bring us toll roads that more resemble Philadelphia streets than the current decently maintained Pennsylvania Turnpike.

Selling or leasing the toll roads is a short-term fix that deceives the public. It infuses a bundle of money into the state budget, but it comes at the cost of losing the revenue. Wait, say the advocates, the state also loses the expenditures. Au contraire. If the private company slips up or goes under, the taxpayers still pay the bill for the repairs. And what happens when the road, if leased, is returned to the state at lease end, or earlier, in poor condition. Who pays?

The major concern is this. If the toll roads are such wonderful sources of income for private industry, why can't they be wonderful sources of income for state governments without selling or leasing them? Is it simply a matter of toll increases being easier for private industry than for government? Nonsense. The cost of using a toll road can be calculated, and the government (or, technically, turnpike or toll road authority) ought to be charging fair market value. Anything less is simply an unauthorized shift of government costs to the general taxpayer, who is funding items that should be funded by the toll road. In saying that, I'm accepting premise of the sale or lease advocates that it is permissible to use toll roads to generate a surplus for use in other budget areas. Personally, I disagree with that concept, however it is applied.

Rather than sell off public assets, why not impose tolls on other limited access roads that require government expenditure? Technology exists that reduces the cost of toll collection to a fraction of what it has been. The idea of mileage charges generally, regardless of the nature of the road, is an idea getting growing support. I dissected this concept in Tax Meets Technology on the Road back in November of 2004.

I am fully aware that private enterprises have bid for, and received, the right to build new highways and to charge tolls for their use. I've been on several, one outside Denver and several in southern California. Despite their locations, there wasn't much traffic on them. There's no surprise there, because the alternatives, though crowded are much cheaper, as in free. Except that free really isn't free, because the true cost of toll-free highways is passed along in other ways. Taxes are being collected through some other channel, including the federal income tax, and funneled into the freeways.

The question of whether to sell an income-producing asset is one that confronts people everyday. Lottery winners sometimes cash in the annuity for a lump-sum. Business owners running profitable undertakings decide to let go, and sell their income-producing enterprise for a lump-sum or a short series of payments. In most cases where an income-producing stream is sold for a lump-sum, the income stream is relatively predictable and stable. Because tolls are predictable and stable, the idea of selling or leasing toll roads attracts the wheeler-dealers. But is it a good idea? What makes it different? What makes it different is that it's a matter of public trust. Once the toll roads, and other highways, enter the private market place, how long until Bill Gates or Walmart ends up owing them? Should citizens be swayed by the promises of quick riches? Will they?

The answer might lie in the story of the fellow who killed the golden goose. I wonder if he'd do it again if he had the chance. I wonder if a public that might decide to support sale of the toll roads would do it again had it the choice. Sometimes the child's do-over isn't very realistic. There's an issue here that needs a wide-open, highly publicized debate. Let's have it.

A Dark Side of Teaching Law

Fortunately, most of the experiences I've had teaching law have been uplifting, rewarding, constructive, educational, and affirmative. Sometimes, though, shadows pass over the pedagogical efforts. Despite more than two decades of teaching law, in both J.D. and LL.M. programs, I continue to be puzzled by the disconnect that occasionally appears between a student's presence in one of my courses and the student's involvement in the course.

At the end of every semester, in both the J.D. and LL.M. courses, the school administers course evaluations. Students are asked to provide numerical responses to a series of questions about the course, the instructor, the materials, and several other items. They also are invited to provide comments. The evaluations for each program differ, even though both would be improved if questions asked solely on one were asked on both. Even the numerical range differs, with the J.D. evaluation using a 1 to 4 scale and the Graduate Tax Program evaluation using a 1 to 5 scale.

Some faculty claim not to look at or read the evaluations. I do. I make it a point to read each comment. Over the years, there have been helpful suggestions that I incorporated into my teaching. Every year, there are encouraging comments. Every year, there are not so encouraging comments. And sometimes, there are the comments that make me wonder.

It is not unusual to find students in the same course providing totally different opinions. One of my colleagues photocopied and framed two comments from students in a course that he taught some years ago. One comment pretty much described him as a magnificent teacher, the best that the student had ever encountered. The other urged the immediate dismissal of a professor that the student thought was the most horrific instructor ever experienced. Early this month, as I read through the evaluations for one of my fall semester courses, I discovered a similar dichotomy. One student described me as the best of the professors with whom he or she had taken a law course. Another student requested the administration to remove me immediately from the faculty. An examination of the numerical responses indicated that the latter student was pretty much alone in his or her response.

How can two students in the same course at the same time have such totally different perspectives? One explanation is simply a matter of personality preference. Students who dislike my law-practice-based rigorous approach and teaching style often develop an intense dislike that manifests itself on evaluations. Many students who dislike the approach change their minds as the semester progresses, noting the beneficial impact on their educational development of the assignments I give them to do, but others don't figure it out until long after graduation, when they send me the classic "I thought you were a jerk but now that I've been in practice I understand what you were trying to do" message.

Another explanation, though, for the starkly opposite opinions is alarming. Understanding it is enhanced by understanding how negative student comments fall into three categories.

The first category includes a variety of gripes and complaints that are to be expected and that usually manifest themselves in numerical scores one or two steps below the highest possible choice. Students express dismay at the volume of work and at the speed with which some topics are covered. Some detest the idea of graded assignments administered during the semester, having become comfortably and dangerously acclimated to the "all at the end one shot" examination testing process that infects so much of higher education and law school. Some students don't like the course book. In any group of students of significant numbers, it isn't surprising to find a few who don't like the course or how it is taught but who are enrolled because one or another reason persuades them that they need to be in the course even though they'd prefer to be elsewhere. For the most part, these expressions of dissatisfaction are debatable questions, on which people who have not yet lived in the practice world honestly can hold opinions different from those of us who have.

The second category of comments are troublesome but understandable. When students decry the reading load, which is much less than what law school reading loads were 10, 20, or 30 years ago, they are making judgments based on their unfamiliarity with courses in which significant amounts of technical material must be absorbed. Some students go so far as to explain that they have other, more important things to do. By the time students reach my courses, I'd hope they'd been disabused of the notion that legal studies should be tenth or eleventh on their list of priorities. A common gripe is the allegation that my teaching takes them on tangents or includes irrelevant comments, which suggests to me that these students, despite having been through at least one year of law school or five Graduate Tax courses, have not yet grasped the concept of reasoning by analogy. Too many students, especially in the Graduate Tax Program, continue to demand "just the rules and answers" and resist acquisition or development of the analytical process essential to learning law, tax, and most other subjects. In fairness, for students who have journeyed through an array of non-demanding courses, it's not their fault that they recoil when reality confronts them in course replicating the demands of practice. I'm told that many students have the same adjustment problems when they start out in a clinical course. Nonetheless, I do think someone with so many other things to do that they cannot invest the 70 hours a week that law school requires of the average student, or the 6 to 8 hours a week that a Graduate Tax Program course demands, should reconsider and perhaps postpone their law school or Graduate Tax enrollment. Nor do I have much sympathy for students who don't want to do as much work as is demanded by a dedication to future practice success in meeting client needs.

The third category of comments are the frightening ones. What should one think of a student who claims that I am a bad teacher because there is no syllabus for the course? Yes, of course there is a syllabus. What should one think of a student who claims that postings to the course web page are secretive? I can't even begin to figure out that claim. All students have access and what gets posted can be seen by all. I suspect the complaint is a feeble articulation of someone's annoyance at having to make the effort to visit the course web page, even though frequent visits to course web pages is a requirement not of my courses but of both academic programs. Every now and then a student writes that I glossed over some topics because I must not know that area of the law. I wonder how those students' classmates would have reacted to a decision to squeeze even more coverage into an already packed course. Oh, they'd probably write their own negative commentary. By the way, it ought not be a surprise that I surely know the areas of the law that I treat in summary fashion. On what basis a student could justify the claim of inadequate professorial knowledge continues to bewilder me. Every so often, students list the bad experiences they've had being called on in class, even though I don't call on students in class. It's these counterfactual allegations and premises that concern me. Do people who have distorted perceptions of the facts make good lawyers and tax practitioners?

It is accepted among many of my colleagues that students use course evaluations to vent their frustrations, without taking the time to engage in careful analysis of the situation. Those of my colleagues who choose to ignore course evaluations figure that they're not going to learn much from student rants. I disagree. Not only do I sometimes acquire useful and constructive commentary that improves the courses, I also learn some things about the dark shadows that trouble some students. For someone to write negative comments based on factual impossibilities suggests that there is a serious problem, and that revelation matters. It is one of several factors that influence my proposals and my support for others' proposals to faculty and administration that attention be paid to more than mere intellectual endeavors of students. I'm glad to report that my law school makes all sorts of efforts to reach out to and help students who are struggling. I'm not glad to report that some students who could use assistance aren't identified and don't try to deal with the frustration, anger, and negativity that afflicts them. I suppose I should mention that the course evaluations are anonymous, so these indications of problems don't provide opportunities to offer help.

These concerns don't arise from the silly comments. When I read commentary on my admitted inability to choose suits and ties that impress students, I laugh and wonder whether a different tie would make me or them more adept at working through the law. Students notice things that aren't relevant to the course, so I simply find more incentive to persuade them to focus more of their brain's processing power on the matter at hand rather than my wardrobe, or, for that matter, the attributes of their classmates. Some things never change. When I was in my second year, sitting in Family Law, someone passed me a note to relay to another student. It was open, and said, "Check out the ring on NNN's finger." Hopefully, nothing important was missed while this distraction took hold.

Another source of consternation is provided by the responses to a question on the Graduate Tax Program course evaluations. It's a question that does not appear, but should be provided, on the J.D. evaluations. We ask students how many hours they invest each week in the course. The common expectation is that at least 6 to 8 hours are required if a student properly prepares for class and does assimilation after class. Of the students who filled out evaluations in last semester's Partnership Taxation course, only 20 percent put in as many as 8 hours. Almost a quarter claimed they put in one to two hours. These are typical responses, and motivated my decision to elaborate, during the first evening of class, my expectations of time investment and the status of the course as one in a graduate program offered to tax professionals earning a post-doctoral degree. Some students translate that early warning as arrogance, disrespect, and unprofessionality. Sometimes I almost convince myself that at least some Graduate Tax students view the program as an extended, expensive CLE or CPE session, one that is tantamount to the purchase of a degree. "You talk, I'll listen and write, and then you ask me to repeat it, giving me a high grade if I recycle enough data." Sorry, that's not what it's about. I guess I do aggravate students who don't like my bubble bursting messages.

The appropriate administrators do read the course evaluations. They're quite adept at separating negative comments raising red flags from the negative ones that are counterfactual or expressions of frustration and anger. There have been times when well-written, corroborated student comments have triggered action by a dean or director. The senseless ones are discounted. The only annoyance is that the low scores attached to the evaluations containing ludicrous comments are not removed from the numerical ratings. Truthfully, it's more than an annoyance, because some of those numerical ratings are used for other purposes, and so the fear of low or mediocre ratings inspires some teachers to placate students, in what turns out to be, for the students, short-term delight and long-term catastrophe.

If at this point you wonder why I continue to teach, the answer is that most of my students do work diligently, do try, do seek dialogue when they are frustrated so that they can make adjustments, and eventually do figure out by the end of the semester what I'm trying to encourage them to do. The messages from graduates, both those who enjoyed the courses and those who put aside their dislike and have their epiphanies after a year or two in the practice world, are wonderful. Ultimately, the ones who get it, whether sooner or later, bring to their clients the excellent legal advice and guidance that those clients deserve. The others? I shudder to think.

Is the J.D. Degree Merely a Ticket to More Training?

Over at the Money Law blog, interesting comments are being shared in A great debate at WSJ's Law Blog. The discussion began with a Wall Street Journal op-ed in which Cam Stracher ponders how a paralegal arrested for practicing law without a license had succeeded in doing so for as long as he did without making a mess of things. Stracher, who teaches at New York Law School, observed that there is no reason to conclude the paralegal would have done a better job had he attended law school.

Yes, once again, not surprisingly, legal education is being criticized. Certainly I have contributed more than a few barbs, in pieces such as "So What's the Problem with the Problem Method?", "Bar Exam Pass Rates, Legal Education, and a Plea for More Law School Clinics", "Beer, Softball, 4-Day Weekends: Is This Any Way to Learn Law?", "The Law School Curriculum: Ready for a Change?", "So What Do You Buy When You Pay Tuition?", and "Law Schools: Preparing Students for Practice?". It would appear that there's not much to be added. But appearances can be deceiving.

Despite being convinced of the need for serious reform of the legal academy, for the reasons I share in "Want to Be a Lawyer? Just Say That You Are!",I have not been persuaded that law school and the bar examination should be tossed aside. The proposal to open up alternatives to law school reflected a response to the growing emphasis at most law schools on faculty scholarship, a trend that fuels my commitment to persuade law schools to hire those difficult-to-find faculty who can produce useful publications while bringing law practice into the classroom.

What got my attention was the response [subscription site] to Stacher's op-ed piece that was penned by two Boston University law professors, Tamar Frankel and Wendy J. Gordon. Objecting to practice-oriented legal education, they argue, "Legal education may need revamping, especially as our economy and technology develop, but going back to an 18th century apprenticeship model is not the solution. We teach future professionals, not tradesmen." After correctly pointing out that law schools do offer clinical courses, trial practice courses, and writing courses, Frankel and Gordon claim, "But the best practice will come after law school, with maturity, with watching the senior partners and with learning from mentors."

And that, folks, is the scary part. What Frankel and Gordon are suggesting is a continuation of the decades-long habit that sees law school graduates getting paid to observe, to do research applying first-year legal research skills, to do tasks that paralegal can handle, and even to do secretarial work. That arrangement, made possible by charging clients for the time invested by what can best be called trainees, no longer works well and is breaking down even as some in the legal academy hinge their arguments on it. Why is it breaking down? Clients have become smart. They do not want to pay the apprentice to watch and observe. Similar fee pressures make it more difficult for established associated and long-time partners to invest time in mentoring. Law firms cannot charge clients for the hours of conversation between mentor and trainee.

Yes, it is true that starting salaries at the elite law firms are sky-rocketing. The elite law firms get to hire the best graduates from the best law schools. These are students who have the ability to extract from their legal education and from their experience every bit of useful understanding that they can squeeze from the combination of what the faculty offer and what these usually self-starting individuals dig up for themselves. To the chagrin of my best students, I tell them that I don't try to teach the A students, because they're quite capable of teaching themselves. Others have more need of my guidance.

The pressure on those graduates lucky or unlucky enough, depending on one's perspective, to receive and accept an offer from a top-line high-paying law firm is enormous. If the salary is $165,000, these new employees must generate something on the order of $400,000 or more in legal fees. Is the work that they do truly worth $200 or more per hour? The clients will let us know.

But what happens to the other law school graduates? Some end up as judicial clerks, where they do have a magnificent opportunity to be mentored. Speaking from experience, nothing can substitute for a year or two (or two and a half in my case) of one-on-one examination of the law and legal analysis. But most law graduates do not have the opportunity to bridge the gap between law school and law practice in this manner. Many are tossed into law offices overloaded with work, public defenders' offices and prosecutors' departments operating at full steam almost twenty-four seven. They are, in many ways, dropped into the deep end of the pool and told to swim, no lifeguard on duty, thank you very much. Somehow the idea that the law practice world will step in and make up for the deficiencies of legal education is a bit too much to accept as appropriate or even honest.

Defenders of what legal education has become and is becoming insist that law school is not and should not be "trade school," much in the manner argued by Frankel and Gordon. Of course law school is not trade school. It is not a place where students, other than those in clinical courses, learn which document is filed with a particular county office, or as I heard during my student days, "how to find your way to the court house." That's not what advocates of practice-focused legal education want.

Law practice involves problem solving and problem prevention, on behalf of clients. To that end all legal education should be pointed. Problem solving and problem prevention requires problem recognition, and there is a place in law school for the emphasis that currently is placed on issue spotting. Problem solving often requires creative thinking or development of new public policy, and there is a place in law school for a bit of the public policy analysis and legal philosophy focus that is beginning to swamp the curriculum. When upperclass students tell me that I'm the only member of the faculty that reminds them to think about the client and to try to think as does the client before fashioning a response to the client, I shudder. Ought not an understanding of client psychology have a place in helping students learn what considerations shape the legal analysis they share with clients and how they package that analysis?

Teaching law in the abstract is something that is far too prevalent in America's law schools. Teaching law in the abstract fails to open the eyes of law students to the practical realities that shape the law when theory meets practice. The common defense, exemplified by Frankel and Gordon, that law schools offer clinical courses and trial practice experiences, is a canard. For many law faculty, clinics are a necessary distraction, and remnants of what was at one time open hostility to clinics and those teaching them still hover over many schools. Trial practice courses are fine, but most law graduates don't litigate cases. Certainly few, if any, litigate as soon as they enter practice, and many lawyers never enter a courtroom as a litigator during their entire professional careers.

Law schools do not need more courses. Goodness, the array of courses in the law school curriculum is overwhelming. During the past decade, all sorts of courses reflecting the scholarly interests of law faculty have been added because they are interesting, provocative, and often necessary to attract the "scholar who will assist in out-Harvarding Harvard in the U.S. News marathon" game.

What's needed is a change in the structure of the traditional doctrinal courses. It's not enough to learn that the law requires one thing or another. It's important to consider whether the parties will act in accordance with it, to understand what the options are when the theoretically correct legal answer does not match the actions of the client or some other person, and to appreciate how one's approach to the matter can influence how the client deals with the matter. It is more important to understand how the law came to be the way it is than it is to advocate some law reform that has little if any chance of seeing the light of day in a committee let alone a court or legislature. Professional responsibility issues need to be incorporated into substantive courses and not stashed in the corner in a separate course, because in practice those issues do not arise in a vacuum. Some of my students bristle when I raise professional responsibility questions in my tax and decedents' courses, because "that stuff is in another course." Well, it ought not be. The same problem exists with respect to digital technology. Most law faculty continue to omit discussion of cutting edge legal issues arising from the existence of legal technology, perhaps because they don't understand it and don't have the time to learn about it because they're under pressure to crank out ten more articles for tenure. It's only in my decedents' course, my students tell me, that they are challenged to consider the legal issues arising from the use of digital signatures on wills, revocation of digital documents, and the issues arising from the disposition of the decedents' email and email accounts. To put it bluntly, law faculty need to prepare students for practice in the twenty-first century.

There are an assortment of comments in the Money Law Blog posting on the Frankel and Gordon reaction to the Stracher op-ed. Take a look. You'll even find a short one from me:

It has to do with truth in advertising. There's something wrong with schools of law ending up as schools of (legal) philosophy, advanced political science and similar elements of the S.J.D. degree. My determination to speak out against the ongoing shift in legal education was triggered by a colleague's comment 15 years ago, "We aren't here to train lawyers, we're here to teach legal philosophers." Sorry, but legal philosophers is far, far down the list of what this nation needs from its educational system.

As much as I like my comment, I will also quote Bill Henderson, because he says it so elegantly: "It is time the legal academy began to focus on the problems and trends are affecting the legal profession today rather than an exclusive focus on the legal issues or scholarly debates that engage law faculty. If we do this, I am confident how and what we teach would change."

Law schools are on notice. It's time they turned their attention from defending the status quo to making a transformation that repairs the connection between legal education and law practice. It's time to reject the monopoly of theory in the same manner that monopoly of practice - the so-called trade school approach - has been consistently rejected. It's time for legal education to be rescued by the lawyers.

A Tax or a Ban: Which is Better?

Philadelphia's mayor, John Street, made a comment about the recently enacted ban on trans fat that goes into effect in Philadelphia later this year. He noted that he preferred not to pay for the consequences of other people's bad health decisions. I assume he was referring to the higher medical insurance premiums and other medical costs that medical care consumers face because of illness and disease caused by the ingestion of trans fats.

My attempts to find a link to Street's comments have been fruitless. Ouch. Even the web site of the radio station on which I heard Street speak does not have his comments. At least, not that could find after hunting around. Ouch again. The closest I could get was this report.

Street's comments brought several thoughts into my mind. I asked myself why a ban rather than a tax. And then I asked myself why stop at trans fats.

The principal difference between a ban and a tax is that, in theory, a taxed item is available to those who are able and willing to pay whereas a banned item isn't available, period. Of course, the theory ignores smuggling, black markets, and other avenues to avoiding bans. The disadvantage of a tax is that those unable to pay either do without the item or forego something else, presumably something more important, in order to obtain the desired item. If something is horrifically bad, such that no one should have it, then a ban is the ideal approach. Bubonic plague cultures should be banned, not simply taxed.

The tax approach is used for a variety of items that some people think should be banned. Tobacco products probably tops the list. Tobacco products are one of the few exceptions to the adage that one should partake of life in moderation, neither over-indulging or totally depriving one's self of a substance. That ties in with the adage that a well-balanced meal presents at least three food colors on the plate, but I digress.

Why are tobacco products taxed rather than banned? The tax on tobacco products arguably exists for two purposes. One is to discourage use. The other is to generate funds that, in theory, are or can be applied to defray the cost to society of tobacco use. Attempts to ban tobacco products would cause an uproar. Even attempts to ban the use of tobacco products in public have triggered spirited debates. Almost a year ago, in Proposed Philadelphia Tax Break to Manipulate Behavior, I commented on an interesting twist on the tax angle, namely, providing tax breaks for perceived good behavior rather than taxing undesirable behavior. The reason for the creative suggestion was the attempt to find a compromise between those trying to ban tobacco use in public places and those holding steadfast to their claimed right to smoke. People complain about taxes on tobacco and other items, but most end up paying them because they are so intent on acquiring the item in question.

Yet no matter how one slices it (yes, ouch again), the underlying objection to taxation or prohibition of harmful items and activities is that government has no right to control individuals' lives. Some who take this position accept the idea that taxing or prohibiting items or activities that are harmful to others is within the realm of appropriate governmental action because governments have a duty to protect its citizens from harm. Logically, this perspective would support a prohibition on smoking because second-hand smoke can kill, while at best it would favor a tax on trans fats because there is no indication that one person's ingestion of trans fat causes coronary artery disease in someone else.

Perhaps John Street is right, that there is a harm in anyone's use of trans fats because the ultimate consequence is a burden on the health care system that increases costs to others. But that reasoning leads to the next question. All sorts of items and activities impose additional costs on others. People who refuse to wear motorcycle helmets incur higher medical care costs when they are in accidents than do those who wear motorcycle helmets. Should riding motorcycles without helmets be banned? Or taxed? Or should a society that claims to be compassionate simply leave helmetless injured motorcycle riders to their own resources? Again, those with more wealth would have more choices available to them.

Should the concept of taxing harmful items and activities be extended to taxation of non-activity? One cannot ban failure to exercise, for doing so would raise arguments that the government was forcing people to exert themselves, something that many think a government does not have the right to do. Interestingly, governments do require people to shovel snow from sidewalks and to keep properties in good repair, but they don't require that it be done by a specific individual. Again, those with money can pay others to do the work, while those without adequate financial resources end up doing it themselves or facing a tax that is called a fine. This analysis, however, isn't all that helpful when it is applied to something like physical exercise. How we wish we could pay someone else to do our push-ups for us. Fat chance that would do us any good. OK, a big OUCH for that one. Sorry. As I tell my students, I cannot study for them or do the intellectual work they need to do anymore than I can burn calories for them by riding a bicycle. Failure to exercise is no less a problem than trans fats. Should governments ban failure to exercise? Is that possible? Perhaps, though, the advocates of taxes on cigarettes would argue for a tax on failure to exercise. Interesting idea, but probably unworkable and likely to cause a furor that would dwarf that triggered by the public smoking ban.

Some health insurance companies provide premium discounts for insureds who regularly exercise. However one wants to characterize the higher premiums paid by those who don't exercise enough, it is not a tax. It isn't imposed by a government. So why not rely on health insurance companies to provide discounts to those who consume little or no trans fat or to impose surcharges on those who take in too much? The problem is that most of us don't know how much trans fat we eat, most of us cannot figure it out, and too many of us would not report accurately what we were doing. Even those who meticulously read food labels are stymied, in part because the labels aren't always correct or complete, and in part because only the few recluses among us avoid eating food offered by others or served by restaurants. If we rejected all restaurant offerings that included trans fats, we'd be left with a much shorter menu from which to pick.

A tax on trans fats provides another practical challenge. Restaurants and food manufacturers trying to maximize market would need to offer two versions of their menu items or food products. In the case of restaurants, the logistics of preparing and serving two versions of the same item for two different prices, unlike the cost-free "hold the onions" approach, would make eating out too much like doing a tax return. Talk about indigestion.

The libertarian in me wants to say, "Hey, let people do what they want, just don't blow smoke in my face, and if you become ill or die, too bad for you." The practical realist in me responds, "Sure, it may be easy for me to avoid tobacco use but how do I know what's in the food I buy and the food I order at restaurants? Can I protect myself from unhealthy substances without the assistance of a government?" What it comes down to is this: if I'm willing to let the government ban the use of arsenic in food, why should I be uncomfortable with a ban on trans fats? Could it be that I cannot square that with the absence of a ban on tobacco product use?

I wonder if people even will notice that trans fats have disappeared from foods sold in Philadelphia restaurants, other than the asserted increase in price that is required by the use of replacement ingredients. I wonder if people will flock to restaurants in towns that welcome the use of trans fats because the food tastes better. I wonder if medical studies five or ten years from now will show measurable decreases in the rates of disease and death attributable to the ingestion of trans fats.

Of course, my entire philosophy could change if someone proposed a ban on chocolate. As best I can determine, the fat in chocolate is not trans fat.