Tax Relief Based on Age and Income?

More than a year ago, in New Pennsylvania Tax "Reform" Doesn't Add Up, I analyzed Pennsylvania's property tax reform legislation. Although I was far from impressed with the legislation in its entirety, my comments on one aspect reflected the opposite conclusion:

Under the legislation, senior citizens currently eligible for property tax relief through income tax credits will qualify for larger credits, in other words, more property tax relief. To their number will be added more senior citizens, because the income cut-off for this relief will be increased from $15,000 to $35,000. There are many retirees earning between $15,000 and $35,000 for whom property taxes are a severe burden. This part of the legislation is a worthwhile, and even noble, objective.

The relief, as I also pointed out, would not be triggered until the state began receiving revenues from casino operations.

Now State Representative John Perzel is introducing legislation that would use casino revenues to finance real property tax relief to senior citizens. According to Perzel's news release, his Older Pennsylvanian Property Tax Elimination Act, which carries the interesting acronym of OPPTEA, would eliminate the real property tax for homeowners aged 65 or older whith incomes of $40,000 or less. Unfortunately, I have not been able to find the text of the legislation. Thus, I don't know what Perzel means by "income." Is that Pennsylvania taxable income? Federal adjusted gross income? Some sort of modified adjusted gross income that includes tax-exempt interest? There are all sorts of "incomes" and some do not truly measure a person's economic status or ability to pay real property taxes.

According to this Delco Times story, some legislators are jumping on the OPPTEA bandwagon. Others have withheld judgment, until they "see it," a comment that suggests that I am not alone in my quest for the legislative language. It would not surprise me that the legislation has not yet been drafted and that there is no language.

Perzel plans to have "eligible seniors" send their real property tax bills to the state Department of Revenue, which would send a check to the school district. That does seem a bit less complicated than having senior citizens file for refundable credits on their state income tax returns. Presumably the Department of Revenue would cross-check the applicant's eligibility by looking at state income tax returns. How, though, does one distinguish a senior citizen who has not filed a tax return because she has no taxable state income from one who has not filed because he or she forgot to file or is evading taxes?

It is not clear if the funds that Perzel wants to use for this plan are the same as, or in addition to, the funds already earmarked for general real property tax relief. The Delco Times story quotes legislators who think the former and who think the latter. Again, there is a reason that legislative proposals are easier to analyze when the text of the legislation is available. It's more likely people can figure out what the proponent really wants to do.

Several years previously, in Killing the Geese, I addressed the issue in broader terms when a since-derailed plan to replace the property tax with loca earned income taxes and increases in the real property transfer tax was being touted as the remedy:

Yes, the real property tax poses a problem for people whose incomes are fixed and whose homes continue to increase in value. Real property taxes for these folks increase while their income doesn't. But let's look more closely. Is it really such a HARDSHIP if a person pulling down $300,000 in pensions and investment income needs to cope with a $400 real property tax increase? On the other hand, someone scraping by on social security and a small pension finds a $250 increase taking a meaningful chunk out of a $15,000 annual income. And let's not forget that a significant number of elderly no longer own homes, and in some cases, never owned homes.

The cry that real property taxes hurt the elderly is as misleading as the silliness the late Rep. Claude Pepper rode to fame. His mantra that "the elderly are poor" led to a shift in government outlay allocation that has left us with a nation in which poverty is rampant among children. The simple fact is that a person's age should no more be used as a measure of their economic status as should their hair color or lack thereof. And, of course, there are people who cannot be classifed as "elderly" for whom real property tax increases are a serious burden, though most young poor don't have the opportunity to own real property.

So the relief ought to be provided to those who need it, namely, the poor. This is what has been done with the state income tax. True, the definition of "poor" can and will fuel some debate, but it can be resolved.

In some respects, the issue has come full circle.

Property taxes are a burden to some citizens of Pennsylvania but they are not an unreasonable burden to all of them. They may be disliked. They may be an aggravation. They may be used to finance school programs with which some taxpayers disagree. But they are a serious impediment to homeowners on relatively low fixed incomes, who find themselves unable to buy necessities such as food and medicine because they need to pay real property taxes to avoid losing their homes.

So one question is why people under the age of 65 who are on fixed incomes and facing the risk of losing a home when real property taxes increase are ineligible for assistance? Think of the person on a social security disability pension, or receiving a small monthly amount from a structured settlement on account of a disabling injury. Ought not they, too, be helped? What's so magical about 65? Is it not an arbitrary number holding even less correlation with reality than 16, 18 and 21? In other words, it has become increasingly apparent, from recent scientific studies, that age alone tells us little or nothing about a person's pyschological, financial, intellectual, or emotional state.

Under the current plan, which will go into effect whenever the casino revenues begin to flow into the state treasury, property tax relief is shared by all homeowners, and amounts to a small, several hundred dollar, reduction in bills that often are in four, and sometimes five, digits. Perzel and several of the legislators who support OPPTEA think it makes more sense to eliminate the tax completely for senior citizens rather than make miniscule reductions in the real property tax bills of all homeowners. I'm not certain I agree that real property taxes ought to be totally eliminated for all senior citizens with incomes of $40,000 or less. There's no reason that they ought not be charged some small amount that remains fixed. Why do I think this? One of the legislators quoted in the Delco Times article points out that real estate taxes are a burden even for some senior citizens with incomes exceeding $40,000, because in some instances the tax bill amounts to 20% or more of their income. If senior citizen homeowners were required to pay a fixed, relatively small real property tax, it would be possible for senior citizens in the $40,000 to $50,000 income range to obtain some relief.

There is another technical problem with Perzel's bill. What happens if a senior citizen with "income" of $39,500 in year one, who benefits from total elimination of the real property tax, incurs an income increase of $600 in year two? This person would now be responsible for the entire real property tax bill, perhaps as much as $3,000, $5,000, or even $10,000. Those expert in drafting tax legislation call this a "cliff" provision. One extra dollar of income and the entire benefit disappears. Would it not be better to scale the relief? For example, senior citizens with "income" of $10,000 or less would get full property tax relief, or perhaps be required to pay $100. Seniors with incomes exceeding $10,000 would receive partial relief, receiving a decreasing amount of relief, that is, a smaller check on their behalf from the Department of Revenue to the school district, as their incomes increased. Thus, a $600 increase in income might translate into a $50 or $100 decrease in property tax relief and not a total elimination of the property tax relief.

Presumably, the amount of property tax relief for a particular real property tax year would be based on the senior citizen's "income" as reflected on his or her income tax return for the previous calendar year. It is difficult to imagine how any other arrangement could be administered in a sensible way.

Until one can figure out what Perzel means by "income" it is difficult to give these suggested improvements with more specificity. So here's an invitation to John Perzel: you are welcome to share with us the legislative text of your proposal. Let's see what it is that you are proposing, in specific rather than general conceptual terms.

Waiting a Bit Longer to Learn if Snipes is Guilty of Tax Fraud

I've commented previously on the ever-changing adventures of Wesley Snipes as he responds to tax fraud accusations. I started with The Tax Fraud Environment: Sniping at the Congress, and followed with Namibia: A Different Sort of Tax Haven? and The Snipes Tax Trial: A Circus in the Making?. Thanks to Paul Caron's TaxProf Blog for the heads up on the latest developments in the Snipes case.

According to the Ocala Star Banner, Snipes fired his attorney, and replaced him with Robert Bernhoft of Milwaukee, who then asked the court for a continuance. Bernhoft requested time to prepare the defense, and claimed that Billy Martin, the lawyer fired by Snipes, had committed "pretrial preparation failures." Martin disagreed, and in turn alleged that the firing was "a ploy" to obtain a continuance. The judge in the Snipes case also referred to the continuance motion as a ploy, asking Snipes and Bernhoft why they had not filed professional ethics complaints against Martin. One of Snipes' co-defendants, who represents himself, and the attorney for the other both agreed that a continuance was in order. The judge also was concerned that several continuances had already been granted in the case.

Shortly thereafter, according to this Hollywood Reporter story, the judge relented and granted the continuance. What changed his mind? He met with Snipes and was persuaded that there were "issues" between Snipes and Martin and that justice would be served by the continuance. Nonetheless, the judge made it clear that there would be no more continuances. The trial, originally set to begin on October 22, will now begin in January.

Martin has another famous client, one Michael Vick, who he represents in federal dogfighting charges. Bernhoft previously represented Snipes in a criminal paternity case, and succeeded in having the charges dropped. Neither attorney appears to restrict his caseload to tax work, which certainly cuts against the stereotype that lawyers are of two types, tax practitioners and anything-but-tax practitioners. Particularly in the area of criminal tax fraud defense work, it is not all that unusual to find the attorneys also representing people charged with crimes not involving tax matters.

Bernhoft has several very visible successful tax fraud defenses to his credit. He represented Joseph Banister, the former IRS agent, and Vernice Kuglin, the Federal Express pilot, both of whom had been indicted for failure to file federal income tax returns and to pay federal income taxes. He also obtained acquittals of 17 defendants in a trial more than a decade ago. He succeeded in the Kuglin case because he was able to persuade a jury that Kuglin's letters and inquiries to the IRS asking about the validity of the income tax corroborated the defense assertion that she wasn't trying to hide anything. The favorable verdict in the Banister case rests both on an arguably weak government case and the defense's ability to persuade the jury that the defendant genuinely believed that the income tax is invalid.

Bernhoft has an interesting tax history. On July 27, 1999, the United States District Court for the Eastern District of Wisconsin adopted the recommendation of the federal magistrate that the court grant the government's motion for summary judgment and its petition for a permanent injunction against Robert Bernhoft and Robert Raymond, prohibiting them from engaging in any and all of the following activities:

1. Inciting other individuals and entities to understate their federal tax liabilities, avoid the filing of federal tax returns, or avoid paying federal taxes based upon (a) the false representation that wages, salaries, or other compensation for labor or services are exempt from federal income taxation, or (b) any other such frivolous claim with respect to the scope of federal income taxation, or (c) any false or fraudulent claim regarding the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit for federal income tax purposes;

2. Advertising, marketing, or selling any documents or other information advising taxpayers that wages, salaries, or other income not specifically excluded from taxation under Title 26 of the United States Code are not taxable income;

3. Providing forms for or assisting any individual in the preparation of false Internal Revenue Forms W-4, W4E, 1040X, and any other form, return, or declaration claiming that the taxpayer is exempt from federal income taxation or entitled to excessive withholding allowances;

4. Filing, providing forms for, or otherwise aiding and abetting the filing of frivolous Freedom of Information requests with the Internal Revenue Service; and

5. Engaging in any other conduct subject to penalty under Section 6700 of the Internal Revenue Code, Title 26 of the United States Code.

When the defendants appealed, the decision was affirmed, and the Supreme Court refused to take the case. Raymond v. U.S., 78 F. Supp. 2d 856 (E.D. Wisc 1999), aff'd, 228 F.3d 804 (7th Cir. 2000), cert. denied, 533 U.S. 902 (2001).

It appears as though Bernhoft has switched gears, given up on marketing tax protest materials, and turned to taking on high profile tax fraud cases. He seems adept at getting juries to acquit tax fraud defendants. Of course, what isn't known is how many clients have pled guilty or otherwise failed in their attempts to escape the charges. It will be interesting to see how he fares in the Snipes case. Because of the continuance, we must wait a little longer. Hopefully the delay will improve the chances for the correct outcome, whatever it may be. But before the outcome is known, surely a variety of significant evidence will be brought forward. This story is far from over.

Reason #2939 I Want to Teach Property Law

A colleague sent me an email the other day, and it added to the list of reasons I want to teach the first-year property course. The email referred me to a story and came with an introductory tag line: "Talk about great exam questions!" Oh, indeed, there are. It's true, we law faculty don't need to make things up when we need hypotheticals. The world just keeps on giving.

The story has been reported in more than a few places, but the email that sent me to the BBC America version. Though the BBC titled its piece "North Carolina Pair Feud over Leg" I think "Tales of the Lost Leg" has a better movie title ring to it.

The facts are fairly simple, if not very bizarre. After he was in a plane crash, John Wood's leg was amputated. He kept the leg so he could be "buried as a whole man when he died." He put the leg into a barbecue smoker and then put the smoker into a storage facility. For some reason, Wood stopped paying the rental fees for the storage facility, so the storage company seized the storage locker contents and sold them at an auction, using the proceeds to pay Wood's storage fees. The purchaser of the items, Shannon Whisnant, looked inside the smoker and found the leg. He gave it to the police, and after determining no crime had been committed, they handed it off to a funeral home so that Wood could retrieve it.

In the meantime, Whisnant was collecting money from people willing to pay to look inside the empty smoker. That inspired him to ask the funeral home for the leg. The folks there refused, so Whisnant approached Wood and proposed joint custody of the leg, with a sharing of profits. Wood rejected the offer and demanded the return of his leg. Whisnant threatens legal action if the leg is not returned to his possession, claiming he has a receipt for its purchase. According to this more recent report, Wood and Whisnant have agreed to take their case to the Judge Mathis show, and were scheduled to tape the episode last Friday. According to this story, the leg is not at the funeral home, Whisnant says he doesn't have it, and also says he has an idea where it is.

Most folks who haven't been to law school would ask, "OK, so who gets the leg?" Perhaps some lawyers would simply ask that question. But there are all sorts of questions that need to be answered. For the moment, assume that the contract between Wood and the storage company was valid and enforceable, and that there were no improprieties with respect to the auction at which Whisnant made the purchase.

Here are the questions that need to be answered:

1. Did Whisnant obtain legal title to the leg by purchasing the contents of the storage locker even though neither he nor the storage company knew the leg was in it?

2. If so, are there any statutes barring the sale of body parts that would invalidate the alleged sale?

3. Did Wood's storage of the leg in the locker violate any health or safety ordinances or similar laws?

4. If so, does the violation keep the leg out of the bundle of contents that the storage company was permitted to sell?

5. Did Whisnant abandon title to the leg when he transferred it to the police?

6. Did the funeral home undertake any fiduciary responsibility to Wood when it took possession of the leg?

7. How much of the amount paid by Whisnant for the bundle of property sold by the storage company is allocable as his tax basis in the leg?

8. If Whisnant is held not to own the leg because he transferred it to the police, is he entitled to a loss deduction equal to his tax basis in the leg?

9. If Whisnant is held not to own the leg because he transferred it to the police and is not permitted to claim a loss deduction, is he entitled to a charitable contribution deduction for the value of the leg?

I am certain there are more questions. For the moment, those are enough to keep any law student writing for an hour or two.

As to the outcome: Forgive me, but it seems Whisnant ought to let Wood have his leg, no matter what "the law" might say. Whisnant has one motive, and only one motive, namely, money, and he's trying to bank not on his own efforts and contribution to society but on the misfortunes of another person and the unexpected inclusion of an amputated leg in a bundle of items purchased at an auction. Even if Whisnant is poor, the decent thing to do is to back down. Now I need to go find out what Judge Mathis decides.

If you are wondering where all the puns and word plays are, I've been nice and resisted the temptation. Actually, I've been trumped. A marvelous use of a variety of anatomical terms and leg-related words, not unlike my style of toying with the language, appear in the "What kind of sauce would you like on that?" account of the story on the Crooked Paws Retreat blog. Yes, you read that right.

All I'll say is that when Thanksgiving, which is less than two months away, finally rolls around, I'm going to be ready with all sorts of tales (ouch) when someone (probably me) is carving the turkey and says, "Who gets the leg?" Well, I'll also say that I might be risking access to the dessert table if my smart-aleck comments get people's noses out of joint.

Yet More Reasons to Dislike Grading Curves

Yes, indeed, I detest grading curves. Supposedly they make life easier for graders, but in the long run they are deceptive. For me, the best measure is a comparison of performance against a standard. If there is some reason to rank students, they can be ranked in accordance with their accomplishments scored as a percentage of what could have been done. To restrict the A grade to an artificial percentage of a class is wrong for two reasons. First, it makes some students appear to be less accomplished than they are simply because their scores are a tad lower than the lowest score in the selected percentile. Second, it can make unaccomplished students appear more competent than they are because someone needs to be in the top x%. Grading curve defenders will point to the various exceptions and wrinkles that accompany curving rules, to demonstrate that "when appropriate" a grader can reduce the number of A grades or even eliminate them entirely. That's not enough.

The goofiness of grading curves surfaced recently in Marquis v. University of Massachusetts. Brian Marquis, a student enrolled in the University of Massachusetts College of Social and Behavioral Sciences, sued the university, some of its officials, the chair of the Philosophy Department, and a teaching assistant, because the teaching assistant lowered Marquis' grade based on a grading curve. According to the complaint, Marquis enrolled in Philosophy 161, Problems in Social Thought, taught by Jeremy Cushing, a teaching assistant. On the first day of class, Cushing distributed a syllabus that explained the grading policy:

Each exam will be worth 25% of the final grade for a total of 75%; The response papers will be worth a total of 20% (or 5% each). Each paper will receive a number grade (from 0-5) in .5 point increment; The remaining 5% is for participation in class.

Marquis finished the course with response paper scores of 5, 4, 4, and 4.5, for 17.5% out of 20%. His exams earned 23, 22.5 and 19.5 out of a possible 25%, for a total of 65% out of 75%. He earned 5% for class participation. His total score of 92.5% 'translat[ed], by universally accepted standards, into an A- letter grade." The complaint did not explain who set the "universally accepted standards" for converting percentages into letter grades.

When, after the semester, Marquis looked up his grade on the university's data system, he saw that a grade of C had been entered for the course. He contacted Cushing and asked for either an explanation or a re-evaluation. In his response Cushing wrote, "This brought your final grade to an 84 for the class. The numerical grades were on the high side .. but I thought your grade (of C) was a good reflection of your work. To make the grades more representative of student performances, I set a curve (or, more accurately, I drew up a new grade scale). There were two other students that had grades in this range, one with an 83.5 and one with an 84.5, both of these students also received a grade of C. In your case, the grade assigned by scale seemed to fit." When Marquis complained to the University Ombudsman, she replied, "I would urge you to accept this grade and continue on with your course work as these are no grounds for an academic grievance. For example, 84 points could range anywhere from a 'C' to possibility an 'A-,' at the extreme end."

Marquis alleged that Cushing's grading was arbitrary and capricious. He alleged that when he applied to graduate schools he would be disadvantaged, because C grades are viewed unfavorably by graduate programs, in part because they suggest the student is lazy and inattentive to studies. He alleged that the grade pretty much squashed his chances of getting into graduate school.

Marquis rested his case on several grounds. He alleged violations of the Massachusetts Consumer Protection Act. He alleged violation of his First Amendment rights because the ombudsman shut down the grievance procedure. He alleged violation of the Fifth Amendment because he was denied a chance to appeal and because the grading infringed on his rights by taking of liberty and property without due process. Marquis also alleged breach of contract and breach of special relationship. He added allegations of reckless action, conspiracy, deception, interference with civil rights, promissory estoppel, intentional infliction of emotional distress, and tortuous interference with economic advantage. He sought certification of the litigation as a class action.

In their Memorandum in Support of Motion to Dismiss, the defendants argued that Marquis had failed to state a claim upon which relief may be granted, had ignored existing judicial authorities rejecting many of his specific claims, had not followed specific procedural prerequisites for certain claims, had not demonstrated a contractual relationship with the individual defendants, and failed to allege facts supporting his tort and constitutional claims. The defendants argued that a course syllabus does not create binding contractual rights. They also alleged Marquis had not completed service of the complaint within the required time.

According to this Boston Globe story, District Court Judge Michael A. Ponsor dismissed the suit. Marquis has indicated he is considering an appeal.

On the law as it stands, the court was correct. Unfortunately, the law provides no useful remedy, in fact no remedy, for students harmed by the sort of situation Marquis encountered. It is unfortunate that "the law" leaves students at the mercy of educational institutions, aside from obvious instances of racial, gender, religious, or similar discrimination.

Of course, if educational institutions did things the way they should be done, these sorts of issues would not arise. The Marquis case is not an instance of a student who is unjustifiably unhappy with his or her grade. It involves a serious grading problem.

Let's treat the case as the court had to treat it, namely, we must assume that the facts alleged by the plaintiff are true. As best as I can tell, the defendants did not dispute any of the facts that bear on my criticism of what happened.

Cushing gave the students a partial explanation of how the course would be graded. To his credit, he did more than some teachers, especially college and university faculty, provide in this respect. What he omitted, of course, was the connection between the acquired percentages and the letter grades. One might assume that a 100% earns an A, but after reading what happened in the Marquis case, I'm unwilling to make that assumption. The response of the ombudsman to Marquis suggests that there is very little correlation between the level of achievement measured against a standard and the letter grade assigned by the grader. Professional educators tell us that a good grading system lets the students know what is expected and what grades can be earned when a student performs at a particular level. My students know that I have a benchmark, that roughly 75% or better is equivalent to an A, that 20% is the minimum to earn a passing grade, that roughly 50% is equivalent to a C. The law school has in place a policy that requires faculty to explain the bases on which grades in a course are earned. Thus, faculty must explain if the grade is based entirely on an examination, a paper, semester exercises, presentations, or some combination, and whether and how class participation affects the grade. Faculty are not required to explain how performance translates into a letter grade, though a few of us do provide that explanation.

Cushing then altered the grading system without notifying the students. What appeared to be a 92.5% became, somehow, and 84%. Professional educators agree that this is a terrible thing to do. To leave students thinking that their total scores will be based on a published explanation but to use a different grade scale without telling the students is appalling. Perhaps the law has no remedy, but ought not educational institutions, especially huge universities that have education departments, think twice about the adverse ramifications of faculty engaging in this sort of changing rules in the middle of the game?

Cushing claims he set a curve, or, more accurately, drew up a new grade scale. Nowhere in his explanation on the course syllabus does he mention a curve. Yes, he threw his students a curve ball when he introduced the curve. Was it really a curve? In a sense, yes, it was. Why did he not inform the students at the outset that he would be doing this? I have an idea, and I'll get to that in a moment.

Cushing gives as one reason for altering his grading his intent or attempt to "make the grades more representative of student performances." If an 84 or a 92.5 is a C, that leaves very, very fine lines between the C and C+, the C+ and the B-, the B- and the B, the B and the B+, the B+ and the A-, and the A- and the A. Even if the only grades are C, C+, B, B+ and A, that's a lot of line drawing to squeeze into a small numeric range.

The other reason is that "[t]he numerical grades were on the high side." So? High scores could mean that students learned more than was expected, or somehow figured out how to do a better job writing exams than did previous students. They could mean that a disproportionate number of very bright and high achieving students enrolled in the course for this particular semester. Cushing's explanation, though, suggests that what happened was that he over-valued responses and assigned more points than hindsight would admit. Well, that happens. The solution is to get better at designing exam questions and assignments, and to learn more about grading. The solution is not to change the benchmarks in the middle of the course, or after the exams and assignments are completed.

Students don't realize it, but designing examinations, semester exercises, assignments, and problems is a very challenging task. If the question inadvertently reaches too many issues, or if there are insufficient facts, or if the analysis requires students to know something beyond the scope of the course, the measurement of student achievement will be skewed. Good testing requires an understanding of what the course is designed to do, and requires that the tester have specific goals in mind with respect to each question or problem. This is something that professional educators learn in their education courses.

What Cushing did is typical of the tribulations afflicting first-time teachers who do not have education degrees (and perhaps some who do). Cushing is a teaching assistant. I wonder if anyone was mentoring him with respect to examination, testing, and grading. In many respects, the institution failed Cushing no less than, and probably more than, Cushing failed the institution and the students. Universities throw graduate students into teaching roles because they're inexpensive, and because their use frees up faculty for research and other activities not directly connected to teaching. So long as the law turns the other way when students suffer because of institutional inadequacies, the quality of higher education in this country will continue to suffer.

Grading curves hide a lot of errors in examination design, defects in questions, flaws in scoring, and shortcomings in converting scores to letter grades. Grading curves provide an excuse behind which faculty can hide. Grading curves distort the evaluation of student work. The problems in the Marquis case go way beyond grading curves, and yet grading curves took center stage because the grader resorted to one when the rest of the evaluation system broke down.

When speaking in opposition to grading curves, I use an analogy that curving advocates have yet to negate. If 30 people enter a race, and 10 of them run a mile in fewer than 4 minutes, so be it. If the benchmark for an A is a 4-minute mile, and if in past and future races, only 3 or 4 runners run that quickly, it ought not diminish what the 10 runners have accomplished. If it is necessary to select the fastest runner for a gold medal, that's fine, even though 9 other very fast runners won't take the gold. What is important is the achievement and not the rank. I'm told that those seeking to hire lawyers (and perhaps the same is true of those seeking to hire people with other degrees and majors) rely on rankings. That's dangerous. They should rely on grades, assuming, of course, that the grades reflect what the student has accomplished as against a benchmark. Being number one means only that one has higher grades than everyone else, but it doesn't necessarily mean a person is all that accomplished. Similarly, being number 50 out of 100 doesn't sound all that great, but if the those holding the top 49 spots are supergeniuses, one doesn't necessarily go wrong hiring number 50.

Grades matter. So, too, unfortunately, do ranks. Grading curves distort the evaluation process. Every excuse that I have been given for the use of grading curves comes across as a method to mask a flaw in testing design, scoring, and the setting of benchmarks. To quote someone who is a teacher and who teaches teachers, when she learned I had been appointed to a law faculty, "But you don't have an education degree." "No matter," I replied, "I don't think any of us do." Her response, something to the effect that this was a horrible or at least unsatisfactory situation, rings true to this day, perhaps even more loudly.

Some might argue that "the government" should require institutions of higher education to mandate education courses for their faculty, as is done for most K-12 teachers. I say, no, if institutions of higher learning can't figure that out for themselves and take the necessary steps on their own, they are setting themselves up for long-term failure, measured by the achievements of their graduates. But if the government is not to be the source of pressure, who is? The answer is simple. Those paying the tuition should demand that they get what they pay for, and that includes sensible grading standards, well-designed evaluative tools, and prohibition against changes in grading methods and policies after the end of the drop-add period. Some institutions do follow these best practices. It's time for the rest of them, no matter their rank or reputation, to get on board. The law may not demand it, but common sense, decency, fairness, and truth so require.

When Lawyers Fail to File Tax Returns

It ought not be difficult for people to understand the unpleasant ramifications of failing to file tax returns. It ought to be very easy for lawyers to understand that failure to file tax returns is unwise. It is particularly distressing when the failure arises not from ignorance or negligence but from a deliberate decision to disregard the filing requirement.

In previous posts I have shared my thoughts with respect to particular instances involving attorneys who fail to file tax returns. In Some Aspects of Tax Law Aren't Complicated, which addressed attorneys who allegedly failed to report gross income, I commented,

Despite the not uncommon occurrence of lawyer being indicted for failure to file tax returns, each time such a situation comes to my attention the bewilderment reawakens. Why? By now every attorney should be aware of the filing requirement, should be aware of what happens to those who don't comply, and should take steps to ensure he or she doesn't go down the same unwise path.

In Noncompliant Tax Attorneys Are Dangerous to the Tax System, I described the Tax Court's granting of a motion for summary judgement by the IRS with respect to an attorney who did not file tax returns and who represented at least two other taxpayers who also failed to file tax returns.

The problem extends beyond a small handful of noncompliant attorneys. Even among tax lawyers, the problem is significant. As I noted in Tax Practitioner, Heal Thyself, the IRS reported that 8.5% of tax attorneys failed to file a federal income tax return for the last year before the statistics were compiled. In Just a Mistake?, I commented on a tax lawyer who entered a guilty plea to a charge of tax evasion.

Now comes news that a former partner in a prominent New York law firm has pled guilty to charges that he failed to file New York city and state income tax returns. According to the new release, "As a result of the plea, the defendant will pay $1.5 million in taxes and criminal fines to the city and state and be sentenced to 45 days in jail." But it's worse. About a week ago, the attorney resigned from the bar. How sad. He wasn't a tax lawyer, but surely if he needed tax advice there were tax lawyers in his firm.

It's worse. According to the district attorney's news release, "The investigation also revealed that the defendant signed a document at the request of his law firm in which he represented that he had filed his federal and state tax returns and that he had paid his tax liabilities for the previous year." Could the attorney have thought he filed the returns? Perhaps if one year was in issue, it could have been a matter of a lost mailing, or an envelope that dropped behind a desk or cabinet. But according to the news release the attorney had not filed the city and state returns since 1998, and allegedly since 1982. What isn't clear is whether he filed federal tax returns. Was the attorney in financial difficulty? There's nothing to indicate an answer one way or another.

As I pointed out in Tax Woes for Philadelphia Restauranteur, if the thought of not filing a tax return is prompted by financial difficulties, the course of action is clear:

Each semester I explain to my students that the worse thing to do when in financial trouble is to avoid paying taxes by hiding income. It's better to file a return without paying the taxes. No fraud, no crime. Lots of aggravation, but no jail time.

To that I should add, "No fraud, no resignation from the bar, no destruction of one's career."

Somewhere along the line, law students are told that they have an obligation to file tax returns. Some learn this before they reach law school, and at some point during law school all of them hear it. But are they listening?

What is it that law schools can do to instill in their students a commitment to filing tax returns? I don't know. It's not as though law schools are telling their students not to file. It's not as though law schools are not telling their students the stories of what can happen when tax returns are not filed. It's not as though law schools aren't telling their students that if they get into financial difficulties they should file their returns and request a payment arrangement.

Perhaps sometimes someone's brain just flat out misfires. Perhaps illness causes memory lapses and bad judgment. A lawyer's professional colleagues can help by keeping track, just as the New York attorney's firm asked specifically about the filing of tax returns and the payment of taxes. It is unlikely, though, that illness accounts for years of noncompliance. Sometimes, sad to say, it's an inability to comply and a defiance of law. Those are not good character traits for lawyers to have.

Selling Government Revenue Streams: A Bad Idea That Won't Go Away

Early in the year I shared my reactions to Governor Rendell's proposal to lease the Pennsylvania Turnpike to a private company in order to generate a temporary surge in cash flow. In Selling Off Government Revenue Streams: Good Idea or Bad?, I asked some questions:

• What happens if the private company wants to raise tolls more often and more steeply?
• Does the length of a lease matter?
• What happens if the private company fails to maintain the road properly?
• And what happens when the road, if leased, is returned to the state at lease end, or earlier, in poor condition? Who pays?
• 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?
• Rather than sell off public assets, why not impose tolls on other limited access roads that require government expenditure?
• 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?

In that commentary, I called for "wide-open, highly publicized debate" even though a careful reading of my analysis discloses my opposition to the sale of the goose that lays the golden eggs. In a follow-up commentary, Are Citizens About to be Railroaded on Toll Highway Sales?, I called for "a referendum at the next election." I noted that polls showed widespread lack of support for the idea of leasing the turnpike.

Shortly thereafter, the governor formally presented his plan to the legislature, and I shared my comments in Turnpike Cash Grab Heats Up. As I had in Selling Off Government Revenue Streams: Good Idea or Bad?, I called for user fees, in the form of tolls, on the major state highways, particularly those in need of repair because of high traffic volume. I mentioned the mileage-based road fee that has again moved into the spotlight, as I described earlier this week in Mileage-Based Road Fees, Again.

The legislature rejected the turnpike lease idea, and instead enacted a toll on Interstate 80, to go into effect next year. Within minutes of its enactment, the provision came under heavy fire from people who want Interstate 80 funded by those who don't use it. Arguing that a toll would hurt businesses and residents near the highway, politicians and business leaders from the area of the state through which the highway runs embarked on a campaign to eliminate the tolls before they go into effect. Two members of Congress from the area introduced legislation in Congress seeking a federal ban on I-80 tolls. It's interesting that residents and businesses near the state's toll roads have prospered, without having the chance to impose the cost of their use of the toll road on people and businesses elsewhere. It is amazing how difficult it is for those with a long-term unfair advantage to reconcile with the idea of giving it up.

So what's a governor to do? Choice one: speak the truth, educate the citizens, point out the equity of asking people who use I-80 to pay for what they are using, show courage in explaining why the I-80 free ride must end, expose the turnpike lease proposal for what it really is, and, of course, risk losing votes and aggravating politicians. Choice two: cave in, let the whining from the free-ride beneficiaries carry the day, open the doors to the vultures waiting to take over the turnpike, and let the majority of the state's citizens end up on the short side of the road cost ledger. Tough choice? Considering that the governor is in his last term, surely maximizing votes in the next election wouldn't affect his decision, unless, perhaps, he has his eye on higher office. There's a clue here for political observers, because the governor, according to this Philadelphia Inquirer story, has revived the turnpike lease proposal.

This time, there are 34 outfits lined up to get in on the big give-away. Let's face it. No private enterprise is going to jump in on this deal unless there's money to be made. Lots of money. And if there's lots of money to be made, that means toll revenue will exceed the payment to the state and the cost of operating the turnpike. Would it not make more sense for the state to retain control and follow one of two alternatives? Yes, it would. The state could charge the tolls that the private company would charge, and use what would be the profit to fund road repairs. Or the state could reduce the tolls to an amount necessary to cover the cost of operating the turnpike, so that drivers aren't contributing to the profits of some cash grabber.

The boondoggle implicit in the proposal is readily apparent from an analysis of the "suitors" seeking to become the turnpike lessee. Almost all are financial enterprises, management companies, and engineering firms. Among them are several toll-road management companies, who somehow think that they can extract money that the Turnpike Commission hasn't found. In other words, if they take over, expect huge toll increases, not to fund public highways, but to line the pockets of shareholders and highly compensated company officers. One of these companies is from Australia. Another is from Spain. Is there some sort of shortage of Pennsylvanians capable of managing toll roads? These two companies, by the way, jointly leased the Chicago Skyway and the Indiana Toll Road. Recently I was on the latter road. Unlike 2005, E-Z Pass no longer is available. Drivers must sit in a queue to collect a ticket and to pay a toll. This is an improvement? What nonsense. Some folks in Indiana just got raked over by the slick sales pitches of these "management" companies, whose claim to the word "manage" is that they manage to take cash and time from drivers on the Indiana toll road.

What makes an investment firm qualified to operate a toll road? These money handlers seeking to dip into the turnpike's revenue stream include groups from Canada, India, and Switzerland, and several from elsewhere in the United States. Again I ask, is there no one in Pennsylvania capable of operating the turnpike? Maybe the good news is that people in Pennsylvania aren't experts in the smoke-and-mirrors dance that characterizes the "lease to private enterprise" gimmick. Perhaps the Defense Department's experience in leasing out government functions to Blackwater has a lesson for the Pennsylvania legislature?

Take a look at the list of enterprises trying to get in on this cash cow deal. It's in the the Philadelphia Inquirer story. Will Pennsylvania Turnpike users be better off if the road is managed by Citi Infrastructure Investors, or the Canada Pension Plan Investment Board? How about AIG Financial Products Corp. or HH Capital Advisors? Perhaps JE Jacobs or Merrill Lynch bring years of toll road management experience to the table? Think of all that Transurban USA Inc. or UBS Investment Bank Infrastructure Fund could do to fill potholes.

Folks, these companies exist to make money. The only way they can make money is to charge tolls that are higher than the sum of the cost of operating the turnpike plus the amounts advanced up front to the state. In substance, these companies are lending money to the state and charging the equivalent of interest at astronomical rates. Their presentations are slick, but not unlike those made to any other entity or person in need of a quick cash fix. Pennsylvania can do better than to mortgage its future and sell off the well-being of its citizens.

Funding the Infrastructure: When Free Isn't Free

Two months ago, a bridge carrying an Interstate Highway over the Mississippi River in Minnesota collapsed, killing more than a dozen people and causing tens of millions of dollars in economic damage. Considering that the bridge was carrying heavy traffic, it is amazing that the death toll wasn't much higher.

From that tragedy came at least one lesson. This nation had best repair its infrastructure, particularly highways and bridges. The catch? The repairs cost money. Where will the nation get the money it needs for this task?

That the repair task needs to be accomplished isn't debatable. Bridges, highways, and other infrastructure is deteriorating quickly as maintenance is deferred, as traffic loads increase, and as highway funding decreases in inflation-adjusted dollars. It doesn't take Einstein to do the math, or the physics. It makes far more sense to spend a dollar today to prevent future loss than it is to do nothing and encounter thousands of dollars of loss, to say nothing of injuries and deaths, a month, year, or decade from now.

So what's the problem?

As best I can tell, it's a matter of more politics and ignorance, with some incompetence tossed in for flavor. Perhaps there is some greed in the mix, because the notion of paying for what we use appears to be heresy to some people simply because they don't want to pay.

According to a story from almost a month ago, Rep. Oberstar, DOT's Peters Split on Funding Plan, a Congressional proposal to increase the gasoline tax to fund what clearly are necessary repairs has run into opposition from the Administration. The proposal calls for a 5-cent per gallon tax, a relatively small amount when compared to the cost of gasoline. The plan includes other provisions, but I will leave those administrative and engineering questions to others, at least for the moment.

I am baffled by the response from the Transportation Secretary Peters:

It makes no sense to my mind to raise the gas tax at a time when we are rightfully exploring every conceivable mechanism to increase energy independence and clean our air, promote fuel economy in automobiles and stimulate the development of alternative fuels as well as reducing emissions.... We should be encouraging states to explore alternatives to petroleum-based taxes, not expanding the country's reliance on them by increasing the gas tax.

Why would raising the gasoline tax pose a problem to the process of searching for alternative energy? Would it not, in fact, encourage that process by making the alternatives appear less costly compared to gasoline? Does not an increase in the tax on gasoline, like the imposition of a tax on any product, cause demand to fall? Consider the opposite: reducing taxes on, or subsidizing a product, which would increase demand.

Perhaps the Secretary's last sentence suggests a preference for some other sort of highway and bridge funding. As I noted in Monday's Mileage-Based Road Fees, Again, it probably makes sense to replace the gasoline tax with a mileage-based highway use tax. But until that approach is ready for prime-time, and it's not, the nation needs to ride the funding source that is in place.

But more recently, according to Boxer, Peters Clash Over Bridge Safety, the Transportation Secretary told the Congress, "The answer is not to spend more. It is to spend more wisely." This perspective makes sense only if it can be demonstrated that highway transportation funds are being wasted, stolen, or embezzled. It doesn't make sense to argue that money currently spent on highways should be shifted to bridge repairs, because we'll next be reading about 30 vehicles falling into a sinkhole.

In the meantime, we're told in Bush Opposes Raising Gas Tax for Bridge Repairs that the President responded to the proposal by saying, "Before we raise taxes, which could affect economic growth, I would strongly urge the Congress to examine how they set priorities.” I have a news alert for the President. Failure to fund infrastructure repair, sooner rather than later, also will affect economic growth. When enough bridges collapse and highways fall apart, the trucks won't be moving products, such as fuel, food, clothing, and, yes, even military supplies. If you think that won't affect economic growth, you don't understand economics.

Better yet, take a lesson from the governor of Minnesota. According to Bridge Collapse Revives Issue of Road Spending, during the past two years the governor of Minnesota twice vetoed increases in the state gasoline tax intended to pay for transportation needs. Reportedly, he is now reconsidering his position and his approach to these issues.

In all fairness, the current mechanism for allocating gasoline tax receipts needs to be purged of politics and linked to need. Somewhere along the line, members of Congress gave themselves the right to specify that certain portions of the fund get used for specified projects. These designations often failed to reflect need, but instead caused construction of multi-lane highways in rural areas, bridges to nowhere, and interchanges used by few vehicles. To make matters worse, some highway transportation funds were diverted to other uses. Bicycle and pedestrian paths were funded, whether or not demand existed. New public transportation developments in sparsely populated areas were constructed, while existing and heavily-used public transit systems continue their shoestring operations.

The problem with rejecting tax increases until the funding allocation system is fixed is that more people will die, more people will be injured, more property damage will occur, and more transportation bottlenecks will stifle the economy while Congress wiggles and squirms and the Administration and politicians wave slogans in the voters' faces. "No tax increases" sounds great until one realizes it's not unlike the "No more spending" family budget vow that looms in the way of paying for the baby's food. Perhaps "No more unnecessary tax increases" would resonate with those whose ability to analyze economic problems goes beyond three-word sentences.

The fact that I, like most others, do not like taxes does not mean I will reject them when they are necessary. It would be better, and easier, to talk about "user fees" because that's what the federal gasoline tax and the proposed mileage-based road fees are. Properly structured, set at a price that reflects the true cost of building and adequately maintaining a highway, bridge, interchange, or other facility, these user fees would not only move the debate from the silly place it now occupies but also would make the prospect of additional bridge collapses and road failures the highly unlikely outcome most people thought was the case.

Any other approach does not bode well. Paying for repairs with borrowed money increases the nation's debt load, making it more likely that the foreclosure will destroy the country. Ignoring the problem and not spending money guarantees death and destruction on a far larger scale. Abandoning the infrastructure simply hastens the demise of the economy and ultimately the country. Unfortunately, the time has come to pay the price for so many bad transportation infrastructure decisions during the past 50 years. The even more unfortunate aspect of the matter is that most of those who made the bad decisions aren't around to see the consequences of their vote-pandering and ignorance or to deal with the consequences. The only good part of this is that voters will have a chance to ensure that those bad decision makers still around are deprived of additional opportunities to make a mess of things.

Mileage-Based Road Fees, Again

Larry Staton, who has been reading MauledAgain for almost as long as it has existed, has passed along another tip that not only is enlightening but timely. Larry referred me to a USA Today article, Drivers Test Paying by Mile instead of Gas Tax. The article explains that beginning early in 2008, six states will permit selected drivers to test a system that imposes road use fees based on mileage in lieu of a gasoline tax based on gallons consumed. In the experiment, drivers will continue paying the gasoline tax and receive hypothetical invoices for the amounts that they would have paid under the mileage-based fee. This will permit them to make comparisons and determine which approach was costlier to them. The people running the experiment want to get information on how people would react if this system were in place. In addition to this six-state experiment, several other states either have conducted their own experiments or are making plans to have appropriate state agencies conduct them.

I discussed the mileage-based road fee in Tax Meets Technology on the Road, in which I described both the advantages and disadvantages of the mileage-based road fee. Ultimately, I came out in favor of this approach. One of the potential disadvantages, government acquisition of information about where a driver has been, turned out to be a non-issue in Oregon's experiment. It's interesting to note that a concern of such significance to academic theorists turned out to be unimportant to 91 percent of the experiment participants. As I noted in my post, it was not an issue for me because nothing in that sort of information about my driving would be of interest to anyone, and it might come in handy if I needed to prove I was not in some place.

The issue is timely because some states are contemplating raising existing highway tolls and/or imposing tolls on currently toll-free highways. In Pennsylvania, a debate is raging over the proposal to make the Pennsylvania portion of I-80 a toll road. I'm planning to discuss that issue in greater detail as the story develops. The discussion, at least to date, appears to omit analysis of the critical component, namely, assignment of highway costs to those who generate the need for governments to pay those costs. The mileage-based road fee, especially one that reflects vehicle weight, is, if nothing else, much more equitable.

My only gripes are that the experiments should be much more inclusive, and that they should be in place for shorter periods of time. There's much more to be learned by trying the experiment in two or three dozen, or all, states rather than six. In all fairness, those running the experiment may have funding limitations. The experiments should provide the requisite data in a period shorter than the planned two years, and if the date can be accumulated in one year, replacement of the gasoline tax with the mileage-based road fee would be one year closer.

As pointed out in the USA Today article, it seems inevitable that the gasoline tax will be set aside in favor of mileage-based road fees. The advantages of the latter far outweigh the disadvantages. The reasons for making the change are compelling, and, in this instance, the sooner, the better.

Maule on Legal Education, 2007 Edition

This is about a month late, but fortunately I remembered it when it popped up when I googled my full name the other night. So it was moved to the front of the "waiting to be blogged" line.

In the year since I posted Maule on Legal Education, 2006 Edition, another column has been added to the list. That's pretty much the norm, especially because there are only so many Gavel Gazette soapbox spots available and I ought not appropriate more than my share. Of course, the powers-that-be aren't going to let me turn the front page of the law school newsletter into my own weekly column.

So, once again, here are the links, in chronological order (and with the latest URLs, which again were changed):

Money for Nothing and Work for Free?, The Gavel Gazette, at 1 (March 5, 2001)

Crumbling Myths & Dashed Expectations, The Gavel Gazette, at 1 (Sept. 3, 2002)

Learning to Teach and Teaching to Learn, The Gavel Gazette, at 1 (Sept. 29, 2003)

Time CAN Be on Your Side. Or at Least by It, The Gavel Gazette, at 1 (Feb. 16, 2004)

Doing Puzzles While Learning & Practicing Law, The Gavel Gazette, at 1 (Sept. 20, 2004)

Up All Night = Grades Go Down, The Gavel Gazette, at 1 (Nov. 7, 2005)

Thinking About Thinking, The Gavel Gazette, at 1 (Feb. 5, 2007)

No matter how busy a first-year student thinks he or she is, the few minutes invested in reading these short essays and grabbing the free advice in them will provide worthwhile payback in the form of countless hours saved from using more efficient study habits, from figuring out how to allocate time, and from avoiding mistakes that require investment of additional time to remedy. These essays have been republished in other media, at least two have been reprinted, several have been quoted, at least seven law faculty at other schools distribute one or more of them to their first-year students during orientation or the first week of class, and collectively they have been cited at least several dozen times.

Yes, the eighth in the series is taking shape.

Property Tax Assessments: Really That Difficult?

Few people like to pay taxes, even if they're receiving more from the government than they're contributing, and even fewer like to experience a tax increase. So it's no surprise that the tax reform group, Philadelphia Forward, has urged all Philadelphia real property owners to file appeals in response the city's reassessment of their properties for real property tax purposes.

Philadelphia Forward advocates use of full market valuation for property tax purposes, something that the city of Philadelphia does not use. Under full market valuation, properties are assessed at full fair market value, and the tax rate is applied to that assessment. The advantages of full market valuation include fairness, ease of determining whether properties are being properly assessed, and logical correlation between taxation and value. The disadvantage is that costs money and takes time to pin a fair market valuation on each property.

Citing the Clifton case that I discussed a few months ago in An Unconstitutional Tax Assessment System, Philadelphia Forward explains that Judge Wettick found that "Using income tax terminology, one out of every four Philadelphia property owners was in a tax bracket of at least 3.35% and one out of every four property owners was in a tax bracket that did not exceed 1.42%." It also notes that

The Philadelphia Tax Reform Commission established that: "Philadelphia’s property assessments do not meet industry standards for accuracy; all across the city, assessed values diverge widely from market values. Philadelphia’s property assessments do not meet industry standards for equity; properties in poorer neighborhoods are, on average, assessed at a higher percentage of market value than properties in more affluent neighborhoods. The inaccuracy and regressive nature of Philadelphia’s assessments violate standards of vertical and horizontal equity."

A map of the disparities in effective rates gets the point across in a strong visual way.

It's more complicated than just convincing city officials to value properties at fair market value rather than at some other amount determined in some way that isn't very clear or obvious to homeowners or taxpayers. The people who make the assessments have no authority to set or change the tax rate, so if the assessments are established at fair market value, most property owners in the city would experience whopping tax increases, and the city would experience a surge of tax revenues.

The determination of how much property tax revenue the city should collect is a question separate from determining how that tax should be apportioned among property owners. The first question is part of the larger issue of establishing city spending, the scope of services provided by the city, and related matters such as public employee retirement and other benefits. The second question has been answered by the state Constitution and judicial decisions, including that of Judge Wettick in Clifton. Property taxes must be assessed uniformly. Someone who owns a property worth twice the value of a property owned by a second person should pay real property taxes twice the amount imposed on the second person.

Because determinations by two different components of city government establish a property owners' real property tax, those two components need to sit down together and map out a plan under which properties are assessed at fair market value, and the rate adjusted so that the overall tax revenue is unchanged. Thereafter, if the city wishes to increase revenue, it can do so using the process for increasing the real property tax rate, in a way that is transparent and provides taxpayers with an opportunity to comment on the wisdom or folly of such an increase.

As it presently stands, the so-called reassessments not only would fail to bring uniformity, they also would trigger a tax increase. I'm not sure what would happen to the assessment appeals system if all 400,000 property owners take the advice of Philadelphia Forward and appeal, but we may be finding out soon. On the Philadelphia Forward web site are instructions for filing the appeal, and the organization pledges to assist property owners and accompany them to hearings.

The system needs to be fixed. I have a sense things will become more complicated and frenetic before they are resolved.

Coming to Class?

The National Law Journal, in Law Profs Debate Mandatory Attendance Policies, picks up on an issue that has resurfaced recently, as evidenced by the quantity and intensity of comments to Dave Hoffman's Paternalism and Compulsory Attendance posting on Concurring Opinions. Dave takes the position that compulsory class attendance cannot be justified sufficiently to warrant continuation of the ABA accreditation standard that requires law schools, in effect, to make attendance mandatory. It is important to note that he nonetheless does follow his school's attendance policy.

Dave does a good job of tackling each of the arguments made in support of compulsory attendance. Some of the folks posting comments in response to his analysis make important points about the value of attending class, and in a few instances, about the sense of requiring attendance.

My approach to attendance has evolved through the several decades that I have been teaching. The realities of what I have encountered surely cause me to think again and again about the question. Keep in mind that I've never had serious attendance problems in my classes, perhaps because the word has been out for a long time that to do well one needs to attend. But almost every semester there are a few students whose attendance is spotty, and every other year or so there is a "phantom," namely, a student who rarely, if ever, appears in the classroom.

Initially, my approach was simple. The students are adults, and so they can decide whether or not to attend class. Of course, if the consequences aren't to their liking, they will find no sympathy from me. It is difficult to accept the excuses for poor performance offered by a person who is complaining about a low grade but who also is someone I've never seen until that day.

But at the same time, I began my teaching career dedicated to helping students learn how to provide their clients with the best possible legal services they could provide. That meant my classes needed to provide students with something that justified my existence in the room. I committed myself to helping students learn how to teach themselves and how to synthesize the out-of-classroom preparation and assimilation that I expected them to undertake.

After a few years, it became apparent to me that, contrary to the conclusions reached by Rafael Pardo in Class Absences and Grades, there was a correlation between grades and significant non-attendance. That did not surprise me, because I design my examination so that students who attend class have an opportunity to demonstrate that they learned from what the class adds to the materials, and so that students who missed more than a few classes would need to put in corresponding extra effort to attain the same level of achievement. Not many phantoms, as we call them, succeeded in doing so. For what it's worth, I also charted grades against students' seats in the room, finding that those on the "edges" tended to have lower grades, perhaps because they were not as connected to the classroom discussion or perhaps because they deliberately chose "distant" seats because they were unwilling to engage the classroom experience. Students closer to the front tended to be absent much less, if at all, but that would be consistent with the notion that enthusiastic students want to be front and center.

The next evolution was triggered by my increasing frustration with repeated one-on-one conversations with students about their grades after grades were released by the school several months after the course ended. Not only did I find myself saying the same thing numerous times, I also discovered that both students and myself came to appreciate the value that my comments would have had if they were shared during the semester before the examination. This frustration was reinforced by the continued evidence that students taking the "reading period means leave the reading to the end of the semester and justifies cramming" approach did not do nearly as well as students who learned incrementally during the semester, building subsequent lesson on well-learned previous lesson.

This evolution first brought the in-class quiz. I would administer them in class, and because they counted toward the grade, another reason to attend class was created. However, when approving during-semester quizzes, the faculty required me to give make-up quizzes for students who missed class for a valid reason. One of the Associate Deans took on the task of deciding if an absence was for a valid reason. It became a burden for him. So despite the fact that examination performance improved and attendance improved from the typical 85 or 90 percent to 98 percent, the experiment was dropped.

Unsatisfied with that outcome, I resurrected the concept a few years later when developments in technology made it easier to do. I did away with the word "quiz" and substituted the phrase "semester exercise." Some were administered using email and discussion boards, and some were administered in class. By this point, the faculty's policy on grading had also evolved, so I did not need to seek faculty approval. To deal with valid absences for in-class exercises, I permit students to drop the lowest 2 scores, which would include the zero for an exercise not performed. Though some students initially gripe about "this high school approach," whereas many others welcome the feedback and the opportunity to correct bad academic habits before the examination, by the end of the semester almost all students come to realize the value of semester exercises. The emergence of student response pad ("clicker") technology a few years ago enhanced the process. The effect on attendance was an increase, though it still hasn't reached 100 percent.

The use of semester exercises gave me the opportunity to watch for students who were failing to provide responses to out-of-class graded assignments and failing to show up when in-class graded questions were posed. I began paying even more attention to tracking their attendance by looking to see if they were in the classroom. When I noticed a student missing more than one or two assignments in a row and failing to attend class, I contacted the student. The point of the contact was not to force a withdrawal but to give a stern warning to the effect that if the student did not turn things around, he or she was almost certain to end up with a miserable grade in the course. If the student did not respond to my contact attempt, something that happened more often that I would have predicted, I enlisted the assistance of the Associate Dean for Academics. In far too many instances, it turned out that habitual absentees were dealing with serious issues in other areas of their lives. One student was being physically abused, and once the appropriate people in the law school administration became involved, the matter was resolved in a better way than it might have otherwise turned out. Because of these situations, I try to watch closely the attendance and participation patterns of students who appear to be developing status as a "phantom." It may be parentalistic, but if it saves a student from a serious problem, it's worth it. Students who miss a few classes because of interviews or illness appear not to suffer in terms of examination performance or grades, and I don't fret about them or keep score. If they miss 7 or 8 classes for these reasons but are taking steps to compensate, they'll more than get by.

So, ultimately, I don't compel attendance directly. I try to induce it by making the classroom experience not only something students conclude they need to attend but also something students conclude they want to attend. I try to encourage attendance by providing four or five in-class exercises that provide not only feedback but also a small component of the course grade. I keep an eye out for chronic absentees and non-participants so that I can contact them to determine the reason for their disappearance and to refer them to the administration if need be.

My current approach to attendance does not violate the law school's policy of requiring "regular and punctual" attendance. At the same time, it appears to minimize the sort of problems that arise when half or more of the students are missing most classes. Will the way I handle attendance continue to evolve? Probably. It would be foolish to consider what I am doing now as set in stone.

Passing the Buck, Congressional Style

Thanks to this item on Paul Caron’s TaxProf Blog, I learned that three members of the Senate Finance Committee sent a letter to the Secretary of the Treasury, urging him to “take immediate steps to encourage working families” facing increased tax liabilities from mortgage foreclosures to submit offers of compromise to the IRS and to have the IRS accept those offers. I described the circumstances generating these liabilities in ”Greed, Stupidity, Poor Judgment, and Taxes. One of the points I made was that elimination of this tax liability does not put ownership of the foreclosed home back in the hands of the taxpayer. The solution is more sensible lending practices and resistance by home buyers to overextending their budgets.

What the three Senators are urging the IRS to do rests on the authority given to the IRS under section 7122 of the Internal Revenue Code to negotiate tax liabilities and to arrange payment schedules. Regulations section 301.7122-1(b)(3)(ii) explains that the “. . . IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability.” As I pointed out in ”Greed, Stupidity, Poor Judgment, and Taxes, it’s unlikely these tax liabilities would be paid in any event. Yet, as I also pointed out, ought not the liability simply be deferred, in case one or another of these taxpayers has a reversal of fortune?

There are several things I don’t understand about the Senators’ letter. The first one is trivial but symbolic. The letter refers to relief for working families. What about working singles? What about families out of work because the economy isn’t quite what some people claim that it is? What about retired people who are losing their homes because of increased property taxes? Restricting relief to working families, though I don’t think that’s what the Senators intend, is foolish and unjustified. My point is that this blind attachment to slogans can contribute to a poorly phrased document.

The other things I don’t understand is the entreaty to have Treasury and the IRS step in to fix a mess that is not of their making. If any component of the federal government is responsible, it is the Congress. The Senators write, “Americans shouldn’t have to wait to get the relief that is needed right now.” In that event, why can’t the Senate act quickly? Is there not a lesson to be learned here by the Congress to help it understand why it’s time to deal with the ever-increasing inefficiency of the legislative process?

The Senators themselves write, “We recognize that it would be simpler to change the law to provide relief...” So why ask someone else to do your work? Yes, I know that shoving work and costs onto others is a feature of present-day culture, but that doesn’t make it right.

Worse, it would take longer for the taxpayers’ cases to work their way through the offer-in-compromise system than it would take for the Congress to enact legislation. So despite what the Senators claim, this isn’t about faster relief and it wouldn’t be “immediately.” It has been suggested it’s about tax relief that avoids the legislative mandate to find offsetting revenue to fund the tax reduction.

The letter also points out that lenders are sending Forms 1099 to taxpayers with amounts of debt forgiveness that are higher than the actual amounts. This is not news. The Senators suggest, “The IRS should be aggressively educating lenders, practitioners and affected taxpayers to ensure that accurate 1099s are being provided.” and then claim, “Too often the IRS emphasizes dealing with problems on the back-end as opposed to preventing a problem at the beginning.” Excuse me. The beginning of the problem is where the tax law begins. It starts with the legislation enacted by the Congress. If the tax law were simple, rather than a repository of payoffs to special interest groups and voting blocs, it would be much easier for lenders, practitioners, and affected taxpayers to get it right.

Do these Senators think that the IRS will drop some of its other responsibilities and put their request at the top of the list? I don’t think so. The letter is campaign fodder. The Senators can crow to the electorate that they took steps to solve a problem that they won’t simultaneously describe as of their own making.

Football Fines Deductible?

While most fans of professional football, NFL-style, have been debating the appropriateness of the fines imposed on the New England Patriots and their coach Bill Belichick for violating NFL filming rules, the tax world has been pondering the tax implications of the Commissioner’s decision. One commentator, in Goodell Misses a Big Tackle gives this take on the Belichick fine: "Now, certainly, $500,000 is nothing to sneeze at. It's a big number, and reportedly about 12 percent of Belichick's annual salary. But it is tax-deductible."

Is it? Are the fines imposed on the Patriots and on Belichick deductible for federal income tax purposes?

The easiest piece of the analysis to undertake is the application of section 162(f), which prohibits deductions for fines and similar penalties. That provision does not apply, however, because the fines and similar penalties that it makes nondeductible are those imposed by governments. The NFL, despite what some might think, is not a government.

The determination, therefore, turns on the application of section 162(a). That provision allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” For the NFL fines to be deductible, they need to be ordinary and necessary, they need to be expenses, they need to be paid or incurred during the taxable year, and they need to be paid or incurred in carrying on a trade or business.

There’s not much disagreement among those who have commented on the question that the fines are expenses, in contrast to being capital expenditures, that they have been or will be paid or incurred during the taxable year, and that they are paid or incurred in carrying on a trade or business. The Patriots are in the business of operating an NFL franchise, and Belichick is in the business of being employed as an NFL head coach.

The critical portion of the analysis involves the interpretation of the phrase “ordinary and necessary.” In other words, is the payment of an NFL fine by a franchise and by a head coach for violating filming rules an ordinary and necessary expense? Or is it something else?

The Supreme Court, in Deputy v. DuPont, 308 U.S. 488, 495 (1940), has defined ordinary as “normal, usual, or customary.” Courts have defined necessary as “appropriate and helpful in the taxpayer’s business.” Note that the judicial approach to the definition bifurcates the phrase into two defined terms. Ultimately, according to the courts, the definition will turn on the facts and circumstances of each particular case.

When trying to apply a legal definition to a set of facts, it helps if there are other situations, either identical or similar in detail, where the same question has arisen. Though there are no cases or rulings dealing with fines imposed by professional sports leagues, there is a case dealing with fines imposed by a mercantile trading exchange.

In Rothner v. Commissioner, the Tax Court held that fines paid by a trader to a mercantile exchange for violating certain trading rules was deductible by the trader. A close look at this case is instructive, because in both Rothner and the Patriots/Belichick situation the fine was imposed by a private organization under contract law, not by a government under a statute.

Rothner and several other traders were fined by the exchange for violating its rules. The Patriots and Belichick were fined by the NFL for violating its rules. Rothner and the other traders had been warned and had previously been fined. The Patriots and Belichick had been warned. Rothner and the other traders were suspended, but Belichick was not.

If Rothner did not pay the fine, he would have been denied the right to trade on the exchange's floor. The exchange would also have the right to forfeit his seat and sell it, using the proceeds to pay the fine. It is unclear what the NFL would do if Belichick does not pay the fine. Presumably he would be suspended but that's a guess.

In Rothner's case, "it was a common occurrence for the [exchange] to fine members for violations of its rules, and a list of persons fined was issued weekly." In 1987, 87 fines were imposed, in 1988, 141, and in 1989, 139. The number of fines imposed by other exchanges were at least in the “several hundreds” annually. The number of fines imposed by the NFL is something I haven't ascertained, but it is nowhere near being in the thousands annually. The number of fines imposed by the NFL for violation of filming rules appears to be two: the Patriots and Belichick.

According to the Rothner court, the

”principal function of the term 'ordinary' * * * is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are * * * capital expenditures". Additionally, the term "ordinary" has been defined as "normal, usual, or customary" [citing Deputy v DuPont]. A payment of an expense is "normal" if it arises from an action that is ordinarily to be expected of one in the taxpayer's position [citing Commissioner v. Heininger]. Although an expense may be incurred only once in a taxpayer's lifetime, it is ordinary if the transaction that gives rise to it is "of common or frequent occurrence in the type of business" in which the taxpayer is engaged [citing Deputy v. DuPont, Welch v. Helvering, Lilly v. Commissioner]. As respondent concedes that petitioner's payment of the CME fine was not a capital expenditure within the meaning of section 263, we need not further consider that aspect of the term "ordinary".

The Rothner court then concluded that "a private wrongdoing in the course of conducting a business is not extraordinary." How can that be? Whether something is ordinary or extraordinary depends on the facts. The court should have said that "a private wrongdoing in the course of conducting a business is not FOR THAT REASON ALONE extraordinary" --- a conclusion which makes perfect sense. But then the court backs up:

Moreover, even if improper conduct were extraordinary in business, the payment of a settlement or judgment attributable to the conduct is generally expected to be made by the person in the course of whose business the conduct occurred.

What happened to the court's statement "it is ordinary if the transaction that gives rise to it is "of common or frequent occurrence in the type of business" in which the taxpayer is engaged." Isn't that the test?

Well, that's the test the court applied. It pointed out that there were 356 disciplinary proceedings that resulted in fines, of which 53 involved the type of infraction in which Rothner and the other traders engaged. The parties also had stipulated that other exchanges "imposed monetary sanctions on their members for alleged violations of their rules several hundred times per year." So based on these facts, the court concluded that "payments of fines pursuant to disciplinary proceedings by securities and commodities exchanges were a common and frequent occurrence in the type of business in which petitioner was engaged."

So that leaves the question of whether what Belichick and the Patriots did was a transaction "of common or frequent occurrence" in the NFL. At the moment, allegations of filming rule violations appears limited to the Patriots. To me, this is the distinction between ordinary ("everybody does it") and extraordinary (Belichick and the Patriots are alone in their transgressions). Belichick and the Patriots stand alone for the type of infraction for which they have been fined, a far cry from 53 fines in a 3-year period (or more, counting the other exchanges). They are among a very very rare (dare I say extraordinary) group of select persons and clubs fined by the NFL generally (perhaps dozens, but surely not the 356 (hundreds or even thousands counting the other exchanges) in a 3-year period.

Next, the Rothner court explained that an expense was necessary if it met "the minimal requirement that it be appropriate and helpful for the development of the taxpayer's business." I suppose Belichick and the Patriots would argue that breaking the rules was appropriate and helpful. Appropriate? Hmm. Helpful? Of course. If it wasn't helpful to cheat, only the pathological would cheat. I'm not quite ready to label all cheaters as pathological because that would mean we're living in an asylum. Why do I doubt it is appropriate? The clients of the traders don't seem to care if their traders violate a trading limit on the floor of the exchange. NFL fans do care if the NFL's integrity is impugned, and if the reaction has a negative economic impact on the NFL or the Patriots, then Belichick's actions will directly or indirectly HURT --- not help --- the business operated by the New England franchise, and thus would not have been an appropriate thing to do. In other words, for the Patriots, acting honestly had a value that was of a higher order than it appears to have had for mercantile exchange traders.

This analysis compels me to conclude that the Rothner case is distinguishable from the Patriots/Belichick situation. Someday perhaps it will lose its distinction, but that will be a day when violations of filming rules and fines for those infractions are an everyday occurrence in the NFL much as they were (and hopefully no longer are) in the exchanges. Pity that day ever arrives.

The notion that the ordinary and necessary requirement precludes deduction of expenses that are extraordinary, unusual, not normal, or not customary is troubling. Consider what happened in Trebilcock v. Commissioner. The taxpayer, a business entrepreneur, paid an ordained minister to minister spiritually to the taxpayer and his employees, through prayer meetings designed to raise their spiritual awareness level, and through counseling with respect to personal and business problems. When presented with a business problem the minister would pray and then propose a solution based on prayer. The Trebilcock court relied on the outcome in another case, Amend v. Commissioner, in which the taxpayer paid a Christian Science practitioner for assistance in raising the taxpayer’s spiritual awareness. According to the Trebilcock court, “The Amend court conceded that the consultations promoted the taxpayer’s spiritual balance and thus allowed him to cope more easily with the strain of running a large business.” The court then noted that the assistance did not sharpen business skills and was no different from that provided by any minister, making the payments personal rather than business expenses. The Trebilcock court, analyzing the portion of the payments for counseling, concluded that they were not ordinary because the taxpayer did not offer evidence to show that these sorts of payments were ordinary in his type of business. In other words, he failed to prove that the transaction giving rise to the expense, the retention of a minister to inject spiritual awareness into business problem solving, was “of common or frequent occurrence” in his business. Trebilcock reinforces the basis for distinguishing Rothner.

The outcome in Trebilcock makes sense. What Trebilcock was doing was extraordinary. He was a pioneer. Not long after, American business owners concerned about the then-seemingly dominance of the Japanese business economy, adopted some of the techniques used by Japanese businesses. The idea that worker productivity improved when employees were spiritually grounded (and note that in this sense, spiritually does not necessarily mean religiously) caught on. Today, it is not uncommon for businesses to spend money to bring spiritual values into the workplace. An interesting analysis of this phenomenon, including a list of large companies now using the Trebilcock and Amend approach, can be found in Spirituality and Ethics in Business. Ironically, I doubt that the IRS is challenging the deductions claimed by the companies noted in the article.

For me, the notion that pioneers get the short end of the tax stick because what they are doing is extraordinary rather than normal and usual doesn’t make sense. Ought not the tax law not impose a disadvantage on business entrepreneurs who are trying new and different methods? If the idea of allowing the Patriots and Belichick to deduct the fines is distasteful, it’s not because what they did is not ordinary. Yet despite the questionable wisdom of the ordinary requirement, the determination of whether the fines are deductible must be made under the law as it is, not the law as we would prefer it to be. There is a very good argument that under current law the fines are not deductible.

Most commentators disagree with the conclusion that the better argument supports nondeductibility. They base their conclusion on several analyses.

Some claim that the “ordinary” requirement is designed to prevent deduction of personal expenses. I disagree. Not only has no court or ruling so concluded, the statutory language supports the conclusion that personal expenses are blocked by something other than the “ordinary” requirement. They are blocked by the trade or business requirement. An ordinary and necessary expense of carrying on a personal endeavor isn’t deductible because it’s not an expense in carrying on a trade or business. If that’s not enough, section 262 disallows deductions for personal expenses. If the “ordinary” requirement did so, section 262 would be superfluous in that regard. The same rejoinder applies to the argument that the “necessary” requirement exists to push personal expenses out of section 162(a).

Some claim that the “ordinary” requirement exists to keep capital expenditures out of section 162(a). The courts, however, have given a dual meaning to “ordinary.” One is the requirement that the expense not be a capital expenditure. The other is the requirement that the underlying transaction be “of common or frequent occurrence” in the business. The first prong is the redundant one, because section 263 establishes the principle that capital expenditures are not deductible. It is not extraordinary to build a building in which to operate the business, but the cost of the building is not deductible as an ordinary and necessary expense because it is a capital expenditure. That leaves the “ordinary” requirement with some meaning other than “not a capital expenditure.”

Some have claimed that “ordinary” means reasonable or that it means not lavish or extravagant. However, Congress uses those terms in section 162(a) with respect to specific types of business expenses but not in the general definition. By having used the terms, Congress demonstrates that they have a meaning and that if Congress wanted that meaning to apply to the general definition it would have used those terms rather than “ordinary.” To put a “reasonable” or “not lavish” gloss on the general definition would make the Congress’ use of those terms with respect to specific expenses superfluous.

Some argue that the term “ordinary and necessary” is an indivisible phrase and that the individual words have no independent meaning. If this is so, why have the courts provided a definition of “ordinary” and a definition of “necessary” in ways that treat those words as separate words?

Some argue that “ordinary and necessary” was a general accounting phrase used to indicate payments that accountants treated as appropriate deductions in determining business profits, and that it now is a phrase with little or no meaning. This argument rests on the premise that an interpretation such as “appropriate and helpful” was intended to strip “ordinary and necessary” of meaning rather than to create a new substantive test. I disagree. The words are in the statute, the drafters intended to put them there, and there is nothing in the statute itself making those words or that phrase irrelevant. That’s not to say I disagree with the underlying view that the phrase ought not be in the statute, but trying to render it void of meaning, or to use it as a substitute for “not personal” or “not a capital expenditure” is inconsistent with its existence and the statutory construct.

Some argue that the cases denying deductions because an expense is not ordinary because no one else is engaged in the transaction are wrongly decided. From a policy perspective, I agree, because these decisions put business pioneers at a disadvantage. But from a doctrinal perspective, I disagree, because these cases are interpreting a requirement inserted into the statute by the Congress. The courts, in some respects, don’t have much choice because to reach the opposite result would require either ignoring the word ordinary or giving it a redundant meaning. Either approach would render the word ordinary irrelevant.

The more interesting, and probably more important, question is what to tell the Patriots and Belichick when they ask for advice when doing their tax returns. Although some have suggested that they would simply tell them the fines are deductible, I would be much more circumspect. I would share with them my analysis of the question, including an explanation of the outcomes in Rothner and Trebilcock. I would explain the advantages and disadvantages of claiming or not claiming the deduction. I would let them decide how much risk they were willing to incur and how much risk they wanted to avoid. My guess is that they would decide to claim the deduction. I would make it clear to them that if the IRS audited and challenged the deductions, then they would have no basis to complain that I had given them bad advice, because I would not be surprised if the IRS did challenge the deduction. I also would not be surprised if the IRS paid no attention to the deduction.

The cynic in me thinks that if the IRS challenged the deduction and prevailed, Congress would enact some sort of moratorium barring the IRS from challenging the deduction of fines imposed by the NFL. Not far behind would be special legislation making sports fines explicitly deductible no matter how common or rare the underlying transaction, unless the fine was imposed on account of violation of a government’s criminal law.