TaxProf Blog

June-December 2012: A Golden Time of Gift Giving

Wall Street Journal, A Golden Age of Gift Giving:

With the government's $5.12 million gift-tax exemption set to fall to $1 million at year-end, more families are using the current leeway to do some financial housekeeping, experts say. "Cleanup gifts," as estate planners call them, can be used to forgive intrafamily loans, equalize gifts to children or grandchildren, pass along an interest in a family business or preload a life-insurance trust, among other strategies. ...

But before families start writing checks, the most important thing to consider is whether or not they should make gifts in the first place. "Everybody is trying to save taxes to the extent that they can, but at the end of the day they want to make sure there is money in their bank account for themselves," says Hilary Pierce, a partner and head of the estate-planning group at Sideman & Bancroft in San Francisco.

If you still feel comfortable with the idea of making gifts after subjecting yourself to that gut check, here are some ways to tidy up your planning:

• Forgive and forget. Well-off families who used up the former exemption of $1 million would sometimes turn to low-interest family loans to continue transferring assets to children and grandchildren. Forgiving such a loan now makes it possible to take advantage of the current exemption without shelling out cash. ...
• Even out the score. If your grandchildren span a wide age range, your children have different numbers of children or you have been married more than once, the cumulative value of gifts you have made to various family members to help pay for education, weddings, homes or other items might vary widely. ...To fix those problems, clients often include language in a will or trust to "equalize" gifts to grandchildren. ...
• Give away the store. With the current gift-tax exemption and valuation discounts for minority stakes in a business, you could move at least part of a family enterprise out of your estate. ...
• Set up a backstop. It is a longtime, plain-vanilla estate-planning tool: an irrevocable trust with your children, grandchildren and spouse as beneficiaries.Now, with a sexy new acronym, so-called spousal limited-access trusts, or SLATs, are getting a lot of attention from people "who are worried about taxes but also about giving too much away," says Robert Morrill, managing partner at Gilmore, Rees & Carlson, a Wellesley, Mass., law firm that specializes in trusts and estates.Such trusts can get assets out of a husband's or wife's estate while taking advantage of the full gift-tax exemption.Mr. Morrill encourages clients to assume the surviving spouse isn't going to reclaim any assets from the trust, though there is an escape hatch: The trustee could make distributions for the surviving spouse "if fortunes change after the trust is funded," he says.

WSJ: New Taxes for 'Renouncers'?

Following up on my prior posts (links below):  Wall Street Journal Tax Report, New Taxes for 'Renouncers'?, by Laura Saunders:

On Capitol Hill, there is new interest in connecting taxes and passports. ...

Sens. Schumer and Casey want to change the law to raise the overall penalty on renouncers, unless they can prove they didn't decamp for tax reasons. Those who can't prove otherwise would owe a new 30% tax on all future investment gains earned in the U.S., even though they no longer are citizens and no longer live here. Failure to pay the tax would keep them from re-entering the country.

Will this proposal get traction? Clint Stretch, a veteran tax expert at Deloitte Tax in Washington, doesn't think so. "There's always a tension when the IRS gets involved with affairs usually handled by the State Department, and this does that," he says. Michael Graetz, a law professor at Columbia University and former top Treasury official, hopes the proposal goes nowhere: "This is a good example of bad anecdotes making bad legislation."

A different proposal is further along in the pipeline. It would allow federal officials to revoke or deny passports to delinquent taxpayers who owe the IRS $50,000 or more. The provision passed the Senate in February and is before the House now. Revenues it generates would be used to help fund a highway-transportation bill that extends provisions set to expire on June 30.

The measure comes on the heels of a 2011 Government Accountability Office study [Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes]. ... The GAO report found that for the year it studied—2008—the State Department issued passports to more than 224,000 citizens who owed about $6 billion in tax. ... Mr. Stretch says he thinks this provision has a far better chance of passage than the Schumer-Casey bill. "This is akin to shutting off the cellphone if you don't pay your bill," he says, "and it prevents the IRS from having to send folks with guns and badges to collect the money."

Prior TaxProf Blog Posts:

• Facebook Co-Founder Renounces U.S. Citizenship in Advance of IPO, Saving Millions in U.S. Taxes (May 11, 2012)
• Will Facebook Co-Founder's Renunciation of U.S. Citizenship Increase His U.S. Tax Bill? (May 12, 2012)
• Seto, Kleinbard Explain Tax Consequences of Facebook Co-Founder's Renunciation of U.S. Citizenship (May 13, 2012)
• Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship:  $67 Million (May 16, 2012)
• Sen. Schumer Proposes 30% Tax on Facebook Co-Founder, Others Who Renounce U.S. Citizenship for Tax Purposes (May 17, 2012)
• WSJ:  New Ex-Patriot Tax on Facebook Co-Founder 'Isn't Worthy of America' (May 18, 2012)
• Estate & Gift Tax Savings From Facebook Co-Founder's Renunciation of U.S. Citizenship Dwarf Income Tax Savings (May 19, 2012)
• Should You Renounce Your U.S. Citizenship Like Facebook Co-Founder Eduardo Saverin? (May 20, 2012)

Top 5 Tax Paper Downloads

This week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list. The #1 paper is now #29 in all-time downloads among 8347 tax papers:

1.  [1808 Downloads]  There’s No There There: Low Tax Rates and Economic Growth, by Filip Spagnoli (National Bank of Belgium)

2.  [290 Downloads]  Corporate Shams, by Joshua D. Blank (NYU) & Nancy C. Staudt (USC)

3.  [253 Downloads]  Recent Developments in Federal Income Taxation: The Year 2011, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)

4.  [222 Downloads]  Guide to the Internal Revenue Service Decision-Making Process Under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations, by Jeffrey P. Hermes (Berkman Center for Internet & Society)

5.  [215 Downloads]  Zotero -- A Manual for Electronic Legal Referencing, by John Prebble & Julia Caldwell (both of Victoria University of Wellington, Faculty of Law)

Block: A Continuum Approach to Systemic Risk

Cheryl D. Block (Washington U.), Letting Go of Binary Thinking and Too-Big-To-Fail: Preserving a Continuum Approach to Systemic Risk, 6 Brook. J. Corp. Fin. & Com. L. 1 (2012):

This Article highlights differences between principle and practical implementation of prudential regulation and resolution rules pertaining to financial institutions. In principle, even though general prudential regulatory rules reflect a gradual risk-based continuum approach, their implementation with respect to large systemically important institutions has often been through regulatory forbearance. Particularly when confronted with lobbying pressure from very large banks, regulators have opted for inaction. In ironic contrast, statutory and regulatory resolution rules over time have increasingly restricted regulators’ options, often apparently leaving regulators to make a binary choice between letting the entity fail and providing a major government rescue or “bailout.” In reality, however, regulators have adopted a range of government strategic responses to imminent or actual large private business failures. Resolution authority is binary in principle, but actually implemented along a private-public continuum. Despite Dodd-Frank’s attempt to limit this “reality,” regulators are likely to continue to exercise their resolution authority in a more flexible manner along this continuum than might otherwise appear from formal and statutory rules.

Such a continuum-based approach is important for both regulation and resolution. On the regulation side, this approach suggests better implementation of the risk-based principles already in place and assurance that new enhanced prudential regulatory rules will be properly implemented. On the resolution side, it means understanding that resolution authority reflects government policy with respect to allocating large financial entity failure risks. Rather than pretend to rid the system of bailouts, regulators should acknowledge the range of existing and potential government responses to risk allocation, and work toward developing an equitable and transparent process and substantive criteria for making allocative choices in the case of systemically important financial institution failures.

State Trend: Independent Tax Courts

Thomson Reuters Legal, Heard in More States: See You in Tax Court!:

Six states have established or considered establishing independent tax tribunals in the last two years, a trend supported by the business community, but one which also is stirring debate about the need for these new tribunals.

Eighteen other states have well-established tax courts, and another nine states and the District of Columbia offer independent tax courts or forums that do not have to be staffed by tax experts. Twenty-one states, including Alabama, do not have independent tax courts at all, among them are three of the largest states -- California, Texas and Florida.

Some critics say independent tax tribunals layer costs and complexity onto systems that already are slow and cumbersome, helping tax lawyers perhaps more than their clients. States set them up nonetheless, in part because the systems make them appear friendlier to business at a time of high unemployment and interstate rivalry for jobs.

(Hat Tip: Francine Lipman.)

Mitt Romney, David Petraeus, and Tax Lawyers: 'Incredibly Boring White Guys'

PJ Tattler, Could a Romney/Petraeus Ticket Be a Game Changer?:

According to Politico, the phrase “incredibly boring white guy” is now part of the search criteria needed to qualify one for a place on Mitt Romney’s VP short list.

Of course, Romney’s desire for a running mate bearing this awkward description stems from the negative backlash suffered by Senator John McCain in 2008 after he selected Governor Sarah Palin as his “game-changing” VP candidate and then was pounded for the choice by the mainstream media.

Several very competent “incredibly boring white guys” (IBWGs) such as Ohio Senator Rob Portman, Virginia Governor Bob McDonnell, and South Dakota Senator John Thune have all had their national profiles raised recently, guaranteeing them a spot on the VP short list, but precisely because they are a group of IBWGs, the needle on the media excitement meter has scarcely moved a millimeter.

In seems that IBWGs are only exciting when one is in desperate need of an experienced heart surgeon or tax attorney — or if your name is George Clooney.

However, there is someone who holds high national stature and also happens to be an IBWG and who, if he agreed to be Romney’s running mate, might actually qualify as a “game changer.”

That person is David Petraeus.

IRS Releases Spring 2012 SOI Bulletin

The IRS's Statistics of Income Division yesterday released (IR-2012-58) the Spring 2012 SOI Bulletin (Vol. 31, No. 4), with these articles:

• High-Income Tax Returns for 2009 (p.6), by Justin Bryan:  For 2009, there were 3,924,489 individual income tax returns reporting AGI of $200,000 or more, and 3,975,288 with expanded income of $200,000 or more. These returns represent, respectively, 2.793% and 2.830% of all returns for 2009.
• Individual Noncash Contributions, 2009 (p. 62), by Pearson Liddell & Janette Wilson:  For Tax Year 2009, 21.9 million individual taxpayers who itemized deductions reported $31.8 billion in deductions for noncash charitable contributions.
• Accumulation and Distribution of Individual Retirement Arrangements, 2008 (p.89), by Victoria L. Bryant:  The year-end fair market value of all IRAs fell from $4.7 trillion in 2007 to $3.7 trillion in 2008, a 22.5% decrease.
• Foreign Recipients of U.S. Income, 2009 (p.105), by Scott Luttrell:  U.S.-source income payments to foreign persons and taxes withheld declined across nearly all categories of income in Calendar Year 2009, as the U.S. economy was in the midst of the Great Recession. Some $546.5 billion in U.S.-source income payments were made to foreign recipients in 2009, a decrease of 20.7% from the 2008 total. Taxes withheld on U.S.-source income paid to foreign persons experienced a similar decline to $7.2 billion, down 21.4% from 2008.
• The Distribution of Corporate Income: Tabulations from the Schedule M-3, 2004-2008 (p.128), by Caitlin Bokulic, Erin Henry & George Plesko:  Corporations determine the amount of income earned during a year using a variety of reporting standards. These differences in reporting standards have led to differences in the amount of book and taxable income that is reported by firms.  To investigate the patterns and sources of these differences, this article examines a sample of firms that filed a Form 1120 Schedule M-3 during  2004-2008.  The sample was disaggregated into statutory tax brackets to show the magnitude of aggregate measures of both financial statement worldwide and domestic income and taxable income to better understand the population of corporate tax filers.
• 2009 Gifts (p.142), by Melissa J. Belvedere:  There were 223,093 [gift tax] returns filed during 2010, reporting a total of $37.9 billion in assets, which were transferred to 867,507 gift recipients, mostly children and grandchildren.  The majority of gifts given were in the form of cash, although real estate and stock also comprised significant percentages of total assets.
• The Income and Wealth of 2007 Estate Tax Decedents (p.151), by Barry Johnson, Brian Raub & nd Joseph Newcomb:  21% of estate tax decedents who died in 2007 reported income in the top 1% of the adjusted gross income distribution for Tax Year 2006.

Rapoport: Rethinking Legal Education in Non-Elite Schools

Nancy B. Rapoport (UNLV), Changing the Modal Law School: Rethinking U.S. Legal Education in (Most) Schools, 116 Penn St. L. Rev. 1119 (2012):

This essay argues that discussions of educational reform in U.S. law schools have suffered from a fundamental misconception: that the education provided in all of the ABA-accredited schools is roughly the same. A better description of the educational opportunities provided by ABA-accredited law schools would group the schools into three rough clusters: the “elite” law schools, the modal (most frequently occurring) law schools, and the precarious law schools. Because the elite law schools do not need much “reforming,” the better focus of reform would concentrate on the modal and precarious schools; however, both elite and modal law schools could benefit from some changes to help law students move from understanding the theoretical underpinnings of law to understanding how to translate those underpinnings into practice. “Practice” itself is a complex concept, requiring both an understanding of the law and an understanding of how to relate well to others. Because law students may not understand how to relate well to those with different backgrounds from their own, law schools should do more to explain how one’s perspective is both limiting and mutable. Too many law schools suggest that students can “see” different perspectives by, essentially, merely thinking harder. The essay concludes with some suggestions regarding possible reforms of U.S. legal education, focusing primarily on the modal law schools.

Galle: Economics and Politics in the Choice of Price Instruments

Brian D. Galle (Boston College), The Tragedy of the Carrots: Economics & Politics in the Choice of Price Instruments, 64 Stan. L. Rev. 797 (2012):

Externalities are one of the most fundamental market failure justifications for government action, and Pigouvian taxes and subsidies are standard tools for correcting them. Even so, neither the legal nor the economic literature offers any comprehensive account of when policymakers should prefer taxes to subsidies or vice versa. This Article takes up that task. Prior efforts to distinguish between “carrots” and “sticks” have generally been limited to the context of pollution regulation, and I show here that even those efforts are incomplete. I also extend the analysis to the case of positive externalities, where there is little prior literature to speak of. Overall, I find that sticks are usually superior to carrots, but that there are some interesting exceptions.

Nonetheless, carrots are rampant in modern lawmaking, especially carrots in the form of tax expenditures. I identify features of modern politics and law that contribute to the current inefficient overproduction of carrots. Among others, I find that federalism contributes to political preferences for carrots. That implies an until-now unrecognized reason to centralize certain forms of government regulation.

Finally, I take issue with the claims of the environmental literature that carrots, even if the inferior policy choice, should be used when politics would be likely otherwise to frustrate any regulation. Using carrots in critical and closely contested situations only contributes to externality producers’ incentives to raise the political stakes, either by cranking out more negative externalities or withholding benefits.

Roxan: Globalization, Tax Policy, and the Developing World

Ian Roxan (London School of Economics, Law Department), Limits to Globalisation: Some Implications for Taxation, Tax Policy, and the Developing World:

Globalisation is a phenomenon that is said to have radically changed the international economy. It is said to have radically limited the power of national governments, particular in the field of taxation, in a world of highly mobile capital and flexible transnational corporations. To explore the extent of the effects of globalisation on taxation, this article discusses some ideas about how we should look at international tax policy in the face of the realities of globalisation, particularly in a world that includes developing countries, by considering the differences between different discourses on taxation, such as the economic, the legal, and the policy discourses. The policy discourse can offer new perspectives on the old question of the choice between source and residence taxation, makes it possible to understand them in terms of tax fairness criteria, and gives rise to a new criterion: the participation principle. Not only does the participation principle provide interesting approaches to some cases of concern to developing countries that have traditionally been viewed as source taxes, but the rise of digital goods do not simply shift the location of taxed activities. They can also offer creative opportunities for the developing world.

District Court: I.R.C. § 7702B(f)(2)(C) Unconstitutionally Excludes Same-Sex Couples From CalPERS Plan

The U.S. District Court for the Northern District of California yesterday held that the Defense of Marriage Act and I.R.C. § 7702B(f)(2)(C) unconstitutionally limit same-sex couples and domestic partners from participating in the long-term care plan offered by the California Public Employees Retirement System ("CalPERS). Dragovich v. United States, No. 10-01564 (N.D. Cal. May 24, 2012):

Because Congress’s restriction on state-maintained long-term care plans lacks any rational relationship to a legitimate government interest, but rather appears to be motivated by antigay animus, the exclusion of registered domestic partners of public employees from § 7702B(f)’s list of individuals eligible to enroll in state-maintained long-term care plans violates the Constitution’s equal protection guarantee.

• Metro Weekly

Websites and Intangible Asset Amortization Under § 197

Christopher H. Bowen (Tax LL.M. 2012, Northwestern), Comment, Websites and Intangible Asset Amortization Under 26 U.S.C. Section 197: A Marriage That Bears Little Fruit, 16 Marq. Intell. Prop. L. Rev. 181 (2012):

[I]s the website an asset that can be merely capitalized and act as a recovery of basis, or can it be amortized and written off before being sold to a different buyer? The tax code and regulations provide several potential methods to answer this question. This Comment will explore the interactions between some of those tax code provisions, specifically § 197, and to a lesser degree, Revenue Procedure 2000-50, and the intellectual property rights associated with websites. Part II of this Comment presents a hypothetical, which will demonstrate how a website’s intellectual property rights interact with some of the current tax laws. Part III will briefly explore how the intellectual property rights of copyright, patent, and trademark apply to websites, with particular emphasis on the issues that copyrights have with websites. Part IV will explore the history of intangible asset amortization, which culminated in the creation of § 197 in 1993. Part IV will discuss the way websites’ intellectual property rights interact with § 197 and Revenue Procedure 2000-50. Part V of this Comment will discuss conclusions and some potential solutions for the problems presented by the tax code and regulations.

Tax Planning for Outbound and Inbound Transactions

David B. Newman (Waller Lansden Dortch & Davis, Nashville), Tax Planning for Outbound and Inbound Transactions, 3 Charlotte L. Rev. 217 (2012):

This paper is meant to provide a helpful resource to tax lawyers and tax accountants in connection with their work on advising U.S. and foreign persons with respect to the tax ramifications of outboundand inbound transactions.

Cleveland-Marshall Cuts Incoming 1L Class by 30%

The Careerist reports that Cleveland-Marshall College of Law Dean (and Tax Prof) Craig Boise has announced that the school is cutting its incoming 1L class by an 30% (last year's class size was 168 (131 full-time, 27 part-time), with LSAT/GPA medians of 154/3.28).  George Washington and UC-Hastings previously announced reductions of their incoming classes.  Albany, Creighton, Touro, and Western New England cut their 1L classes last year.

Jensen: Legislative and Regulatory Responses to Tax Avoidance

Erik M. Jensen (Case Western), Legislative and Regulatory Responses to Tax Avoidance: Explicating and Evaluating the Alternatives, 56 St. Louis U. L.J. ___ (2012):

This article examines statutory and regulatory developments in American anti-avoidance law. After a look at the nature of tax shelters — with that concept defined broadly for these purposes — the article examines and evaluates several methods of dealing with them: enacting statutes or promulgating regulations aimed at particular abusive transactions; enacting “outcomes-oriented” legislation, like the passive activity loss rules, intended to deal with wider patterns of behavior; codifying the economic substance doctrine; imposing anti-abuse doctrines through regulations; requiring disclosure of potentially abusive transactions; and creating national standards that govern advice provided by tax professionals. The article unexcitingly concludes that no one method will by itself bring abusive behavior to acceptable levels. Flexibility is going to work better than rigidity in attacking shelters, and a combination of methods will work better than a single one.

Shay: Fiscal and Political Challenges for U.S. International Tax Reform

Stephen E. Shay (Harvard), Daunting Fiscal and Political Challenges for U.S. International Tax Reform, 66 Bull. for Int'l Tax'n 4 (2012):

This article reviews fiscal and political challenges to agreement on U.S. tax reform. Due to current U.S. budget deficits, fiscal structure and political gridlock, the challenges to finding common ground on a broad tax reform or a separate international tax reform are daunting.

Effective Exchange of Information and Tax Havens

Hedda Leikvang (J.D. 2012, Vanderbilt), Note, Piercing the Veil of Secrecy: Securing Effective Exchange of Information to Remedy the Harmful Effects of Tax Havens, 45 Vand. J. Transnat'l L. 293 (2012):

The enforcement of tax laws abroad has long posed problems for authorities. However, that enforcement becomes increasingly more problematic when the information necessary for proper enforcement is located within an impenetrable system whose sole purpose is to protect that information from tax authorities in other countries. Although much effort has been expended to remedy the harmful effects of tax havens, few strategies have succeeded. But with the prospects of a record federal deficit and an ever-increasing tax gap, U.S. authorities have begun to look for new ways to strengthen the enforcement of U.S. tax laws abroad. The most prominent of these proposals is the Stop Tax Haven Abuse Act, which invokes the use of a presumption strategy to remedy the lack of information problem. Nevertheless, this Act will most likely fall short of successful regulation. Most importantly, the Act represents a one-sided attempt to regulate a problem that is truly international. Moreover, even if the Act passes, it will provide the IRS few new tools to assist with the collection of taxes. Another issue with the proposed Act is that it invokes a presumption strategy, which may be viewed as an easy runaround for the lack of an automatic exchange provision in the bilateral agreements that currently control the exchange of tax information with foreign authorities. This Note summarizes and analyzes the current regulatory framework and proposes a strategy for the unification of existing regulatory regimes to provide a more effective system for combating the harmful effects of tax havens.

The Madness of State Film Tax Incentives

Adrian H. McDonald (J.D. 2007, South Texas), Down the Rabbit Hole: The Madness of State Film Incentives as a 'Solution' to Runaway Production, 14 U. Pa. J. Bus. L. 85 (2011):

This working paper is a "sequel" to my first law review article on runaway productions, Through the Looking Glass: Runaway Productions and "Hollywood Economics, 9 U. Pa. J. Bus. L. (2007).

Since 2007, there has been a race to the bottom as virtually every state has enacted significant, if not detrimentally generous, tax incentives to lure film and television production. The efficacy of these incentives is evaluated at length, with particular attention paid to the origin and implementation of tax incentives in California, Massachusetts and Louisiana - states with colorful backgrounds on this issue. The paper suggests that the current "solution" to the runaway production problem (competing state incentives) is counter-productive to the point of becoming the problem and calls for the enactment of a single national tax incentive for the entire nation to better compete with foreign production locales like Canada.

Columbia Journal of Tax Law Publishes New Issue

The Columbia Journal of Tax Law has published its sixth issue (Vol. 3, No. 2):

• Sachin S. Pandya (University of Connecticut, School of Law), Tax Liability for Wage Theft, 3 Colum. J. Tax. L. 115 (2012):  "This paper shows how, under existing tax law, illegal wage underpayment by an employer (sometimes called “wage theft”) may generate employer tax liability for unreported income or disallowed business expense deductions. Given that the tax authority needs information from the underpaid worker to prove such liability, the paper identifies two ways that a worker can transmit that information to a tax authority: becoming a tax informant, or bringing a qui tam action under a state false claims act. Finally, the paper discusses possible influences on the decision of the unpaid worker to inform on the employer to the tax authority, and considers the conditions under which a tax authority is likely to audit an employer based on such information. In so doing, the paper identifies a new approach to combating wage theft and an undiscovered implication of basic income tax law."
• Ryan A. Compton (University of Manitoba, Department of Economics), Christopher C. Nicholls (Western University, Faculty of Law), Daniel Sandler (Western University, Faculty of Law) Lindsay M. Tedds (University of Victoria, School of Public Administration), Quantifying the Personal Income Tax Benefits of Backdating: A Canada – US Comparison, 3 Colum. J. Tax Law 144 (2012):  "This paper contrasts the post-tax returns of backdated at-the-money options to currently-dated in-the-money options (with the same strike price as the backdated options) and demonstrates that a Canadian executive can earn a significantly larger after-tax return from backdated options compared to a US executive. We tie this to the favorable Canadian tax treatment of executive options relative to their treatment in the United States. The comparison suggests that the personal tax regime may have been one of the factors which impacted the desire to receive backdated options in lieu of other forms of compensation in Canada but not so in the United States."
• Jonathan P. Schneller (Law Clerk, Justice Elena Kagan, U.S. Supreme Court), Adam S. Chilton (Ph.D. candidate, Harvard University, Department of Government) & Joshua L. Boehm (J.D. 2012, Harvard Law School), The Earned Income Tax Credit, Low-Income Workers, and the Legal Aid Community, 3 Colum. J. Tax. L. 177 (2012):  "The Earned Income Tax Credit (“EITC”) is the largest U.S. welfare program, with twenty-four million low-income Americans receiving $60 billion of disbursals in 2009. Through the EITC, working Americans with little or no tax liability can receive up to nearly $6,000 in refundable tax credits each year. Over the past two decades, policymakers have increasingly favored the EITC over direct-transfer welfare programs, citing its lower administrative expense (as recipients “self-certify” by filing taxes) and incentives for recipients to work. Despite its political appeal, the EITC suffers deep structural flaws. Largely because EITC claimants have little guidance in navigating the difficult filing process, they are subject to high rates of IRS audits and rescission of benefits with penalties and interest. This proliferation of EITC-related controversies has created an immense need for legal assistance, yet low-income tax law largely remains a peripheral concern within the legal aid community."

Continue reading "Columbia Journal of Tax Law Publishes New Issue"

Deborah Jones Merritt: Client-Centered Law Schools

Deborah Jones Merritt (Ohio State), Client Centered Law Schools:

[L]aw schools should educate students to provide the qualities that clients seek. How would law schools do that?

Many people asking this question point to the medical school model, suggesting that law schools should adopt one (or two) years of clinical rotations, perhaps followed by additional years of residency. I would not adopt that model wholesale. For one thing, it is far too expensive for the legal profession. Medical education rests upon enormous payments from Medicare, private insurance, government research grants, and private research funding, plus hefty tuition. Medicare alone contributes $9.1 billion a year to teaching hospitals, which helps pay for resident salaries and teaching costs. We don't have that kind of government support or private insurance in law.

But that shouldn't stop us from making legal education more responsive to clients. There are solutions that lie within our grasp, some of which borrow from less well known corners of medical education. I'll limit this post to my first four suggestions.

The first step is simply to embrace client needs as a measuring stick for curriculum decisions. That's a surprisingly radical notion in legal education. We talk sometimes about meeting student needs, and we reflect other times on employer demands. We plot constantly about how to raise our US News ranking. But we rarely ask directly, does this course/program/pedagogical method maximize the value we are providing to future clients? ...

The second step is to bring clients into the curriculum. One of the best features of medical school, in my opinion, is that students practice patient interviews and meet real patients during their very first year. ...

Third, I would seek new models to add hands-on professional work to legal education. There are ambitious ideas like Bradley Borden and Robert Rhee's proposal for a law school firm. I can imagine smaller initiatives involving partnerships between law schools and particular employers. ...

Fourth, I would rethink the teaching of every doctrinal course. ...

Those are my first four ideas for creating more client-centered law schools. Since you know me by now, you can guess that I have a lot more suggestions. A few of the others are (a) academic prerequisites to law school admission; (b) upper-level "uncasebooks" that teach the law without appellate opinions; (c) courses on law practice management and trends in the business of law; (d) law practice shadowing opportunities; (e) introductions to more of the technologies used in law practice; and (f) requiring every full-time faculty member and top-level administrator to demonstrate ongoing proficiency in the rules of professional responsibility. ...

How will we pay for these changes? Not through increased tuition. I would ask all tenured faculty to recognize the disproportionate amount of time we have devoted to research during the last twenty years and to "give back" some of that time by spending a disproportionate amount of time on pedagogic reform over the next three years. Going forward, I would reduce the amount of time and money we devote to research rather than teaching. I strongly support academic research; despite its critics, research too benefits clients and society. But there were many law professors who produced outstanding scholarship before 1980; indeed, their work still influences us. Those professors generated their scholarship with heavier teaching loads, less research support, and no computers. I think we can match those standards today -- and even retain our computers.

Update:

• Scott Fruehwald (Legal Skills Prof Blog)
• Paul Horwitz (Alabama)

Henderson: The Future of Higher Education Is Education

The Legal Whiteboard:  What is the Answer to High Student Debt?, by WIlliam D. Henderson (Indiana):

This question is coming up a lot these days, but the nation's best minds (New York Times, New Yorker, Washington Post) are swinging and missing. ... My own belief is that educational quality is the next great frontier. If we can put a man on the moon in the 1960s, surely with four years and $120K we can turn a reasonably able and motivated 22 year old into a critical thinker who can reliably communicate, collaborate, gather facts, assess data, lead, follow, and approach problems with both empathy and objectivity.  Further, improving quality changes the debate from "how much does higher education cost?" to "how much is higher education worth?"  And if the worth is sufficiently high, both public and private employers would be willing to subsidize it in exchange for preferred access to graduates.  

The only barrier is institutional focus.  To make this happen, a university has to take an "Apollo Project" approach that focuses purely on education.  After figuring out the "how high" and "how fast" possibilities, an institution could then focus on controlling costs through process improvements and building modules.  First quality (worth), then cost.  This is not trade school education; this is about fully exploring human potential.

The first university to break into this space will have a profoundly disruptive effect the rest of higher education. The future of higher education is education.

Improving Tax Incentives for Historic Preservation

David J. Kohtz (J.D. 2012, Texas), Note, Improving Tax Incentives for Historic Preservation, 90 Texas L. Rev. 1041 (2012):

Historic preservation laws are increasingly controversial, and their perceived unfairness has led to calls for their repeal. In his note, David Kohtz argues that policymakers should condition tax incentives on some form of public access to efficiently produce the public benefits that justify the incentives. He first examines the justifications for historic preservation tax incentives, concluding that public access is essential to effective incentive programs. Next, he critically reviews public access provisions in selected statutes, focusing on access to private residences. The programs provided by these statutes, he explains, fall into three categories: (1) physical access, (2) visual access, and (3) virtual access. Kohtz concludes that it is only by providing at least one of these types of access that historic preservation tax incentives are justified.

David Listokin (Rutgers University, School of Planning and Public Policy) & Siona Listokin-Smith (George Mason University, School of Public Policy), Improving the Incentives for Historic Preservation: A Reply to David Kohtz, 90 Texas L. Rev. See Also 285 (2012):

David Kohtz considers the justification, efficiency, and public policy provisions of such tax incentives. Kohtz’s justification discussion oversimplifies and has a tenuous relationship to the public access mandates while his efficiency discussion, which equates efficiency with public access, undershoots a more complex economic framework of what constitutes efficient policy. Nonetheless, Kohtz’s review of the current state of the art and future recommendations for change concerning public access in the historic preservation tax incentives are a timely contribution to the literature. We especially like the note’s conceptualizing a multi-dimensional model of access in the incentives ("physical," "visual" and "virtual"), and we suggest an additional access component that we label as "policy."

2009 Law Grad Pays Off $114,000 Student Loan -- In Cash

• Business Insider, Here's What Happened When This Guy Tried to Pay A $114,000 Student Loan in Cash:

Last week, a Reddit user posted a photo of a $114,000 student loan bill—paid in cash—that elicited thousands of comments and dozens more when we posted it here. Since then, the anonymous alum has stepped forward as Alex Kenjeev, a 2009 law school graduate of the University of Toronto. Kenjeev, who works for venture capitalist firm O'Leary Ventures, told Business Insider the $114,000 payment was the last chunk left of $190,000 in loans he took out during school.

He'd spent years dragging out his payments while pouring most of his income into a start-up. As for why he paid in cash, Kenjeev said he wasn't proving some point about the dangers of credit cards or trying to show off. He just thought it'd be really funny. "It was stressful enough to carry such a big debt load. I thought it would be worth getting a few laughs out of it," he said. "Neither bank thought it was as funny as I thought it was."

• Above the Law, Dreams Do Come True, You Can Pay Off Your Student Debts in Cash, by Elie Mystal:

I still consider Alex Kenjeev my hero. Slow rolls his debts, makes a bunch on money, then dump bags of cash on the bank to leave him alone. ... My God, that’s so awesome. If I could ever pay back my loans in one sitting, this is how I’d do it. In fact, this is how I thought it would happen. I figured I’d have to play a little dodgeball with my creditors for a couple of years, but then I’d hit it big and earn enough money to make my outstanding debt seem trivial. I’d walk into a bank one day and drop a hundred and fifty thousand dollars on somebody, and bam, I’d be done.

• ABC News, Man Pays Off $114K Student Loan Debt in Cash
• Daily Mail, Law School Grad Pays Off $114,000 Student Loan in CASH... and Brags About It by Posting the Receipt on Facebook
• JD Journal, Law Grad Pays Loan Balance in Cash

McMahon Presents Innocent Spouse Relief, Women, and Joint and Several Tax Liability Reform at Cincinnati

Stephanie Hunter McMahon (Cincinnati) kicked off our 16th Annual Summer Faculty Workshop Series yesterday with a wonderful presentation of her latest paper, What Innocent Spouse Relief Says About Women and Why We Need a New Rule for Joint and Several Tax Liability:

Every time spouses sign joint returns, they accept joint and several liability. Therefore, each spouse is liable for all of the tax due on income reported, or failed to be reported, on the joint return unless he or she can claim relief. One form of relief targeted specifically to filers of joint returns is innocent spouse relief that relieves a spouse of liability under one of three vague standards. Joint and several liability’s efficient tax collection often conflicts with innocent spouse’s equitable claims to have signed the return while being lied to, abused, or manipulated. The question for Congress is how to balance these competing claims. Located at the intersection of the public-market / private-family divide, innocent spouse relief offers an opportunity to explore how the government views women. Currently, the relief provided is both over- and under-inclusive by not offering relief to all wives who are unable to assess the validity of their returns but offering relief to some who both know and help orchestrate the evasion. This paper argues, instead, that the IRS should respect wives’ autonomy when signing the return and grant relief only when a wife was unable to exercise that autonomy. Therefore, in the event that a spouse is abused or deceived, relief needs to be more automatic that under today’s law to reduce the administrative costs on both taxpayer and the government.

This paper follows up on Stephanie's prior work, including:

• An Empirical Study of Innocent Spouse Relief: Do Courts Implement Congress’s Legislative Intent?, 12 Fla Tax Rev. ___ (2012)
• To Have and To Hold: What Does Love (of Money) Have to do with Joint Tax Filing?, 11 Nev. L.J. 718 (2011)
• London Calling: Does the U.K.'s Experience with Individual Taxation Clash with the U.S.'s Expectation?, 55 St. Louis L.J. 159 (2010)
• California Women: Trying to Use Federal Taxes to Put the 'Community' in Community Property, 25 Wis. J. L. Gender, & Soc'y 36 (2010)

Mulligan: The EITC Discourages Work for Most Taxpayers

New York Times:  Do Tax Credits Encourage Work?, by Casey B. Mulligan (University of Chicago, Department of Economics):

The earned-income tax credit is often said to encourage work, but it may do just the opposite. ... The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates the mountain-plateau pattern described above: an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.

... For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year. In other words, for households on the downward-sloping portion of the earned-income tax credit schedule, the credit acts as an extra 20% tax on the income they earn in that range. The work-encouraging potential of the credit occurs only on the upward-sloping portion. ... [I]t is more common for families to be on the part of the earned-income tax credit where it acts as a tax, rather than a reward to additional work.

Update:  Linda Beale (Wayne State), EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

Blum & Singer: Taxing U.S. Retirement Distributions to Foreign Nationals

Cynthia Blum (Rutgers-Newark) & Paula N. Singer (Vacovec, Mayotte & Singer, Newton, MA), A Proposal for Taking the Complexities Out of Taxing U.S. Retirement Distributions to Foreign Nationals, 11 Fla. Tax Rev. 775 (2011):

As the global mobility of workers increases, more and more foreign nationals participate in U.S. retirement plans and eventually receive payments from these plans. The current system for U.S. taxation of these payments is exceedingly complex and uncertain. An elderly recipient of these payments living outside the U.S. finds it difficult and expensive to obtain the tax advice necessary for filing an accurate nonresident Form 1040NR. As a result, many do not file the return, and few are likely to be contacted by the IRS. Whatever tax, if any, was withheld by the payer becomes by default the final tax, even though it is unlikely to correspond with the actual tax liability prescribed by Congress and the applicable U.S. treaty. Moreover, foreign recipients are often able to avoid disclosure of their payments to tax authorities in their home countries.

We recommend a new system for taxing retirement payments to foreign nationals that would alleviate these serious administrative burdens. Under our proposal, Congress would establish two withholding rates for these distributions: a low rate of 15% for periodic distributions or minimum required distributions; and a 30 percent rate for other lump sum distributions, which are most conducive to avoiding home country tax and depleting retirement savings. The 30 percent withholding rate would also apply whenever a payee fails to provide documentation of his U.S. or foreign *776 status. These rates would be, by design, the final U.S. tax liability for foreign nationals, who would generally have no need to file a nonresident Form 1040NR. In addition, the Treasury would provide more detailed guidance to payers regarding the types of distributions that qualify for treaty relief; and a recipient's request for treaty relief would always trigger notification to the home country so as to permit it to collect its own tax. Our proposal would greatly reduce administrative burdens for the IRS, for payers and for payees, and would provide greater assurance that the tax prescribed by Congress and by our treaty partners is accurately collected.

Justice Douglas in Tax Cases

I. Jay Katz, The William O. Douglas Tax Factor: Where Did the Spin Stop and Who Was He Looking Out For?, 3 Charlotte L. Rev. 133 (2012):

Although much better known for his opinions regarding constitutional law and individual rights, Justice William O. Douglas also left an indelible mark in tax law. Throughout his thirty-six year tenure on the Supreme Court, Douglas wrote a significant number of majority and dissenting opinions in some of the most famous tax law cases of his day. As the title of the article suggests, most of Douglas's opinions were full of spin from the bias of the party he favored and read more like a brief than an objective Court opinion. In additionto their obvious spin, Douglas's opinions often lacked well-reasoned analysis, ignored compelling counter-arguments made by his brethren in dissenting and majority opinions, misconstrued, minimalized, or completely ignored contrary judicial and legislative authority. In many instances, Douglas's majority opinions frequently crossed the line of judicial interpretation into judicial legislation with absurd outcomes and punitive consequences to the taxpayer or the government. In addition to Douglas's dubious legacy as a “spin” Justice in tax controversies, Douglas also wrote poorly reasoned majority opinions that were difficult to comprehend and provided little guidance to the taxpayer and the government.

The purpose of this Article is to critique the judicial evolution of Douglas as a “rogue” Justice in tax controversies through a comprehensive analysis of a cross section of Douglas's prominent majority and dissenting opinions in the three distinct periods of his judicial tenure. Those periods were (1) the Pro-Commissioner Period (1939-1944) in which Douglas's opinions were decidedly spun for the Commissioner regardless of the inequitable consequences to the taxpayer; (2) the Pro-Taxpayer Period (1944-1958) in which Douglas's allegiance shifted from the Commissioner to the taxpayer as reflected in his opinions delivered throughout that period; and (3) the Taxpayer Advocate Period (1958-1975) in which Douglas's Pro-Taxpayer opinions were as extremely slanted in favor of the taxpayer as they were in favor of the Commissioner during the Pro-Commissioner Period.

Rhee: Essential Business Concepts for Lawyers

Robert J. Rhee (Maryland), Essential Concepts of Business for Lawyers (Aspen, 2012):

Accounting and finance cannot be taught through the dense text and format typical of legal casebooks. Mirroring textbooks used at business schools with significant quantities of visuals, Essential Concepts of Business for Lawyers uses many graphical elements, including pictures, charts, diagrams, and tables. Engaging hypotheticals are fun and engaging, but they also illustrate the application of important concepts in business situations. At the end of every chapter, there are three forms of review and summary: Essential Terms, Key Concepts, and Review Questions. The text uses many examples, specially set in example boxes, to illustrate and reinforce difficult concepts. Completely up to the minute, the book features material on important, recent events such as the financial crisis of 2008-2009, the collapse of investment banks, the Bernie Madoff fraud case, and Enron. While this book is not a casebook, it includes edited appellate cases at the end of every chapter. These cases provide essential contextualization, illustrating the legal application of the business concepts presented, and make more concrete the lawyer’s need to understand business. This makes Essential Concepts of Business for Lawyers unique among available books, as the cases connect the unfamiliar (business concepts) with the familiar (case law). Flexibility makes it stand out as well. It can be easily used as a primary text in an independent course on essential business concepts and is the only single book that adequately serves this function. Additionally, this book can be used as a required or recommended supplement in doctrinal business law courses such as business associations, securities regulations, corporate finance, taxation, banking law, financial regulation, and business planning. A Teacher’s Manual accompanies with PowerPoint slides.

Bell: U.S. News Discloses Median LSATs, GPAs for First Time in Law School Rankings

Tom Bell (Chapman), U.S. News & World Report Improves Transparency of Law School Rankings:

Huzzah for U.S. News and World Report!  The most recent edition of its law school rankings includes the median LSAT and GPA of each school’s entering class.  [Unfortunately, the rankings table still sorts by 25th-75th percentiles; to get median LSAT and GPA data, you must click on each individual school, and then click on "More About Admissions"].... Though USN&WR remains short of that ideal, disclosing median LSATs and GPAs represents a major step towards making the rankings more transparent and, thus, trustworthy.

USN&WR started the trend towards transparency last year, when it began publishing the “volume and volume equivalents” measures that it uses in its law school rankings....  There remain only two categories of data that USN&WR still uses in its law school rankings but does not disclose:  overhead expenditures/student (worth 9.75% of a school’s score in the rankings) and financial aid expenditures/student (worth 1.5%).  [Full methodology here]  It isn’t evident why USN&WR declines to publish those inputs, too, though perhaps the financial nature of the data raises special concerns.  If USN&WR cannot bring itself to publish overhead expenditures/student and financial aid expenditures/student, however, it should abandon those measures.  They serve as poor proxies for the quality of a school’s legal education and if we cannot double-check the figures we cannot trust their accuracy.

WSJ: Maryland Points Way to Tax Policy in a Second Obama Administration

Wall Street Journal editorial, O'Malley's Tutorial: Maryland's Governor Offers a Lesson in Progressive Taxation:

Governor Martin O'Malley is the gift that keeps on taking. Even as he grabs ever more from Maryland taxpayers, he's providing useful instruction in the real purpose and pattern of progressive taxation, which is that sooner or later it comes after the middle class.

Last week the legislature in Annapolis enacted another huge tax increase, this time hitting anyone earning more than $100,000 ($150,000 for couples). This isn't a tax on the 1%. It's a tax on the top 14%.

Readers may recall that when Mr. O'Malley first raised taxes, in 2007, he said he could balance the budget on the backs of the rich. That didn't work out so well. The number of millionaires fell sharply in the state, whether because of the recession or because they sought tax shelters or simply fled to lower-tax states. Revenues came in far below projections, and the deficit forecast ballooned.

So Mr. O'Malley is now going where the real money is—the middle class. The highest state-local combined income tax rate will rise to 8.95% from 8.7% and 7.95% when Mr. O'Malley became Governor, giving Maryland one of the highest rates in the nation. About 300,000 Maryland filers reported six-figure incomes last year. ...

The progressive tax ratchet—the racket—is to pretend government can squeeze more money from the rich than is possible, then spend the imaginary windfall, then when deficits persist claim there's no choice but to raise taxes on the upper middle class and eventually on everyone who has income to tax. This is why Californians making as little as $48,000 pay a tax rate of 9.3%.

Our condolences to Maryland residents who are getting soaked again, but thanks to Mr. O'Malley for this tutorial in progressive government. In a second term, rest assured President Obama will do the same.

Deborah Jones Merritt: Short-Term Law School Predictions (2012-2014)

Deborah Jones Merritt (Ohio State), Mid Game:

Several commenters have asked me whether faculty are discussing the issues raised in this blog and, if so, what any of us see as the endgame. ... [H]ere are four predictions about what might happen by the end of the game's first quarter (roughly within the next two years). ...

1. This summer will produce shock waves at almost every school. Applications are down, including among those who scored highly the LSAT. In addition, based on comments at sites like top-law-schools, 0Ls are much more reluctant to pay sticker price outside the T14. Even some applicants with multiple offers in hand are still weighing whether to attend law school at all.

Schools outside the T6 almost certainly will have trouble filling their seats with applicants as qualified as the ones they currently enroll. The challenges may be greatest at schools ranked roughly 15-100, who will face pressure on three fronts: (a) fewer applicants in their original pool, especially at the higher LSAT levels; (b) more competition from schools ranked just above each of them, who are dipping further into their own pools; and (c) more competition from the schools ranked just below each of them, whose scholarship offers will be more tempting to applicants than in the past.

A significant number of schools at every level may pare class size to maintain LSAT and GPA levels. Alternatively, they may end up inadvertently under-enrolled because students change their minds in late summer. This summer probably will be a volatile one for admissions, with lots of students admitted off waiting lists who leave gaps at other schools.

The schools that do cut class size may face a sobering outcome: the unfilled seats are likely to be full-price ones. I suspect, in other words, that schools will continue offering scholarship money to attract the best students; they may even push those budgets to maintain their entering-class profile. When classes start in August, the missing bodies may be ones who would have paid full tuition. Losing 10-25 students at the "average" seat cost isn't too bad; losing 10-25 students who would have paid full tuition for three years is a bigger blow. ...

2. Tuition won't rise nearly as fast as it has in recent years. Some schools may even freeze tuition to attract students, although I think few will go so far as to roll back sticker price. Instead, schools may try to increase scholarship offers, de facto lowering tuition. Scholarships are an appealing way for schools to cut tuition, because they can differentiate among applicants. ...

3. Schools will begin looking for new sources of revenue. They are likely to admit more international students to both LLM and JD programs. They may also create revenue-generating courses targeted at practitioners. ...

4. Schools, students, and employers will adapt to new hiring patterns. I don't think the boom times of 2007 will come back -- certainly not within the next two years. The new patterns will vary by law school prestige and geography, but some likely overall trends are:

(a) More externships, volunteer positions, and fellowship-funded positions during the 1L and 2L summers. ...

(b) More staff attorney, career associate, contract attorney, and other "alternative" positions at law firms of all sizes. ...

(c) Much more mobility and part-time work during the first 2-3 years after graduation. The job market overall is unstable, and new lawyers clearly are having a hard time establishing themselves. We'll continue to see graduates moving among contract positions, government jobs, fellowships, and law firms. ...

(d) Increased emigration. American JDs have value abroad and, as the domestic job market remains rocky, foreign jobs may become more attractive. ...

Notice that my "first quarter" predictions do not include massive closings of law schools. It's possible that some law schools will shutter, and I think that would be a good result. But law schools have a lot of resources and considerable fat to pare from their budgets. Meanwhile, although the applicant stream has diminished, it is still large enough to fill all existing seats at law schools. At least during the next two years, I think we'll see reduced class sizes rather than closures. What happens after that may depend on how schools themselves react during the next two years, especially on predictions 2-4. Will we find ways to attract more students by cutting some costs? Will we find new sources of revenue? Will we place more of our graduates abroad? Will we find out more about the new job market so that we can help our graduates better navigate those waters?

Seventh Circuit: 'Remarkable' That Accounting Firm 'Screwed Up Its Taxes'

Forbes, Seventh Circuit Surprised To See Accounting Firm "Screw Up Its Taxes", by Peter J. Reilly:

“That an accounting firm should so screw up its taxes is the most remarkable feature of the case.”

Yikes.  I used to write things like that before I got  on a classy venue like Forbes.com and started working for a national firm for my day job.  So I want to be clear.  That’s not me.  It is the Seventh Circuit in its wrap-up to Mulcahy, Pauritsch, Salvador & Co., Ltd, an appeal of a tax court decision which I wrote about, almost exactly a year ago, in a post titled Personal Service Corporation and C Corp – Recipe For Disaster.  MPS is a full service accounting firm.  For the years in question (2001 – 2003), it was a C Corp, which is a little unusual nowadays, but not so unusual in 1979, when the firm was founded.  Once you have a business in a C corporation, it is not so easy to get it out, so it is understandable that they continued that way.

Rutgers-Camden Dean Doubles Down on Questionable Marketing Pitch to Prospective Law Students

Following up on Monday's post, LST Calls for Resignation of Rutgers Dean and ABA Investigation of Improper Recruiting of Law Students: 

• ABA Journal, Rutgers at Camden Law Dean Defends Marketing Pitch Touting Salaries of $130K for ‘Many Top Students’:

A marketing pitch sent to prospective students by Rutgers University School of Law at Camden touted a 90% employment rate in the legal field for its employed graduates and top private-practice salaries in excess of $130,000 for “many top students.” Now law dean Rayman Solomon is defending those claims after critics charged that the statistics are misleading. ...

According an analysis by Law School Transparency, no more than five recent graduates reported a salary of $130,000. And the 90% employment statistics include jobs where having a J.D. is an advantage, the group says. Solomon said he didn't dispute the group's figures, but disagreed with its analysis.

• Inside Higher Ed, Group Seeks Resignation of Rutgers-Camden Law Official:

Alleging false and misleading recruitment materials that overstated earnings expectations and understated the risk of unemployment, an advocacy group is calling for the resignation of a Rutgers University at Camden School of Law administrator. Law School Transparency, a policy organization working to reduce the cost of legal education, said associate dean Camille Andrews sent prospective students information that exaggerated the benefits of attending Rutgers-Camden. In addition to Andrews's resignation, Law School Transparency called for an investigation by the American Bar Association and asked the university to clarify the data in those materials to any prospective students who were contacted.

Dean Rayman Solomon is standing by Andrews. Solomon said the recruitment material was accurate but that he's "open to discussion" about the best way to reach prospective students going forward. The promotion in question targeted potential applicants who took the GMAT, not the LSAT, the typical law school admission test. The goal, Solomon said, was to reach a new audience and introduce the Rutgers-Camden program. Students could then go online to get more information.

"This was one letter saying are you interested, have you thought about it?" Solomon said. "This is not our entire marketing campaign. This is telling people that we have a program."

But were the numbers misleading?

"I don’t know how to respond," Solomon said. "If you have a hundred people, would four of them be misled? Would one be misled? Would 98 be misled? [It was] a piece that was designed to get people to think about something they hadn't thought about. This wasn’t the only information they could get about it."

• Law School Transparency, Rutgers–Camden School of Law’s Dean Stands by Marketing Campaign:

The brunt of Dean Solomon’s response is that this is but a single letter that isn’t a big deal and shouldn’t affect decision making. To that we ask, what could the employment statistics have been meant to do other than affect application and enrollment decisions? The letter was part of a recruitment campaign, not a not a teaser for a movie due out next summer. Camden should strive to have all of its communications with students be accurate and honest. Dean Solomon further states that the misinformation is okay because other information is out there. It would appear that he is saying “you should know not to take our statements at face value.” That’d be a pitiful position for a law school dean to take.

It’s not acceptable to provide prospective students with false and misleading information just because the truth is available somewhere else. Interpretation 509-4 to ABA Standard 509 clearly states that reporting consumer information accurately somewhere does not absolve a school’s responsibility to present such information in a fair and accurate manner elsewhere.

• Above the Law, Rutgers Law Dean Offers Nonsensical Response to Transparency Criticism
• Cherry Hill Courier Post, Doubts on Law School Pitch
• JD Journal, Activists Ask Rutgers-Camden School of Law Administrator to Step Down

The IRS and the Ambiguities of Tax Accounting

Luke Roosevelt Hornblower (J.D. 2012, Loyola-L.A.), The Empire Strikes Out: The IRS & the Ambiguities of Tax Accounting, 135 Tax Notes 1045 (May 21, 2012):

This article surveys the rare cases in which the IRS has unsuccessfully challenged a taxpayer’s method of accounting as not clearly reflecting income. Those cases together shed light on when tax accounting methods may reflect income just clearly enough to pass judicial muster.

All Tax Analysts content is available through the LexisNexis® services.

Massachusetts Bar's Advice to Law Schools: Reinvent 3L Year, Be More Like Medical Schools

Massachusetts Bar Association Task Force on Law, the Economy and Underemployment, Beginning the Conversation (May 17, 2012):

The MBA Task Force on Law, the Economy and Underemployment began its work in November of 2011 with a mission to study factors contributing to the problem of underemployment among recent law school graduates in Massachusetts. ...

In an effort to achieve its mission, the task force members were divided into four sub-committees, assigned to explore and report on: (1) law school curriculum reformation and the creation of a legal residency program; (2) fair disclosure of data by law schools and reasonable expectations by prospective law students; (3) structural obstacles to employment; and (4) avenues to utilize the resource of new law graduates while enhancing their skills for employment. While these topics are by no means an exhaustive list of factors contributing to the current employment picture, the task force used them as a launching point for what it hopes will be a more extended conversation.

The task force initially examined two non-legal professions currently experiencing little to no unemployment among its recent graduates, and compared their teaching methodologies to that of a typical modern law school. The task force found that both the medical and dental school teaching models place considerable emphasis on providing the kinds of hands-on practical training that more fully equips students to begin practicing soon after graduation. In contrast, while law schools offer a certain amount of practical training, largely at the election of the student, the primary concentration of offerings continues to be highly theoretical. The task force recommends that the MBA encourage Massachusetts law schools to reinvent the third year so as to provide greater opportunities for law students to gain practical legal experience and expand opportunities to hone their legal writing skills, beyond that offered through traditional first year legal writing programs.

In order to incentivize law schools to make such a shift, while remaining responsive to the needs of its readers, U.S. News & World Report should be pressed to incorporate a new criterion into its ranking system, based on how well each law school prepared its graduates for actual practice. Finally, the task force recommends that the MBA further explore the concept of a highly supervised legal residency program, which would provide practice-area specific training (such as civil trial law, criminal defense or probate practice training) to third year students and/or recent graduates in their chosen area of legal concentration.

The task force also considered the highly publicized issue of law schools misreporting admissions and employment data. While there have only been two recent examples of law schools supplying false admissions data [Illinois, Villanova], the task force considered whether the sanctions for misreporting are sufficient to deter other law schools from doing the same. As one suggestion to ensure better compliance, the task force recommends that the MBA support legislation, similar in concept to the goals of the Sarbanes-Oxley Act, requiring law school deans and trustees to certify that the data provided by the law school is fair and accurate. With respect to employment data, because of significant changes made recently by the American Bar Association in collecting data from the law schools, it is premature to determine if more must still be done. However, the task force recommends that the MBA further explore alternative sources — rather than the law schools themselves — to provide the critical data upon which prospective law students rely when choosing a law school. At the same time, the task force members did feel that prospective law students bear some responsibility to conduct adequate investigation and adjust their expectations to the economic realities of the legal job market.

It is important to note that the task force did not limit its focus solely to law schools as it explored root causes of underemployment among new lawyers. It also examined existing barriers to employment in Massachusetts, including the oversupply of lawyers caused by the virtual open door bar admission policies existing in Massachusetts. In an effort to reduce these barriers, the task force recommends that the MBA pass a resolution to better regulate the bar passage rate in Massachusetts by tying it to the national average. The task force further recommends that Massachusetts limit reciprocity with lawyers admitted in foreign states and initiate reciprocal pro hac vice rules, particularly with its border states. The task force further suggests that Massachusetts law schools provide incentives for their students to practice in other states, to further expand the footprint of employment opportunities for graduates of the nine existing Massachusetts law schools.

Finally, the task force catalogued a number of resources and opportunities already available to unemployed and underemployed lawyers in Massachusetts in order to fill gaps in legal services’ needs, and to provide recent graduates with experience necessary to increase marketable skills and thereby employment opportunities. While the task force made a number of recommendations to expand existing programs, the task force also supports the creation of certain new programs, including postgraduate clinics and the law school law firm, first proposed by [Tax Prof] Bradley T. Borden and Robert J. Rhee [The Law School Firm, 63 S.C. L. Rev. 1 (2011)].

Together, this report and the recommendations contained herein, represent the beginning of an important conversation to address the dynamic employment prospects faced by current and future law school graduates. Perhaps the most significant of the task force’s recommendations is that the MBA establish a permanent committee to study these and other factors contributing to underemployment among law school graduates with the goal of more closely monitoring evolving employment trends and developing strategies designed to overcome identified obstacles to employment.

• ABA Journal, Mass. Bar Task Force: Legal Education Could Take a Page from Medical Education’s Book
• Boston Business Journal, Report: Law School Should be More Like Medical School 
• JD Journal, Massachusetts Bar Task Force Releases Report
• Legal Skills Prof Blog, Massachusetts Bar Task Force Says Third Year of Law School Should Focus More on Practical Training

It's Time to Investigate the IRS

Following up on my prior posts (links below):  Fox News: It's Time to Investigate the IRS:

Richard Nixon ordered the IRS to conduct tax audits of those on his infamous “Enemies List.” Now, a spate of investigations and leaks coming out of President Obama’s IRS raises concerns that this administration may also be using the power of the nation’s most feared agency to silence its political opponents.

Today, more than six dozen grassroots citizens groups seeking to gain 501(c)(4) -- and in some cases 501(c)(3) -- tax status today find themselves facing unexpectedly invasive investigations and onerous procedural hurdles. All these groups have received non-profit recognition at the state level. Yet their requests for IRS recognition have been left in bureaucratic limbo for months -- in some cases, for more than two years. ...

In a separate instance of bureaucratic malfeasance, it appears that some within today’s IRS are even willing to break federal law to publicly disclose the private donor information of conservative non-profits.

Somehow, the Human Rights Campaign (HRC), a gay advocacy group, got its hands on Schedule B of the tax return filed by the National Organization for Marriage (NOM) -- a conservative values organization that has sparred with the administration and liberal groups over homosexual marriage. The HRC -- soon followed by scores of left-leaning publications, magazines, and blogs like the Huffington Post and Mother Jones -- published the confidential document that revealed the names, contact information, and donation amounts of anyone who had given over $5,000 to NOM.

NOM has called for immediate investigations by the Justice Department and the Treasury Department’s Inspector General to determine how HRC gained possession of this document. ...

The IG and the DOJ need to undertake their investigations with utmost seriousness, swiftness and impartiality. And they should bring criminal indictments against anyone inside or outside of the IRS found to be responsible for these abuses of federal tax power. This kind of behavior is simply unacceptable, for it threatens the liberty and freedom of Americans who want to participate in the political process.

Prior TaxProf Blog coverage:

• Senate Candidate Calls for Investigation of IRS 'Assault' on Tea Party (Feb. 24, 2012)
• IRS May Out Donors to Tea Party, Other 501(c)(4) Groups (Mar. 9, 2012)
• NY Times Backs IRS Efforts to Out Donors to Tea Party, Other 501(c)(4) Groups (Mar. 10, 2012)
• Why Is The IRS Asking Tea Party Groups If They Know Me? (Mar. 16, 2012)
• More on IRS, Tea Party Groups, and § 501(c)(4) Tax-Exempt Status (Mar. 24, 2012)
• House Demands IRS Documents on Alleged Harassment of Tea Party Groups (Apr. 12, 2012)
• National Organization of Marriage Demands Investigation of IRS's Leak of Mitt Romney's Contribution (Apr. 13, 2012)
• Sen. Hatch Demands Investigation of IRS's Leak of Mitt Romney's Contribution to Pro-Marriage Group (May 11, 2012)

Luke & Abramovsky: A Tax System Approach to Flood Insurance

Charlene Davis Luke (Florida) & Aviva Abramovsky (Syracuse), Managing the Next Deluge: A Tax System Approach to Flood Insurance, 18 Conn. Ins. L.J. 1 (2011):

This Article critiques the National Flood Insurance Program and proposes an alternative insurance plan that would use the strengths of the federal tax system to address the complexities of flood loss and provide basic coverage for all individuals. The Article also discusses the current tax rules applicable to flood loss and proposes methods for harmonizing such rules with the proposed program.

Kalsem: 19th Century Women, Law, and Literature

My Cincinnati colleague Kristin Kalsem has published In Contempt: Nineteenth-Century Women, Law, and Literature (Ohio State University Press, 2012):

In Contempt: Nineteenth-Century Women, Law, and Literature, by Kristin Kalsem, explores the legal advocacy performed by nineteenth-century women writers in publications of nonfiction and fiction, as well as in real-life courtrooms and in the legal forum provided by the novel form.

The nineteenth century was a period of unprecedented reform in laws affecting married women’s property, child support and custody, lunacy, divorce, birth control, domestic violence, and women in the legal profession. Women’s contributions to these changes in the law, however, have been largely ignored because their work, stories, and perspectives are not recorded in authoritative legal texts; rather, evidence of their arguments and views are recorded in writings of a different kind. This book examines lesser-known works of nonfiction and fiction by legal reformers such as Annie Besant and Georgina Weldon and novelists such as Frances Trollope, Jane Hume Clapperton, George Paston, and Florence Dixie.

In Contempt brings to light new connections between Victorian law and literature, not only with its analysis of many “lost” novels but also with its new legal readings of old ones such as Emily Brontë’s Wuthering Heights (1847), George Eliot’s Adam Bede (1859), Lewis Carroll’s Alice’s Adventures in Wonderland (1865), Rider Haggard’s She (1887), and Thomas Hardy’s Jude the Obscure (1895). This study reexamines the cultural and political roles of the novel in light of “new evidence” that many nineteenth-century novels were “lawless—showing contempt for, rather than policing, the law.

“Kristin Kalsem’s In Contempt makes a significant contribution to scholarship on the history of feminist jurisprudence. She covers thorny legal issues including married women’s property, infanticide, and lunacy law, as well as birth control, imperialism, and women’s admission to the bar. In her afterword she urges scholars to engage the ‘new evidence’ she has brought to light—and I have no doubt that this evidence will be welcomed enthusiastically.” -- Christine L. Krueger, professor of English, Marquette University

Deborah Jones Merritt: Law School Tuition, Monopoly Rents, and Law Prof Professional Responsibility

Deborah Jones Merritt (Ohio State), Price Sensitivity:

"Our consumers are not very price sensitive." I've heard that sentiment repeatedly during the last year, as colleagues across the nation respond to criticisms of law school tuition. ...

I wonder, in fact, how much of the tuition collected by law schools represents monopoly rents from the guild restrictions of the legal profession itself. To practice law, individuals must surmount significant barriers to entry: They must complete a four-year college degree, score decently on the LSAT, attend (and pay for) law school, and pass the bar examination (which often entails paying still more tuition for a bar review course). Increasingly, these individuals must also take a series of low-paying or volunteer positions to obtain practical experience and establish their credibility as lawyers. ... [L]aw school represents the single largest--and by far most expensive--barrier to entry. Potential lawyers don't get to choose their pipers: They must dance to our tune at whatever price we charge. ...

[L]aw schools are triply shielded from the free market: first by rules that restrict law practice to licensed lawyers; second by bar admission regulations that require applicants to graduate from accredited law schools; and third by self-designed accreditation standards. When we take advantage of these restrictions to escalate tuition far beyond inflation, we're not just stifling our graduates with debt; we're abandoning our professional responsibilities.

If you have a fetish for footnotes, DCM and I published a more academic version of these ideas last year (Responsibility-Rights in the Legal Profession).

Treasury Department: Distributing the Corporate Income Tax

The Treasury Department's Office of Tax Analysis has released Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology (Technical Paper 5, May 2012):

The purpose of this analysis is to improve the U.S. Treasury Department’s distributional model and methodology by defining new model parameters. We compute the percentage of capital income attributable to normal versus supernormal return, the percentage of normal return attributable to a cash flow tax versus a “burdensome” capital tax, and the portion of the burdensome tax on normal return to capital to distribute to capital income versus to labor income. In summary, 82% of the corporate income tax burden is distributed to capital income and 18% is distributed to labor income.

Garon: Technology and Legal Education Disruption

Jon Garon (NKU Chase College of Law), Legal Education in Disruption: The Headwinds and Tailwinds of Technology:

Part one of the article tracks the changes that automation is bringing to the legal profession from self-help online tools to predictive document drafting and other innovations. It analyzes the potential of the virtual law firm, unbundled (or specialized) legal services and the development of virtual law firm networks that will grow into the standard for small firm practice.

Part two translates these changes for legal education. While much of the core subjects taught in law school today will remain the same (i.e. Contracts, Torts, Property, Civil Procedure, Constitutional Law, Evidence, Corporation, Tax, etc.) much else needs to change.

• Like the other advocates for skills training, the article emphasizes clinical and field placement education for students.
• Like advocates for better instructional design, it calls for law school to each subject like logic and communication skills explicitly rather than hoping that students will glean these skills from the first year classroom discourse.
• It changes the focus on professionalism by recognizing that law is also a business, requiring law schools to prepare graduates with courses and training on the business of lawyering (including accounting, human resources, business development, legal business ethics, marketing, leadership and management training).
• It also emphasizes that 64% of law practice is done for business entities and an additional 10% of attorneys work in-house. So the emphasis of law schools should better reflect the kinds of lawyering that are actual taking place. While this does not suggest abandoning litigation or the teaching of how to serve individuals, it requires a more accurate balance so graduates are less surprised by the environment in which they practice law.
• Finally, it highlights that the nature of business has become global and technical so courses on international business, intellectual property and other fields relevant to the success of one’s clients should comprise the electives. Moreover, the proposal recognizes that many of these courses are better learned from the disciplines where the clients are trained, so interdisciplinary programs with certificates and even joint degrees should be encouraged.
• The trade-off means that fewer credits and course hours are expended on the core subject matter law school teaches. This will not be a problem since the measure of seat time is a poor approximation of a student’s learning or competency. Instead, competency testing for both skills and knowledge should be integrated throughout the curriculum, allowing students to move at their own pace and demonstrate readiness to leave law school using something more precise than a six-semester schedule.

Walsh: The Puzzle of the Pre-enforcement Challenge to the Individual Mandate of § 5000A of the Tax Code

Kevin C. Walsh (Richmond), The Anti-Injunction Act, Congressional Inactivity, and Pre-Enforcement Challenges to Section 5000A of the Tax Code, 46 U. Rich. L. Rev. 823 (2012):

There is a puzzle surrounding the Supreme Court’s consideration in March 2012 of a pre-enforcement challenge to the “individual mandate,” the provision of the Patient Protection and Affordable Care Act codified at § 5000A of the federal tax code. Republicans and Democrats alike claim to want a prompt, definitive ruling from the Supreme Court about the constitutionality of § 5000A. But the federal tax Anti-Injunction Act (“AIA”) presents a serious potential obstacle to the Supreme Court’s ability to reach the merits of the present pre-enforcement challenges. The AIA is a rule that Congress made. And it is not too late for Congress to make an exception to that rule. The puzzle, then, is this: If there is a congressionally created obstacle to getting a ruling that everyone in Congress seems to want, and Congress can remove that obstacle, then why has it not done so? This contribution to the Everything but the Merits symposium held on November 11, 2011 at the University of Richmond School of Law examines various aspects of this puzzle.

A combination of inertia, ignorance, and uncertainty about how the Supreme Court will rule if it reaches the merits may explain Congress’s failure to act in the face of the serious jurisdictional problem that the AIA may present. Partisans on both sides of the constitutional debate obviously want to win, but only one side can, and both sides prefer a jurisdictional loss to a loss on the merits. It could be, also, that there really is no AIA problem. One seeking an exhaustive analysis of the arguments can look to the briefs filed in the litigation. This symposium contribution presents one simple argument for the applicability of the AIA from the text of § 5000A itself that should be enough to demonstrate why those who want a prompt ruling should have cause for concern.

The costs to delayed review of the AIA’s constitutionality are, at this point, sufficient to justify Congress in acting to avoid it. But if Congress and the Obama Administration do not act, then neither should the Supreme Court strain one way or the other in deciding whether the AIA bars the present pre-enforcement challenges.

Cui: Foreign Administrative Law and International Tax -- Treaty Implementation in China

Wei Cui (China University of Political Science and Law), Foreign Administrative Law and International Taxation: a Case Study of Treaty Implementation in China, 64 Admin. L. Rev. 191 (2012):

U.S. tax specialists and the U.S. government increasingly have to take into account the interactions between U.S. and foreign tax laws, but to date, they have paid little attention to the administrative law backgrounds of foreign tax laws. In a growing range of cases, especially in the tax treaty and foreign tax credit (FTC) areas, the need for such attention is urgent. This Article describes a novel class of cases encountered by U.S. taxpayers that emanate from recent tax treaty implementation in China. In these cases, U.S. (and other foreign) investors face certain rules that conflict with common interpretations of tax treaties, and that, at the same time, are not legally binding under Chinese domestic law. The questions arise as to (1) whether U.S. taxpayers should still treat such rules as binding, and (2) what the consequences are of their doing so in terms of their ability to claim U.S. foreign tax credits. Equally, the U.S. government faces the question of what to do with these cases of errant treaty interpretation.

This Article shows that these questions for U.S. tax law and policy cannot be answered without an understanding of the Chinese administrative law approach to treaty implementation. An examination of this background suggests that affected U.S. taxpayers cannot simultaneously avoid contesting the applications of the Chinese rules and to claim, for FTC purposes, that they have taken “all practical and effective remedies” to reduce their tax liabilities. It also suggests that the U.S. FTC rules on what qualifies a compulsory tax payment constitute a way of “exporting” U.S. concepts of the rule of law. But most fundamentally, it highlights the inadequacy of the traditional leap of faith undertaken by both the signers and users of tax treaties—the belief that treaties should be expected to be implemented by other countries regardless of their domestic laws. Instead of making such a leap of faith, this Article argues that U.S. taxpayers and the U.S. government should recognize that the observation of treaty obligations can be ensured only if the signatories embrace the rule of law. To protect their rights and expectations under tax treaties, they must tap unfamiliar mechanisms that enhance the rule of law, such as legislative, judicial, and executive oversight.

Herzig: Exchange Funds

David J. Herzig (Valparaiso), Exchange Funds: A Proposal for Regulations, Finally, 135 Tax Notes 865 (May 14, 2012):

The economic downturn has created an investment market in which some tax-advantaged strategies have become favored. To avoid taxable diversification, taxpayers have turned to exchange funds. Through the rules in sections 351, 721, and 368, taxpayers can diversify a single stock position without recognition. Exchange funds have existed in one form or another since the 1930s. However, after 50 years of IRS acquiescence and minimal public discourse, the debate surrounding the technical rules has been renewed. This report discusses the basics of exchange funds and the regulation and legislative proposals the New York State Bar Association Tax Section submitted to Treasury. The author then explores those recommendations and makes a proposal of his own.

All Tax Analysts content is available through the LexisNexis® services.

Bankruptcy Court Finds Undue Hardship, Discharges $340,000 Student Loan Debt of Former Law Student With Asperger Syndrome

National Law Journal, Asperger Syndrome Prompts Court to Forgive Former Law Student's Debt:

A former law student has won a bid in bankruptcy court to discharge nearly $340,000 in education debt because her diagnosis of Asperger Syndrome rendered her unable to repay the loans. The U.S. Bankruptcy Court for the District of Maryland on May 17 found that Carol Todd, who attended the University of Baltimore School of Law, met the difficult burden of showing that she would suffer undue hardship if forced to repay her debt.

Todd, who received her high school general equivalency diploma during the late 1980s, at the age of 39, began attending law school in 1992 but did not finish, according to the opinion. She went on to obtain a master's degree from Towson University and a Ph.D. from an unaccredited online school in 2007. She filed for Chapter 7 bankruptcy in 2009. At the time of her trial, she was 63 and owed $339,361 to three student loan creditors.

Haneman: Court-Ordered Mediation in Will Contests

Victoria J. Haneman (La Verne), The Inappropriate Imposition of Court-Ordered Mediation in Will Contests, 59 Clev. St. L. Rev. 513 (2011):

Following the successful implementation of court-ordered mediation programs in divorce and family law cases, similar programs are being adopted to mandate the use of mediation in other areas of litigation. Complex emotional and personal issues can easily transform inheritance into a destructive process, and an increasing number of courts are ordering probate disputes and will contests to mediation.

The freedom of the individual to designate his heirs is a foundational norm that permeates doctrine in the law of wills, and as a result, the idea of testator intent has reached near-mythical stature. Conversely, mediation shapes settlement without rigid deference to legal rules and often marginalizes the intent of the testator as an impediment to reaching agreement. Because the approach taken in mediation directly conflicts with the legal rules applied by the courts adjudicating those same cases, a legitimate question is raised as to whether or not instituting court-ordered mediation programs that mandate mediation in will contest cases is appropriate. The contention of this Article is not that mediation is inappropriately used by the parties to a will contest case, but instead that court-ordered mediation is inappropriate. Mandatory mediation imposes an obstruction on the right of access to the courts that is inappropriately imposed when the process contravenes the substantive law of the case. This Article proposes an easily-implemented legislative solution that resolves the conflict between law and process.

The Proposed § 356 Regulations

Terri Guinn (J.D. 2012, San Diego), Comment, Proposed 2009 Regulations Dealing With Section 356 Nonrecognition Rules Should be Given the Boot, 48 San Diego L. Rev. 1397 (2011):

“Fire, Aim, Ready!” Could this be the approach taken by the Internal Revenue Service (the Service) in its attempt to finalize regulations, proposed more than two years ago, that would specify a new method for determining a shareholder’s taxable gains and losses in certain reorganization transactions? Has the Service decided to elevate theory over practicality without thinking through all of the ramifications of these regulations? Finalizing these proposed regulations in their current form may have serious unintended consequences. As drafted, they miss their intended mark by inadvertently creating a loophole whereby some shareholders could take immediate losses on some of their shares when, in reality, they have an overall gain. This Comment will explain why the proposed 2009 regulations set poor policy and are inconsistent with congressional intent.

Former University of Georgia Prof (and CNN President) Leaves Present for Neighbor

Giegerich: The Monetization of Business Tax Credits

Thomas W. Giegerich (McDermott, Will & Emery, New York), The Monetization of Business Tax Credits, 12 Fla Tax Rev. 629 (2012):

This Article examines the history of the development of federal incentive tax credits, from the enactment of the investment credit in 1962 to the cash grant in lieu of credits regime introduced as part of the American Recovery and Reinvestment Act of 2009, and methods for "monetizing" tax credits developed in the context of state tax credits as well as federal tax credits (and associated taxation issues). The principal thesis of the Article is that (1) the current array of federal business tax credits addressed in the Article are in the nature of subsidies rather than structural components of the computation of a "correct" tax; and (2) therefore constraining the monetization of these tax credits through the imposition of normative-based substantive requirements is inappropriate. As the Article states in conclusion, if the judgment is that tax expenditures of this kind play a useful role (i.e., they should not simply be repealed), then the articulation of the underlying goals and intended beneficiaries of current tax-based subsidies should be sharpened and our existing "delivery mechanism" closely examined and possibly overhauled.

Lazear: 2013 Tax Increases Are to be Feared, Not Spending Cuts

Wall Street Journal op-ed, Three Views of the 'Fiscal Cliff', by Edward P. Lazear (Stanford University, Graduate School of Business):

Discussion of the so-called fiscal cliff—the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don't act—confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts.

Anyone who uses the term "fiscal cliff" accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy.

But there are two other views: that of the budget balancer and that of the supply-sider. Rather than term the impending changes that will occur in 2013 a "fiscal cliff," the budget balancer thinks of this as "fiscal consolidation." Tax increases reduce the deficit, as do cuts in government spending. Both are austerity measures that make the government more responsible and, therefore, both are conducive to long-run economic growth. Those who support the Simpson-Bowles plan subscribe, at least in part, to this view. ... The budget balancer regards both tax increases and spending cuts as moves in the right direction.

The supply-sider has a different view from both the Keynesian and the budget balancer. Fundamentally, supply-side advocates focus on the harmful effects of tax increases. Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt. ...

Which of the three views is correct?

On the tax side, there is strong evidence that supports the supply-siders. Christina Romer, President Obama's first chairwoman of the President's Council of Economic Advisers, and David Romer document the strong unfavorable effect of increasing tax rates on economic growth [The Macroeconomic Effects of Tax Changes]. They report that an increase in taxes of 1% of gross domestic product lowers GDP by almost 3%. The evidence on government spending also suggests that high spending means lower growth.

The evidence on government spending also suggests that high spending means lower growth. For example, Swedish economists Andreas Bergh and Magnus Henrekson survey a large literature and conclude that an increase in government size by 10 percentage points of GDP is associated with a half to one percentage point lower annual growth rate [Government Size and Growth: A Survey and Interpretation of the Evidence].

The evidence suggests that we should move away from worry over the impending "fiscal cliff" and focus more heavily on concern about raising taxes. And although some Keynesians may view this as not the best time to control spending growth, promising to change our ways in the future is as credible as Wimpy's promise to pay on Tuesday for the hamburger that he eats today.