Knave Watch: The American Family Business Institute

I subscribe to the Kleinrock tax service. I find it easy to use, fairly comprehensive, and cost effective, because it contains a minimum of editorial content and a maximum of source material.

Part of my morning ritual when coming into the office is to go online to Kleinrock's Daily Federal Tax Bulletin and review new tax developments. Recently, Kleinrock has been attempting to cover legislative developments at an early stage, picking up press releases about various lobbying efforts on Capitol Hill. They should stick to their basic franchise, providing comprehensive source material, because they're simply too credulous when reporting on lobbying efforts. A case in point is the report today on the lobbying efforts of the so-called American Family Business Institute.

Kleinrock reports that:

As of June 27, the anti-estate tax lobbying group, the American Family Business Institute, is awaiting word from congressional Republicans on when to release an advertising campaign that highlights the benefits [sic] of repealing the tax. The ad is expected to play in several Democratic districts where members are on record in support of full repeal. Airing the commercial would happen just before the Senate votes on permanently repealing the estate tax, which is expected to happen next month.

What Kleinrock's editors did not realize is that the American Family Business Institute is an example of knavery in its purest form. In an ad campaign that features two of the individuals who were depicted in the HBO series Band of Brothers, the AFBI will press its contention that:

The [Gift and Estate Tax which the AFBI refers to as the "Death Tax"] is a cruel and unfair burden on grieving American families and the time has come to bury it deep in the ground where it belongs. . . . It taxes Americans on already-taxed assets and it wreaks havoc on families and family-run businesses. The [Estate Tax] is now aimed squarely at our nation's 'greatest generation' and we are proud that two of that generation's most celebrated figures will be leading the charge in this campaign.

The non-partisan organization FactCheck.org has this to say about the ad campaign in a posting entitled Estate Tax Malarkey (one member of the "Band of Brothers" featured in the campaign is Donald G. Malarkey):

Contrary to ad's claim that "your family" might be crippled, the vast majority of families actually are not affected by the estate tax. In fact, less than 3 percent of deceased adults in 2002 had estates subject to the tax, according to the nonpartisan Urban-Brookings Tax Policy Center and figures from the IRS.

And though the ad focuses on family farms and businesses, the truth is that very few actually pay the estate tax. The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004.

And even considering estates for which farming or business was a sideline, the Center found only 7,090 taxable estates for 2004 that included any farm or business income. That's still just 38 percent of all taxable estates. The fact is that repealing the estate tax entirely, as the ad advocates, would benefit mostly non-farmers and non-business-owners.

The ad would have been accurate had it said that "some families" are affected.

Far from imposing tax bills on farms and businesses that "cost them everything," the average estate tax paid by all farm and business estates in 2004 was just under 20 percent of the value of the estate, according to calculations by the Tax Policy Center.

The effective rate was far less for smaller estates. Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent, a hefty tax bite but well short of "everything."

But what's most interesting about the AFBI is that it can't even get any good horror stories to post on its website to support its position that that Estate Tax in its current form forces families to sell their closely-held businesses or farms.

None.

In a page on their website called Death Tax Tales, the Institute purports to show real hardship experienced by real people. Yet, only five of the entries are dated after 1997. Postings before that time simply lack relevance to the current Estate Tax, because of the dramatic increase in the unified credit amount.

Examining the entries listed as being after 1997, at least three are not "tales" at all, but opinion pieces that merely echo the Institute's position. (Two of these, incidentally, are from that paragon of honest reporting, the Wall Street Journal editorial page.)

What about the other two "horror" stories.

One is from an article in the Annapolis Capital-Gazette. (This one cost me five bucks because the AFBI's link would not connect to an article that was was more than 30 days' old. (The article was published on May 27, 2004.))

The story is not about the terror of the Estate Tax at all, but is instead a typical report from a small town paper of a old style garage giving way to a gourmet food store. The garage, together with an adjoining property that was about four times as large, was sold for $1.2 Million in 2004. Since the unified credit amount for decedents dying in 2002 and 2003 was $1 Million, only $200,000, less, of course, the costs of burial, estate administration, etc., would have been subject to the Estate Tax. It is unlikely that the federal estate tax would have been more than $50,000. (Had they sold the business without the post-death step-up in basis, the capital gains tax would likely have been about four times that amount.) This would hardly seem to be sufficient to force the family to sell the business.

And it wasn't. As the article happily reports:

[T]he sale [does not] spell the end of Miller's Garage, which has been serving community motorists since the late 1930s. It will move down the street and service cars in the rear of Miller's Muffler.

The only portion of the article that would lend any credence to the AFBI's argument is the following, which I quote in its entirety:

"The story is we had to sell it off to settle the estate and pay inheritance taxes and such," said Joe Miller, who runs the garage his father built.

I rather think that it was the "such" that compelled the sale.

The other story is even less convincing. It is the tale of Jenell Ross (again, the link does not work and I had to use Google to track down the article) who whines about the tax, but never claims that it caused her family to sell the family business after her father's unexpected death. Instead, she states that after his death:

[T]he responsibility of keeping the business running and the workers employed fell on my mother, brother and myself.

In other words, they kept the business. In fact, not only did they keep the business, good tax planning allowed her family to "not [face] the fear of what could have been." (The family was apparently paying off the estate tax over 10 years at the low interest rates previously discussed here.)

If, as the AFBI claims, family businesses face ruin due to a confiscatory estate tax, there should be at least one case in the past five years they can point to.

In the words of the Smothers Brothers, "Curb Your Tongue, Knave."

Update

Further checking reveals that Ms. Ross' father died in 1997. Thus, her story, even though dated October 11, 2003, is not relevant to current calls for Estate Tax repeal, since the unified credit is so much larger now and moving upward. When it peaks at $3.5 Million, it will allow families such as the Ross' to exempt $7 Million in wealth from the imposition of the tax.

Thus, of the five purportedly post-1997 stories, only one relates to a post-1997 estate. And, in that case, the family likely fared better under the current tax regime than it would had the forces of repeal had their way because of the basis step-up rules.

Not Condemned to a Slow Death

On Tuesday, the Baltimore Sun had a story about one developer's difficulty in acquiring the last parcels necessary to commence work on a projected $150 million condominium and retail project in a neighborhood near Johns Hopkins University called Charles Village. It seems that the final holdout sold his row house to the developer for $1.1 million. At the beginning of the property acquisition process, similar homes were purchased by the developer for $100,000. As time went on and word of the project got out, prices increased. Most of the homes were purchased for $250,000.

On Wednesday, the Supreme Court handed down its opinion in Kelo v. New London. That decision affirmed the right of state and local governments to condemn property even if the property is ultimately conveyed to another private party, so long as the future use by the public is the purpose of the taking. The Court the interpreted the phrase "public use" to include use for any "public purpose." The Court explicitly endorsed the concept that "[p]romoting economic development is a traditional and long accepted function of government." Thus, promoting economic development would be a valid public purpose sufficient to support a property condemnation even if the condemned property were subsequently conveyed to a private developer.

Under the Court's decision, the city of Baltimore could have acquired all of the real estate via condemnation, including the owner of the "last parcel," and then sold the entire parcel to the developer. The Court in Kelo made it clear, however, that the purpose of the acquisition could not be merely to convey the acquired property to a particular developer. Such an acquisition would constitute a "private purpose" and would be forbidden under the Fifth Amendment.

Apparently, the right-wing bloggers are all in a dither about Kelo. However, the facts surrounding the Charles Village acquisition, which became public only the day before the opinion was handed down, underline the practical necessity to allow state and local governments to have such broad condemnation powers. While it's true that the Charles Village project was put together by a private concern, without any assistance from the government with respect to the property acquisitions, the project has been delayed for over a year. Additionally, the real estate acquisition costs escalated significantly over original estimates. There is no knowing how many urban real estate redevelopment projects are not undertaken because the developers face similar difficulties. Furthermore, it would appear that some real estate holders got a bad deal, while others, who could hold out, got very rich deals.

I am not unmindful of the potential for abuse that Kelo poses. I am skeptical, for instance, that the process by which the fair value of property is determined will in all cases adequately compensate sellers who are forced to sell. This is particularly true if the sellers are old or have lower incomes. Such individuals may not be able to successfully fight city hall. However, this problem can be mitigated in a number of ways. (How about the ability of a property owner to retain an attorney and pay a contingent fee based upon the difference in the government's initial offer and the final price paid. You think that conservatives who rail against contingent fees in tort cases might now have some second thoughts?)

And, even the Court allowed that there was a possibility that there could be cases in which the ostensible public purpose was merely a smokescreen to allow a taking for a private purpose. However, such hypothetical cases could "be confronted if and when they arise." Thus, this mere possibility of abuse presented no need to embrace a blanket prohibition on takings that ultimately found their way to other private owners.

Perhaps the underlying rationale for Kelo was stated best by a proponent of the Charles Village project:

"Why should one person hold out for so much and stop something the community wants?" asked Charles Village Association President Beth Bullamore.

No Knave, No Fool

Some commentators have taken issue with my denominating those who follow Republican economic nostrums as being either knaves or fools. I have detailed at some length on this blog the outright lies of the right wing commentators with respect to the tax system (e.g., that the estate tax threatens closely-held family businesses and farms, that the U.S. tax system is beginning to burden the wealthy, etc.) and their willful omission of critical facts (e.g., that if you abolish the estate tax and replace the revenue loss by repealing the basis step-up rules, you shift the tax burden from the very wealthy to the less wealthy).

I believe that when individuals supporting a proposition regularly and repeatedly lie about the facts of their proposals and regularly and repeatedly fail to set forth relevant facts, they can justifiably be classified as knaves. I also believe that when the lies and omissions appear with sufficient regularity and are as egregious and transparent (or easily discoverable) as they are, individuals who buy the crap that these individuals are selling can justifiably be called fools.

Nouriel Roubini regularly demonstrates that he is neither a knave or a fool. In one posting (Deja Vu Voodoo Economics...or Supply Side Voodoo Black Magic...), he demolishes the theoretical underpining of the right's economic policy. He did a similarly masterful job on Bush's proposal to gut Social Security (Social Security Privatization as the Mother of All Con-Man Smoke-and-Mirrors Shell-Games). These postings are, by blog standards, fairly long. Yet, they're very readable. He proves that, without any question, there are knaves and fools out there.

What the Best Dressed Tax Advisors Are Wearing This Year

From Terry Cuff, we now have the last fashion trend among tax advisors (or non-advisors) here. Perhaps we will see professional practice firms enforcing strict dress codes, extending casual Fridays to 24/7.

Long (Arm) Shot

In Beyond Systems, Inc. v. Realtime Gaming Holding Company, LLC, the Maryland Court of Appeals rejected an attempt to exercise personal jurisdiction based merely upon an Internet link arrangment.

Realtime is a Georgia LLC with its principal place of business in Georgia. It is a holding company that owns all of the interests of KDMS, a Delaware LLC with its principal place of business in Georgia. KDMS develops interactive software used in the online gaming business. KDMS entered into a marketing agreement with Montana Overseas, a Panamanian corporation, wherein Montana Overseas would issue licenses to use the KDMS software. One of the licensees is windowscasino.com which is owned by an entity in St. Helier, Jersey, United Kingdom. Windowscasino.com is an interactive online casino that promotes only the games designed by KDMS.

Windowscasino.com entered into an "affiliate" arrangement with Travis Thom, a resident of Albuquerque, New Mexico. Under the arrangement, Thom paid windowscasino.com for a software package that allowed Thom to get paid when individuals came to gamble at windowscasino.com via a link on Thom's site (goldenrhinocasino.com). Thom then embarked on a mass e-mail solicitation. That solicitation resulted in 240 emails in a 24 hour period being received by employees of Beyond Systems in Maryland.

Beyond Systems brought an action against Realtime and KDMS under Maryland's anti-spam law, the Maryland Commercial Electronic Mail Act, Section 14-3001, et seq., of the Commercial Law Article of the Maryland Code. The Circuit Court had dismissed Beyond Systems' complaint on the basis that it could not exercise personal jurisdiction over Realtime and KDMS. The Court of Appeals affirmed the dismissal.

The Court first rejected the attempt to bottom jurisdiction on the basis of "general personal jurisdiction" as follows:

Though the maintenance of a website is, conceivably, a continuous presence everywhere, the existence of a website alone is not sufficient to establish general jurisdiction in Maryland over Realtime Gaming and KDMS. BSI provided the trial court with no evidence beyond Realtime Gaming and KDMS’s website, to establish substantial, continuous, systematic contacts with Maryland. Therefore, we conclude that the trial court properly determined that it lacked general jurisdiction over Realtime Gaming and KDMS.

Oddly, the Court referred to the websites in question as belonging to Realtime and KDMS. In fact, the website that operated the casino was owned by the Jersey, U.K. entity and there was no evidence of common ownership of that entity, on one side, and Realtime and KDMS, on the other. However, the IP address of the website was registered to Realtime and KDMS. In rejecting the assertion of specific personal jurisdiction over the defendants, the Court stated that:

The only evidence of any kind of relationship between Realtime Gaming and KDMS and windowscasino.com is the fact that the windowscasino.com website contains a link to an IP address registered to KDMS where customers can download the gaming software. This does not establish or even indicate a relationship, principal-agent or contractual, between Realtime Gaming and KDMS, on the one hand, and windowscasino.com on the other in which windowscasino.com is empowered to act on Realtime Gaming and KDMS’s behalf or whether Realtime Gaming and KDMS control windowscasino.com. BSI does not provide any evidence of mutual corporate officers, board members, owners, or other such controlling individuals or entities to show anything more than that windowscasino.com has obtained a sub-license from Montana Overseas. A mere link with no more compelling evidence is insufficient to create the necessary nexus between Realtime Gaming and KDMS, and windowscasino.com and Thom.

Three judges of the Court (Chief Judge Bell and Judges Raker and Harrell) dissented, arguing that the Plaintiff should have been allowed to take discovery on the personal jurisdiction issue. They noted that:

The relationship between [defendants] and windowscasino.com is shrouded in the mists of holding companies, offshore entities, and multi-level licensing arrangements. According to respondents, KDMS has entered into an exclusive license with a master licensee (Panama-based Montana Overseas). Montana Overseas, in turn, sub-licenses the software to many client casinos, among them windowscasino.com (seemingly a trade name of either Angel de la Mañana, a Costa Rican corporation, or ADLM, Ltd., located in the Channel Island of Jersey). Respondents assert that KDMS and Realtime have no direct relationship with their sub-licensees, and exercise no control over the manner in which the sub-licensees advertise their services. Under BSI’s theory, on the other hand, the licensing and sub-licensing agreements are shams, Montana Overseas, Angel de la Mañana, and ADLM are mere dummy corporations, and windowscasino.com is a trade name or alter ego of KDMS/Realtime.

While the relationships may be exactly as KDMS and Realtime claim, the three facts detailed above provide some credence to BSI’s theory. A KDMS-owned server is providing KDMS-developed software directly to end users. This server’s collection of affiliate identification numbers suggests that KDMS and Realtime may have some role in the administration of windowscasino.com’s affiliate commission system.

These facts alone do not establish an agency relationship between KDMS/Realtime and windowscasino.com, but they do render BSI’s request for discovery something more than a “fishing expedition.” BSI is entitled to more information regarding the connections among the various entities. Who owns Montana Overseas, Angel de la Mañana, and ADLM? Do these companies have any assets or employees? Who is acting as the “house” when a gambler bets at windowscasino.com? Do the purported licensing agreements between KDMS/Realtime, Montana Overseas, and Angel de la Mañana or ADLM actually exist, and if so, what do they contain? Is the software licensed for a flat fee, or do KDMS and Realtime receive an additional payment for each download? What aspects of windowscasino.com’s business, if any, are run directly by KDMS and Realtime? Do KDMS and Realtime write advertising copy for windowscasino.com and its affiliates?

I think that, on balance, the dissenters have the better argument. If discovery on the personal jurisdiction issue is not allowed in cases such as this, the opinion will have essentially established a roadmap to making an end-run around not only anti-spam laws, but virtually every attempt to exercise state and local jurisdiction over Internet commerce. At the very least, the plaintiff should have been allowed to take limited discovery to determine whether the actual relationship among the defendants was really as independent as its "public face" purported it to be.

Federalism

Via TaxProf, we learn of two related private letter rulings, PLR 200524016 and PLR 200524017. The rulings apply the Defense of Marriage Act to deny domestic partners spousal benefits under qualified deferred compensation plans run by state governments.

The state in question in both rulings has a domestic partner statute that "provides that registered domestic partners have the same rights, protections and benefits and are subject to the obligations and duties 'under law' as granted to and imposed on spouses." Among the rulings given in the PLRs was the following:

A registered domestic partner, a former registered domestic partner, or a surviving registered domestic partner as defined in [the state's] Act is not a spouse, a former spouse or a surviving spouse for purposes of [the relevant IRS Code Provision] section 457. Accordingly, in the event that the Spouse Provisions are not interpreted and applied in a manner consistent with the Defense of Marriage Act, the operation of Plan A will not be in compliance with section 457(b).

In other words, if the state interpretes its plan to include a domestic partner within the term "spouse," not only will the benefits of the plan not inure to the participants who are attempting to invoke the state's domestic partner statute, but the plan itself will be disqualified. Thus, every other participant in the plan (presumably all government employees within the affected jurisdiction) would lose the tax-deferral benefits that the plan would otherwise have conferred.

Assuming that the rulings correctly apply the Defense of Marriage Act (and I believe that they do), they mean that, even in states that allow same-sex marriages, those marriages will not be effective to confer federal tax benefits that otherwise extend to married couples. Furthermore, because all employees would lose benefits if the plans were extended to same-sex marriages, the Act essentially prohibits states from even attempting to extend benefits to same-sex couples.

It is obvious that Republican calls to allow states and localities to make independent policy determinations without federal government interference are hollow. That principle apparently applies only when the state and local policies adhere to the doctrines of the Republican right.

Flattery Will Get You Everywhere

I just received an email solicitation, likely a low-level sort of spam, indicating that it was sent to me "[b]ecause [I am] one of the more forward-thinking people regarding the online collaboration of tax issues." In spite of (because of?) that, I thought that it was worthwhile passing on the email because it announced the creation of a Wiki for tax research by Intuit called TaxAlmanac:

www.TaxAlmanac.org is a free new tool for tax profesionals to research tax issues and share knowledge. TaxAlmanac was recently referenced by Time magazine as one of the new "wiki-based" information tools....There is an overview of TaxAlmanac [here].

Trent Lott Update

I thought that the Senate resolution apologizing for lynchings in the South was mostly a showboat effort to allow the Republicans to attempt to demonstrate that they have good taste, even if they don't necessarily taste good. (Charlie the Tuna strikes again.) No expenditure of federal funds was involved and who can really be in favor of lynching these days. Admittedly, the resolution didn't contain a tax cut for the super rich, but you can't have everything.

However, as reported by The Washinton Post, even this little piece of inexpensive symbolism was too much for some senators:

There were few senators on the floor last night and no roll call, no accounting for each vote. But 80 of the Senate's 100 members signed on as co-sponsors, signaling their support.

Missing from that list were senators from the state that reported the most lynching incidents: Mississippi Republicans Trent Lott and Thad Cochran.

United We Stand?

Via the Florida Asset Protection Blog, I came across the case of Leo v. Powell (In re Powell), (Bankr. N.D. Ala., April 20, 2005). As a matter of black letter law, the principles upon which the case rests seem to be rather non-controversial. However, a close reading of the facts suggest that the case may have been either wrongly decided or poorly argued by the trustee in bankruptcy.

John David Powell filed for Chapter 7 bankruptcy protection. Among his assets was a 15% interest, as a limited partner, in a family limited partnership that had a net asset value of approximately $2M. The bankruptcy trustee sought to have the assets of the partnership either sold and divided or partitioned under relevant provisions of the Alabama Code.

Quite correctly, the Bankruptcy Court turned aside the specific request made by the trustee holding that the asset in the bankruptcy estate was Powell's partnership interest, not some interest in the underlying assets. In relating the facts of the case, however, something rang false.

The debtor, his brothers, and a trust for the settlors' grandchildren held 85% of the interests in the partnership. The settlors, the debtor's parents, held the remaining 15% of the interests. However, the distributions that went to the parents/settlors were grossly disproportionate to their percentage ownership of the limited partnership. While this may have been justified due to services that they rendered to the partnership, the point was never examined.

Compare the silence in Powell to the way the court addressed a similar issue in Movitz v. Fiesta Investments, LLC. (Discussed here.) It is all well and good to conclude, as the court did in Powell, that the assets of an entity belong to the entity and cannot be attached by creditors of one of the owners of the entity. But where the entity is controlled by a friendly family member and there is evidence that distributions are possibly being made to frustrate creditors (as would be the case if, without any other factual basis, disproportionate distributions were made to non-debtor family members), the court should be able to step in to protect the rights of the creditors. The opinion is silent as to the reason that this was not done.

I don't think that, based on the opinion, we can say definitively that the outcome of the case is wrong. First, the question as to disproportionate distributions seems not to have been raised by the trustee, as was the case in Fiesta Investments. Second, because the partnership did require active management, it is possible that the distributions were justified, even though they were disproportionate to the stated interests of the partners. Of course, since the court never focused on the question, we may never know what answer it might have given.

Trent Lott: Racist or Just Hypocrite?

Brendan Nyhan (here) takes Jeffrey Dubner of Ameican Prospect (here) to task for unjustifiably reading Trent Lott's mind when he voted against the nomination of Roger Gregory to be a judge on the United States Court of Appeals for the Fourth Circuit. Gregory, who had initially been nominated by President Clinton to a recess appointment to the Fourth Circuit, had been renominated by President Bush. Lott was the only Republican senator to vote against Gregory.

Dubner had suggested that Lott's vote was not driven by the purest of motives:

Lott's vote, it would seem, was just to resist the integration of the Fourth Circuit, which had never seen an African American judge; Republicans blocked four separate African American nominees during Clinton's presidency.

Nyhan attacks Dubner for engaging in a "faux-psychological speculation. Without supporting evidence, it's just a blatant accusation of racism against Lott for opposing a black nominee -- the same kind of reductionism that Republicans use when attacking Democrats as bigots for opposing minority or religiously conservative judicial nominees."

Let's look a little more closely.

At the time of the Gregory vote, Lott's office articulated Lott's rationale for voting against Gregory as follows (see here):

"This was an institutional decision based on a statement Senator Lott made last year that any approval of federal judges during the recess should be opposed," said Lott's spokesman Ron Bonjean.

Last Wednesday, the Senate voted to confirm William H. Prior, Jr., as a judge on the United States Court of Appeals for the Eleventh Circuit. The following passage from the New York Times describes the vote:

The Senate voted, 53-45, to confirm Judge Pryor for a lifetime appointment to the United States Court of Appeals for the 11th Circuit, based in Atlanta. He has been sitting on the tribunal since early 2004 under a temporary presidential appointment that would have expired late this year without the Senate confirmation.

Three Republicans voted against confirmation - Senator Susan Collins and Olympia Snowe, both of Maine, and Lincoln Chaffee of Rhode Island.

(My emphasis.)

Now real quick: Can anyone tell me how the Junior Senator from Mississippi voted?

There are several possibilities that would explain Lott's vote other than the one suggested by Dubner. For instance, he has reconsidered his position with respect to recess appointments and now, as a matter of policy, doesn't believe that they are such a bad thing.

And I have a fee simple deed to a large bridge in New York that I will sell for a song.

Professor Bainbridge as Charlie the Tuna

At some point on Wednesday, I thought that I had observed a miracle--law bloggers standing up as one and giving the Kentucky Attorneys' Advertising Commission grief for even considering the possibility that it could charge lawyers $50 a pop for every time they posted on their weblogs. (Dave Giacalone who lead the charge has 15 trackbacks to his original posting.) Wouldst that it were true.

Professor Steven Bainbridge, although sympathetic to the opposition to the Kentucky statute ("My own take on this is that restrictions on advertising by lawyers is stupid, anti-competitive, and ought to be a clear violation of the First Amendment. But the Supreme Court disagrees, having given virtual child porn greater constitutional protection than advertising by lawyers.") nevertheless feels that lawyers who blog are entitled to no exemption from the statute. His conclusion is that:

Once you accept that advertising by lawyers can be regulated, it's not at all clear to me that blogging ought to get a blanket exemption from the lawyer advertising rules. It's clear that many lawyers see blogging as a marketing device.

* * * * *

There is a distinction between blogs that happen to be written by lawyers and lawyer marketing blogs, of course, but even if you buy David [Giacalone's] distinction between professional self-promotion and advertising, it's hard to escape the conclusion that at least some of the latter should be deemed advertising. If you don't buy David's distinction, of course, it would seem that most lawyer marketing blogs are advertising.

In an extended posting, Dave responded to Bainbridge and, as updates to his original posting, Bainbridge replied.

As I see it, that Bainbridge fell for what I would call the "Charlie the Tuna" fallacy. That is, he has confused non-specific marketing, which promotes a person or firm as being of high repute or ability in general (i.e., that the person or firm has good taste), with advertising, which promotes a service, service provider, or product as being valuable for achieving a specific goal (i.e., that the service, service provider, or product tastes good). The distinction goes to the heart of the problem that the Kentucky rule was designed to address. Let me highlight the issue by example

Currently, late night cable television seems to be innundated with advertisements for firms that purport to be able to settle delinquent tax obligations for pennies on the dollar. Clearly, these are advertisements, focused and directed to conveying the message "You have this problem and I can solve it." The Kentucky rule is designed to address this sort of advertising in order to prevent various undesirable outcomes.

In the case of tax delinquency advertisements, the advertisements seem to promise far more than they can deliver. I am also aware that there seems to be a sense that they are run by fast buck operators. While I don't know whether this is, in fact, the case, it is the possibility of having fast buck operators prey on desperate, but unsophisticated laypeople that provides one of the underlying rationales for the Kentucky regulatory scheme. The other significant rationale is that advertising will encourage the filing of numerous baseless claims and lawsuits. (It's not important for this discussion whether these underlying assumptions are correct or whether the cure for the alleged disease is appropriate.)

On the other hand, for instance, while I have posted on this weblog concerning various legal issues that I deal with in my representation of clients, my discussions have concentrated on the legal issues presented in various cases, IRS pronouncements, etc. My postings are not designed to encourage the use of any specific services that I offer.

Going further, of course, some (many?) of my posts are arguably not "legal specific" at all. By way of example, I have posted on various tax policy issues, focusing primarily on the effects of various proposals and of the current tax arrangements on income distribution. However, in a broad sense, all of these postings constitute marketing, because they demonstrate (I hope) that (i) I keep current on legal developments and (ii) I possess the writing and intellectual skills necessary to be a successful practitioner. Yet, this weblog does not present the possible social ills that the Kentucky arrangement was designed to protect against, since it does not lend itself to either the "overselling" of my services or the fomenting of litigation.

I believe that most legal weblogs fall into the same category as mine. That is, to a greater or lesser degree, they're marketing their authors, but they are not advertising the services of their authors. I think that Bainbridge makes his mistake by failing to recognize that all advertising is marketing, but not all marketing is advertising.

A final war story to underline the point.

I was an expert witness in a legal malpractice case. On my professional biography there is a mention of a letter to the editor of the New York Times that I had written. The topic had nothing to do with business or tax law. The attorney representing the other side asked why I had included a reference to the article in my professional biography. I replied that I believed it was significant because it illustrated, in a small way perhaps, that I possessed certain analytical skills that reflected on my professional abilities. In other words, like Charlie, I had good taste even if, especially from the questioning attorney's view in that case, I didn't taste good.

Nobody's Really THAT Stupid

About a week and a half ago, I posted comments concerning perceived intellectual shortcomings of the Maryland State Bar Association's Committee on Ethics. This evening, Dave Giacalone at f/k/a reported the action taken by the Kentucky Attorney's Advertising Commission against Ben Cowgill's Legal Ethics blog. By comparison to Kentucky, Maryland's ethics rules are a paragon of enlightenment.

According to Cowgill, Kentucky requires that lawyers "submit a copy of [any] advertisement [they create] to the Attorneys' Advertising Commission, along with a filing fee of $50.00. In the past, the Commission has interpreted those requirements to mean that the lawyer must pay a filing fee of $50.00 each and every time the content of the advertisement is modified. " Apparently, the Commission is considering whether each blog by a lawyer constitutes an advertisement and whether every blog posting by a lawyer is a separate "modification" of that advertisement. If it adopted the latter position, every blog posting would require making a payment of fifty bucks to the Advertising Commission.

As things currently stand, Cowgill will continue to post without fear of retribution while the Commission takes the matter under advisement:

I have received a "green light" to continue posting, without paying a filing fee for each post, until the matter is resolved.

It is my sincere hope that we will be able to agree on a sensible interpretation of the regulations that permits other Kentucky lawyers to launch law-related web logs. Several Kentucky lawyers have told me that they are very attracted to the idea of creating web logs as on-line journals about the areas of law in which they practice. But each of them has expressed concern about the filing fee mentioned above. I am hopeful that the time and attention I have devoted to the issue will resolve the problem for everyone and pave the way for other web logs by Kentucky lawyers.

Thus, I will begin posting again this week. Look for my reports from the annual convention of the Kentucky Bar Association, where the featured speakers include Geoffrey Hazard and Jay Foonberg. It's good to be back!

Let me make two predictions: First, the Commission will, at the least, not impose a fee for every weblog posting by an attorney. Second, in due course, there will be no fee at all imposed on lawyer-authored blogs in that state.

Even the Commission knows that the general rule (a filing fee for engaging in free expression) is probably unconstitutional. Certainly, the Commission knows that an interpretation that would impose a filing fee on every blog posting is unconstitutional since it imposes a significant cost on the free speech rights of attorneys. Moreover, such a rule would put Kentucky attorneys at a competitive disadvantage against attorneys in other parts of the country.

Scoops

I had intended to comment on Littriello v. U.S., which addressed the question of whether the check-the-box regulations were valid.

The Service had made an assessment against Littriello, who was the sole member of a single member LLC, for the entire amount of employment taxes that the LLC had not paid, including both the employer's and the employee's share of FICA and the income tax required to be withheld. The Service contended that it could assess these amounts directly against Littriello because the LLC in question was a disregarded entity under the regulations. Thus, the Service did not have to comply with the requirements necessary for the assessment of a penalty under Section 6672 and the assessment included the employer's share of FICA.

The Court upheld the Service's position and the regulations.

However, before I could post my comments, TaxProf Blog posted extensive comments by Professors Charlotte Crane and Steve Johnson. Their comments adequately addressed the federal tax implications of the case, making any comments that I might have a couple of days late and a few dollars short. In other words, I was scooped.

However, some days you eat the bear and other days the bear eats you. I seem to have scooped the NY Times in at least one case. Compare yesterday's lead story in the NYT ("The Bush administration tax cuts stand to widen the gap between the hyper-rich and the rest of America. The merely rich, making hundreds of thousands of dollars a year, will shoulder a disproportionate share of the tax burden") with my postings here and here.

The Power of Attorney

In Vinogradov v. SunTrust Bank, Inc., the Maryland Court of Special Appeals reviewed the grant of summary judgment against an investor who granted a power of attorney to her stockbroker. She complained that the broker's employer was negligent in failing to oversee the broker's trades on her behalf and that the employer was liable for the broker's alleged breach of fiduciary duty. She claimed losses of almost a million dollars.

The customer claimed that SunTrust and the broker owed her a duty to:

1. Monitor her accounts, the trading activity and transfers in and out of the accounts, to exercise reasonable care to prevent loss or harm, and to advise her of any suspicious activity in these accounts; and


2. To monitor her accounts to ensure that SunTrust's internal policies, as well as the policies of the National Association of Securities Dealers [NASD] regarding suitability were followed.

In support of her claim, she offered evidence that SunTrust was concerned about the level of trading activity on the account. She proffered the affidavit of an expert witness who testified that the defendants "had breached an industry standard of care" by providing " insight into 'securities industry regulatory requirements and relevant standards of care.'" However, the evidence showed that after its investigation, SunTrust was comfortable that the broker had acted properly and that his actions fell within the parameters of the power of attorney granted to him by the plaintiff.

The Court concluded that "even assuming that SunTrust ordinarily would have a duty to warn [the plaintiff] of suspicious activity in her accounts, the [power of attorney] absolved SunTrust of such duty by the broad language that gave [the broker] every right to take the actions he took with regard to [her] funds and by fully protecting SunTrust while it relied on the [power of attorney]." The Court further found that SunTrust's "concern over account activity is not the same as concern over a particular individual's conduct."

Simply put, SunTrust's investigation revealed that the broker was acting properly and well within the authority granted by the plaintiff to the broker.

Finally, the Court rejected the breach of fiduciary duty claim, since "Maryland does not recognize a separate tort action for breach of fiduciary duty."