Found It!

Previously, I complained that reports from the Congressional Research Service aren't available to the public on the web. Via Kevin Drum, I have just learned about Open CRS, a private effort to collect CRS reports and put them in a single searchable archive on the web. So far they've collected 8,223 CRS reports.

As Drum explains:

CRS reports are commissioned by congressmen on a wide variety of topics, they're generally nonpartisan and reliable, and most of them run 5-10 pages, which makes them terrific introductions to complex issues.

Great news, but, like Drum, I still can't figure out why CRS refuses to post the reports itself. The Open CRS project depends on individuals obtaining reports from their Congressional representatives in pdf format and then submitting the reports to Open CRS for posting. Needless to say, this is a somewhat awkward procedure and will result in delays between the time the reports are issued and the time they are posted on the website.

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."

Mechanical Ethics

In a recent posting, Carolyn Elefant took issue with Maryland Disciplinary Committee's recent Ethics Decision, Ethics Docket 05-11, Participation in For-Profit Referral Organization with Non-Attorneys. That opinion concluded that it was unethical for a lawyer to join an organization that was designed to facilitate cross-referrals among lawyers and non-lawyers.

Carolyn quite correctly criticized not only the ruling itself, but the general approach of the ethics committee. As she said "Sometimes a bar association issues a decision that's so impervious to the realities of legal practice that you have to wonder whether those who drafted it ever practiced law." Unfortunately, the simplistic and mechanical approach that the committee took in Ethics Docket 05-11 is typical of the committee's general approach to questions that come before it.

For instance, in Ethics Docket 2005-03, the committee was asked to opine as to the ethics implications of a paperless office. Rather than either (i) answering the question directly, (ii) setting forth specific guidance with respect to paperless record keeping that would satisfy the various ethical considerations pertinent to document retention, (iii) suggesting that an ad hoc committee be formed to study the issue, or (iv) asking the individual making the inquiry to outline precisely how he or she proposed to maintain the system and what safeguards against loss of records were built into the system, the committee merely restated the general principles involved with respect to record retention. The opinion then blandly stated, without any discussion, that "We also point out that in view of [the pertinent record keeping standards and principles], we are not as confident as you that the use of a paperless storage system for all files that are more than three (3) years old would be permissible."

The issue before the committee, however, was not their "confidence," but whether the details of the precise system to be used by the inquirer actually allowed the pertinent ethical principles to be effected.

I am currently maintaining my records pretty much on a paperless basis as to ongoing work. (I have not gone back to archive older records, which continue to be retained in paper.) I am willing to bet that I meet and exceed the applicable standards in every respect. Specifically, seven of the eight standards deal with when documents can be destroyed, how they can be destroyed, etc. My system addresses all of the concerns to which these seven principles or standards are directed quite simply: I never destroy documents.

All documents are scanned and saved to a client's file on my computer. Every day the files on my computer are backed up to (i) my firm's server and (ii) my portable hard drive. The server is backed up periodically, I believe weekly. My hard drive is backed up to my laptop every week or so. Thus, generally at the end of every two week cycle, all client files are in up to five different locations. Short of a nuclear attack on Baltimore, they're safe. Try doing that with paper.

But the mindlessness of the committee is deeper than just technological illiteracy. Lawyers are supposed to attempt to provide service to the greatest number of people at the lowest possible cost. My paperless record retention costs about $100.00 a year. Not only does it beat the out-of-pocket costs of paper document retention by a multiple of at least 10, but it has the additional benefit of reducing the labor and time lag involved in record retrieval. In short, electronic record retention has "ethical benefits" that the committee never bothered to examine, since cost savings ultimately redound to the benefit of clients.

This is not merely a rant with respect to the benefits of a paperless office, however. The point is that the committee's decision in Ethics Docket 205-03 is typical of its general approach to problems.

By way of example, the committee regularly disregards the economic consequences of its decisions. Thus, in Ethics Docket 05-11, the committee essentially handicapped potential new entrants into the legal market by putting outside the pale a particular type of networking. The rationale of that opinion only makes sense if (i) the members of the committee don't have any clients or (ii) like Tom Hagen, they all "have a special practice; [they] handle one client." Traditional sorts of networking, (everything from college and law school alumni associations, to country club, church, or synagogue membership, to participation on charitable boards, all well-known networking devices) are apparently okay, but novel methods of networking are not. The result is that the "ins" can retain a competitive advantange against potential new entrants to the market.

The committee's approach descended into absolute arrogance in Ethics Docket 2005-04. There, the committee was asked about the propriety of a solo practitioner, whose practice was concentrated in estate planning and tax advice, partnering with a financial services firm to provide referrals of the attorneys' clients. The attorney would receive a commission based upon the investments the attorneys' clients made with the financial services firm. Apparently, the arrangement would be exclusive, that is, the attorney would not refer to any similar firm.

There is no question but that the arrangement lends itself to potential conflicts of interest at a number of points. However, rather than addressing the substantive issues, the committee simply dismissed the inquiry as merely outlining the inquiring attorney's "many arguments or debating points as to why [the attorney felt] that [his or her] professional independence would not be impaired by forming an association with" the financial service provider. The committee then stated "we [do not] engage in written debates with inquirers over our interpretations of the rules, trying to justify our opinions to the inquirer. "

Why not? One of the purposes of, for instance, judicial opinions is for courts to lay out the intellectual underpinnings of their decisions. This allows those opinions to be discussed and criticized. As a consequence, the judicial decision making process contains within it a potential corrective against the perpetuation of error. This is necessary because judges are mere mortals. I am not certain, but I think that the members of the MSBA Ethics Committee are as well.

The question of whether lawyers should be able to also engage in selling securities, insurance, act as business brokers or real estate brokers, etc., is one about which reasonable people can differ. I think a reasonable argument can be made that by forcing lawyers to "sell" only services, the cost of those services will, over time, escalate so that many people will not have access to legal counsel. (I think that this process is actually ongoing now and is accelerating.) I also see the conflict of interest potential inherent in "cross-practicing." The committee, however, not only sees but one side, it refuses even to discuss whether there is another dimension to the question before it.

The great battle in legal theory of the twentieth century was whether the tenents of law were already in existence and the task of lawyers and judges was to discover them or whether law was a constantly evolving and developing process. Oliver Wendell Holmes' famous dictum in 1898 ("The life of the law has not been logic, it has been experience") summarized the victory of the legal realists that law was a dynamic process, not a static set of a priori assumptions. Since Holmes wrote those words in 1898, one would think that by now the MSBA Ethics Committee would have figured out what they mean.

Hide and Seek

While preparing the immediately preceding post, I attempted to find an independent link to the Congressional Research Service report that I pointed to. (The link in my posting is to the TaxProf website which posted a reprint of the report from Tax Analysts.) Not only could I not find a copy of the report on the CRS website, I couldn't find a CRS website that contained any reports of any kind whatsoever.

The reason is explained by The Memory Hole here:

The Congressional Research Service, a branch of the Library of Congress, provides fact-rich, unbiased, nontechnical reports to members of Congress regarding a variety of issues. The CRS does not distribute these reports to the public in any way. You can't get them online, order paper copies from the CRS, or even read them in the Library of Congress. CRS is not subject to the Freedom of Information Act. The Service's philosophy is that it works for Congress, not the people, so its publications are deliberately made difficult to get.

A few exceptions exist. Some third parties get selected reports through Congressional representatives, then post them online. The State Department's Website contains CRS reports that State prepared. Penny Hill Press provides all CRS reports, but you have to cough up $29.95 for each report if you're not a subscriber ($7.95 is you are a $299-per-year subscriber).

For a while, the Websites of Congressmen Mark Green and Christopher Shays provided a gateway to a CRS internal database, giving us access to a large but still incomplete selection of these reports. (Frustratingly, the CRS database blocked search engines, meaning that the reports never showed up in searches and weren't cached by Google or Gigablast.)

In mid-October, Green and Shays suddenly shut off access. Since theirs were the only doors into the CRS database, all of us lost access to this rich source of information. Luckily, The Memory Hole had copied many of these reports before the curtain came down. Below you will find the four main pages from Green's portal to the CRS database. If The Memory Hole has a copy of any given report, the link "MemHole mirror" appears after the title. We're interested in filling the gaps, so if you have a report that's listed but not mirrored, please send it. And we're especially interested in receiving CRS reports that don't appear anywhere else online.

For more info on access issues surrounding CRS publications, read "Congressional Research Service Products: Taxpayers Should Have Easy Access" from the Project on Government Oversight.

We're not talking here about material that is kept from the public due to national security concerns. CRS produces non-partisan analyses of issues before Congress. In fact, the information is not secret at all, it is merely difficult to access. Apparently, these hurdles to access are created intentionally by the CRS.

Blogs benefit public discourse by widely broadcasting information and opinion. They have natural limitations (e.g., the limitations on the time that bloggers can devoted to any one posting, for instance) and, as a result, blogs often offer secondary comment to more in-depth analyses. Organizations and institutions such as CRS are intended to produce studies that are easily digestible (that is, they're easy to read), yet offer a good degree of depth. The CRS should unlock access to these reports and allow its database to be available on the Web and searchable via the major search engines.

Estate Tax Policy Summary

Via TaxProf, you can download a Congressional Research Service report Economic Issues Surrounding the Estate and Gift Tax: A Brief Summary, by Jane G. Gravelle. The report is short and summarizes the arguments, pro and con, with respect to the repeal of the estate tax. It makes several points that are worth emphasizing:

First, the estate tax adds progressivity to the tax system.

Second, "as is also the case for the income tax, neither economic theory nor empirical evidence clearly indicate that the estate tax reduces savings." (Emphasis added.)

Third, at worst, there is only a minimal negative impact on small businesses and farms.

A Knave Admits Leading Fools

Via TaxProf, there's a link to the article Estate Tax Repeal: Who Stands to Gain? by Dustin Stamper, published by Tax Analysts. The article not only confirms what I have pointed out here, namely that estate tax repeal will hurt many of those who are supporting it, but that the cheerleaders for repeal are aware that this is the case.

For instance, the article notes that:

Digging down to the essence of estate tax repeal, the debate becomes less and less about how small businesses and farms are affected and more about the fairness of the tax itself. Some of the staunchest advocates are not afraid to admit that many of their supporters, in the end, have nothing to gain.

"For most of you in this room, this is not your tax," [Republican pollster Frank] Luntz said at [a] rally [last week]. "It's a principle and a moral issue."

To the extent that there is some policy reason behind the efforts to repeal the estate tax, it is an intent to distort market mechanisms. Thus:

The Seattle Times Publisher Frank Blethen, a long-time advocate for estate tax repeal, told Tax Analysts that he not only understands that [many small businesses will actually end up paying more taxes under the proposed repeal in 2010 and beyond than they would with the increased exemption proposed to be in effect in 2009], but embraces it.

"This is about holding on to businesses and farms," he said. "If you don't sell, you don't have to worry about basis."

Let's see: Repeal of the estate tax removes a tax burden on the really, really rich and shifts it onto individuals who are not as well off. The policy reason is to distort the market and to encourage families to hold onto their assets even though sound business judgment would warrant that they sell.

Could someone tell me what conservative priniciple Luntz et al. are talking about?

Update

A brief Google search reveals that Luntz has shifted his rationale for attacking the estate tax. As recently as March, 2004, Luntz said:

The most frequent victims of the death tax come from the most credible professions in the country — farmers and small business owners.

Of course, this was untrue, but the falsity of the argument was not widely known. In the 2004 article, Luntz offered a compromise to opponents of estate tax repeal that he suggested opponents could accept:

Set the exemption high enough that virtually all farms and small businesses won’t be affected. Set a rate that simplifies the tax structure and doesn’t force would-be payers to sell their businesses or hire high-priced tax attorneys.

Now, once it has become well known that Luntz's principle argument for abolition of the estate tax has already effectively been embodied in the tax statute, in arguing for complete repeal he is forced to rely on, ah, principle?

My Little Town

I've lived in Baltimore all my life. In my experience, at least, Baltimore has always had a municipal inferiority complex, poorer and less sophisticated than its neighbors to the north (Philadelphia and, especially, New York) and hte south (Washington, D.C.). However, there is clearly a renaissance underway.

Yesterday, the Fitch bond rating agency rated Baltimore's general obligation bonds A+ while raising the general outlook to "Stable" from "Negative". (Free registration required.)

The rating is based upon:

Maryland's (the state) continuing support of city revitalization resulting in tax base growth and stabilized population decline, as well as the city's conservative budgeting practices, moderate debt levels, and its demonstrated ability to deal with ongoing fiscal pressures. General fund operations are tightly balanced, although reserves continue to grow incrementally. The city is undergoing an aggressive plan to revitalize several of the neighborhoods surrounding the successful downtown redevelopment and this effort is likely to lead to continued private investment within the city. Debt levels are moderate, largely as a result of city action to limit borrowing to an affordable level. Capital needs are fairly sizable mostly for water and wastewater projects given the age of Baltimore's infrastructure and are payable from rates and charges on the system's users which extends beyond the city limits.

Baltimore's financial management is excellent, contributing to the steady buildup of reserves over the past decade, even as the city sustained major population and employment losses. The city's more active participation in the management of its school system may prove to be of long-term benefit to the city if it succeeds in instilling tighter fiscal discipline and improving academic achievement, both of which appear to be occurring. The city made an emergency loan to the school system during fiscal 2004 equal to $42 million, or 75%, of its budget stabilization reserve to alleviate cash flow problems.

I wonder whether the changes ongoing in the city will be reflected on The Wire.

The Unfunded

Brad DeLong takes issue with Daniel Gross's column questioning why GM and Ford are continuing to pay their shareholders substantial dividends. DeLong writes:

According to Gross, Ford has $23 billion in cash and yet a stockholder's total equity value of only $18 billion. If that is true, why not spend $18 billion on a special cash dividend?

The reason is that these figures are essentially incorrect. They are derived from Ford's balance sheet statement that does not reflect liabilities for unfunded pensions and retiree medical benefits. According to a Reuters story on May 5, these liabilities are in the respective amounts of 12.3 Billion and, hold onto your hats, 32.4 Billion as of the end of 2004. One has to dig through Ford's financial statement filed with the SEC to find this bland explanation for the omission of the liabilities from its balance sheet:

Note 10.

* * * * *

Company Contributions

Our policy for funded plans is to contribute annually, at a minimum, amounts required by applicable laws, regulations, and union agreements. We do from time to time make contributions beyond those legally required.

Pension: As of April 2005, we contributed $2.4 billion to our worldwide pension plans, including benefit payments paid directly by the Company for unfunded plans. We expect to contribute an additional $400 million in 2005 for a total of $2.8 billion. Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. pension plans in 2005. We also do not expect to be required to pay any variable-rate premiums for our major plans to the Pension Benefit Guaranty Corporation in 2005.

Health Care and Life Insurance: In April 2005, we contributed $200 million to our previously established Voluntary Employee Beneficiary Association trust ("VEBA") for U.S. hourly retiree health care and life insurance benefits.

In other words, these massive liabilities, which would entirely wipe out the shareholder book value of the company if shown on the balance sheet, are simply omitted. Of course, this does not mean that the company has no value. After all, the balance sheet does not reflect the company's goodwill and the stream of Ford's future earnings may be sufficient to take care of these benefit shortfalls. Since Ford has a market capitalization of $18.4 Billion, a figure that presumably factors in the pension and health care liabilities, on one side, and the goodwill value, on the other, the "market" apparently believes that Ford has, all things considered, a positive valuation.

Yet this analysis does not resolve the DeLong/Gross debate, although it would seem that DeLong's glib "why not pay out the entire value in dividends" is clearly unwarranted. The issue is far more complex: To what extent will the payment or non-payment of dividends impair the company as an ongoing operation?

If, for instance, in authorizing the dividends the directors significantly overestimate the company's ability to continue in operation and reverse its current fortunes, the decision to pay dividends could, in retrospect, be deemed to be folly, because, for instance, the payout might impair liquidity just when it was most needed to restructure the business.

On the other hand, it may be helpful to use dividends to keep shareholders relatively contented. A failure to authorized dividends that runs counter to shareholder expectations could be viewed very negatively by the market (such as might be the case if the market concluded that the failure to pay dividends was because the financial condition or prospects of the company were more dire than management had previously let on). A radical drop in market capitalization could, in effect, turn into a run on the bank.

If pressed to take sides, I would go with Gross, but that's only because DeLong is simply too doctrinaire as to the amounts that should be paid out. That being said, however, I am not at all certain that the dividends are entirely too high.

It Ain't Me Babe!

I tripped over the following quote in a column in the Chicago Sun-Times:

Stuart Levine may be the first person ever to be both knighted and indicted in the Northern District of Illinois.

The column does not say where donations to the legal defense fund can be made.

Pedigrees and Mutts

Without any doubt, the blog with the most refined and respected intellectual pedigree is The Becker-Posner Blog, co-authored by a Nobel-prize winning economist, Gary Becker, and Richard Posner, perhaps the leading public intellectual on any judicial bench. In a recent posting by Becker entitled Should the Estate Tax Go?, Prof. Becker makes an argument cobbled out of several assertions of fact that, to be charitable, are dubious. In order, they are as follows:

1. There is no convincing evidence that . . . the degree of social mobility across generations [] has been falling during the last couple of decades.

Well, yes and no. According to an article by David Wessel in the May 13, 2005 WSJ (subscription required), "[O]ver the last 10 years, better data and more number-crunching have led economists and sociologists to a new consensus: The escalators of mobility move much more slowly. A substantial body of research finds that at least 45% of parents' advantage in income is passed along to their children, and perhaps as much as 60%. With the higher estimate, it's not only how much money your parents have that matters -- even your great-great grandfather's wealth might give you a noticeable edge today." Strictly speaking, this does not necessarily contradict Becker's assertion, which is that the rates of social mobility are relatively unchanged, but it certainly puts a different spin on it.

In essence, Wessel is saying that we (and here he points to Becker by name) have overestimated the rate of social mobility. (Interestingly, Wessel quotes Becker as follows: "Even . . .Prof. Becker is changing his mind, reluctantly. 'I do believe that it's still true if you come from a modest background it's easier to move ahead in the U.S. than elsewhere,' he says, 'but the more data we get that doesn't show that, the more we have to accept the conclusions.'" The quote seems at odds with Becker's position in the blog posting.)

2. The estate tax brings in only $24 Billion in revenues, but generates costs in professional fees alone of $6 Billion.

Joel Schoenmeyer does a good job of demolishing this assertion. ("There may be 20,000 estate planning attorneys in the country, but very few of them devote all of their time to estate tax issues (in fact, from what I've seen, very few of them devote all of their time to estate planning issues).") As I noted previously, there is already a substantial body of academic study that indicates that the compliance and enforcement costs of the estate tax, while higher than those of the income tax, are not nearly as great as Becker estimates. See here.

3. The estate tax also makes it harder for families to pass successful businesses on to their heirs. Yes, and alligators roam the sewers in New York City. Again, see here.

4. Becker finishes with a real howler: The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health. Let me see, if we abolish the estate tax, I'll bet that at least half of the $6 Billion in the professional fees paid to avoid the tax will be directed to trying to "raise opportunities to children from poor families." Right.

Judge Posner in his response sees the issues much more clearly, pointing out the faulty "social mobility" assumption that underlies Becker's argument. Posner suggests, for instance, that gift tax rules be tightened to impose a gift tax on private school or college tuition paid by Grandpa or Grandma. (I've often wondered what percentage of high tuition private college charges are paid by the students' grandparents.) He also comments on two points I've previously discussed, namely the effect of the repeal of the "pick-up" tax credit and the effect of the repeal on the basis step-up rules. (However, he does not point out the regressive result of the repeal.)

Let me make a couple of suggestions for reform:

1. The proceeds of policies of insurance in insurance (or Crummey) trusts ought to be subject to estate tax. The current law warps investment decisions away from those that would be dictated by the market to investment in life insurance. Here, I'm ready to trust the market.

2. The rules with respect to discounts applicable to family limited partnerships or family limited liability companies ought to be formalized via statute. Under current law, there is too much incentive to game the system by taking an agressive approach to discounts and then negotiating the issue with the audit agent.

3. The rules with respect to income tax deductibility of charitable deductions if the donor is relatively young (say, below 62) could be loosened. As currently structured, there is too much incentive to wait until death to dispose of assets via charitable donations. This proposal would create incentives for early donation and would assist in reaching a result that Posner favors, to foster "the creation of centers of private power . . . as an offset to growing governmental power."

4. Outlaw dynasty trusts. A full discussion of dynasty trusts is beyond this posting. Suffice it to say at this point that the concentration of income and wealth in this country is growing rapidly and the last thing we need is a new vehicle to accelerate that trend.

Just one mutt's view.

Dancing With Myself?

In the song Dancing With Myself, Billy Idol writes:

Well there's nothing to lose
And there's nothing to prove
I'll be dancing with myself

In Jones v. Novastar Financial, Inc., Judge Albert Matricciani should have taken the lyrics to heart and declined to address at least one question presented to him.

The case involves an LLC that was formed by a Delaware mortgage broker. The LLC had the mortgage broker and the local branch manager as its members. In addition to the operating agreement of the LLC, the mortgage broker entered into a "a branch support and administration agreement." This was presumably an agreement whereby the mortgage broker extended support services to the LLC. The Court determined that the complaint stated a valid private cause of action against the LLC under the Maryland Mortgage Lender Law, Md. Fin. Inst. Code Ann. Sections 11-501 et seq.

The Court then concluded that the mortgage broker could be a co-conspirator with the LLC. This seems to me to be wrong. The mortgage broker was a member of the LLC and, while the operating agreement was not described in any detail, it presumably had management rights with respect to the operation of the LLC. To the extent that it was exercising its rights qua LLC member, the conspiracy claim should have failed.

In any event, however, the conspiracy claim was rejected because the Court did not "find in the complaint allegations of an agreement to carry out unlawful actions outside of the [operating] agreement and the branch support and administration agreement." In other words, there was no agreement to undertake unlawful acts.

The Court should have addressed this issue first and then simply not addressed the issue of whether a party could conspire with an LLC that it was a member of since that question would have been rendered moot.

The Media and Taxes

Joel A. Schoenmeyer at Death and Taxes--The Blog had some nice things to say about my posting on the WSJ's reporting of the estate tax/basis step-up tradeoff. He then addressed the repeal of the "pick-up" tax credit in 2001. I agree entirely with his comments, but I think that the background of the repeal is worthy of further comment.

In essence, before the massive tax cuts enacted in 2001, the estate tax had a provision that granted a tax credit for state inheritance taxes paid. While there were limits to the credit, in effect it worked as a direct subsidy from the federal government to the states. After all, the states could enact a tax on estates that cost its citizens nothing because the tax paid to the state reduced the federal tax that would otherwise have to be paid on a dollar for dollar basis. At the end of the day, estates were no worse off than if the state had not enacted a tax. Since it cost their citizens nothing, virtually all of the states enacted an estate tax equal to the pick-up credit.

The reason that the credit was abolished in 2001 was that the tax cutters could claim that their bill cut taxes by about $9 Billion a year less than was actually the case. Of course, the $9 Billion came out of the pockets of the various states. (There was some poetic justice: Brother Jeb's state relied on the pick-up tax for about 5% of its revenue. Thus, the tax cuts pushed by Big Brother George forced him to raise taxes on the citizens of Florida.)

Needless to say, none of this was reported at the time by the mainstream (meaning, non-technical) media. Admittedly, in the context of the orgy of tax cutting then taking place, it was fairly small potatoes. Yet, it illustrated the high degree of disingenuousness exhibited by the tax cutters and should have been worthy of mention.

I agree with Schoenmeyer's comments as to the ripple effect that the repeal of the pick-up credit will have, but there's another affect that's important. Specifically, it is relatively easy for an individual to abandon domicile in one state and establish domicile in another. As the states begin to replace the old pick-up tax with a real tax, they will incentivize some of their citizens to abandon their current domiciles and to move to states which do not enact such provisions. Of course, the citizens who will be most significantly affected by such tax enactments are often wealthy and retired, that is, a group that is perhaps the most mobile segment of the general population. By enacting an independent tax on estates, states could be playing with fire because if the well-to-do begin to abandon their (relatively high tax) domiciles with a vengeance, there will be a reduction in income tax revenues as well. On balance, the states could actually end up with reduced revenues on a net/net basis.

Housekeeping Update

I've updated the list of links to other legal weblogs. The list is by no means intended to be encylopedic. While initially, I had links to virtually any legal weblog that I was aware of, the update represents the addition of only legal weblogs that I follow via Bloglines, thus the list, as updated, is heavily weighted toward discussions of tax, business, and technology issues.

There will likely be one further change in the next week when I add icons to allow easy subscription to this weblog via Yahoo and MSN. Any other suggestions as to how the format of the weblog can be improved are welcome.

Late to the Game

In yesterday's Wall Street Journal, Tom Herman's "Tax Report" feature had the headline "Estate-Tax Repeal May Hurt Some." (Paid subscribers only.) In the article, he reported what I had noted last month, namely that people who would not benefit from the abolition of the estate tax would be exposed to tax liability they currently escape due to the operation of the basis step-up rules. The estate tax repeal would likely abolish these rules, thus subjecting capital gains to income tax, in cases where, under current law, the gains would escape tax entirely.

The WSJ is reputed to have a somewhat split personality--outrageously ideological on its editorial page, scrupulously honest in its actual news reporting. Herman's article, which I believe falls into the news reporting category, erodes one's confidence in the reputation of the reporting side.

Start with the headline itself, indicating that the repeal may hurt "some." Wrong: As I pointed out, not some. The simultaneous repeal of the estate tax and of the basis step-up rules would impose a tax on many, offering relief to only a few. Consistent with Republican philosophy, of course, the few are very rich, the many merely the well-to-do and the simply wealthy.

The body of the article gives the impression that the abolition of the basis step-up rules is the product of some arcane statutory fine print. (In fact, the article actually refers to those who are aware of the problem as "tax advisers who have studied the fine print.")

Look, this is not, as one tax expert quoted by the WSJ says, "enough to make your head spin." Rather, it's what the late Charlie Eckman used to say, "It's a very simple game!" A lot of people, including people in the middle class, benefit from the basis step-up rules. As the estate tax law changes currently enacted take effect, only the few very rich will benefit from a repeal of the estate tax. The losers outnumber the winners by at least a factor of 20. The repeal of the estate tax will have the effect of imposing tax on the less well-to-do to satisfy the really, really wealthy. This is not subtle or tricky. Any decent reporter whose beat is taxes should have known about the issue from the beginning.

Higher Authority? Maybe.Wrong courthouse? Definitely.

In Union of Orthodox Jewish Congregations of America v. Brach's Confections, Inc., Judge Andre M. Davis addressed a venue question that, if anyone doubted it, settles the issue of whether litigation has to be conducted in a way that is convenient to counsel. It doesn't.

The Plaintiff is a non-profit organization that offers Kosher certification of food. Its trademark signal (that is, its hekhsher) is a "circled 'u.'" (Commonly referred to as the "OH-U" symbol.) Brach's is a Delaware corporation with its principal place of business in Dallas and manufactures and markets confections and candies, including “Star Brites Peppermint.” It seems that the label to the Star Brites appeared to contain the hekhsher.

After what the Court categorized as "an exchange of some rather over-heated emails and letters, in the course of which, in classic 'lawyerese,' Louis Vuitton S.A. v. Lee, 875 F.2d 584, 587 (7th Cir.1989)(Posner, J.), plaintiff threatened to sue," the parties raced to two different courthouses to commence actions against each other. The Orthodox Union filed first, initiating an action in Maryland that it filed in the Southern Division Courthouse. That is, the courthouse closest to its attorney's offices. A few hours later, Brach's filed in the Norther District of Texas where it is headquartered.

Judge Davis had no difficulty in ordering the action transferred to Texas. It seems to me to have been a foregone conclusion since:

It is undisputed that plaintiff is headquartered in New York and that defendant is headquartered in Dallas. The only relevant connection this district has to this dispute is that some of the allegedly infringing products were found on the shelves of one or more retail food stores in Baltimore, and a local rabbi would so testify.

(Emphasis by the Court.)

As best as one can gather, the Orthodox Union wanted to bring the action in Maryland because its counsel, perhaps acting pro bono, was located in either Maryland or Washington, D.C. Thus, proceeding here would have been less expensive for the Orthodox Union. However, since it had virtually no real connection with Maryland, its choice of forum was rejected in favor of the Texas Court in the District where Brach's is headquartered.

The Orthodox Union should not be too dismayed over the outcome of the case, however. There are Jews in Texas.

Progressivity/Regressivity Update

TaxProf has a posting entitled "Did NY Times Publish Biased Marginal Tax Rate Table?" The NYT published a chart, which I discussed in my posting here. Apparently, the Times omitted the data from the lowest income levels which highlight the progressive effect of the Earned Income Tax Credit.

What's interesting is that, in some ways, the chart that includes the effect of the EITC highlights the overall lack of progressivity of the system. There is actually regressivity as between very low income individuals and lower-middle income individuals. There is a "notch" that reduces tax rates for some middle income individuals, but there's a steep jump in marginal rates for individuals making just under $100,000 a year. At just over the $100,000 a year mark, the marginal rates turn regressive. While there are some choppy progressive/regressive "spikes" as income moves upward from there, the marginal rates essentially flatten out as annual income hits about $225,000.

Again, as I pointed out, the figures used in both charts are representative of only the Federal tax system, the most progressive part of the American tax system. At least according to the older Pechman studies, state and local taxes tend to be fairly regressive, thus making marginal rates overall fairly flat.

Outsider

Via Mark Kleiman, there is this story in the NYT that Britain's leading higher education union has voted to boycott two Israeli universities. In the body of the article, there is this passage:

Omar Barghouti, a founding member of the Palestinian Campaign for the Academic and Cultural Boycott of Israel, which pushed for the union vote in Britain, said comparing Israeli occupation to South African apartheid was a fair parallel. While Palestinians are not officially barred from Israeli universities, they are effectively kept out, he said.

Who is Omar Barghouti? According to a bio that accompanied one of his screeds a year ago, he is a "independent Palestinian political analyst" who is:

a dance choreographer with El-Funoun dance ensemble in Palestine . . . . [who] holds a Masters degree in electrical engineering from Columbia University, NY, and is currently a doctoral student of philosophy (ethics) at Tel Aviv University.

(Emphasis added.)

If Palestinians are "effectively kept out of Israeli universities," how . . .?

Oh, never mind.

Progressivity v. Regressivity

In a previous post/rant, I took a editorial in the WSJ to task for citing an article in support of the proposition that federal income tax rates were becoming more progressive. In fact, the study cited by the WSJ made the point that income tax rates are becoming less, not more, progressive.

Via Brad DeLong, Alex Tabarrok of Marginal Revolution has a chart with this posting that shows fairly conclusively that while there is some progressivity in the federal tax system, the extent of progressivity is fairly choppy and, at certain points, marginal rates are actually regressive. (It is not clear whether the chart factors in FICA/SECA taxes, which are regressive. See the comments by Half Sigma.)

More significantly, I've been unable to find any current information on the progressivity/regressivity of the U.S. tax system as a whole. That is, a study that would factor in the effect of state and local taxes, as well as federal taxes. The only comprehensive study in this area was done several years ago by the late Joseph A. Pechman. I believe that the last year that was analyzed in the study was 1985. Pechman found that the distributional burden of the tax system as a whole was fairly flat since the progressivity of the federal tax was offset by the regressivity of state and local taxes.

If, as seems to be the case, federal taxes are becoming less progressive, it is likely that the U.S. tax system as a whole is actually becoming regressive, since there have been virtually no significant structural changes in state and local taxes in the last 20 years. In fact, to the extent that there have been no increases in state and local income taxes or income tax rates, state and local taxes may actually be more regressive than when Pechman conducted his study since any effective revenue increases at the state and local level have likely come from slightly regressive property taxes and highly regressive sales and excise taxes.

Can someone point me to a study that updates the older Pechman study?

Where Have All the Students Gone?Gone to Careerists Every One

Sunday, I traveled to the University of Maryland in College Park and, with my son, went to hear Tom Friedman give a presentation. Sure, I knew that he was there to flog his new book and I also knew that, since I read his column regularly, I was pretty familiar with what he was going to say. But he was to be joined for a large part of the presentation by Shibley Telhami. Thus, the event promised to be somewhat more than the usual author-speak. And, since it was the last day of Passover, I could always conclude my trip with a pizza from Ledo's (the original, not one of the franchisee pretenders).

Something about the presentation troubled me. It had nothing to do with what Friedman or Telhami said or didn't say. It was the audience. There were few students there, either graduate or undergraduate. By and large, the members of the audience were old. And I don't mean Stuart Levine old. Just by a guess, I believe that well over a third, maybe more than half, of the audience was over 60.

I graduated from College Park in 1972. I won't lie and say that every student was an activist or actively concerned with the issues of the day, but I will tell you that had individuals with the reputation of Friedman and Telhami come to speak on campus, they would have attracted a huge crowd of students, both graduate and undergraduate. Yes, I know what you're thinking: My memory of an intellectually engaged student body is simply a variant on the same sort of nostalgia that my parents exhibited when told me that they had to walk six miles to school every day in blinding snowstorms and through deep snowdrifts. I don't think so.

Something has changed. There is none of that intellectual snap, crackle, and pop that was in the air when I was an undergraduate. (Ok, it's true that today my knees are the principal part of my being that snap, crackle, and pop on a regular basis and maybe my memories have become romanticized, but still.)

I recall reading about students who went to college after World War II on the GI Bill. They were significantly more focused and directed than the other students at the same time who came to college directly from high school. I believe that today's college students are much like that post-WWII generation than mine.

This is both a good thing and a bad thing. It's good because we will likely turn out technically more proficient engineers, chemists, biologists, computer scientists, etc. It's bad because these students have somehow lost their youth.

At least the pizza was as exquisite as I remember it.

Update

Apparently some schools, such as the University of Texas, have more traditional student bodies. See here.