Paul L. Caron

Thursday, July 25, 2013

NY Times: Dell's Abandoned Foreign Dual Hybrid May be Template for Future Corporate Inversions

Dell LogoFollowing up on my prior posts (links below):  New York Times, Dell Considered Novel Tax Strategy in Buyout, by Lynnley Browning:

In the proposed buyout of Dell by its founder, the company considered but rejected as too risky a novel strategy that tweaks the now-curbed practice of corporations moving overseas to take advantage of lower taxes.

The strategy, drafted by JPMorgan Chase and disclosed in Dell’s regulatory filings in recent months, proposed a fresh twist on that practice, which has largely been banned by the IRS. In slides of a presentation dated last October, JPMorgan cited a “lack of precedent” for the strategy, calling it a “new structure — has not been executed publicly.”

Dell and its advisers decided not to use the strategy in part because of potential image problems with U.S. and European regulators and investors, people briefed on the matter said. But the new strategy could serve as a template for future buyout participants because it circumvents anti-abuse regulations, said Robert Willens, a tax and accounting expert. ...

Dell was presented with a maneuver that some tax lawyers said appeared legal but aggressive. ... The apparent reason is the strategy resembles a corporate inversion, a stamp in recent decades for tax-dodging corporations like Tyco International and Nabors Industries. Those companies prompted Congressional investigations and tougher IRS rules after they moved their headquarters to the offshore haven of Bermuda, with a post-office box holding company as the parent to the main U.S. subsidiary that housed operations and management. ...

The proposed strategy involved conducting the buyout through a newly created foreign entity that would have effectively owned Dell. Under U.S. tax laws, that foreign entity would have legally escaped U.S. corporate taxes because it would have been a partnership for U.S. tax purposes. At the same time, the foreign entity, whose jurisdiction was not specified, would have been treated under tax laws in that unspecified jurisdiction as a corporation and would have been subject to foreign taxes. Those two contrasting tax outcomes, embodied in one structure, would have created a “foreign hybrid,” able to navigate different national tax regimes and access offshore cash while paying little or no U.S. taxes.

The “unprecedented” piece in the JPMorgan strategy was the proposal that Dell designate the foreign hybrid as a partnership, securities filings show. The foreign hybrid would have held a new entity called Denali, which would have held Dell shares, and Denali would have owned Dell’s foreign subsidiaries. (Mr. Dell was known in secret negotiations on the buyout as “Mr. Denali.”)

Dell’s physical headquarters would have remained in Round Rock, Tex., while the company would have been able to tap into the cash and tax benefits of being legally based in a lower-tax country. And it would have been able to borrow money from cash-rich offshore subsidiaries to finance Dell’s operations, all without having to pay U.S. corporate income taxes. ...

Global tax officials have increasingly criticized foreign hybrids as leaching corporate profits out of higher tax jurisdictions. The OECD has railed against what it calls “hybrid mismatches” for several years.

Edward D. Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Congressional Joint Committee on Taxation, called the strategy “a twist on the old corporation inversion that relies on the fact that U.S. companies can dress up their foreign entities in different costumes for different tax purposes.”

Whatever maneuverings are used, tax analysts are wondering precisely how the deal might take advantage of Dell’s considerable overseas cash hoard without generating large tax bills. (The U.S. corporate rate for bringing overseas cash home is 35%.) Dell has said it wants to tap nearly half of its estimated $10.4 billion in overseas cash and cash equivalents to help finance the buyout. The rejected strategy would have done just that. Reuven S. Avi-Yonah, a professor of taxation at the University of Michigan, said that other ways of structuring tax to access cash tax-free could present problems.“There are a couple of other options, but those have come under IRS attack,” he said, so the rejected option “would have been safer.”

Prior TaxProf Blog posts:

July 25, 2013 in Tax | Permalink | Comments (0) | TrackBack (0)

Emory Symposium: Innovation for the Modern Era -- Legal Practice in a Changing World

Emory LogoInnovation for the Modern Era: Legal Practice in a Changing World, 62 Emory L.J. No. 4 (2013):

July 25, 2013 in Legal Education, Scholarship | Permalink | Comments (0) | TrackBack (0)

Infanti: The Moonscape of Tax Equality: Windsor and Beyond

Anthony C. Infanti (Pittsburgh), The Moonscape of Tax Equality: Windsor and Beyond, 108 Nw. U. Colloquy ___ (2013):

This essay takes a critical look at the tax fallout from the U.S. Supreme Court’s decision in United States v. Windsor, which declared section three of the federal Defense of Marriage Act (DOMA) unconstitutional. The essay is both timely and important because, while other federal laws will apply to some same-sex couples some of the time, the federal tax laws are a concern for all same-sex couples all of the time.

In the essay, I first describe the path that led to the decision in Windsor. Then, I turn to describing the ways in which the post-DOMA tax terrain may actually be worse for same-sex couples than the already bleak tax landscape. Under DOMA, same-sex couples already faced a debilitating level of uncertainty in determining how the tax laws applied to their relationships. Post-DOMA, same-sex couples will see this uncertainty multiply. They will have to grapple not only with preexisting questions surrounding the tax treatment of relationships that are not recognized, but also with new questions regarding whether and when their relationships will be recognized for federal tax purposes. Even were these uncertainties to be resolved, I conclude the essay by describing how we may find that dispatching discrimination designed to erode the progress of same-sex couples toward formal equality has served only to entrench the privileged status of marriage in our tax laws, failing to erase inequitable treatment along lines of marital status and class.

July 25, 2013 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Rasmusen: Critics of The Economic Value of a Law Degree Are Making the Paper Better

RasmussenEric B. Rasmusen (Indiana University, Kelley School of Business), Critics of The Economic Value of a Law Degree Are Making the Paper Better:

The Economic Value of a Law Degree by Michael Simkovic and Frank McIntyre (S-M) has attracted a lot of negative comment, which is good. Knowing Prof. Simkovic a little, and knowing that Prof. McIntyre is an economist, I am confident that they agree in welcoming the negative comment. When a scholar comes up with a conclusion contrary to the conventional wisdom, the proper response is skepticism. This can take two forms. One is dismissal without reading the paper, because you assume there’s a mistake. The other is extra-careful reading, to try to find the mistake you’re sure is there. Their paper has gotten a lot of careful reading, and it is making the paper better. The referees of economics journals are tough, so this is a good thing for them. As in the courtroom, it’s best to find out your weak points in advance, admit them, and address them as best you can before the other side gets a chance.

The idea of the paper is simple, really: Use government earnings data to see how much more people with law degrees earn over their lifetimes compared to similar people who didn’t get law degrees. The hardest part is to find “similar people”. We can compare male history majors who did and who didn’t get law degrees, but we don’t know whether the ones who chose to go to law school are better or are worse. If the ones with law degrees earn more at age 50, that might be because the smartest and most ambitious were the ones who went to law school and law school itself made no difference. On the other hand, maybe the laziest and most disorganized male history majors went to law school, because they couldn’t or wouldn’t find a job right out of college. This is the study’s main problem, but note that this problem might mean that S-M have underestimated the value of a law degree, not overestimated it.

A lot of the immediate reactions to the paper misinterpret it, though, and the results aren’t as surprising or revolutionary as they seem. Let me go through a few points.

Continue reading

July 25, 2013 in Legal Education, Scholarship | Permalink | Comments (10) | TrackBack (0)

Tamanaha: Why the 'Million Dollar Law Degree' Study Fails (Final Post)

TamanahaBrian Tamanaha (Washington U.), Why the “Million Dollar Law Degree” Study Fails (Final Post):

My first post criticizing Simkovic and McIntyre’s (S&M) study showed how they overstated the earnings premium from a law degree. My second post showed that the only way to make a useful risk assessment is on a per school basis, and that it is indeed risky to attend a bunch of law schools today. In this final post I will expose what I believe is the most profound flaw in their analysis—and I will apologize for one thing I did wrong.

Let me begin by repeating their core claim: S&M have identified “historic earnings norms” that reflect what people who attend law school today are likely to earn over the course of their careers. They claim that even law grads at the bottom quartile stand to earn “hundreds of thousands of dollars” above what they would have earned without the degree.

We must separate two issues: 1) do their “earnings premiums” accurately represent historic law grad earnings?; and 2) are these earnings likely to hold for the coming generation? For their claims to have merit, they must establish both #1 and #2.

Continue reading

July 25, 2013 in Legal Education | Permalink | Comments (3) | TrackBack (0)

Gerzog: Interest Deduction and FLP Valuation Practice Pointers

Tax Analysts Wendy C. Gerzog (Baltimore), Koons: Interest Deduction and FLP Valuation Practice Pointers, 140 Tax Notes 375 (July 22, 2013):

The Tax Court's Koons decision [T.C. Memo. 2013-94] explains the rules for allowing an estate to deduct interest payments, and it details how the court arrived at a determination of the value of a family limited liability company interest.

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

July 25, 2013 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

The IRS Scandal, Day 77

Carrier: Increasing Innovation by Extending the R&D Tax Credit

Michael A. Carrier (Rutgers-Camden), Increasing Innovation Through Copyright Common Sense and Better Government Policy, 62 Emory L.J. 983 (2013):

Innovation is crucial to the U.S. economy. But many of our laws and policies are not promoting innovation. This Essay addresses this problem. The first set of proposals focuses on copyright law. The recommendations avoid vague copyright law and suggest the elimination of statutory damages and personal liability in cases of secondary infringement. The second set of proposals highlights government policies that can be adjusted to achieve a more enlightened immigration policy; adequate funding for basic research; an increased focus on science, technology, engineering, and mathematics (STEM) education; and an extension of the research-and-development (R&D) tax credit.

July 25, 2013 in Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 24, 2013

Vampire Squids of Law: How the Demise of Big Law Is Grossly Exaggerated

SquidSlate:  The Fascinating Vampire Squids of Law: How Rumors of the Demise of Big Law Keep Getting Grossly Exaggerated, by Mark Obbie:

As Rolling Stone just helpfully reminded us, even the best-intentioned magazine narrative can be undone by an overly provocative sales hook. The New Republic’s latest cover piece avoids the Rolling Stone trap of a cover image whose ironic message overwhelms the story’s point entirely. In fact, TNR’s photo of Bob Odenkirk as smarmy Breaking Bad lawyer Saul Goodman plays directly into the crowd-pleasing hook that TNR uses to hype its big cover story this week about the death of Big Law. But there’s the rub: A simple, valid business yarn gets hijacked by narrative tricks that amount to a greater journalistic sin than trying to humanize the Boston Marathon bombing suspect.

Let’s start with what’s good about the story by TNR senior editor Noam Scheiber. By describing hard economic times in Big Law—the elite, global law firms that serve huge corporate clients—Scheiber just might convince a few English majors not to bother taking the LSATs. In case they’ve missed the dozens of earlier opportunities to learn that a costly law degree does not automatically entitle them to a life of wealth and comfort, Scheiber’s vivid tale of one firm’s bloodletting over—what else?—compensation should steer a few idealistic paper chasers into more productive and surefire pursuits, like developing smartphone apps or Colorado pot farming. Scheiber correctly notes an oversupply of pricey legal talent in a down economy has led to a market resembling “some grand psychological experiment involving rats in a cage with too few crumbs.”

But this is where the story breaks bad. From the cover lines and title (“Big Law in Free Fall,” “The Last Days of Big Law”) to an outlandishly flimsy nut graf (claiming just one in 10 top firms will survive the imminent apocalypse, or so says “one common hypothesis” that then never gets explained or examined), the story looks at one sore throat and proclaims it a cancer pandemic. Its prognosis on the death of the mid-sized full-service firm echoes a forecast made so many times it has lost all credibility. Then the piece takes yet another giant step into journalism hell by shooting readers through a time warp that conveniently skips the past 30 or so years of Big Law business history. Big Law has been declared dying for decades. Pieces touting the death of Big Law have been written for decades. Unfortunately, “Big Law Still Really, Really Dying,” while arguable (except where it’s still really, really profitable), doesn’t sell copy. ...

But there’s a deeper instinct at work here, as well. Let’s call it the Vampire Squid meme. It’s been four years since Matt Taibbi called Goldman Sachs “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” but it might as well have been last week for that quote’s staying power. Scheiber’s story lacks such instant branding, but it’s striving for it. Look at how the magazine’s Laura Bennett distills the story, in a Q&A with cover model Odenkirk:

… basically it’s about the moral decay of white-shoe law firms in the post-recession era, their descent into hotbeds of backstabbing and greed.

This is crowd-pleasing stuff: the grade-grubbing, argumentative kid in class who got too rich too soon but shows up at the high school reunion divorced, drunk, and “between jobs.” Feel better about yourself now? It’s a feel-good story for those of us who are heartened to hear the news that “Big Law Still Really, Really Dying.”

At least the Odenkirk-as-Goodman cover makes us laugh instead of cringe. And if it means that the world has at least one less starry-eyed law student, then it will have achieved some good, too.

July 24, 2013 in Legal Education | Permalink | Comments (0) | TrackBack (0)

Call for Papers: NYLS Symposium on The 100th Anniversary of the Income Tax

NYLS Logo (2013)The New York Law School Law Review has issued a call for papers for its October 4, 2013 symposium, The 100th Anniversary of the Revenue Act of 1913: Marking a Century of Income Tax Law in the United States:

On October 3, 1913, President Woodrow Wilson signed into law the Revenue Act of 1913. This symposium and the companion Law Review issue will examine a century of change and continuity in federal income tax law, tax policy, and the practice of tax law, highlighting the pressing technical and policy issues that are yet to be resolved. Prominent tax practitioners, policymakers, and scholars will discuss timely and emerging issues in the field. The event is being organized by the Law Review and the Graduate Tax Program at New York Law School. The symposium chair is Ann F. Thomas, Otto L. Walter Distinguished Professor of Tax Law at New York Law School.

The Law Review is currently accepting abstracts for papers to be considered for publication in fall 2014. Included below is a list of topics expected to be addressed at the symposium by prominent tax practitioners, scholars, and policymakers. The Law Review will also consider papers on other topics relating to the theme of the symposium.

  • Panel I:  Withholding and Information Reporting from 1913 to FATCA
  • Panel II:  Debt, Taxes, and the Economy
  • Panel III:  U.S. Tax Policy in a Global Economy
  • Panel IV:  Perspectives on the Practice of Tax Law (including tax attorneys’ professional and ethical responsibilities and the provision of pro bono legal services)

To be considered for publication, please send by September 3, 2013, an abstract of no more than 500 words and CV to Editor-in-Chief G. William Bartholomew.

July 24, 2013 in Scholarship, Tax, Tax Conferences | Permalink | Comments (0) | TrackBack (0)

Senate to Keep Tax Reform Proposals Secret Until 2064

Senate LogoPolitico, Tax Committee Transforms Into Fort Knox:

Senate Finance Committee leaders have a message for their anxious colleagues: Your secret is safe with us.

In a memo to the tax staffer for every senator, committee officials said they’re going to great lengths to make sure that tax reform submissions, which are due to the panel on Friday, won’t leak.

For starters, the committee says submissions will be sealed by the panel and the National Archives until Dec. 31, 2064. Today’s fiscal policy fights, which have an endless feel about them, should be less relevant by then.

But staffers are taking other measures to transform the Finance Committee into Washington’s version of Fort Knox. The documents will receive unique identifying numbers, a confidential seal and a special encryption. Paper copies of each proposal will be kept in a safe. And beyond Finance Committee Chairman Max Baucus (D-Mont.) and ranking Republican Orrin Hatch, only 10 staffers will have any sort of access to the proposals.

The unusual tactics speak to the high stakes of the so-called blank slate approach to tax reform Baucus and Hatch are pursuing. They’re starting from scratch in their pursuit of a new tax system and they’ve given their colleagues until Friday to explain which tax provisions should stay on the books.

That’s put senators in the uncomfortable position of defending — or choosing not to defend — breaks with powerful constituencies. Many lawmakers have said they’re reluctant to play ball, worried about picking winners or losers and concerned that those choices might later be held against them.

July 24, 2013 in Congressional News, Tax | Permalink | Comments (1) | TrackBack (0)

Fall 2013 Law Review Article Submission Guide

Nancy Levit (UMKC) & Allen Rostron (UMKC) have updated their incredibly useful document, which contains two charts for the Fall 2013 submission season covering 203 law reviews.

The first chart (pp. 1-54) contains information gathered from the journals’ websites on:

  • Methods for submitting an article (such as by e-mail, ExpressO, regular mail, Scholastica, or Twitter)
  • Any special formatting requirements
  • How to request an expedited review
  • How to withdraw an article after it has been accepted for publication elsewhere

The second chart (pp. 55-61) contains the ranking of the law reviews and their schools under six measures:

  • U.S. News: Overall Rank
  • U.S. News: Peer Reputation Rating
  • U.S. News: Judge/Lawyer Reputation Rating
  • Washington & Lee Citation Ranking
  • Washington & Lee Impact Factor
  • Washington & Lee Combined Rating

They also have posted a list of links to the submissions information on each law journal’s website. Nancy also notes:

The highlights from this round of revisions include the following: First, the list of law reviews is now up from 202 to 203 with the addition of a brand new law review, and for the first time it includes a law review that accepts submissions by Twitter. (The new law review is Belmont. The Twitter-friendly law review is Case Western Reserve.) Second, the chart now includes as much information as possible about what law reviews are not accepting submissions right now, what dates they say they'll resume accepting submissions, etc.

July 24, 2013 in Legal Education, Scholarship | Permalink | Comments (1) | TrackBack (0)

Tamanaha: How the 'Million Dollar Law Degree' Study Understates Risk (Part I)

TamanahaBrian Tamanaha (Washington U.), How the “Million Dollar Law Degree” Study Understates Risk (Part I):

In my last post, I argued that Michael Simkovic and Frank McIntyre’s study, The Economic Value of a Law Degree (new title), substantially overstates the value of a law degree. Their article challenges my argument in Failing Law Schools that getting a law degree today can be financially risky, especially for students who attend expensive low ranked law schools. As Simkovic writes, “we disagree with [Tamanaha’s] conclusions about the riskiness of a law degree because data on law degree holders does not support his conclusions.” Their study proves, they say, that even law grads at the bottom quartile stand to obtain “hundreds of thousands of dollars” in net lifetime earnings above what they would have earned had they not gone to law school.

Here are a few statistics behind my position. Graduates of the class of 2012 of Thomas Jefferson had average debt of $168,800. Nine months after graduation, only 28.8% had landed full time jobs as lawyers lasting at least a year. At California Western law school, the same numbers are $167,867 and 43.8%; at Phoenix law school, $162,627 and 43.6%; at New York Law School, $154,647 and 39.6%; at Southwestern law school, $147,976 and 44.1%; at Whittier law school, $143,536 and 34.1%. And so on. Because interest on law school loans begins to accrue immediately, another $15,000 or so is added to these amounts by graduation day. (These numbers do not include undergrad debt, which averages more that $25,000). The majority of grads who do land lawyer jobs work in small firms, which typically pay $60,000 or less, far below the amount necessary to manage standard monthly loan payments on debt this large. They will even struggle to make monthly loan payments on the extended 25-year plan (which adds a huge amount of interest). They will have little choice but to enter IBR, a government sponsored debt relief program, which has negative consequences of its own.

We can skip all the analysis and cut to the heart of the matter with a simple question: Would Simkovic and McIntyre recommend to a friend (who was not admitted to a better school, and who would end up with debt levels this high) that she should go ahead and enroll in one of these law schools (or others like it)? Would they tell their friend that she would likely come out ahead by “hundreds of thousands of dollars” even if she does not land a job as a lawyer after graduation?

Or would Simkovic and McIntyre express reservations, try to talk her out of it, tell her about the financial risks, warn her that she will be paying back the debt for twenty years or more, tell her that perhaps she should keep working in her current job and maybe retake the LSAT in the hope of getting a better score?

If they give the latter response, then they do not in fact disagree with my position.

[Cross-posted at Balkinization.]  Prior TaxProf Blog coverage:


July 24, 2013 in Legal Education | Permalink | Comments (15) | TrackBack (0)

Life and Career Advice From a 'Minor League' Law Professor

TeeterJohn W. Teeter, Jr. (St. Mary's), Perils and Pontifications: Reflections on the Failures and Joys of a Law Teacher, 37 S. Ill. U. L.J. 53 (2012):

Next to fatherhood and my faith, teaching is what matters most to me, and yet it has been filled with failures as well as undeniable fulfillment and joy. The purpose of this article is, on a selfish level, to self-explicate the bimodal nature of my professional path, but I also hope it will serve as both an inspiration and a warning to new professors and those contemplating life in academics.  ...

[M]y initial articles were parochial, pedantic, and pedestrian. ... A wise dean once advised new teachers to “write about what you know,” and what I knew best was how to read cases thoroughly, identify legal conflicts, and make a pitch as to how those struggles should be resolved. In almost paint-by-numbers steps, I would exhaustively discuss every relevant and significant case on each side of the doctrinal divide and attempt to build a simple legal overpass rooted in common sense and a homespun feeling of fairness. This approach, I learned, is far more likely to impress partners, their clients, and judges than professors and law review editors. There is nothing remotely theoretical about my labor law articles, nothing that deconstructs fundamental assumptions on the nature of justice or that seeks to set forth competing and conflicting prescriptive/descriptive visions of law and society. Nothing, in other words, that would make hearts go pitter-patter in the legal academy. ...

And yet, with self-biting candor, I must acknowledge an undeniably deeper flaw in my scholarship. My goal was to capture the minds, if not hearts, of real world decision-makers in my field—the National Labor Relations Board and the federal judiciary. In my mind, judges and Board members would actually read my arguments, be moved by my reasoning, and transform (or at least nudge) the doctrine in ways that would best serve the interests of working Americans. This proved, alas, to be the deepest debacle of my life as a professor. My labor law articles sank like whale excrement in the seas of jurisprudence, and the most I’ve ever mustered is a solitary citation by a state court judge. Perhaps the ultimate problem was that my labor law articles were neither this nor that, too practical for the pedagogues but not pragmatic enough for the judges and the Board. In any event, I failed to leave my mark on the law, and that has given rise to some melancholy musings. ...

By some accounts, I’m a failure. A wasted draft pick, an aging mediocrity, just another professor in the pits. My labor law articles have failed by any conceivable measure to influence law, society, or intellectual thought. I’m a nobody’s nobody in legal and academic circles, and, to recycle a favorite quote from Robert Penn Warren, I teach at a school that is “long on Jesus and short on funds.” Perhaps I should lie down in darkness, have my light in ashes, and wail the loser’s lament that I should have been, could have been, would have been better.

And yet I love what I do. I sense that it’s my calling, and I’m humbled and grateful to be a teacher. Despite my very real failures and limitations, my career brings me tremendous satisfaction, especially when I focus on the crops brought to harvest rather than the opportunities blown. ...

In a delightfully insightful (albeit obviously dated) essay, the late great Prosser explained that professors who fail to meet certain standards of scholarship are doomed to life in the minor leagues. “[L]ike the second baseman who cannot hit a curve, many a professor who has produced nothing of value is destined to languish all his days in a Class D league.” ... You simply don’t get the same recognition or respect in the minors as professors who can jack the jurisprudence out of the yard in the big leagues of Stanford, Harvard, and Yale.

So be it. There is a joyful challenge to teaching in the minors that plays to my strengths and personal preferences. ...

I’ve had an interesting career, it ain’t over yet, and I’m more thankful to my students than they could imagine. It’s been good. My hope, however, is that my essay will help others interested in teaching lead lives that are better than good, lives where they push their potential into excellence and then transform their excellence into joy. At root, I offer the following guidance. Look outside yourself so you can look within yourself and then share what you find with the world. Actively seek the friendship and guidance of others, especially those from different tribes and traditions. As a student, throw yourself not just into your studies, but also into the Socratic festivities of your classes, the communal cogitations of study groups (or, better still, into spirited legal debates just for the hell of it), and make the most of your professors. If you’re serious about law teaching, then seek out opportunities to work with, learn from, and teach your professors through your responsibilities as an R.A., through law review, and other routes. Once you graduate, clerk for a judge, preferably a well-respected one, and spend time in the legal trenches, doing “real” law, to develop your skills, identify your interests, and sprout that special empathy that comes only with getting your buttocks trounced in court. And once you enter teaching, remember that writing what you know is fine for starters, but writing what you seek to discover, both within yourself and externally, is the surest route toward self-fulfillment and professional growth.

Update:  Above the Law, Law Professor Compares His Own Scholarship to Whale Poop

July 24, 2013 in Legal Education | Permalink | Comments (1) | TrackBack (0)

Chetty, Hendren, Kline & Saez: The Economic Impacts of Tax Expenditures

Raj Chetty (Harvard University, Department of Economics), Nathaniel Hendren (Harvard University, Department of Economics), Patrick Kline (UC-Berkeley) & Emmanuel Saez (UC-Berkeley, Department of Economics), The Economic Impacts of Tax Expenditures: Evidence From Spatial Variations Across the U.S.:

This paper develops a framework to study the effects of tax expenditures on intergenerational mobility using spatial variation in tax expenditures across the United States. We measure intergenerational mobility at the local (census commuting zone) level based on the correlation between parents’ and children’s earnings. We show that the level of local tax expenditures (as a percentage of AGI) is positively correlated with intergenerational mobility and that this correlation is robust to introducing controls for local area characteristics. To understand the mechanisms driving this correlation, we analyze the largest tax expenditures in greater detail. We find that the level and the progressivity of state income taxes are positively correlated with intergenerational mobility. Mortgage interest deductions are also positively related to intergenerational mobility. Finally, we find significant positive correlations between state EITC policy and intergenerational mobility. We conclude by discussing other applications of this methodology to evaluate the net benefits of tax expenditures.

July 24, 2013 | Permalink | Comments (0) | TrackBack (0)

TIGTA: IRS Honchos Racked Up Six-Figure Travel Bills

TIGTA The Treasury Inspector General for Tax Administration yesterday released Analysis of Executive Travel Within the Internal Revenue Service (2013-IE-R007):

In FYs 2011 and 2012, there were 351 and 373 executives in the IRS, respectively. In FY 2011, the IRS spent approximately $4.8 million for executive travel. In FY 2012, spending for executive travel decreased to about $4.7 million. ... Overall, executive travel does not appear to be excessive. However, we noted that a small number of executives had extremely high travel expenses compared to the rest of the executives and that several executives frequently travel to the Washington, D.C., area to conduct day-to-day operations. Moreover, 12 executives (seven in FY 2011 and five in FY 2012) were in travel status for over 200 days.

The travel costs incurred by the individual executives varied significantly. The largest amount reimbursed to an executive was about $160,000 in FY 2011 and $146,000 in FY 2012. ... About 60 percent of the executives incurred $10,000 or less in travel expenses, while about 3 percent incurred more than $60,000.

July 24, 2013 in IRS News | Permalink | Comments (4) | TrackBack (0)

International Tax and the IMF

IMFIMF, Issues in International Taxation and the Role of the IMF (June 28, 2013):

In the discussion of the Board work program on June 3, 2013, it was urged that the Fund be more present in current discussions of international tax issues. This note reviews key issues and initiatives in this area, and sets out a work plan that is focused on the Fund‘s mandate and macroeconomic expertise and that complements the work of other institutions, notably the OECD.

Continue reading

July 24, 2013 in Tax | Permalink | Comments (0) | TrackBack (0)

The IRS Scandal, Day 76

Tuesday, July 23, 2013

Attorney in Federal Agency General Counsel's Office: There Is 'No Innocent Explanation' for IRS Chief Counsel's Meeting With Obama

IRS Office of Chief Counsel LogoI am reprinting (with permission) an email I received today from an attorney in the general counsel's office of a federal agency (not the IRS) concerning reports of IRS Chief Counsel William Wilkins' meeting with President Obama in the White House two days before providing guidance to IRS personnel on handling tax-exempt applications from Tea Party and other conservative groups:

As someone who works as an attorney at an agency general counsel's office, I think people are missing the significance of Obama meeting with the IRS chief counsel in the White House. Understand, agency general counsels are not authorized to give legal advice to the President. They advise their agency heads. Only the AG and by delegation the Office of Legal Counsel to the President is authorized to give legal advice to the President. In my seven years of working at a General Counsel's office, I have never once heard of our general counsel meeting with the President. OLC would go crazy if he did. I have worked on a couple of legal opinions that did go to the White House. And each time they were staffed through OLC. Nothing went to the President that wasn't signed off on by OLC and delivered to him by OLC.

So I can't for the life of me come up with any kind of innocent explanation for why Obama would have met with the Chief Counsel of the IRS. That meeting shouldn't ever happen, and especially not without the Commissioner of the IRS being there. Presidents just don't go to agency chief counsels with legal questions. Presidents don't go to anyone with legal questions. Their staff does. The idea that the President would sit down with some random agency chief counsel and discuss some pressing legal issue is just bizarre to anyone who has worked in the legal field at that level. I am not sure the reporters covering this story understand how legal advice is actually delivered to the President and just how out of the ordinary that meeting was.

Update:  John Steele (Legal Ethics Forum), "There Is 'No Innocent Explanation' for IRS Chief Counsel's Meeting With Obama"

July 23, 2013 in IRS News, Tax | Permalink | Comments (19) | TrackBack (0)

The New Republic: How to Fix Law Schools: Six Experts Weigh In

TNRThe New Republic:  How to Fix Law School: Six Experts Tell Us What They'd Change:

On The New Republic's cover this week, Noam Scheiber chronicles the looming economic collapse of the legal profession. This will come as bad news for the thousands of people who each year take out towering student loans to join that profession. And it also ought to scare the people who run America's law schools, which once sold themselves in large part by promising graduates a safe place in the elite. With that in mind, we reached out to law professors, writers, and practitioners for thoughts on how to improve law school. 

  • Paul Campos (Professor, University of Colorado School of Law), Stop Unlimited Loaning to Law School Students
  • Mark Chandler (General Counsel, Cisco Systems), Let Students Intern for Money and Credit
  • Alan Dershowitz (Professor, Harvard Law School), Make Law School “Two Years-Plus”
  • Mike Kinsley (Editor-at-Large, The New Republic), Lose the Socratic Method
  • David Lat (Founder & Managing Editor, Above the Law), Make a Post-College Gap Mandatory
  • Dahlia Lithwick (Senior Editor, Slate), Fewer People Should Go to Law School—and More Should Drop Out

UpdateABA Journal, Above the Law, Brian Leiter.

July 23, 2013 in Legal Education | Permalink | Comments (1) | TrackBack (0)

Congressional Tax Writers Disproportionately Benefit From Tax Breaks on 'Blank Slate' Chopping Block

Bloomberg:  Second-Home Deduction Future Depends on Congress Using It:

Only a small percentage of U.S. taxpayers benefit from the ability to deduct mortgage interest on a second home. That group just happens to include many of the people who craft the nation’s tax laws.  

Members of the congressional tax-writing committees are eight times more likely than the average American to own a second home with a mortgage, casting doubt on their eagerness to curb the tax break, according to data compiled by Bloomberg.

U.S. lawmakers are an ideal market for second homes: They’re wealthier than the typical person and they live and work in two places -- their home states and Washington. That will shape their approach to revising the tax code, said Bill Allison, editorial director of the Sunlight Foundation in Washington, which promotes government transparency.

“What you end up seeing out of Washington is a real disconnect between how Congress lives in Washington as one of the most affluent areas now, and how the rest of the country lives,” Allison said.

The Senate Finance and House Ways and Means committees are exploring the first rewrite of the U.S. tax code since 1986, and the chairmen of both panels have promised to scrutinize every tax break. As lawmakers try to lower marginal rates, that examination will include the estimated $8 billion a year that they could raise from ending the second-home mortgage deduction.

The lawmakers will start that process coming from a different financial place than many of their constituents do. More than 40 percent of members of the House Ways and Means and Senate Finance committees have mortgages on homes other than their primary home-state residences. Examples are Finance Chairman Max Baucus’s Capitol Hill townhouse, Representative Tom Reed’s cottage on Keuka Lake in upstate New York and Representative Sander Levin’s home on Martha’s Vineyard. About 5% of all homes in the U.S. are second residences, according to the National Association of Home Builders.

Sounds like a ringing endorsemment for Dorothy Brown's 535 Report.

July 23, 2013 in Tax | Permalink | Comments (0) | TrackBack (0)

2009 Estate Tax Value of Minnesota Twins: $24 Million or $293 Million?

TwinsFollowing up on my previous post, Will IRS Strike Out in Estate Tax Litigation Over Valuation of Minnesota Twins?

More than three years after the death of Carl Pohlad, the estate of the billionaire business magnate is mired in a tax dispute with the IRS that has potentially huge financial consequences.

The agency claims that Pohlad’s heirs owe the IRS more than $207 million, largely on the basis of a purportedly low valuation the estate placed on the late patriarch’s most visible asset, the Minnesota Twins. The tax collector also wants $48 million as an “accuracy related penalty” for a total potential tax bill of $255.8 million.

The Pohlad family disputes the IRS position and asserts that the federal agency greatly overvalued Carl Pohlad’s interest in the Twins after he handed most of the control of the ballclub to his sons in the years leading up to his death in 2009. ...

According to the experts hired by the estate, Carl Pohlad’s interest in the Twins was just $24 million at the time of his death in early 2009. The IRS places the value of those assets at $293 million.

The Pohlad estate asserts that Carl Pohlad’s minority ownership of the Twins at the time of his death — with his three sons controlling 90% of the voting shares of the club — is not adequately reflected in the IRS valuation, nor is the Great Recession, which confronted the U.S. economy at the time. ... The Pohlad estate has requested a Tax Court trial in Houston, home of the law firm handling its tax case, Baker Botts. ... At $255.8 million, the dispute would be among the richest pending before the Tax Court. ...

Combined, Carl Pohlad’s financial interest in the Twins was posted at just shy of $24 million, according to the Tax Court petition. The total value of the Twins at the time of Pohlad’s death was estimated at $356 million by Forbes magazine. But [John] Porter, the Baker Botts attorney representing the Pohlads in the IRS matter, said the valuation figures are gross figures that don’t include liabilities such as stadium debt. Moreover, Porter said, the economic environment was not conducive to the sale of sports franchises at the time of Carl Pohlad’s death.

The remarkable story of how the Pohlad family ended up in a nine-figure fight with the Internal Revenue Service over the late Carl Pohlad’s estate isn’t that remarkable at all. It’s called estate planning.

Even though there’s a list of things in dispute with the IRS, including how to treat a block of cemetery plots, this is really all about the chasm between what the IRS thinks Carl Pohlad’s Minnesota Twins ownership stake was worth in January 2009 — $293 million — and the $24 million value the estate’s tax return put on his Twins equity.

Carl Pohlad owned his Twins equity in several pieces. At the time of his death he owned a 52.2% nonvoting interest in MT Sports LLC, which in turn owned a 99%, nonvoting interest in Minnesota Twins LLC. He also owned a 95.5% equity interest in Twins Sports Inc., the managing member of the Minnesota Twins LLC.

In a limited liability company like Minnesota Twins LLC, the managing member is in charge, and usually has authority to borrow money, hire and fire employees and take other actions that the non-managing members have no right to do. But Carl Pohlad owned only 10 percent of Twins Sports’ voting shares, with the rest equally split between Jim and his two brothers.

Sure, there were three separate companies and multiple classes of equity, but as such things go in the ownership of a family business, this structure for the Twins is not particularly artful. What it meant is that at the end of Carl Pohlad’s life, he owned the majority of the franchise but did not control it. ...

Jim Pohlad explained that “you can’t just look up in the Wall Street Journal and figure out the value of things like the Twins,” adding that he and his brothers relied on their valuation experts in wrapping up the estate. ...

When this is settled, the final number won’t be public, but it’s my guess it’s going to be much closer to the position of the Pohlads than the IRS.

July 23, 2013 in Celebrity Tax Lore, Tax | Permalink | Comments (0) | TrackBack (0)

Demands Increase to Make APA Agreements Public

CNN:  The Tax Break That Corporate America Wants Kept Secret, by Lynnley Browning:

Widening scrutiny of declining corporate tax bills has singled out the growing use of post office-box subsidiaries in offshore tax havens to hoard cash stockpiles and whisk profits away from higher-tax jurisdictions. Now some experts wonder if advance pricing agreements, perfectly legal under U.S. law and growing in number, sometimes play a major role in helping to shift some of those profits and drive down corporate tax bills. ...

When applying for an agreement, companies must lift the curtain on their tax planning and convince the IRS that it is legitimate. ... Under the deals, the IRS agrees not to challenge the complex financial calculations underpinning the exchange of assets, goods, intellectual property, and money between a company and its overseas subsidiaries, typically in offshore havens like Ireland or the Cayman Islands. The exchange, known as transfer pricing, is supposed to be tallied at arm's length prices, but different methodologies can produce different results. What's clear, tax lawyers say, is that the calculations can be among the single biggest factors in lowering a company's tax bill and boosting after-tax profits.

But some critics argue that through the pacts, the IRS can sometimes give up too much, particularly in an area -- transfer pricing -- that it increasingly considers a primary means of tax abuse by multinational corporations. "Of course companies are sneaking things by the IRS with these deals -- look, they are seeking to get authorization for something they know might not pass muster otherwise," says Robert McIntyre, director of Citizens for Tax Justice, a left-leaning advocacy and research group.

The manipulation of complex cross-border pricing by multinationals with subsidiaries in low-tax jurisdictions is a growing concern inside the IRS, which in 2011 created a new unit to deal with the problem and said it was developing a strategy to litigate abusive cases. Last year it moved its advance pricing program into the unit, saying it wanted to speed up processing of pact applications.

But if the new unit is a stick, the pricing agreements appear at times to be a carrot. The IRS approved a record 140 pacts last year, more than triple the number in 2011. Another 182 are pending renewal. Overall, since the program began in 1991, 1,155 pacts have been executed, IRS data shows. The biggest users are financial services companies with large cross-border trade, and technology and pharmaceutical companies.

Because the details of pacts are not public -- some companies don't even disclose that they have them -- there is no way to know how the IRS is making decisions regarding murky areas of tax law. Critics argue that the process effectively creates a secret body of law, one that might not be applied evenly across companies. Shareholders know nothing of their details. And some tax experts say the IRS, loath to lose legal cases against corporations it sues to collect back taxes, is being more generous than it would be in an audit. "There's a certain amount of compromise on both sides," admitted one former director of the IRS's advance pricing agreement program.

The IRS has always struggled to ferret out tax strategies that skirt the law or take advantage of gray areas. And it has had a dismal record of challenging transfer pricing issues in court -- in 2010 it lost a case seeking more than $1 billion from software maker Veritas, now part of Symantec. So when the agency created a program for the pacts, in 1991, it envisioned a way to lighten its burden of scrutinizing a company's books.

The IRS says the pacts are "designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional adversarial process." Michael Durst, a former director of the program, who is now at Steptoe & Johnson, said that "the goal, from the standpoint of the IRS, is that APAs won't either increase or reduce companies' tax bills -- instead, an APA will achieve the same result that a company would have reached after audit and possible litigation, but without all of the uncertainty and transaction costs."

July 23, 2013 in IRS News, Tax | Permalink | Comments (1) | TrackBack (0)

Tamanaha: How 'The Million Dollar Law Degree' Study Systematically Overstates Value

TamanahaBrian Tamanaha (Washington U.), How “The Million Dollar Law Degree” Study Systematically Overstates Value: Three Design Choices that Improperly Skewed the Results:

Michael Simkovic and Frank McIntyre (S&M) have created a sensation with the release of their new study purporting to show that a law degree has a value of $1,000,000. Legal educators cheered and skeptics jeered.

S&M pitch the article as a crushing empirical refutation of the argument I press in Failing Law Schools that getting a law degree today can be financially risky, especially for students who attend expensive low ranked law schools. Simkovic writes, “we disagree with [Tamanaha’s] conclusions about the riskiness of a law degree because data on law degree holders does not support his conclusions.” So confident are they in their findings that they warn prospective students: “many college graduates who follow the critics’ advice and skip law school will forego a lucrative career and face higher long-term risks of financial hardship.”

All sides in this debate carry the same responsibility, of course, because if S&M are wrong, people who follow their advice risk serious financial hardship. Thus it is incumbent on all of us to consider these issues carefully and honestly.

Everyone agrees that many lawyers make a good living, so the significance of their study is at the bottom, where the greatest risk lies. S&M assert that even law graduates at the lower end of the earnings spectrum, including grads who don’t land jobs as lawyers, stand to earn “hundreds of thousands” of dollars over what they would have obtained with a bachelor’s degree alone. Great news for all!

Unfortunately, it’s not true.

Let me state up front that their study contributes to the debate over the value of a law degree. Let me also confirm that their study is far more sophisticated than my admittedly crude efforts. But as the old saying goes, it is far better to be approximately right than precisely wrong. Despite having the external trappings of precision and rigor, their study is faulty and misleading.

Continue reading

July 23, 2013 in Legal Education | Permalink | Comments (20) | TrackBack (0)

A Cincinnati IRS Lawyer Speaks: We Are Democrats, But Nonpartisan Democrats

IRS Logo 2I previously blogged my Pepperdine colleague Rob Anderson's work showing that 95% of political contributions in the 2012 presidential campaign made by lawyers at the IRS went to Obama rather than to Romney. Rob followed up yesterday with a fascinating post with an email from an IRS attorney in Cincinnati:

The IRS lawyer's email provides a valuable perspective on the other side of the debate, one that attributes the support of Democrats by federal government attorneys to perceived hostility of Republicans toward government workers. The basic thesis of the email is that "if there is a lack of political diversity among federal government attorneys, it can be attributed almost entirely to the Republican Party agenda." The full text of the email is reprinted below.

The IRS lawyer's email raises three important points of comparison to my analysis. First, the IRS lawyer generally agrees that federal government attorneys substantially support Democrats but disagrees about why. He or she argues that these lawyers are Democrats in part because federal government lawyers convert from Republicans to Democrats once employed by the government. The reason, according to the IRS lawyer, is the perceived hostility of the Republican party to federal regulation and government workers. Finally, the IRS lawyer argues that even if the IRS lawyers are mostly Democrats, partisan politics is never an influence in the work of the agency.

UpdateAttorney in Federal Agency General Counsel's Office: There Is 'No Innocent Explanation' for IRS Chief Counsel's Meeting With Obama

July 23, 2013 in IRS News, Tax | Permalink | Comments (13) | TrackBack (0)

Tax Law Keeps Families of Dead Firemen From Getting $900,000 in Donations

WHEC-TV:  Money Held Up for Webster Firefighters' Families Affected by Christmas Eve Tragedy:

It's been almost seven months since the ambush fire and shooting in West Webster. The firefighters and families directly affected by it still haven't received hundreds of thousands of dollars given specifically to them.

Right after the Christmas Eve tragedy, people came together and showed their support. Donations came flooding into the West Webster Volunteer Fireman's Association. Right now, they have about $900,000 to be split between the four families of the fallen and injured heroes. But those families haven't received a cent. ...

So what's the holdup? Tax codes prevent a not-for-profit group from giving donations to an individual or family. So the West Webster Volunteer Fireman's Association has its hands tied, at least until something changes. ... “We would pay a penalty, we stand a chance to lose our non profit status if we do that, so we are not going to do that.”

The association wouldn't be the only ones paying. ... Brennan Redmond, Brighton Securities, said, “If it gets paid out to the families, it will be considered as wages and be taxed as such. ...

Senator Chuck Schumer said, “We are working with the IRS and even will introduce an amendment with in an upcoming tax bill to make sure that this money is tax exempt." ... Schumer says hopefully by October, Washington and the IRS will straighten out the issues the association is facing.

(Hat Tip: Evelyn Brody.)

July 23, 2013 in Tax | Permalink | Comments (6) | TrackBack (0)

Happy 90th Birthday, to the Man Who Brought My Wife and Me Together

My wife and I met, dated, fell in love, and became engaged while clerking for William J. Holloway, Jr., then Chief Judge of the U.S. Court of Appeals for the Tenth Circuit, who celebrated his 90th birthday exactly one month ago today:

Chief Judge Holloway

July 23, 2013 in Legal Education, Tax | Permalink | Comments (4) | TrackBack (0)

The IRS Scandal, Day 75

Monday, July 22, 2013

The New Republic: The Last Days of Big Law

TNRThe New Republic:  The Last Days of Big Law:

Of all the occupational golden ages to come and go in the twentieth century—for doctors, journalists, ad-men, autoworkers—none lasted longer, felt cushier, and was all in all more golden than the reign of the law partner.

There was the generous salary, the esteem of one’s neighbors, work that was more intellectual than purely commercial. Since clients of white-shoe firms typically knocked on their doors and stayed put for decades—one lawyer told me his ex-firm had a committee to decide which clients to accept—the partner rarely had to hustle for business. He could focus his energy on the legal pursuits that excited his analytical mind.

Above all, there was stability. The firms practiced a benevolent paternalism. They paid for partners to join lunch and dinner clubs and loaned them money to buy houses. When a lawyer had a drinking problem, the firm sent him off for treatment at its own expense. Layoffs were unheard of.

Perhaps more importantly, the security of the legal profession lodged itself inside our cultural imagination. For generations, the law functioned as a kind of psychological safety net for the ambitious and upwardly mobile. If you wanted to be a writer or an actor or a businessman, you could rest assured that law school would be there if your plans fell through. However much you’d maxed out your credit card, however late you were on your rent, you were never more than an admissions test and six semesters away from upper-middle-class respectability.

“Stable” is not the way anyone would describe a legal career today. In the past decade, twelve major firms with more than 1,000 partners between them have collapsed entirely. The surviving lawyers live in fear of suffering a similar fate, driving them to ever-more humiliating lengths to edge out rivals for business. “They were cold-calling,” says the lawyer whose firm once turned down no-name clients. And the competition isn’t just external. Partners routinely make pitches behind the backs of colleagues with ties to a client. They hoard work for themselves even when it requires the expertise of a fellow partner. They seize credit for business that younger colleagues bring in.

And then there are the indignities inflicted on new lawyers, known as associates. The odds are increasingly long that a recent law-school grad will find a job. Five years ago, during a recession, American law schools produced 43,600 graduates and 75 percent had positions as lawyers within nine months. Last year, the numbers were 46,500 and 64 percent. In addition to the emotional toll unemployment exacts, it is often financially ruinous. The average law student graduates $100,000 in debt. ...

There are currently between 150 and 250 firms in the United States that can claim membership in the club known as Big Law, the group of historically profitable firms that cater to the country’s largest corporations. The overwhelming majority of these still operate according to a business model that assumes, at least implicitly, that clients will insist upon the best legal talent instead of the best bargain for legal talent. That assumption has become rickety. Within the next decade or so, according to one common hypothesis, there will be at most 20 to 25 firms that can operate this way—the firms whose clients have so many billions of dollars riding on their legal work that they can truly spend without limit. The other 200 firms will have to reinvent themselves or disappear.

So far, the transition has not been smooth. In fact, the more you talk to partners and associates at major law firms these days, the more it feels like some grand psychological experiment involving rats in a cage with too few crumbs.

(Hat Tip: Above the Law.)

UpdateABA Journal, Above the Law (David Lat), Above the Law (Anonymous Partner).

July 22, 2013 in Legal Education | Permalink | Comments (2) | TrackBack (0)

Submission Guide to the 49 Law Review Online Supplements

Colin Miller (South Carolina) has posted Submission Guide for Online Law Review Supplements, Version 7.0 (7/22/2013) on SSRN:

This document contains information about submitting essays and articles to general online law review supplements. It covers 49 general online law reviews. This document will be updated on an annual basis and as law schools create new online law review supplements.

Here are the 49 on line law review supplements, listed in order of the school's U.S. News academic peer reputation ranking:

July 22, 2013 in Legal Education, Scholarship | Permalink | Comments (0)

The Middle Class Has Been Disappearing ... Into the Upper Class

Carpe Diem:  Yes, the Middle Class Has Been Disappearing, But They Haven’t Fallen Into the Lower Class, They’ve Risen into the Upper Class, by Mark J. Perry (University of Michigan-Flint, School of Management):


America’s “middle class” did start largely disappearing in the 1970s, but it was because they were moving up to a higher-income category, not down into a lower-income category. And that movement was so significant that between 1967 and 2009, the share of American families earning incomes above $75,000 more than doubled, from 16.3% to 39.1%. ... On the previous CD post, Ken commented that although “Many prominent people like Paul Krugman claim that the middle class has been in decline since the 1970s, that assertion is incredibly and verifiably wrong.”

(Hat Tip: Greg Mankiw.)

July 22, 2013 in Tax | Permalink | Comments (2) | TrackBack (0)

NY Times: Was James Gandolfini's Will Really a 'Tax Disaster'?

SopranosFollowing up on my previous post, James Gandolfini's Will Is a 'Tax Disaster':  New York Times, A Public Debate Over the Wisdom of Gandolfini’s Will, by Paul Sullivan:

[A] few weeks after he died, the discussion shifted to his will, which, unlike the wills of most wealthy people quickly became public. Almost immediately, many experts found fault with its contents, saying it was so unwisely constructed it could lead to lawsuits from his heirs.

And then there was the estate tax bill — estimated at a whopping $30 million, nearly half of his reported net worth of $70 million all because of supposedly bad tax planning.... [I]t seemed downright bizarre — at least to me — that he might not have had sound financial advice.

Was this true? Were the numbers accurate? Did any of these commentators know what they were talking about? At first blush it certainly seemed to me that there indeed were serious problems with the will. But before I formed my final opinion, I decided to call Roger S. Haber, Mr. Gandolfini’s lawyer, who drafted the will and is one of its executors. In “Sopranos” parlance, he was Mr. Gandolfini’s consigliere in life and was the man, after his death, who was bearing the brunt of the estate tax ire. ...

He told me that Mr. Gandolfini knew the difference between a probate asset — which is governed by his will — and a non-probate asset, like a retirement account, life insurance policy or asset held in an irrevocable trust. Although Mr. Haber would not elaborate, the implication was that perhaps Mr. Gandolfini had assets in other vehicles that would mitigate his tax liability. The prospect was intriguing.

But I sought outside counsel to examine Mr. Gandolfini’s will and two affidavits that were filed after it. ... The burning question is, does Mr. Gandolfini’s estate have an enormous tax bill? The $30 million figure that was floating around is based on two assumptions that could be wrong. The first was that he was worth $70 million; the second was that his will guides how all that money is disbursed....

Another expert agreed that taxes might not always be the most important consideration. “All these people who are out there talking about the taxes, they don’t get it,” said Leiha Macauley, a partner and head of the Boston office at the law firm Day Pitney. “The person who is trying to provide for the children from the first marriage, the second marriage, and a wife who may be the same age as his sisters, he doesn’t care about estate taxes. He wants to provide for them equally.” Had he wanted to avoid federal estate taxes, he could have left everything to his wife, Ms. Macauley said.

The one thing Mr. Haber could have saved Mr. Gandolfini from was this column and every other article or blog written about his will. They would not have been possible if Mr. Gandolfini had had a revocable trust. Such a trust, which is easy and cheap to create, would have enabled him to have a simple “pour-over will,” which would have said that his possessions had been put into the trust. No one would know anything more about his assets or his intentions. ... “Why would a guy with this much notoriety have a will in the public record?” Mr. Scroggin said. “I have high-profile clients and we do pour-over wills as much as anything to avoid this media brouhaha.”...

Mr. Haber said that Mr. Gandolfini’s children would be fine because the actor had focused on their guardians and trustees more than the money they might inherit.“Jim was a very smart guy and he took all of this seriously,” he said. “He did what he wanted to with full awareness of the laws.”If that is the case, then his estate plan accomplished its purpose, regardless of what others think.

(Hat Tip: Mike Talbert, Bill Turnier.)

UpdateJames Gandolfini’s Lawyer Comments on the Will Controversy

July 22, 2013 in Celebrity Tax Lore, Tax | Permalink | Comments (2) | TrackBack (0)

WSJ: The New Simplified $1,500 Home Office Deduction

Home OfficeWall Street Journal Tax Report:  A New Home-Office Write-Off, by Laura Saunders:

If you are one of the more than four million U.S. taxpayers who work from home, the IRS has a deal for you.

Starting in 2013, the agency is offering taxpayers a simplified home-office deduction [Rev. Proc. 2013-13, 2013-6 I.R.B. 478 (Feb. 4, 2013); IRS Publication 587, Business Use of Your Home] ... It is a striking shift. Until now, all taxpayers taking the home-office write-off had to fill out Form 8829, which has 43 lines and requires complex tracking of multiple expenses, including those for repairs and utilities....

There are caveats, of course. The simplified deduction has a cap of $1,500, while the average home office write-off was $2,600 in 2010, the latest year for which data are available. The new method has a lower cap in part because it allows the taxpayer to take a full write-off for mortgage interest and property taxes on Schedule A, Itemized Deductions. Under the complex method, those deductions are split between Schedule A and the small-business tax forms.

The simplified write-off also imposes a one-size-fits-all value of $5 a square foot for home offices, which will likely make the option a nonstarter for taxpayers in pricier urban and suburban areas. Asked how many of his clients would choose the new option, New York CPA Jonathan Horn says, "Zero." ... Here's what you need to know about both.

  • To be eligible for a deduction at all, a home office must be used "regularly and exclusively" as a place of business. "That means no toys, exercise equipment, or beds for guests," Mr. Zidik says. (There are special rules for in-home day-care providers.) Often the home office also needs to be the principal place of business, unless it is a free-standing structure like a studio or barn. ...
  • Taxpayers using the traditional method need first to figure what percentage of the total property the office accounts for. Then they deduct that percentage of mortgage interest, utility costs, property taxes and other expenses (such as insurance or repairs) from their business income. ... In addition, there is an annual depreciation write-off for 1/39th of the office's value. This must be tracked over the years, and the total of all depreciation deductions is supposed to be taxed when the property is sold. ...
  • The new simplified deduction is different. Taxpayers are allowed to deduct $5 a square foot for up to 300 square feet of office space, for a maximum deduction of $1,500. Mortgage interest and property taxes don't have to be allocated to different forms and are fully deductible on Schedule A. Other home-office costs such as insurance aren't deductible, but neither do they have to be tracked. There also isn't any depreciation to be recaptured when the property is sold. Business expenses unrelated to the home, such as for advertising, equipment and supplies, remain fully deductible.

July 22, 2013 in Tax | Permalink | Comments (0) | TrackBack (0)

PAC-12 Tries to Block For-Profit Universities From NCAA Division I Athletics

Pac 12AZCentral:  Grand Canyon CEO Brian Mueller: Michael Crow, ASU Try to Block Move to Division I:

Grand Canyon University President and CEO Brian Mueller said he believes Arizona State President Michael Crow is leading an effort by Pac-12 CEOs to try to block the school’s move into NCAA Division I athletics.

Mueller said he felt inclined to open up after reported that Pac-12 CEOs had sent a letter to the NCAA questioning whether a for-profit university should be allowed to compete in Division I athletics.

The NCAA and all Division I schools are not-for-profit, tax-exempt entities. The private, publicly traded Christian school has been accepted into the Western Athletic Conference. ...

Azcentral sports obtained the Pac-12 letter, dated July 10 and signed by all the schools’ presidents and chancellors, that was sent to Dr. Lou Anna K. Simon, chairperson of the NCAA Executive Committee. In a May 2 meeting of the NCAA Board of Directors, the committee said it would consider granting NCAA Division I membership to for-profit institutions. Grand Canyon is the first for-profit school to move to Division I.

“Our major concern is how athletics fit within academic missions of for-profit universities. The Pac-12 believes the academic mission of our 12 universities is paramount above all else,” the letter states. “We stand firmly behind the NCAA’s commitment to integrate athletics into the fabric of higher education and view the success of our student-athletes as the ultimate metric of how well we are doing as a Conference. ... Beyond just being reinforced by philosophy, our not-for-profit status ensures it. The resources generated by our Conference support our universities and our student-athletes first and foremost.”

On the issue of whether PAC-12 resources "support our universities and our student athletes first and foremost," the most recent PAC-12 tax return reports that its commissioner was paid $1,859,492. But at least he reported that he worked 40 hours per week for the conference. The twelve Pac-12 directors reported that they worked 1 hour per week for the conference, and received compensation ranging from $390,039 to $1,963,710. In comparison, the total amounts distributed to the member universities ranged from $6.8 million (Washington State) to $12.4 million (Stanford).

Update:  Inside Higher Ed, Share Prices and Big-Time Sports

July 22, 2013 in Legal Education, Tax | Permalink | Comments (1) | TrackBack (0)

Faber: 'Ivory Tower' Economists Are Wrong: Taxes Play Major Role in Wealthy Fleeing High-Tax States

Tax Analysts Peter L. Faber (McDermott Will & Emery, New York), Taxes Play Major Role in Moving Out of State, 69 State Tax Notes 243 (July 22, 2013):

Amy Hanauer and Tim Krueger argue that taxes play no role in taxpayer decisions to move from one state to another (The Tax Flight Myth: People Move for Jobs and Family, Not Taxes, State Tax Notes, July 8, 2013, p. 97 ... ). Their conclusions are apparently based on empirical studies and computer models. They are wrong. Based on my experience as a practitioner who works with wealthy individuals and corporations every day, I can assure you that taxes often play a major role in these decisions and that in many cases, they are the sole reason for the move.  ...

The authors claim that they have been able to show the effect of taxes "while holding other conditions constant." How did they do that? Get real, folks. There are limits on what economists' computers can do. It is impossible to do this, no matter how many computer simulations one does. ...

My experience, and that of my SALT colleagues, is that taxes often play an important and decisive role in decisions to move from one state to another. Moreover, that is particularly the case for very wealthy individuals whose loss can be significant for a state. I am currently working with three wealthy individuals who have come to my firm for advice on how they can change their domicile from New York state to a low-tax state. When they do so, New York will lose between $70 million and $225 million in estate taxes (the variance will depend on which spouse survives the other). New York will also lose income taxes on their very substantial incomes. I assume that people in Ohio and other high-tax states are going through the same analysis. The issue with my clients is not whether to move, it is how to move so as to establish the change in legal domicile. We are going through the usual list of factors that the courts have considered in determining domicile (driver's license, club memberships, religious affiliations, civic activities, etc.). These people will move, and their moves will cost New York millions of dollars in taxes....

The economists can play all the number games they want to with their computers, their calculus, and their fancy equations, but they are still living in their ivory towers. The reality that my colleagues and I deal with every day is very different.

For a particularly timely example, consider yesterday's British Open champion Phil Mickelson:  Forbes: Phil Mickelson Wins British Open---And California Taxes It:

Prior TaxProf Blog coverage:

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July 22, 2013 in Scholarship, Tax, Tax Analysts | Permalink | Comments (13) | TrackBack (0)

Diamond on The $1 Million Value of a Law Degree

One MillionFollowing up on my prior posts (links below):  Stephen F. Diamond (Santa Clara):  The One Paper Every Law Professor and Law School Dean Should Read This Summer:

While the personal motivations of these law faculty “critics” with respect to law school itself may be difficult to explain, the nature of their core argument is much easier to understand. They have been artful and persistent in contending that the real meaning of the recent downturn in legal employment is that the American law school is based on an “unsustainable” business model.

Because of the surrounding macroeconomic crisis – which, like a one hundred year storm swept up everyone in its path – separating cause and effect with respect to this model has, in fact, been very difficult. The anecdotal data appeared to be very much on the side of the critics. After all, with even the most prestigious law firms laying off partners and the most prestigious law schools reporting difficulties for their graduates in the job market it was very hard to consider the possibility that what was happening was, in fact, the result of the inherently cyclical and volatile nature of modern capitalism. ...

A new paper, peer reviewed prior to its presentation to the 2013 American Law and Economics Conference at Vanderbilt, provides concrete data upon which to judge the sustainability of the law school model. ... The good news is that, yes, the recent crisis is cyclical not structural; yes, law school represents a worthwhile investment for a substantial majority of students who earn JDs; and, therefore, as a general matter, law schools and their university administrations should be very cautious about taking drastic action in response to the recent pressure created by the downturn in law school applications.

The reason one can draw these general conclusions is that through careful empirical work the authors are able to track the lifetime earnings premium that holders of JDs win over those students who hold only BA degrees. Their estimate is that at the mean this premium is worth $990,000 for JD holders and at the median is worth $610,000. These figures do not include taxes or tuition although they do include the cost of living incurred while attending law school. After deducting for tuition, however, it is the authors’ conclusion that “for most law school graduates, the net present value of a law typically exceeds its cost by hundreds of thousands of dollars.” Deducting taxes lowers that outcome, although it remains positive for most law students and, the authors argue, “may dramatically increase” at the lower end of the distribution with the availability of debt forgiveness or IBR type programs.

Of course, an institution such as the American law school that can produce graduates who attain such a substantial financial advantage over their non-law school BA colleagues can easily maintain a sustainable business model.

It is important to stress two important aspects of the study that one should keep in mind when considering this paper against the arguments of the law school critics:

  1. this paper is based on a large data set from the U.S. Census Bureau over a long period of time (1996-2011) and thus is the first thorough effort (that I can find) to consider the sustainability of earning a JD without relying on anecdotal information; and
  2. the authors conclude and, in my view clearly demonstrate, that the recent difficulties for JD holders were generated by a cyclical downturn in the wider economy and not by some kind of unique event that hit the legal profession in a manner not experienced by every other profession; and perhaps of greater importance the study’s data clearly show this downturn is over now and the earnings premium of JD holders has now turned upward consistent with its behavior over many years and in spite of the ongoing, if short term, difficulties of recent JD holders (the data on earnings is carried through 2011 for all JDs who graduated from 1996 through 2008).

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July 22, 2013 in Legal Education | Permalink | Comments (10) | TrackBack (0)

The IRS Scandal, Day 74

TaxProf Blog Weekend Roundup

Sunday, July 21, 2013

WSJ: Should Law Schools Bet on Law Students?

WSJ Law Blog, Placing Bets on Law School Graduates:

Benjamin M. Leff, a tax law professor at American University, says he doesn’t see why the legal educational world is so wedded to the traditional model of student debt.

He and another colleague at the school are researching the idea of structuring a loan program as a swap transaction. Here’s how it could work. Under one model, a student would take out a loan and then enter into a contract with the school. The school agrees to cover the loan, and the student agrees to hand over to the school a percentage of future earnings over a fixed period.

The school comes out ahead when the swap is with a student who makes partner at a blue-chip law firm by the age of 30. That student would end up paying the school more than what the school pays the lender.

If a student takes longer than expected to climb the income ladder, the student’s debt load diminishes and the school loses money. So the school has an incentive to help a graduate land a lucrative job and gather more information about their students’ earnings.

July 21, 2013 in Legal Education | Permalink | Comments (3) | TrackBack (0)

Merritt on The $1 Million Value of a Law Degree

One MillionFollowing up on my prior posts (links below):  Deborah Jones Merritt (Ohio State), Financial Returns to Legal Education:

I’ve outlined here both my praise for Simkovic and McIntyre’s article and my first two criticisms. The article adds to a much needed literature on the economics of legal education and the legal profession; it also highlights a particularly rich dataset for other scholars to explore. On the other hand, the article claims too much by referring to long-term trends and historic norms; this article examines labor market returns for law school graduates during a relatively short (and perhaps distinctive) recent period of sixteen years. The article also dismisses too quickly the impact of structural shifts. That is not really Simkovic and McIntyre’s focus, as they concede. Their data, however, do not provide the type of long-term record that would refute the possibility of structural shifts.

My next post related to this article will pick up where I left off, with winners and losers. My policy concerns with legal education and the legal profession focus primarily on the distribution of earnings, rather than on the profession’s potential to remain profitable overall. Why did law school tuition climb aggressively from 1996 through 2011, if the earnings premium was stable during that period? Why, in other words, do law schools reap a greater share of the premium today than they did in earlier decades?

Which students, meanwhile, don’t attend law school at all, forgoing any share in law school’s possible premium? For those who do attend, how is that premium distributed? Are those patterns shifting? I’ll explore these questions of winners and losers, including what we can learn about the issues from Simkovic and McIntyre, in a future post.

Prior TaxProf Blog coverage:


July 21, 2013 in Legal Education | Permalink | Comments (0) | TrackBack (0)

Top 5 Tax Paper Downloads

SSRNThis week's list of the Top 5 Recent Tax Paper Downloads is the same as last week's list. The #1 paper is now #168 in all-time downloads among 9,308 tax papers:

1.  [877 Downloads]  Taxation, Tyranny, and Theocracy: A Biblical Response to Susan Hamill, by Gary North
2.  [328 Downloads]  Startup Ltd.: Tax Planning and Initial Incorporation Location, by Susan C. Morse (UC-Hastings, moving to Texas)
3.  [241 Downloads]  Federal Income and Wealth Transfer Taxation: What Happened and What Might Happen Next, by Gerry W. Beyer (Texas Tech) & Robert L. Moshman
4.  [217 Downloads]  Value Added Tax and Financial Services, by John Prebble (Victoria University of Wellington, Faculty of Law) & Sybrand van Schalkwyk (Staples Rodeway, Wellington, NZ)
5.  [192 Downloads]  Territoriality: For and Against, by Reuven S. Avi-Yonah (Michigan)

July 21, 2013 in Scholarship, Tax, Top 5 Downloads | Permalink | Comments (0) | TrackBack (0)

The IRS Scandal, Day 73

Saturday, July 20, 2013

More on The $1 Million Value of a Law Degree

One MillionFollowing up on my prior posts (links below):

A fascinating new paper argues that a J.D. is worth $1 million over the course of a career, and that the recession hasn't dampened its value. But don't go racing for your LSAT prep book just yet. ...

Having scoured through it -- and having asked the Hamilton Project's Adam Looney, who has done similar work on college graduates, for a second opinion -- Simkovic and McIntyre's paper seems to be both based on a reasonable set of economic assumptions and a very by-the-book interpretation of their numbers. ...

That said, I'm not sure young political-science majors should take this study as a green light to go rushing back to their LSAT prep books. For ease of digestion, here are my reasons in bullet-point form:

Reason 1: The Legal Job Market Continued Deteriorating Well Past 2008. ... The question is whether the problems law graduates have faced a temporary jobs drought thanks to the recession, or if something has fundamentally changed in the industry.

Reason 2: The Boom Times Might Be Over for Good. ... [T]he slow rebound nonetheless suggests something's amiss in law-firm land. Unless government hiring rebounds with a vengeance, or jobs open up en masse thanks to retiring boomers, it's hard to see the hiring picture dramatically improving for young J.D.'s.

Reason 3: Students From Bottom of the Bottom Schools Are Still Suffering. ... Even if law-school graduates on the whole do reasonably well, the law-school boom of the last decade helped spur the growth of bottom-tier institutions that now post 20% or higher unemployment rates among their graduating classes. ...

I'm not yet comfortable saying that many young Americans are missing out by saying no to law school.

If the Simkovic & McIntyre analysis of the value of a law degree is correct, there are two somewhat counterintuitive implications.  First, law schools have been massively undercharging for tuition in the past. If what is now a $150k investment produces $1M increase in income, why are law schools permitting students to capture all of that benefit? Presumably there'd still be plenty of takers for a $300k investment that produces $1M in benefits. And recall that the study is using data from 1996-2011, but that tuition in 1996 was hardly $50k/year.

The second implication is that if Simkovic & McIntyre are correct about the system basically holding going forward, it also suggests that law schools should be raising their tuition. To the extent that it reduces enrollment, it might only boost the value of the degree by constraining the supply of lawyers. Still, I can't imagine any schools going this route (competition is apparently keeping tuition in check).

I think the best critiques of the study I’ve heard so far are:

  1. Maybe there really is a structural shift going on in the way legal services are delivered. ...
  2. Because it uses general averages, the study may mislead people who invest large sums in law degrees from low-quality (or even low-prestige, which isn’t necessarily the same thing) institutions. ...
  3. The study doesn’t discuss bar passage. ...
  4. The study doesn’t discuss the financial, much less hedonic, consequences of carrying heavy debt from college and law school. ... 
  5. The study treats the experience of law school as neutral, neither better nor worse than the three-year alternative job. ...
  6. I happened to have a really good time in law school, so for me it was a net benefit; other people report hating the experience and for them it is a net cost. ...

Thus, the study is a useful data point for law school applicants/entrants and a useful corrective to some recent sturm und drang. But it’s not by any means 100% of the story either.

Clearly, this article has given new life to those who would defend the status quo. However, even assuming the statistical methodology is sound (which I do, as I have no reason to believe otherwise and no time to recreate it), the study suffers from a number of crucial weaknesses.

In general law school graduates might be slightly better off than their peers with no graduate degrees, but a damn lot of them still have pretty bad jobs. It’s also possible the problem might still get worse; law firms are simply not at the size where they were before the Great Recession began, nor are they likely to expand again in the future.

But the new study is a very important contribution to this debate. Law school is perhaps no longer the easy ticket to financial stability that it seemed back when I was in college, but it’s not really clear that law-school is a straight-up bad investment.

Prior TaxProf Blog coverage:


July 20, 2013 in Legal Education | Permalink | Comments (2) | TrackBack (0)

Mental Illness and the Terrors of the Law School Tenure Track

McelroyLaw Prof Lisa T. McElroy (Drexel) has a gripping piece on Slate about her battle with mental illness as she progressed along the tenure track: Worrying Enormously About Small Things: How I Survive Anxiety and You Can, Too. Here is the opening:

I sat in my tent in the Kenyan bush. It was nighttime. I was up late, in Kenyan time, at least. Back in the United States, it was afternoon. The afternoon that the tenure committee was meeting to vote on my future. As a university professor who had worked 13 years toward a goal of job security and respect from my peers, it all came down to this one conference room sit-down.

I listened to the lions roar. And I thought about walking outside the demarcated safari “safe area” into the night, into the bush, into the wild. Because, for me, the safe area was not safe. No place was safe. No place on Earth, I’d found, as I’d crossed hemispheres—west to east, north to south—trying to find one.

If the lions ate me, my family would get my life insurance. And then a tenure denial wouldn’t matter. Having a back-up plan made me breathe easier.

It was a very long night. No email arrived by 1 a.m. I took a sedative and tried to sleep. At 5 a.m., I checked again. There it was. The email.

I had been voted tenure.

So many colleagues across the country had tried to tell me that getting tenure would be anticlimactic. It wouldn’t matter, they said, because by the time the vote came around, I’d have a pretty good idea of whether I’d met the standards or not. I’d have a feel for the politics of my law school. I’d have heard through the grapevine which way the winds were blowing. The vote would not be a surprise.

But as I write today, a month after the board of trustees formally granted me tenure, six months after receiving that email after a very long Kenyan night, I can tell you that my colleagues and friends were wrong.

You see, for a person living with mental illness—in my case, a severe anxiety disorder—the kind of security and certainty that come with tenure are an exquisite relief. And that is because the six years it takes to get there are an exquisite kind of torture, of terror, of talking oneself into being semicalm through the night to make it to the next day, the next class, the next faculty meeting.

Those years are full of lions around every bend. And so the lions in Kenya were familiar, if not friends. And considering letting them eat me alive? It couldn’t be worse than the six-year job interview I’d just been through.

(Hat Tip: The Faculty Lounge, PrawfsBlawg.)

July 20, 2013 in Legal Education | Permalink | Comments (2) | TrackBack (0)

The IRS Scandal, Day 72

A Father's Sad Truth: Dreams Are Important. But So Is Money.

Show Me The MoneyChronicle of Higher Education:  A Father's Sad Truth, by Isaac Sweeney:

As with most parents, I have changed my perspective of the world since having children. I’ve been thinking a lot lately about money (probably because I have an expensive infant in the house), and, as I get older, I realize more and more just how important and necessary money is.

I remember that, when I was a kid, my family, friends, teachers, and other role models told me countless times that money wasn’t the most important thing. Children were, and still are, encouraged to chase their dreams, no matter what. ...

To my own disappointment, I’ve made a decision. As I find it harder and harder to make ends meet, even with my supposedly white-collar job as a tenure-track professor, I’m going to encourage my children to do what they love, but only to a point. I’m going to tell them the thing that I wish someone had told me: They have to make money. Unfortunately, money is too important.

July 20, 2013 in Legal Education | Permalink | Comments (17) | TrackBack (0)

Friday, July 19, 2013

What Is the Economic Value of a Law Degree -- $1 Million or $100,000?

One MillionFollowing up on my prior posts (links below):  Paul Campos (Colorado), If I Had a Million Dollars:

The legal internets are atwitter with talk of a new paper which suggests that a law degree is worth a million dollars. It’s an interesting exercise in econometric advocacy, and I’m going to spend some time analyzing the authors’ claims.

I’m going to proceed in two parts. First, I’m going to assume for the purposes of argument that the paper’s interpretation of its data is correct in regard to the value of law degrees acquired in the past, and that, as they argue, there is no good reason to assume this value will not be maintained in regard to law degrees acquired in the future. Then I’ll critique those assumptions.

Simkovic and McIntyre estimate “the mean pre-tax lifetime value of a law degree as approximately $1,000,000.” ... The authors estimate that the median post-tax value of a law degree is (or has been, which they treat as the same thing) $420,000. Since they assume a working life of 42 years, they are in fact estimating that for the median graduate a law degree generates a $10,000 annual income premium (in 2012 dollars) over what an otherwise similar college graduates who choose not to go to law school could expect to earn over the course of their lifetimes. That still sounds like a pretty good outcome, even if it’s not nearly as spectacular-sounding as the headline-grabbing million-dollar claim.

Yet the wary reader will have noticed a striking omission from the argument so far: how much is it going to cost a law graduate to generate this premium? ... Recall that the authors estimate the median post-tax value of a law degree as $420,000. How much will the typical law student end up paying, in principal and interest, in order to make this investment? The answer is $444,150. ... 

Does this mean that, even assuming the authors’ claims about the income premium generated by a law degree are actually correct, a law degree will have negative net present value for the typical matriculant in the class of 2013? Not quite. This is because the authors discount the hypothetical future earnings of current law students to present value. So – again, granting the accuracy of all of their data and methods – the present value of a law degree for people now enrolling in law school would be the difference between $420,000 and the negative net present value of a legal obligation to amortize $200,000 of debt at 7.5% interest over the next 25 years.

What this latter figure is depends on various assumptions about future rates of inflation and the like, but, given recent historical trends (inflation has been considerably less than half of the interest rate law students must pay on their debt), it’s reasonable to assume that the negative net present value of this obligation is somewhere around halfway between the present payoff cost of the debt and the total future income stream necessary to amortize it under its terms. (The authors use a real discount rate of 3%, which is congruent with this assumption).

In other words, if we give the authors’ analysis every possible benefit of the doubt, we would conclude that, after including the cost of the investment in the analysis, the typical pecuniary premium generated by a law degree acquired by matriculants in the class of 2013 will be $2,619 per year in constant 2012 dollars, or $218.25 per month about $109,000 (On reflection I think the deleted numbers are wrong, because they end up discounting the increased earnings inappropriately. The $109K number represents net present value after subtracting the net present negative value of the investment cost, discounted at the same rate as the higher earnings).

Update:  Stephen F. Diamond (Santa Clara), Man Bites dog: “Bad Cop” Law Prof Paul Campos, Leader of Anti-Law School Camp, Backs New JD Value Study:

In the world of corporate finance there is a very simple decision rule: managers should accept all positive net present value (NPV) projects. This is a very simple and powerful concept. It lies at the heart of how we train managers at every business school in the world. ...

[Paul Campos] has simply done exactly what the paper implies all analysts of the value of a JD should do – apply relevant costs such as potential debt and taxes and subtract those from the expected and discounted future cash flows. Sure enough, even with his inputs (like the implication that students must borrow $200,000 to go to law school) the result Professor Campos comes up with is a NPV of $109,000, i.e., positive. ...

Now return to what I said at the outset: managers – in this case the managers are prospective law students “managing” their own human capital – should accept a project with positive NPV. In other words, even under Campos’ analysis the conclusion that a student should reach is that law school makes sense. The actual net dollar amount above present value is irrelevant as long as it is positive. ...

So, far from undermining the Million Dollar JD Value paper, Professor Campos simply confirms its fundamental insight: law school is a positive net present value project for the vast majority of law students even when tested by the institution’s leading opponent.

Prior TaxProf Blog coverage:


July 19, 2013 in Legal Education | Permalink | Comments (4) | TrackBack (0)

OECD Unveils Global Crackdown on Companies’ Multinational Tax Avoidance

OECD Cover PNGOECD, What is Tax Base Erosion and Profit Shifting and How Can You Stop It?:

Some businesses that are worth billions may pay practically no tax in the places where they operate and make profits. Not because they’re defrauding the system, but because tax systems simply haven’t kept up with how firms in the digital economy in particular add value and make profits, on intangible assets such as design and licensing for example, or even by exploiting your personal data.

Other firms also avoid paying what most citizens would consider “fair” taxes through “(tax) base erosion and profit shifting” or BEPS as the OECD calls it. As we discussed in this article, BEPS schemes themselves can be extremely complicated, but the basic idea is simple: shift profits across borders to take advantage of tax rates that are lower than in the country where the profit is made. Three popular mechanisms for doing this are hybrid mismatches, special purpose entities (SPE), and transfer pricing.

Hybrids try to have the same money or transaction treated differently (as debt or equity for instance) by different countries to avoid paying tax, and often feature dual residence – companies that are residents of two countries for tax purposes. An SPE is an entity with no or few employees, little or no physical presence in the host economy and whose assets and liabilities represent investments in or from other countries and whose core business consists of group financing or holding activities.

Transfer prices are the prices various parts of a company pay each other for goods or services. They are used to calculate how profits should be allocated among the different parts of the company in different countries, and are used to decide how much tax the MNE pays and to which tax administration. There is no simple method for calculating a transfer price and the lack of good “comparables” (similar operations carried out at market prices by unrelated entities) often results in profits being artificially shifted to no- or low-tax jurisdictions.

International tax rules are generally efficient in ensuring that companies are not subject to double taxation, but BEPS takes advantage of gaps in the rules to avoid paying tax completely, so-called “double non taxation” or to pay a sum across two or more countries that is less than what they would pay in a single country.

Opportunities for MNEs to pay less tax harm everybody. Governments lose revenue and may have to cut public services and increase taxes on everybody else. But businesses suffer too. Small businesses, businesses working mainly in one national market and new firms can’t compete with MNEs who shift profits across borders to avoid or reduce tax. And an MNE that doesn’t shift profits is at a disadvantage compared to its BEPSing rivals.

What can be done? Today, the OECD launched a 15-point Action Plan that will give governments the domestic and international arms they need to combat BEPS. The Plan recognises that greater transparency and improved data are needed to evaluate and stop the growing disconnect between where money and investments are made and where MNEs report profits for tax purposes.

The Action Plan will for example stop the abuse of transfer pricing by ensuring that taxable profits can’t be artificially shifted through the transfer of patents, copyright or other intangibles away from countries where the value is created, and it will oblige taxpayers to report their aggressive tax planning arrangements.

When we wrote about BEPS in February, we mentioned the sense of urgency surrounding the OECD work, with the proposal that a workable plan be agreed on within six months. The next steps will take a bit longer of course, but not that much longer. The actions outlined in the Plan will be delivered over the next 18 to 24 months by the joint OECD/G20 BEPS Project, regrouping all OECD members and G20 countries on an equal footing. To ensure that the actions can be implemented quickly, a multilateral instrument will also be developed for countries that want to amend their existing networks of bilateral tax treaties.

Some may protest and try to get the plan neutralised, but would they really prefer the alternative if the no action is taken to address the weaknesses that put the present consensus-based multilateral framework at risk and countries apply: “unilateral measures, which could lead to global tax chaos marked by massive re-emergence of double taxation”?

(Hat Tip: Omri Marian.)

July 19, 2013 in Tax | Permalink | Comments (0) | TrackBack (0)

How—and Why—the Lawyer Bubble Keeps Growing

American Lawyer:  How—and Why—the Lawyer Bubble Keeps Growing, by Steven J. Harper (former partner, Kirkland & Ellis; adjunct professor, Northwestern; and author, The Lawyer Bubble (2013)):

In June, the legal services sector lost more than 3,000 jobs, according to the latest Bureau of Labor Statistics data. Since June 2012, the latest BLS data shows, the industry has seen a net gain of only 1,000 jobs. In the last two months alone, 6,000 positions disappeared.

In a properly functioning market, reduced demand would prompt suppliers to cut output in search of equilibrium. But the legal profession is anything but a functioning market. In fact, it consists of several distinct and dysfunctional markets. ...

The overall picture is ugly. Some schools are laying off faculty and staff to counter the financial impact of reduced enrollments. But they’re also keeping tuition high and spending money on LSAT-enhancing scholarships that disappear after the first year, presumably to be replaced with non-dischargeable loans. Meanwhile, almost all of today’s students are incurring staggering educational debt, but many of them won’t find jobs sufficient to repay it.

That’s not a march toward market equilibrium. It’s a growing bubble.

July 19, 2013 in Legal Education | Permalink | Comments (0) | TrackBack (0)

The IRS's Gay Marriage Tax Problem

Bloomberg, The IRS's Gay-Marriage Tax Problem:

During the runup to the Supreme Court’s June 26 ruling on the Defense of Marriage Act, one number kept recurring: The government’s refusal to recognize same-sex marriages meant gay couples were denied more than 1,000 federal benefits that straight couples enjoy. Now that the justices have struck down DOMA, gays can look forward to equality under U.S. tax laws. That is, just as soon as the IRS can figure out how to make equality happen. The tax agency has promised to “move swiftly” to recognize gay unions, but for many couples it won’t be as simple as checking the “married” box on their 1040.

Those living in Washington, D.C., or the 13 states that allow same-sex marriages can file a federal tax return next April just like other married couples. Not so for the thousands of gay couples who took their vows in one of those states but who live in one of the 37 others where same-sex marriage isn’t recognized. It’s not yet clear whose definition of marriage the IRS is supposed to follow in evaluating their taxes—the state where the couple got married, or the one in which they reside. And will the federal government recognize gay couples in civil unions who file a joint return?

To avoid confusion, a single nationwide rule makes the most sense, says Patricia Cain, a tax law professor at Santa Clara University in California. “The IRS has the power to construe the Internal Revenue Code,” she says. “So for them it’s, ‘What does the word spouse mean?’ ” President Obama has weighed in, saying it’s his “personal belief” that same-sex couples should get the same federal benefits as married couples regardless of where they live. He’s asked federal agencies to research legal issues that might stand in the way. Such a ruling, though, could cause headaches for the IRS, which until now has typically followed states’ definitions of marriage, says David Herzig, a tax law professor at Valparaiso University. “You may solve this problem,” he says, “but you may open up another.”

Many gay couples might not like what marriage equality looks like on a tax form. Until now, they’ve been able to take advantage of their separate status to maximize tax savings—claiming multiple capital-loss deductions unavailable to opposite-sex married couples or multiple tax credits for adopting children. Straight married spouses with roughly equal incomes typically pay a marriage penalty under the tax code, because more of their income is subject to higher marginal tax rates. Gay couples would get hit with the same penalty. And unless the IRS exempts them from paying back taxes, some same-sex married couples could owe penalties for underwithholding during the time they’ve been married, even though the federal government didn’t recognize their unions until now.

On the other hand, gay couples with unequal incomes would get the same marriage bonus as straight couples and could seek a refund for the extra taxes they paid in recent years.

July 19, 2013 in IRS News, Tax | Permalink | Comments (2) | TrackBack (0)