Sunday, November 27, 2005


There's Now Light At The End Of The Tunnel

From Carolyn Lochhead in today's San Francisco Chronicle:
Deficit cracking GOP's solidarity
Party-line votes no longer assured

* * * * *

When Congress returns next month from its Thanksgiving recess, Republican leaders who have never failed to marshal their forces on big party-line votes face the prospect of defeat on tax cuts and spending restraint -- the core issues that have united the party since President Ronald Reagan and gave them their House majority in 1994.

They have lost some tax and spending votes already, and postponed others because of the specter of losing. After a five-year spending spree on everything from the Iraq war to Medicare, deficits are now jeopardizing the tax cuts that were the centerpiece of President Bush's first term.

A move to preserve tax cuts on capital gains and dividends -- the gemstone of the Bush tax cuts for conservatives -- is in trouble in both the House and the Senate. For the first time since Bush took office, House Democrats are united against tax cuts, and Republican moderates are bucking their party leadership.

GOP leaders are pushing a measure to control entitlement spending by shaving Medicaid and food stamps for the poor. But the combination of investor tax cuts and reductions in poverty programs has already led to a series of embarrassing defeats in committee and on the House floor. Republicans are headed for a pre-Christmas showdown that could turn into a political disaster.

* * * * *

The budget outlook -- and the problems facing the GOP -- promise to get much worse. Medicare's costly new prescription drug benefit, an $18 trillion unfunded liability sponsored by the White House and Republican leadership, starts in January. Just two years from now, in 2008, the enormous Baby Boom generation will begin retiring, ceasing income tax payments and starting to collect benefits, leading to a budget squeeze unprecedented in U.S. history.

"We're seeing the future," said Bruce Bartlett, a former Treasury official in the George H.W. Bush administration and tax-cut advocate. "The decisions that have been made over the last five years have resulted in the chickens coming home to roost."

Total spending increases under the current President Bush closely rival those of President Lyndon Johnson, a Democrat famous for conducting the Vietnam War while simultaneously increasing domestic spending.

Discretionary spending rose 48.5 percent in Bush's first term, according to an analysis by the libertarian Cato Institute, twice as much as in two terms under President Bill Clinton, when spending rose 21.6 percent. Adjusted for inflation, Bush has increased total spending at an annualized rate of 5.6 percent, compared with 1.5 percent under Clinton.

"It's only a matter of time before we stop talking about cutting taxes for a very long period of time and talk basically about increasing taxes," Bartlett predicted. "The end of the era of tax cutting is going to put tremendous strain on the Republican coalition, just as the end of the era of big spending put tremendous strain on the Democratic coalition" in the 1980s. "You're hearing more and more people on the Republican side talking about major losses in the congressional elections next year and about 2008 being a really, really bad year for Republicans."

In the two months since Republicans pulled their tax cut bills, the atmosphere has only gotten worse. Republicans lost two important off-year gubernatorial elections in Virginia and New Jersey. Bush's popularity has hit new lows, with the public now decidedly opposing the Iraq war. Leading GOP candidates, including Sen. Rick Santorum, a conservative member of the Senate leadership who faces a tough re-election fight in Pennsylvania, have refused to appear with Bush at campaign events.
* * * * *

As the post-Katrina conservative revolt gelled, the Republican leadership turned to Medicaid, food stamps and student loans for spending restraint. The Senate is proposing $35 billion in reductions and the House $50 billion; both chambers are also seeking between $56 billion and $59 billion in tax cuts.

Large gap to cross

There are enormous differences between the House and Senate on both measures. Reconciling them will be very difficult in the two weeks Congress has left before adjourning for Christmas.

Combined, the measures increase the deficit. The spending restraint appeased conservatives but provoked an outcry from Democrats and GOP moderates. Efforts to console moderates by dropping a measure for oil exploration in the Arctic National Wildlife Refuge and adding subsidies for home heating costs and dairy farmers have done little but stoke more controversy.

The Medicaid and food stamp cuts have attracted the most fire, and barely passed the House 217-215 before Thanksgiving, with no Democratic support. Republicans recessed before attempting to pass the tax cuts.

Much of the roughly $11 billion in cuts over five years proposed by the Senate for Medicaid, a health care program for the poor that many elderly use to pay nursing home costs, were recommended by state governors. They contend the program is becoming burdensome for the states, which must come up with money to match federal funding. Democrats have portrayed the reduction in the growth of Medicaid spending as dire, but even liberal analysts concede they are not severe. One provision would increase co-payments from $3 to $5, and another would allow elderly nursing home residents to shield $750,000 in home equity, raised from $500,000 after Republican moderates objected.

The cuts are "not awful," said Jason Furman, a former adviser to Democratic presidential candidate John Kerry now at the liberal Center for Budget and Policy Priorities.

"It's less about the magnitude and more about why should you be asking poor people to pay anything more for health care at the same time that you're giving brand-new tax cuts to the most fortunate," Furman said. "That is what is just completely wrong with this picture.

"A go-it-alone Republican strategy works when you're trying to cut taxes or increase spending, but when you're trying to make tougher choices, the only way to do it is to work together with the other party for shared sacrifice," Furman said. "Budget reality is starting to catch up with the Republican Party."

Heavy U.S. borrowing with much more on the horizon is stoking concern about a potential financial crisis. Any one of several big economic imbalances -- including looming pressures on the federal budget, the zero U.S. savings rate, the historically high trade deficit, a real estate boom that has supported consumer spending -- could provoke a sudden financial shift, economists say.

* * * * *

"It's just a matter of time before we have some kind of economic event that I think is just going to change the political situation 180 degrees and make deficit reduction the order of the day," he said. "I don't know what it will be. I just know that when you've got gasoline spilling onto the floor of your house, it doesn't really matter where the spark comes from."
(Emphasis added.)

Hat tip to The Raw Story.


How Did This Travesty Come About?

I have generally refrained from commenting here on the Iraq war since it's outside the area that this weblog is designed to cover. (Yes, I know, I violate the coverage rules all of the time, such as on Thanksgiving.) However, David Brook's column on the Op-Ed page of the NYT today (now behind the NYT Select firewall) crosses sufficiently into areas that have been discussed here that I feel comfortable responding.

Brooks discusses a US military operation in Iraq, focusing on the bravery and high level of competence of our personnel there. He complains that there aren't enough stories about our warriers in Iraq. In the course of the article, however, he makes the following bizarre comment:
After the Marines took Ubaydi [their objective], they didn't have the troops to hold it, and it again became a terrorist safe haven. Over the past two weeks, the Marines have been back in Ubaydi for more bloody fighting. This time they have enough trained Iraqi forces to hold the area, but why weren't there enough troops last spring? Every time you delve into the situation in Iraq, you come away with the phrase "not enough troops" ringing in your head, and I hope someday we will find out how this travesty came about.
(Emphasis supplied.)

Is Brooks kidding? The Bush Administration, with the support of cheerleaders such as Brooks, has cut the tax base, primarily by handing out tax cuts to the rich and the very rich. As a consequence, the federal government does not have sufficient revenue to accomplish the tasks that the Administration has assigned to it.

Thus, when confronted by General Eric Shinseki's analysis that the war would require far more troops than the it was willing to commit, the Administration cashiered Shinseki.

When asked why US forces lacked sufficient body armor, Rumsfield lied and claimed that the Pentagon was doing all that it could to get sufficient amounts of armor. In fact, the companies that provided the armor had excess capacity: They awaited only contractual directives to increase production. Of course, the reason the contracts were slow in coming was that this would have highlighted the cost of the war.

The travesty came about because the Administration and its apologists (including Brooks) made a conscious decision to compromise the war effort rather than to compromise their attack on the fundamental structure of our tax system.

At the outset of the war effort in Iraq, one might have agreed or disagreed with whether the invasion was appropriate? I believe that a reasonable case can still be made that continuation of the war is still justified. (It's not a case that I agree with, but that's another story.)

One can reasonably agree or disagree with whether we were lead into war due to the overhyping of the dangers posed by Saddam by the Administration.

What one cannot reasonably argue is that we have competently executed the prosecution of the war. We have not. The reason for this travesty is that the Bush tax cuts have made it impossible to properly conduct the war.

So long as the tax cuts remain in place, the federal government will regularly be unable to successfully carry out its assigned tasks, whether those tasks are domestic or military. The real travesty is that Brooks knows the reason that we have insufficient troops in Iraq. He is simply unwilling to acknowledge that he was complicit in helping to create the problem.


Let's All Breath A Sigh Of Relief

Just when we were becoming concerned that the US tax system was becoming less progressive, we are assured by the report of the Joint Economic Committee, Tax Distribution Analysis and Shares of Taxes Paid--Updated Analysis, reported at TaxProf, that this is not the case.

As I said in August, the JEC is "a satrap of the knavish right." I explained my position here.

The current JEC report is nothing more than a regurgitation of Chairman Jim Saxton's comments in October which I debunked here. It is designed solely to mislead.

Let me summarize reality: The income tax is only a part of the total tax system. That system, taken as a whole, is only minimally progressive.

If the JEC staff members were intellectually honest . . . they would not be JEC staff members.

Thursday, November 24, 2005


A Grinch On Thanksgiving

Via Mark Kleiman at The Reality Based Community, there is a brief discussion of economist Robert Frank's commentary in today's NYT, Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy. Frank outlines the corrosive effect that tax cuts have had on the country as a community, reducing our overall welfare, both rich and poor. While not precisely on point, I am somehow reminded of H.G. Wells' dystonia described in The Time Machine:
The Upper-world people might once have been the favoured aristocracy, and the Morlocks their mechanical servants: but that had long since passed away. The two species that had resulted from the evolution of man were sliding down towards, or had already arrived at, an altogether new relationship. The Eloi, like the Carolingian kings, had decayed to a mere beautiful futility. They still possessed the earth on sufferance: since the Morlocks, subterranean for innumerable generations, had come at last to find the daylit surface intolerable. And the Morlocks made their garments, I inferred, and maintained them in their habitual needs, perhaps through the survival of an old habit of service. They did it as a standing horse paws with his foot, or as a man enjoys killing animals in sport: because ancient and departed necessities had impressed it on the organism. But, clearly, the old order was already in part reversed. The Nemesis of the delicate ones was creeping on apace. Ages ago, thousands of generations ago, man had thrust his brother man out of the ease and the sunshine. And now that brother was coming back changed! Already the Eloi had begun to learn one old lesson anew. They were becoming reacquainted with Fear. And suddenly there came into my head the memory of the meat I had seen in the Under-world. It seemed odd how it floated into my mind: not stirred up as it were by the current of my meditations, but coming in almost like a question from outside. I tried to recall the form of it. I had a vague sense of something familiar, but I could not tell what it was at the time.
There is an unsettling feeling about in the country this Thanksgiving.

We're involved in a foreign war fought by a military drawn primarily from the lower economic classes of our society. At the top levels, the war is commanded primarily by those who have never served in the military and whose sons and daughters are unlikely to ever serve.

The industries that have traditionally lead this country to its position of dominance in the world economy are failing. As they fail, they default on the pension and health care expectations upon which their workers, both past and present, had designed their lives.

The income gap between the ultra-rich, the rich, and then everyone else, continues to widen. There is no longer a sense that Americans still have the implicit assumption of previous generations that their offspring would be more prosperous than they were.

Certainly there are reasons for these trends that cannot be laid at the door of any political party. Technology has reduced barriers to trade. This, in turn, has sharpened both the pace and the intensity of economic competition. Yet, the policies of the current administration have only made things worse.

A foreign war, whether rightly or wrongly launched, is being incompetently conducted. Federal budget deficits, fueled by tax cuts that flow primarily to the rich and ultra-rich, threaten to undermine our competitive position. Access to quality education, both at the secondary and college level, traditionally a stepping stone to a better life, is becoming more limited. The poor and the middle class are, justifiably, uneasy about their ability to continue to afford adequate health care.

In American historical mythology, the Thanksgiving table was a communal table. While certainly never really true, the myth served a valuable purpose. By celebrating the ideal of America as a community, it strengthened that community.

In a basic and fundamental way, the policies of the current administration, and their knavish and foolish followers, are profoundly anti-American.

Wednesday, November 23, 2005


Fat City

In the spirit of full disclosure, let me first note that I am one of the growing population of individuals who have an excess of avoirdupois. I also have bum knees. Thus, it was with more than a passing interest that this story carried by the BBC caught my attention:
The NHS [British National Health Service] in East Anglia has announced overweight people will be denied knee and hip replacements.

NHS managers in East Anglia have decided obese people - classed as those with a body mass index above 30 [for the curious, yes, I fall into this category], which applies to nearly a quarter of the population - will not be allowed to have hip and knee replacements.

The decision by Ipswich, Suffolk Coastal and Central Suffolk primary care trusts, was taken in consultation with local doctors.
It is generally considered more dangerous to anaesthetise overweight patients, who are often asked to slim before going under the knife.

Other thresholds have been set for nine other procedures, including treatment for varicose veins and grommets for glue ear in children.
There is, however, a broader (no pun intended) issue of public policy illuminated by the story. Specifically, how is medical care rationed if there are no costs constraints to obtaining treatment?

One of the characteristics of the American health care system is that private insurers spend a good deal of money attempting to corral a healthy (read: younger) patient population and denying or limiting reimbursement for some types of care entirely. As a consequence, we spend far more of our GDP than any other industrialized nation on health care. Yet, our population is not notably more well-off. In fact, by many measures, we get significantly lower benefits from our health care system than other countries, even though our system is far costlier.

I happen to be in favor of a government sponsored single-payor health system. I believe, for instance, that it would make American industry more competitive. It would also give us a bigger bang for our health care buck. However, I am not unmindful that many of the benefits that those of us who have medical insurance have come to expect (e.g., free replacement knees and hips on demand) might not be as readily available if the government mandates the benefits available.

Tuesday, November 22, 2005


Surprise

The organization, Citizens for Tax Justice, reports:
Lawmakers in the House and Senate are now debating legislation to extend temporary tax concessions for capital gains and dividend income. The tax loopholes, enacted in 2003 and scheduled to expire at the end of 2008, allow capital gains and dividend income to be taxed at a top rate of 15 percent—less than half of the 35 percent top tax rate on wages and other income. If these provisions expire, as current law provides, dividends will once again be taxed at the same rates as other income, while the top capital gains tax rate will revert to 20 percent. A new state-by-state analysis by Citizens for Tax Justice shows that the lion's share of the benefits from extending these tax provisions would go to the wealthiest Americans. In particular:
  • Nationwide, the richest 1 percent of Americans, with an average income of almost $1.3 million in 2009, would enjoy 53 percent of the tax cuts.

  • The average tax cut for this wealthiest group would exceed $12,000 in 2009.

  • The vast majority of Americans would receive nothing at all from extending these special tax rates. 78 percent of Americans would get no tax cut, and an additional 10 percent would get less than $100.

  • Extending tax breaks for unearned income would also worsen the nation’s fiscal health, increasing federal budget deficits by $31 billion in 2009 alone. If these cuts were made permanent, the long-term cost would be much higher.
I bet you're suprised.

Of course, these are "new" tax cuts. We still have scheduled tax cuts that begin to kick in in 2006. Another CTJ report notes:
Since 1991, under a law signed by the first President Bush, the benefits of personal exemptions and most itemized deductions have been gradually phased out for the very wealthiest taxpayers. In 2001, however, the second President Bush succeeded in repealing his father’s reforms. The repeal is scheduled to begin to take effect in 2006, with full repeal in 2010. When and if these two tax changes take effect, their benefits would go almost entirely to the wealthiest Americans.

In particular:
  • In 2006, 97 percent of the tax cuts would go to the wealthiest 1 percent of Americans. The share going to the top 1 percent would rise slightly thereafter.

  • More than 99 percent of Americans would receive nothing at all from these new tax cuts in 2006.

  • The scheduled cuts would cost $2.6 billion in 2006 if allowed to take effect. The annual cost of these cuts would increase rapidly in later years, and would exceed $10 billion in 2010.

Monday, November 21, 2005


The Age of Aquarius v. The Shadow

Via Tax Analysts, we learn that Bill Frenzel, a member of the President's Advisory Panel on Federal Tax Reform, is pissed that the Panel had to comply with the federal sunshine law. As explained by Tax Analysts:
The Federal Advisory Committee Act (FACA) requires that full committee hearings be open to the public and that documents made available to committee members for hearings be available to the public and press. The nine-member tax reform panel met publicly more than a dozen times since Bush named its members in January. The members also met in small group sessions that were permitted to be private because only four or fewer members -- not a quorum -- were present. Documents from meetings with less than a quorum of members are not required to be made public under FACA. Attempts by reporters to open the subgroup meetings and view documents prepared for the subgroup meetings were rejected.
Frenzel is apparently well acquainted with the success of blue ribbon task forces, having served on the President's Commission to Strengthen Social Security. He is a former Republican congressman from Minnesota now resident at the Brookings Institution.

The reason that the Tax Reform Panel's recommendations will go nowhere other than in footnotes to research papers has nothing to do with secrecy or the lack thereof. It's because the Panel's recommendations were DOA due to the constraints imposed by their charter. In essence, the Panel had to accept the premise that the skewed Bush tax cuts were acceptable and the total overall level of taxation was appropriate. Thus, it could not engage in a no-holds-barred examination of the tax system.

The failures of that system are not primarily due to the complexity of the Internal Revenue Code. They are due to the fact that the tax system, as a whole, is not terribly progressive (in many respects is actually flat) and puts an undue burden on middle-class families. In order to address the problems of the tax system constructively, all aspects of our tax system, including Social Security, the estate and gift tax, and aspects of state and local tax, have to be considered together with the federal income tax. A piecemeal approach is simply a dodge, since it allows panels such as the late, unlamented, Tax Reform Panel, to pretend that they're acting to preserve tax progressivity. In fact, at best, they are attempting to preserve tax progressivity in only one component part of the entire system.

Eugene McCarthy used to say, "The function of liberal Republicans is to shoot the wounded after battle." In that regard, there's one good thing to come out of the Panel. Frenzel said, “That’s the fourth commission I’ve taken and I shall take no more.”

Sunday, November 20, 2005


Does Charity Begin With The Tax Code?

There has been a good deal written about the IRS's threatened revocation of the tax exemption of All Saints Episcopal Church because of an anti-war sermon delivered the Sunday before the 2004 Presidential election. Anyone interested in the topic can found links to a good deal of the commentary at TaxProf.

Earlier in the week, Linda Beale reviewed the the IRS letter concerning the review, the church's response, and the sermon itself, as well as a November 13, 2005 sermon about the IRS issue. She concluded:
It is clear that the sermon mentioned specific political candidates by name and discussed specific policies and proposals forwarded by those candidates. It includes some negative statements about both Kerry and Bush, but it could be read to condemn many of Bush's policies and, implicitly, Bush's candidacy. Thus . . . it may well have crossed over the line drawn for tax exempt organizations.
I have given some thought to some of the broader policy issues posed by the audit and the response.

First, what is a partisan political statement or sermon? Certainly, there are sermons which most of us would agree are partisan (e.g., Vote for the ________ Ticket (fill in your party of choice) because they are the party of the Lord.). However, beyond these easy questions (which the Pasadena sermon reveals not to be easy at all), there are many more difficult questions.

In the recent (non-partisan) Dover School Board election, evangelical churches and church leaders campaigned hard for the pro-ID candidates. And, of course, none other than the leader of the (501(c)(3), I think) 700 Club, Pat Robertson, promised (threatened?) Divine retribution on the citizenry of Dover for rejecting this particular "scientific" theory. Was the activity of the evangelical churches in favor of ID non-partisan simply because the pro and con candidates did not wear the "standard" party labels?

Going one step further, what happens when church leaders support some overriding goal (anti-pornography, anti-abortion, etc.) and the identifiably political candidates in support of those particular goals tend to be concentrated in one party or the other? Is "Vote for the Anti-Abortion Candidates" any less partisan than "Vote for Republicans" when all, or almost all, anti-abortion candidates are Republican candidates?

Needless to say, church activism in politics has a long lineage. Should African-American churches in the '50's and '60's been denied tax exempt status because of their leadership role in the civil rights movement? The anti-Vietnam movement later? The abolitionist movement 100 years before? (Ok, I know that this was before the income tax, but allow me my example.)

Politics need not always be intertwined with religious or moral issues, but frequently that is the case. I cannot comment on the minister in question, but I would suspect that his involvment in favor of John Kerry (actually, it seems, more in opposition to George Bush) was less problematic than the position of the Roman Catholic Church threatening to withhold the right to receive communion to political leaders who did not toe the line on the Church's position on abortion.

By their nature, Churches and the clergy involve themselves in politics, even if not always in an explicitly partisan manner. The issue is really one of line drawing, unless one wants to revoke tax exempt status for churches entirely. The line drawing process comes with its own set of problems, namely excessive entanglement with (or, perhaps more correctly here, against) religion.

The inevitability of some degree of entanglement has lead to calls to entirely do away with the charitable deduction for contributions to churches. However, this doesn't resolve the problem, it only moves the goal posts. If, for instance, we denied the charitable deduction for contributions to churches, tricky questions would begin to pop up: Is the contribution to a church-sponsored hospital or day school, a contribution to the church itself? What about a contribution to a college? Should Notre Dame or Yeshiva University be treated differently than a seminary?

Finally, it has been suggested that there not be any tax incentives to make charitable contributions. This could radically diminish the total amount of charitable giving.

A CBO study in 2002, Effects of Allowing Nonitemizers to Deduct Charitable Contributions, found that:
[R]recent research suggests that the price elasticity of contributions by itemizers is more likely to be in the range of -0.4 to -0.8. If those estimates more accurately reflect taxpayer behavior, then a 10 percent decrease in the tax price would increase itemizers' contributions by between 4 percent and 8 percent.
Similarly, the estate tax has a positive effect on charitable giving. In testimony submitted to the Senate Committee on Finance Subcommittee on Social Security and Family Policy, in September of this year, William G. Gale of the Brookings Institution summarized studies on the effect of estate tax repeal on charitable giving as follows:
[A] variety of different kinds of research implies that estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year. Previous studies are consistent with this finding, and also imply that repeal would reduce giving during life by a similar magnitude in dollar terms. To put this in perspective, a reduction in annual charitable donations in life and at death of $10 billion due to estate tax repeal represents a 5 percent decline in overall charitable giving and implies that, each year, the nonprofit sector would lose resources equivalent to the total grants currently made by the largest 110 foundations in the United States.
(Mr. Gale's testimony and some of the studies he relied upon can be found here.)

On the whole, I'm prepared to continue to muddle along with our current system of classification. (I am not certain whether the "deduction" method should be replaced with a "tax credit" method, but that's a discussion for another day.) I think that, on the whole, the charitable contribution deduction serves an important purpose. Specifically, it contributes to the heterogeneity of our society. Thus, the government might cut off funding for certain types of genetic research, but the charitable contribution deduction provides a subsidy for what is, in effect, an alternative decision. (Please note: The issue is not whether one is for or against any particular form of genetic research. The issue is whether, as a society, it is in our best interest to have a tax subsidy that is contra to the majority decision on this and other issues.)

By way of example, I am strongly opposed to current attempts to insert religion, via ID, into the public school system. However, I do not oppose tax deductions to support foundations that do research into the validity of ID. (The concept of doing research on a hypothesis that is, by definition, not subject to refutation is somewhat oxymoronic, but so what.)

I also believe that religious organizations should stay out of politics. But I think that this is a principle that is easy to assert in the abstract, but difficult, if not impossible, to apply with consistency to actual cases.

Perhaps the best that we can hope for is that our application of the principle will be consistently inconsistent. That is, when religious organizations are audited for violations of the political involvement prohibitions, only the more extreme and persistent violations are met with serious penalties. We should turn a blind eye to trivial violations and the targets of audits attacking "exteme and persistent violations," taken as a whole, should be politically and religiously ecumenical.

Saturday, November 19, 2005


Glory Days

If you needed one more reason to take control of Congress away from the Republicans, this is it:
An effort by New Jersey's two Democratic senators to honor the veteran rocker was shot down Friday by Republicans who are apparently still miffed a year after the Boss lent his voice to the campaign of Democratic presidential candidateJohn Kerry.

The chamber's GOP leaders refused to bring up for consideration a resolution, introduced by Sens. Frank Lautenberg and Jon Corzine, that honored Springsteen's long career and the 1975 release of his iconic album, "Born to Run."

No reason was given, said Lautenberg spokesman Alex Formuzis. "Resolutions like this pass all the time in the U.S. Senate, usually by unanimous consent," he said.

Telephone calls to Senate Majority Leader Bill Frist's office seeking comment were not immediately returned.

Wednesday, November 16, 2005


Flat Taxers

The Cato Institute has been flogging the concept that the world is rapidly moving toward a flat tax. See Catching Up to Global Tax Reforms. They point to such advanced economies as those of Estonia, Latvia, Lithuania, and Romania. And Ireland, which really is an advanced economy. (The study also notes the flat tax regime of Hong Kong. But because of Hong Kong's relationship with China, its tax system cannot reasonably be held up as an example for any other country.)

One of the source studies upon which the Cato paper relies is Structures of the Taxation Systems in the European Union. The 394 page report makes for fairly heavy reading, but one thing stands out: The tax systems of the so-called "New Member States" (such as Estonia, Latvia, Lithuania, and Romania) are strikingly different than those of the "Old Member States." Ireland, an "Old Member State," for some reason has a tax system that is closer to those found in New Member States.

As best as I can determine (and I have not read the entire report: I do have a life), the movement to a flat tax in the New Member States is not as pronounced as the Cato Institute report would lead one to conclude. More importantly, the economies of these states, however, are not nearly as advanced as those of the Old Member States. (That's why the percentage economic growth rates in these states tend to be higher: the same amount of increase in GDP represents a higher percentage of GDP than in more developed economies.) Thus, their tax systems are designed to encourage more rapid capital accretion.

One thing that was noticeable was that, generally, the Europeans rely to a greater extent than we do on regressive sorts of taxes. In making my, admittedly not too precise, evaluation, I tried to account for the fact that, in the main, Europeans have national health care systems. Thus, while their tax rates might be nominally higher than in the US, the benefits citizens receive from their governments are higher as well. If one takes into account the portion that we pay out of our pockets (either directly or in the form of medical insurance after discount for the tax benefits) for health care, I think that, for the most part, our taxes may actually be higher than those in Europe.


He's In With The In-Crowd

It's now official. The WSJ has named TaxProf as a blog that "Insiders Read to Stay Current."

According to the WSJ, the blog "[l]aunched last year -- on April 15 -- by University of Cincinnati College of Law Professor Paul L. Caron . . . has gained a wide following among tax professionals, academics and policy-makers."

The best thing about TaxProf is that it's a window to analytical source material on tax policy such as academic papers, position pieces by various think tanks and lobbying groups, and research papers put out by government sources such as the CBO and the Joint Committee on Taxation. Other free tax-related websites, such as the TaxAnalysts site (which was also named to the WSJ's list), tend to link, if at all, to the proprietary (meaning you have to pay) portions of their own web facilities.

As TaxProf approaches the million "visit" mark as measured by SiteMeter, I can only say "Congratulations and keep up the good work."

Tuesday, November 15, 2005


How to Afford a Racoon Coat

As a father of two sons in college, I read with some interest the CRS report, Federal Taxation of Student Aid: An Overview, by Linda Levine (no relation) and Bob Lyke. The report summarizes the tax treatment of various sorts of aid and other income typically used to fund college education.

The report contains a concise description of one of the richest, yet little known, tax provisions relating to tuition funding:
Tuition reductions for employees of educational institutions can be excluded from gross income if they are (1) restricted to education below the graduate level . . . (2) do not discriminate in favor of highly compensated employees, and (3) do not apply to amounts representing payment for services. The last restriction is identical to the one just discussed for scholarships: amounts that represent payment for teaching, research, or other required activities must be included in gross income and may be subject to FICA taxes. Only reductions in excess of such deemed payments are excludable (these excess amounts are like scholarships).

Tuition reductions are excludable even if they are made for the employee's spouse and dependent children; they can also occur at schools other than where the employee works, provided they are remitted by the school attended, not paid by the employee's school. For example, college A could reduce the tuition of students who are children of teachers employed by college B, and neither the students nor parents would have to include the remissions in their gross income.
Hat Tip to Terry Cuff.

Monday, November 14, 2005


Why I'll Never Be A Real Scholar

Insight, synthesis, and brilliance--That's what it takes to be a legal scholar. It is clear that I don't have it and never will.

By way of example, I could not write anything nearly as insightful or which so brilliantly synthesizes so many seemingly diverse streams of theory as Anthony D'Amato in his recently published The Contribution of the Infield Fly Rule to Western Civilization (and Vice Versa). (Abstract and link to full article available here.)

D'Amato begins with the Bible ("authored by the Supreme Being,or at least written under Him for credit"), moves effortlessly through the Greek philosophers' ruminations on the Rule ("Zeno argued that the ball would never come down. It is immobilized at its highest point. . .[and] will remain there for all eternity."), and finishes with modern analyses of the Rule (e.g., "Riemann's Fundamental Hypothosis of Baseball"). Along the way, he provides helpful career advice to younger legal scholars ("To the Articles Editor: If you've had the slightest doubt up to now whether to accept this Article for publication, you can immediately see in the text the pi├Ęce de resistance, the ultimate sockdolager that guarantees publication in any law review or journal, namely, a highly complex mathematical equation that is beyond lawyerly comprehension. This singular equation, coupled with the earlier obligatory reference in the text to Wittgenstein, make this Article more article-like than any other article you’ll ever hope to publish.").

If D'Amato didn't already have tenure, this article would certainly be the hit that would knock in the winning run. A major league contribution to our knowledge of the law, life, and baseball.

Doff, er, Tip of the Hat to Frank Snyder at ContractsProf.

Thursday, November 10, 2005


Urban Legend Debunked

According to the WSJ (subscription required), four fruitcake manufacturers "recently petitioned the Food and Drug Administration to cut the serving size for fruitcake by two-thirds. . . . [Now a] serving size in that category is about 4.4 ounces and packs over 400 calories. The petitioners want the FDA to slice the fruitcake size to 1.5 ounces, or about 160 calories."

According to the article:
[T]he fruitcake makers maintain that the current serving size -- a wedge about two inches high and two inches thick -- is "overindulgent and probably unhealthy." Adds Bob McNutt, president of Collin Street Bakery in Corsicana, Texas, "Our fruitcake is like a fine wine. You take a taste, it kind of leaves you with this long, nice finish."

The bakers' 13-page petition calls on the FDA to "describe fruitcake as the food commonly known as fruitcake." It underscores the product's uniqueness ("Gertrude Stein would say 'A fruitcake is a fruitcake is a fruitcake!' "). It also clarifies who eats the concoction ("Fruitcake is consumed by all populations, but rarely by infants."), and it distinguishes fruitcake from other high-density cakes. ("No products are 'closely related' to fruitcakes. They are sui generis and for decades have been recognized by all population groups in the U.S.")
The urban legend debunked?--There are really only a few fruitcakes in existence at any one time. Those fruitcakes are never eaten, merely passed as "gifts" from one family to another.

Wednesday, November 09, 2005


Once and For All Time

At Dispatches from the Culture Wars, there is a discussion of the legal possibilities opened up by the ouster of the pro-ID members of the Dover, Pennsylvania School Board by the voters by Ed Brayton. Brayton concludes in part by saying:
[I]ronically, it may end up being true that having pro-ID candidates thrown out of office at this point is the best thing the ID movement could have hoped for. But only time will tell that. I suspect that, at the very least, we will get a ruling from Judge Jones on the merits of the case. After that, there is a great deal of uncertainty as to how it proceeds.
I think that his pessimism is unfounded. The way I view it, there are four possibilities:
  1. Prior to the December 5 date that the new board is installed, the court issues a ruling substantially vindicating the position of the plaintiffs. Before the new board is installed, the lame duck Id'ers cause the defendants to file an appeal. That appeal will not be heard until substantially after the new board is installed. This gives the new board the ability to enter with the plaintiffs into a consent decree that says, essentially, as follows: the plaintiffs win on every point, including getting the entry of a declaratory judgment, but the plaintiffs relinquish their claim for attorneys' fees.

  2. Prior to the December 5 date that the new board is installed, the court issues a ruling substantially vindicating the position of the old ID'er board. The plaintiffs file an appeal. That appeal will not be heard until substantially after the new board is installed. This gives the new board the ability to enter with the plaintiffs into a consent decree that says, essentially, as follows: the plaintiffs win on every point, including getting the entry of a declaratory judgment, but the plaintiffs relinquish their claim for attorneys' fees.

  3. After the December 5 date that the new board is installed, the court issues a ruling substantially vindicating the position of the plaintiffs. Here, the new board likely can settle for a consent decree that says, essentially, as follows: the plaintiffs win on every point, including getting the entry of a declaratory judgment, but the plaintiffs relinquish their claim for attorneys' fees.

  4. Finally, there is a possibility that after the December 5 date that the new board is installed, the court issues a ruling substantially vindicating the position of the old ID'er board. Here, the plaintiffs will likely appeal, but they should be willing to settle for a consent decree that says, essentially, as follows: the plaintiffs win on every point, including getting the entry of a declaratory judgment, but the plaintiffs relinquish their claim for attorneys' fees.
In other words, there are four basic paths to a final resolution, all of which lead to the same end: A final, non-appealable decree that bars ID from the Dover schools--forever. Because the consent decree would be entered into by the board and would be supported by consideration from the plaintiffs (their relinquishment of their claim for attorneys' fees), the decree cannot be vacated if ID'ers again get control of the school board.


Tax and Legal Defense Funds

Tom DeLay has one. Scooter Libby will have one. Karl Rove and Dick Cheney may each need one. The "one" that I am speaking of is a legal defense fund.

Contributions to such funds are generally not tax deductible. In the case of DeLay, because of rules of the House of Representatives, there is a limitation on the amount that such a fund can take from any one individual and any contribution in excess of $250 has to be publicly disclosed in a report to the House. (Ol' Tom apparently screwed up on this one.)

Legal defense funds on behalf of a private citizen such as Libby are not subject to similar limitations. However, there would seem to be one tax aspect of these funds that is frequently overlooked, namely the gift tax implications of contributions.

To the extent that a contribution is less than $11,000 in 2005 or $12,000 in 2006, there are essentially no gift tax implicatons because gifts of this size need not be reported. Thus, assuming they time their contributions appropriately, wealthy contributors can give up to $23,000 to funds for each individual within the next 90 days. However, IRC § 2511(a) would seem clear that a contribution does constituted a gift:
Subject to the limitations contained in this chapter, the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States.
(Emphasis added.)

I have found no authority that would provide an exemption from the gift tax for such contributions. I will publish an update if anyone could point me to any authority to the effect that such contributions are either exempt or not taxable gifts.

Tuesday, November 08, 2005


The Latest Tax Planning Strategy--Be Stupid

I got my LL.M. in taxation from Georgetown University Law Center in 1979. That degree capped over 20 years of formal education. However, even now, I find more things to discover and learn.

For instance, thanks to the efforts of the conservative Tax Foundation, I have just learned that one of the best long-term tax strategies to follow is simply to be stupid. In its most recent publication, Putting a Face on America's Tax Returns, the Foundation points out:
[A] college education is . . . the ticket to a higher tax rate.

. . . [L]ower income taxpayers have lower levels of educational achievement, while higher income taxpayers have higher levels of educational achievement. . . . As we look further up the income scale, the percentage of taxpayers with a high school degree or less falls sharply while the number with some college or better grows considerably. Among those taxpayers in the top 20 percent, more than 8 out of 10 have some college education or better. This illustrates an ironic result of our progressive tax rate system and our national efforts to encourage young students to get a college education – there is a stiff tax penalty for achieving a college education.
How could I have missed something that, in retrospect, seems so obvious? Throughout my professional carreer, I have recommended such tax planning techiques for clients as having wealthy grandparents pay the college tuition of their grandchildren directly to the colleges they attend, thus avoiding any taxable gifts and having the money subject to estate tax. (I'll bet that even the Bush family employs this strategy. My guess is that George I is paying the Yale tuition for W's daughter.) Instead, I should have been recommending that the grandparents paid as much estate tax as possible and to leave their progeny to fend for themselves.

I've drafted trusts with provisions that assure that if a child is not fully educated when his or her parents die, the family's assets will first be employed to pay that child's tuition. How was I to know that I was condemning these children to a lifetime of high marginal rates? Should I put my malpractice carrier on notice?

I now see the wisdom of Republican social policy. For instance, in Maryland, Governor Bob Ehrlich has dramatically cut back the budget at the University of Maryland, resulting in tuition increases that have put the University beyond the economic reach of many students. It is obvious that, in doing so, he was wisely attempting to save these kids from the curse of low cost higher education that he himself has had to endure.

Thanks to the Tax Foundation for educating us all.

Monday, November 07, 2005


Procrastinators Can't Wait

The IRS has just promulgated new regulations that allow "an automatic six-month extension to taxpayers who must file an individual income tax return if they submit a timely, completed application for extension on Form 4868. Taxpayers do not have to sign the request or explain why an extension is needed in order to receive the automatic six-month extension of time to file. An automatic extension under the temporary regulations does not extend the time for payment of tax."


MS Word Strikes Again

A story, Beware Your Trail of Digital Fingerprints, in today's NYT that summarizes the "secrecy" problems inherent in Microsoft Word documents, one of which was previously noted here.

The incident that triggered the NYT article involved the information contained in the Word document's "metadata" that disclosed the author and the author's "company" affiliation. The document in question was a position piece on Judge Samuel Alito distributed on a "background" basis by the Democratic National Committee. The article also discusses the report on the assassination of Lebanon's former prime minister, Rafik Hariri, that I had discussed.

The article offers these protective steps from Dennis Kennedy:
Saving a copy of a document in "rich text format" (RTF), or as a simple text file first (options in the Save menu), and then converting it into the common "portable document format" (PDF) before circulating it is a good tack, Mr. Kennedy said. Still, some debate remains as to whether traces of metadata from word-processing programs like Microsoft Word are carried through to the PDF file.
Of course, even PDF has its problems. In May, Dave Fishel reported on the ease with which material in PDF documents that authors had believed to be redacted can be uncovered. Fishel's comments with respect to whether the inability of Adobe Acrobat "redactions" to permanently hide the intended material can be fairly characterized as a "potential problem with PDF" are relevant to the Word "problem" as well:
I'd characterize it as a lack of skills and awareness on the users' part, which is generally related to a lack of training, lack of curiosity about and time to use and understand the tools, and also to a failure by organizations to provide proper tools and methods.

Friday, November 04, 2005


Knaves and Fools of Biblical Proportion

Liberals are frequently attacked because they allegedly look down upon religious fundamentalists as stupid and ignorant louts. Whether or not this allegation is true, the accusers certainly seem to be exhibiting what psychologists call projection.

In this article from the The Atlanta Journal-Constitution (free registration required), Jack Abramoff's partner, Michael Scanlon, explained why they had funneled casino money to Ralph Reed's consulting firm: "Simply put, we want to bring out the wackos to vote against something and make sure the rest of the public lets the whole thing slip past them. The wackos get their information [from] the Christian right, Christian radio, e-mail, the Internet and telephone trees."

In other words, not only is the Abramoff crowd a bunch of knaves, but they have contempt for the fools who follow them.

It's not clear whether Abramoff/Scanlon believe that Reed, himself, is a wacko, but the facts set forth in the article certainly prove that he's a hypocrite.

Finally, the article touches on the Abramoff-Norquist-Reed connection that I had discussed here.

I will update as developments warrant.

Hat tip to Crooks and Liars.


A Shareholders' Agreement

Previously, I discussed those aspects of Edenbaum v. Schwarcz-Osztreicherne that dealt with various questions arising under Corps. & Ass'ns § 3-413(b)(2). The case also involved questions with respect to the proper construction of a shareholders' agreement.

Edenbaum attacked three rulings made by the circuit court with respect to the shareholders' agreement.

First, the lower court had held that the shareholders’ agreement was a shareholders’ agreement, not an employment agreement. Therefore, as either a shareholder or a director (the court was not altogether clear in which capacity), Schwarcz was entitled to continue to receive her salary after she was terminated as an employee of Liberty.

Second, the circuit court awarded Schwarcz a portion of Liberty's profits for the years in question.

Finally, the two awards were entered as judgments against Edenbaum.

The second question is fairly mundane. In essence, the Court reversed the circuit court because it was not clear how the lower court's award of profits tied to the expert testimony that had been offered. It is of limited general interest.

The first and third questions, however, are worthy of closer inspection.

The Court of Special Appeals reversed the circuit court's ruling with respect to the nature of the shareholders' agreement, holding that it constituted an employment agreement as well as an agreement regulating various aspects of corporate governance. It thus rejected the judgment in favor of Schwarcz because that judgment was based upon her rights as an officer and director. Oddly, the appellate court also rejected any attempt by Schwartz to offer as an alternative basis for the judgment the fact that there had been a breach of the employment agreement between the parties. Here, the Court of Special Appeals found that Schwarcz should have cross-appealed, thus she had waived her right to appellate review as to whether her rights under the employment agreement had been violated.

Finally, the Court held that the circuit court had wrongfully entered judgment against Edenbaum, individually, because Schwarcz's claims, if any, were only against the corporation. Because Edenbaum had not guaranteed the obligations of the corporation, judgment should not have been entered against him.

While I will offer more detailed comments in a subsequent post, let me offer some briefly here.

As to the first count, the circuit court was probably correct in granting Schwarcz a judgment for lost compensation as an officer and director. The Court of Special Appeals seems to have it right, the shareholders' agreement did constitute an employment agreement in addition to constituting an agreement as to corporate governance. But the Court's denial of any recompense to Schwarz because she failed to cross-appeal seems to be incorrect. After all, one only appeals from the judgment and Schwarcz had no quarrel with the judgment. In essence, her argument that the shareholders' agreement encompassed an employment agreement should have been treated as an alternative argument in support of the judgment for lost compensation, with the lost compensation being based upon her wrongful termination as an employee. In my extended comments, I will discuss how I believe that the Court's ruling conflicts with its analysis under Corps. & Ass'ns § 3-413(b)(2).

The Court's ruling as to the third count also seems at war with its § 3-413(b)(2) ruling. If, as the Court suggests, the agreement of the parties in the context of a closely held corporation is closely akin to that of the parties in a traditional partnership, the party expelled from the business should be able to obtain a judgment directly against the dominant party if the expulsion was wrongful. After all, the contract governing all of the players, the shareholders' agreement, was entered into by all of the individuals as well as the corporation.

In my next posting on this case, I will discuss its implication for the resolution of disputes in Maryland with respect to all varieties of closely held business entities.


Odds-On Favorite

For many years, audit activity by the IRS declined. It is now on the increase and is showing results.

In a statement released by IRS Commissioner Mark Everson, he notes that for the fiscal year ended September 30th:
  • Enforcement revenues – the monies the IRS gets from collection, examination, and document matching activities – increased by 10% to a record $47.3 billion.

  • Total individual returns audited increased by over 20% to 1,216,000 from 1,008,000 in 2004. The number completed is back to a level last achieved in 1998.

  • Audits of individuals with incomes over $100,000 surpassed 221,000, the highest figure in 10 years, and well over double the 92,000 completed in fiscal year 2001. The coverage rate in this category is still too low, but at 1.58% is double what it was four years ago.

  • Audits of small businesses organized as corporations turned up after years of decline. 17,867 were completed in 2005 against 7,294 a year earlier.
The dirty little secret that tax practitioners have been aware of for some time was that audit activity was at such a low level it was economically rational for taxpayers to play "audit roulette." Apparently, the House is determined to reset the odds.

Appended to the Commissioner's statement is a chart which shows the dramatic increases in the level of audits and taxes collected.

Wednesday, November 02, 2005


Lifting the Yoke of Oppression

I look at a lot of judicial opinions. I comment on some of them. Rarely, however, do I have the opportunity to review and comment on an opinion that is as signficant for business practitioners as the opinion of the Court of Special Appeals in Edenbaum v. Schwarcz-Osztreicherne, handed down last Friday. I will discuss the opinion in three postings, one this evening and one tomorrow, both describing the case and the holdings and briefly analysing the Court's conclusions. In a subsequent posting, I will discuss the holdings at greater depth and address the broader policy implicatons of the opinion.

The case arose from a shareholders' dispute. The two parties owned all of the stock in Liberty Assisted Living, Inc., which owns and operates a small, eight-bed assisted living facility in Montgomery County.

Between December 2000 and early January 2001, the parties, Edenbaum and Schwarcz, agreed that they would operate Liberty's business on a "50/50 basis," although Edenbaum held a 51% interest in Liberty, and Schwarcz a 49% interest. The parties entered into a "sparse, one-page" shareholders' agreement that was summarized by the Court as follows:
The . . . agreement provided that both parties would be directors of the corporation; that Edenbaum would be President, Secretary, Treasurer, and Chief Executive Officer; and that Schwarcz would be Vice President and Director of Operations. It further stated that Edenbaum's vote would be "controlling in any business decisions and/or disputes between the parties either as shareholders or directors" and that Edenbaum would "have the final say in all business and corporate decisions."

The agreement also spelled out the parties' duties and responsibilities. While Edenbaum was responsible for paying "all bills," "generat[ing] resident bills," "hiring of consultants," "[m]arketing of the facility," making all "business management decisions," "oversee[ing] all paperwork of resident files," "giving tours to prospective clients and their families," and "keeping [the] house in compliance with state and county regulations," Schwarcz was responsible for the "[c]ooking and cleaning of the home, patient care, grocery shopping, transportation for residents, laundry and daily house maintenance." The two shared responsibility for "[r]esident activities, hiring staff ... accepting residents" and "family interactions. And finally, the agreement provided that Edenbaum and Schwarcz would receive "equal salaries" and share equally in the company's profits.
In late September, 2001, after a lenghty period of strife, Edenbaum discharged Schwarcz from her position as Director of Operations and discontinued payment of her salary.

The resulting lawsuit was brought by Schwarcz. Initially, she alleged breach of contract. Later, she added a request that Liberty be dissolved because of Edenbaum's "illegal, oppressive and/or fraudulent" conduct. The trial was marked by allegations by Edenbaum that Schwarcz had acted improperly with respect to her assigned tasks and denials of those allegations by Schwarcz.

The trial court ruled that, under the terms of the shareholders' agreement, Edenbaum had the right to relieve Schwarcz of her responsibilities at Liberty. But it declined to find that the shareholders' agreement constituted an employment contract. However, the trial court awarded Schwarcz $89,880 for lost profits and post-termination salary, entering judgment against Edenbaum and Liberty jointly and severally. Finally, the trial court refused to order the dissolution of Liberty because it found that Edenbaum's conduct was not "oppressive."

The Court of Special Appeals reversed both the judgment for damages and the denial of Schwarcz's request for dissolution. I will discuss the reversal of the denial of the request for dissolution tonight because that action will likely have a greater impact on business disputes.

Corps. & Ass'ns § 3-413(b)(2) permits "[a]ny stockholder entitled to vote in the election of directors of a corporation" to petition a court to dissolve the corporation on the ground that the "acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent." Critically, the Court distinquished "oppressive" conduct from conduct that is illegal or fraudulent, stating that:
"Oppressive" conduct is not defined by the statute. But, as it is singled out as a separate category of conduct justifying corporate dissolution by Corps. & Ass'ns § 3-413(b)(2), we surmise that it does not necessarily involve "fraudulent: or "illegal" conduct. "Oppressive" conduct has been described by other jurisdictions as:
burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visual departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.
(Citations omitted.)

The Court went on to state that:
"Oppression," however, has also been defined by one Maryland commentator as "conduct that substantially defeats the reasonable expectations of a stockholder." James J. Hanks, Jr., Maryland Corporation Law § 11.7(b)(1990, 2004 Supp.). Or, in the more precise terminology of one of our sister states, "conduct that substantially defeats the 'reasonable expectations' held by minority shareholders in committing their capital to the particular enterprise."
(Citation of judicial authority omitted.)

The Court ultimately looked to the reality of the parties' relationship, not merely the artifices of legal form:
[I]t is generally understood that, in addition to supplying capital and labor to a contemplated enterprise and expecting a fair return, parties comprising the ownership of a [closely held] corporation expect to be actively involved in its management and operation. Unlike the typical shareholder in a publicly held corporation, who may simply be an investor or a speculator and does not desire to assume the responsibilities of management, the shareholder in a [closely held] corporation considers himself or herself as a co-owner of the business and wants the privileges and powers that go with ownership. Employment by the corporation is one such privilege and often is the shareholder’s main source of income. Moreover, "providing for employment may have been the principal reason why the shareholder participated in organizing the corporation."

But the very nature of a closely held corporation makes it possible for a majority shareholder to "freeze out" a minority shareholder, that is, deprive a minority shareholder of her interest in the business or a fair return on her investment. The limited market for stock in a [closely held] corporation and the natural reluctance of potential investors to purchase a noncontrolling interest in a [closely held] corporation that has been marked by dissension can result in a minority shareholder's interest being held "hostage" by the controlling interest, and can lead to situations where the majority "freeze out" minority shareholders by the use of oppressive tactics.

Because of the "predicament" a minority shareholder is in when a freeze out occurs, courts have looked at a majority shareholder's alleged "oppressive" conduct, in terms of the "reasonable expectations" held by minority shareholders in committing their capital to the particular enterprise. The "reasonable expectations" view of oppressive conduct "[r]ecogniz[es] that a minority shareholder who reasonably expects that ownership in the corporation would entitle him to a job, a share of the corporate earnings, and a place in corporate management would be 'oppressed' in a very real sense [sic] when the majority seeks to defeat those expectations and there exists no effective means of salvaging the investment." But, we caution, "oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture. It "should not be deemed oppressive simply because the petitioner's subjective hopes and desires in joining the venture are not fulfilled." That is to say, "[d]isappointment alone should not necessarily be equated with oppression."
(Citations and most internal quotation marks omitted.)

Applying its analysis to the case before it, the Court found that Schwarcz had a reasonable expectation that she would be "employed by the corporation, share in corporate earnings, and have a place in corporate management." "Her termination [by Edenbaum] substantially defeated her reasonable expectations that she would be employed by the corporation, receive a salary, and take part in its management." Thus, the Court reversed the trial court's finding that Edenbaum had not engaged in oppressive conduct.

However, the Court's analysis did not stop there. It went on to discuss the remedy that Schwarcz might be entitled to. Specifically, the Court made it clear that her remedy was (i) not limited to judicial dissolution of the corporation and (ii) that judicial dissolution might actually be inappropriate because it represents fairly drastic action. Instead, the Court invited the trial court to "allow alternative equitable remedies not specifically stated in the statute." Specifically, the Court suggested numerous possible alternative remedies:
(a) The entry of an order requiring dissolution of the corporation at a specified future date, to become effective only in the event that the stockholders fail to resolve their differences prior to that date;

(b) The appointment of a receiver, not for the purposes of dissolution, but to continue the operation of the corporation for the benefit of all the stockholders, both majority and minority, until differences are resolved or 'oppressive' conduct ceases;

(c) The appointment of a 'special fiscal agent' to report to the court relating to the continued operation of the corporation, as a protection to its minority stockholders, and the retention of jurisdiction of the case by the court for that purpose;

(d) The retention of jurisdiction of the case by the court for the protection of the minority stockholders without appointment of a receiver or 'special fiscal agent';

(e) The ordering of an accounting by the majority in control of the corporation for funds alleged to have been misappropriated;

(f) The issuance of an injunction to prohibit continuing acts of 'oppressive' conduct and which may include the reduction of salaries or bonus payments found to be unjustified or excessive;

(g) The ordering of affirmative relief by the required declaration of a dividend or a reduction and distribution of capital;

(h) The ordering of affirmative relief by the entry of an order requiring the corporation or a majority of its stockholders to purchase the stock of the minority stockholders at a price to be determined according to a specified formula or at a price determined by the court to be a fair and reasonable price;

(i) The ordering of affirmative relief by the entry of an order permitting minority stockholders to purchase additional stock under conditions specified by the court;

(j) An award of damages to minority stockholders as compensation for any injury suffered by them as the result of 'oppressive' conduct by the majority in control of the corporation.
The portion of the opinion that deals with Schwarcz's claims is truly breathtaking. It extends the concept of "oppression" as used in Corps. & Ass'ns § 3-413(b)(2) further than most Maryland practitioners believed was the case. Just as importantly, the opinion opens the way for trial courts to resolve shareholder disputes with a well-designed scalpel rather than a meat ax.


Everybody Agrees?

At a recent seminar given by the Brookings Institution, the Heritage Foundation, and the National Press Foundation, there was surprising agreement that "Federal budget deficits, projected to grow substantially in coming decades as health-care costs soar and tax revenues decline or stagnate, are unsustainable and pose a long-term threat to the U.S. economy and the well-being of future generations of Americans." See here.

Not surprisingly, there was some difference in emphasis in the remarks offered by conservatives and liberals. For instance:
Brian Riedl, a Heritage budget expert, described a "spending spree" since 2001, noting widespread waste and ineffective programs.
On the other hand:
Joseph Minarik, vice president and director of research for the Committee for Economic Development, noted that the swing from budgetary surplus in 2000 to deficit today has been 6% of GDP, and 80% of that has come from declining revenues, although most future deficit growth will result from health-care and other spending growth.
(Emphasis added.)

The issue that is beginning to seep into the mainstream of political discourse is whether the party that created a massive budget deficit by passing irresponsible tax cuts for the rich and extremely rich can be trusted to make the hard policy decisions that lay ahead. By way of example, it is becoming obvious that, if only from the standpoint of international economic competitiveness, we need to overhaul the way in which health care is paid for. This means that there have to be radical changes made in the way health care is funded. Diversionary issues, such as placing a large share of the blame for rising health care costs on medical malpractice claims, simply won't cut it anymore.

If the Democrats want a platform to run on, it's this: "We can make the hard choices. There will be burdens to be borne, but we'll see that these burdens are borne equitably."

Tuesday, November 01, 2005


Sloppy Seconds?

Via Crooks and Liars, we have this wonderful question asked by CBS White House Correspondent John Roberts at Scott McClellan's daily press briefing:
Roberts: "Scott, you said that- or the President said, repeatedly, that Harriet Miers was the best person for the job. So does that mean Alito is sloppy seconds, or what?"
Roberts later apologized for his "poor choice of words."