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September 05, 2007
I'm in DC for tomorrow's Ways & Means Hearing on Fair and Equitable Tax Policy for America's Working Families. In preparing for the hearing, I was reading the Joint Committee on Taxation's report on carried interest, which cites the Glom. (!) See footnote 112.
In the meantime, I've just posted a new paper on SSRN, Taxing Blackstone. Here's the abstract:
This Essay analyzes the "Blackstone Bill," which would treat Blackstone and other publicly-traded private equity firms as corporations for tax purposes. Earlier this year, the Blackstone IPO fueled a heated, somewhat confusing debate about taxing private equity. This Essay seeks to clarify what the legislation will accomplish, and what it won't.
There are two ways of looking at the Blackstone Bill. The first way is as a substantive change in the tax law. Specifically, the bill may be viewed as a rifleshot approach to changing the tax treatment of carried interest. The second way is to think of the bill as a mechanical correction of the publicly-traded partnership rules. Specifically, the bill may be viewed as a technocratic response to the regulatory gamesmanship of Blackstone's deal structure, which allows it to avoid the corporate tax that other, similarly-situated financial intermediaries pay.
In terms of a change in the substantive tax treatment of carried interest, the merits of the Blackstone Bill are questionable. The efficiency and distributive consequences are unclear; the revenue potential is indeterminate. The bill fails to achieve what we ultimately want: taxing the returns from managing financial asstes consistently regardless of the form in which the business is conducted.
But the Blackstone Bill is nonetheless defensible as a response to aggressive regulatory gamesmanship. To put it more provocatively, the bill is justifiable because the Blackstone IPO structure is offensive to the rule of law values on which our tax system relies.
You can download the paper here, or email me.
Or, if you prefer the snazzy visuals (click on the images for a less-blurry view):
This paper was a tough one to write. The normative case for taxing Blackstone as a corporation is weaker than I thought when I started the paper; the weakness relates directly to the shaky case for having a corporate tax at all. And yet there is something to be said for enforcing rules, flawed as they may be. I would prefer that Congress reform the taxation of carried interest and, so long as I'm at the wishing well, I would wish for reform of Subchapter M and integration of corporate and shareholder-level taxes. But taking the corporate tax and current tax treatment of carried interest as a given (at least in the short run), I do think the Blackstone Bill is worth passing.
I welcome your comments and suggestions by email.
September 04, 2007
The more experience I have in the classroom, the more important learning student names becomes. Unfortunately, learning names has never come easily for me, and years of accumulated names seem only to have increased the challenge of adding new names.
As a result, the new BYU Center for Learning caught my attention with an email touting their inaugural Tip of the Month: Learning Students' Names. Check out the name memorization games, which seem a bit hokey and class-time consuming for law school, but would probably work.
In lieu of games, this semester I am using a strategy that combines (1) studying the online class roll, (2) calling on all of the students in the class during the first two weeks, and (3) having lunch or hiking the Y with all of the students. I am just about there.
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My friend Nate Oman has launched a new "legal scholarship podcast" called Law Talk. His first guest is another friend, Steve Smith, at the University of San Diego. Great discussion and an auspicious start for the podcast. Nate has invited me to guest on a future session, but don't let that dissuade you from subscribing via iTunes or Feedburner.
In my Contracts class, we just finished our discussion of the Shirley MacLaine case, the first case in the casebook. If you studied contracts in a law school, you probably encountered the case, which involves a contract between MacLaine and Twentieth Century Fox (TCF). Under that contract, MacLaine agreed to star in the movie version of the popular Broadway musical Bloomer Girl. The movie was never made, but TCF offered to place MacLaine in the lead role of another movie entitled "Big Country, Big Man." She refused, and that film was never made, either. (By the way, MacLaine turned down the opportunity to appear in Casino Royale because she was under contract for Bloomer Girl.)
MacLaine sued for payment under the contract. According to the California Supreme Court, "the sole issue is whether [MacLaine's] refusal of [TCF's] substitute offer of 'Big Country' may be used in mitigation." So conceived, the case turned on whether "Big Country" was "inferior employment" to "Bloomer Girl." The majority felt that "no expertise or judicial notice is required" to see that "Big Country" was inferior, but the dissent observed, "It is not intuitively obvious … that the leading female role in a dramatic motion picture is a radically different endeavor from the leading female role in a musical comedy film." And off we go, discussing the rationales for the "duty to mitigate."
Victor Goldberg's new book, Framing Contract Law, has a chapter devoted to the case, in which he discusses the following "pay-to-play" provision from MacLaine's contract:
We shall not be obligated to utilize your services in or in connection with the Photoplay hereunder, our sole obligation, subject to the terms and conditions of this Agreement, being to pay you the guaranteed compensation herein provided for.
Goldberg observes:
By posing the problem in terms of the "different or inferior" question, the California Supreme Court deflected attention from the essence of the contract. The contract had a "pay-or-play" provision, common in the motion picture industry. The studio had, in effect, purchased an option on her time; they would pay her to be ready to make a particular film, but they made no promise to actually use her in making the film. When Fox canceled the project, they did not breach; they merely chose not to exercise their option. There was no breach and, therefore, there was no need to mitigate.
Interestingly, this theory was presented in the lower courts in the MacLaine case. The Superior Court held that TCF waived the right to have damages mitigated. (Though any actual earnings by MacLaine during the contract period would have to be deducted from the contract price.) At the Court of Appeal, however, a unanimous court found an "implied condition that [MacLaine] mitigate [TCF's] obligation by accepting other suitable employment," but concluded, "It is obvious that the two plays differed widely."
This set the stage for the opinion that appears in my Contracts book, which focuses exclusively on mitigation. Of course, the existence of the pay-to-play provision doesn't do much to deflate the value of that opinion to our discussion of mitigation, but Goldberg's insight reinforces the notion that [appellate] opinions are fables. It also raises more troubling issues about the relationship between transactional work and litigation: "Why did the California Supreme Court ignore the purpose of the relevant contract language in determining whether Shirley MacLaine had to mitigate? Does the disjunction between contract law's analytic boxes and transactional lawyers' practical concerns lead to systematic error in contract litigation?"
Kyle O'Neill of the Detroit Free Press is launching a new sports blog and his topic is -- surprise! -- Michigan's loss to Appalachian State. The title of his first post: "U-M fans, media should calm down and other thoughts on the historic loss."
I don't know Kyle, but it struck me as very clever that he would launch his blog today featuring that topic and the message "calm down." The last thing that any new sports blogger wants is calm readers. The whole point of such a blog is to get people agitated. And I suppose nothing could get the Maize and Blue more agitated than being told to calm down. It's brilliant!
September 03, 2007
The always insightful Simon Lester observes that the latest sin case that the WTO may take up (we’ve already told you about Antiguan internet gaming) is the incipient American ban on clove cigarettes. Indonesia, where such cigarettes are both a staple, and, apparently, an export, thinks that banning cloves but not methols would constitute trade discrimination against foreign exporters.
And, in a recent decision that the Fifth Circuit called, ahem, “high stakes,” that court threw out the Secretary of the Interior’s effort to save the Indian gaming regulatory scheme held to be unconstitutional in the Seminole Tribe case. The Indian Gaming Regulatory Act required states to negotiate casino deals with Indian tribes under the management of a judge which, the Supreme Court held, violated the states' 11th amendment immunity from suit, in Seminole Tribe. The secretary then replaced the judicially managed negotiation with a negotiation process managed by Interior. But the 5th Circuit just concluded that the Act did not authorize the agency to substitute itself for a court: “Congress plainly left little remedial authority for the Secretary to exercise. … The Secretary may not decide the state's good faith; may not require or name a mediator; and may not pull out of thin air the compact provisions that he is empowered to enforce. To infer from this limited authority that the Secretary was implicitly delegated the ability to promulgate a wholesale substitute for the judicial process amounts to logical alchemy.” I generally don’t bother predicting cert grants, but I could see the government trying to obtain one here, and if it did, law clerks might find a follow up to Seminole Tribe – and an effort by the government to get around the impact of that decision without going to Congress for more legislative authority – to be quite exciting.
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September 02, 2007
For some reason, a financial scandal doesn't excite me the way it does most people. I guess I'm something of a cynic: newspapers need to fill column-inches, TV networks need to fill airtime (oh, and law professors need to fill law journals and resumes). At least to some extent, IMHO, financial scandals may be manufactured by media coverage. Or if not manufactured, at least sensationalized.
So I've been following the mortgage crisis with only one eye. But that one eye was caught by Gretchen Morgenstern's NYT piece two Sundays ago (sorry, I been busy), where she does something of an expose on Countrywide, the giant mortgage lender that has just been rescued by BofA. Her tagline for the piece is Countrywide's scripted pitch that it's getting "the best possible loan" for the customer. She also echoes familiar outrages expressed about mortgage lenders and the mortgage crisis:
1. Countrywide made risky subprime loans they should not have made.
a. subprime loan terms are unfair
b. Countrywide made too much money from subprime loans
2. Countrywide is now getting its comeuppance, as subprime mortgage defaults are causing massive losses.
3. securitization of mortgage debt is bad because it enables Countrywide and other mortgage lenders to lend irresponsibly and dish hidden problems to unsuspecting securities purchasers.
No doubt, the real estate downturn is causing much suffering for folks who are being hit with interest rate adjustments that can't meet. How much of that is Countrywide's fault, though, I'm just not sure.
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August 31, 2007
New Yorkers love their greenmarket produce. And rightly so this time of year, though the commitment to local gardens makes a March full of sauteed fiddlehead fern salads really dreary. Maybe that's why Hunts Point Market dealers often bribe USDA inspectors to show up particularly quickly when a shipment of actually fresh vegetables comes in, or, sometimes, to rate produce as worse than it really is, so that buyers can purchase low, and resell high.
In honor of tomato season, but unseasonably late in a schedule that usually features a summer off for the court, the D C Circuit recently barred a veteran Hunts Point outfit from participating in the USDA's Hunts Point inspection scheme. It agreed with the Department of Agriculture that one of the firm's vice presidents gave a USDA inspector fifty bucks every time he came for inspection, in exchange for which the inspector allegedly did what the firm wanted.
Fifty bucks ain't a lot of money. Which is why I note with slight sadness the passing of Kleiman & Hochberg, Inc, traduced by an employee with a too-close relationship with a regulator, and condemned to dealing, from this point forward, in uninspected fruits and vegetables. Could it possibly have been worth it to bribe the USDA on the penny ante level? The opinion may be found here.
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August 30, 2007
Lynnely Browning profiles Lee Sheppard in the Int'l Herald Tribune. I don't always agree with Lee, but she does a wonderful job of asking the hard questions and keeping us all current. And give her credit -- a couple of years ago when the Treasury proposed partnership tax regulations which would quasi-codify the status quo on carried interest, Lee was the only one out there making a fuss.
And what would we do without her cultural commentary on what the fashionable set in the Hamptons is wearing these days?
Speaking of the Hamptons, the rioting over carried interest has begun.
That line appears in a form letter I just received from Christine Durham, Chief Justice of the Utah Supreme Court. My name has been "drawn at random" for possible jury service. I am doubting the randomness of the draw. I suspect this has more to do with the fact that I recently registered to vote.
When I told a friend about the letter, he said, "That's good for you, right? I mean, wouldn't you be particularly interested in that because your are a law professor?"
No. Unlike Christine, I have never wanted to be on a jury. I don't care much for litigation of any sort. My only trip to the courthouse as a lawyer was the day I was sworn into the bar.
Anyway, this led to a conversation with one of my colleagues about exclusion of law professors. He felt that law professors would be highly unlikely to make the cut, but I know law professors who have served on juries. Still, I wonder whether I would want one of us on the jury if I were a litigant. Perhaps the decision requires too much context, but as a general matter, wouldn't law professors tend to exert a disproportionate influence over the other jurors?
Classes started on Monday here at BYU, and the first college football games of the year are being played today. It's official ... fall is here.
BYU is preparing to dismantle the University of Arizona on Saturday (no repeat of last year, Darian!), and one BYU fan has offered some rules for BYU football fans. Most are patronizing, some are a bit dated, and a few would only appear on a BYU fan board, but with a bit of editing, many of the rules might have broader application. Like these:
1. Do not EVER bring "something to do" to a game.
16. Stadium dogs just taste better.
35. We have to stay to the end of blowouts. That's the part where we can see next year's players.
