Law Commons^™

Using The Client-File Method To Teach Transactional Law, Bradley T. Borden

Bradley T. Borden

This Article presents a teaching method (the client-file method) for transactional law courses that combines the business school case-study method with the law school case method. The client-file method of teaching requires students to become familiar with real-word legal issues and the types of documents and information that accompany matters that transactional clients bring to attorneys (i.e., the contents of a client file). The method also requires students to learn and apply substantive law to solve problems that arise in a transactional law practice. Because the client-file method places students in a practice setting, it helps them become more practice-ready …

Goliath Versus Goliath In Hight-Stakes Mbs Litigation, Bradley T. Borden, David J. Reiss

Bradley T. Borden

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles …

Notable Partnership Tax Articles Of 2012, Bradley T. Borden

Bradley T. Borden

This Article reviews several partnership tax articles published by academic journals in 2012. The subjects of the articles range from broad reform proposals to taxation of reorganizations to taxation of carried interest to issues affecting partnership liabilities.

Dirt Lawyers And Dirty Remics, Bradley T. Borden, David J. Reiss

Bradley T. Borden

It is appropriate that the day-to-day practice of real estate law did not touch on the intricacies of the securitization of mortgages, let alone the tax laws that apply to mortgage-backed securities. Securitization professionals did not, however, account for the day-to-day practices of real estate lawyers as they relate to the transfer and assignment of mortgage notes and mortgages when structuring mortgage-backed securities. The consequences of this may turn out to be severe for investors, underwriters, and securitization professionals.

One of the consequences of the sale of a negotiable note not done in accordance with the requirements of the holder …

Quantitative Model For Measuing Line-Drawing Inequity, Bradley T. Borden

Bradley T. Borden

The law draws lines. It draws lines between manslaughter and murder, negligence and gross negligence, speeding and driving legally, and capital gains and ordinary income. Those lines invariably cause undesirable results. In particular, lines in the law cause inequity because they impose different treatment on similarly situated persons. Despite this inequity, analysts generally embrace the quantitative comforts of inefficiency analysis. This Article introduces a quantitative model for measuring inequity. Consequently, the preference for quantitative measures no longer justifies the disdain for inequity analysis. Instead, democratic and philosophical efforts to assess laws should embrace now-quantifiable inequity analyses as the analytical tools …

Beneficial Ownership And The Remic Classification Rules, Bradley T. Borden, David J. Reiss

Bradley T. Borden

REMICs are securitized pools of mortgages that qualify for special flow-through taxation. To qualify for flow-through tax treatment, the pool must satisfy several requirements. An intended REMIC that fails to satisfy those requirements will likely be taxed as a corporation and payments made to holders of interests in a failed REMIC will likely be nondeductible dividend payments, subjecting the REMIC to significant tax and penalties. Such tax and penalties will cause beneficial interests in the pool to lose value and frustrate investors who relied upon REMIC classification as an incentive to purchase interests. Thus, tax classification is critical to REMICs …

Wall Street Rules Applied To Remic Classification, Bradley T. Borden, David Reiss

Bradley T. Borden

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.

The original paper is available at: http://newsandinsight.thomsonreuters.com/New_York/Insight/2012/09_-_September/Wall_Street_Rules_Applied_to_REMIC_Classification/.

The Overlap Of Tax And Financial Aspects Of Real Estate Ventures, Bradley T. Borden

Bradley T. Borden

This article examines the effect partnership tax law has on financial aspects of real estate ventures. It introduces the relevance of the aggregate and entity views of tax partnerships (i.e., LLCs, LPs, and other partnerships) and demonstrates how those views can greatly affect financial projections for each of the members of a real estate venture. It also demonstrates how financial calculations can vary significantly depending upon how closely analysts track a tax partnership’s allocation method. Finally, the article serves as a primer for tax practitioners who are unfamiliar with the financial tools that are so prevalent in real estate analysis, …

From Allocations To Series Llcs: 2011'S Partnership Tax Articles, Bradley T. Borden

Bradley T. Borden

This article reviews the partnership tax articles published in student-edited journals in 2011. The articles comprise a rich output on timely topics and demonstrate that partnership tax is primed for even more scholarly attention.

Three Cheers For Passthrough Taxation, Bradley T. Borden

Bradley T. Borden

This report addresses recent suggestions by the Obama administration, lawmakers, and others that some passthrough entities should be taxed as corporations. It argues that passthrough taxation is the correct regime, from a technical standpoint, for many business arrangements. Applying an entity tax to those structures would be inappropriate. The report argues that an entity tax would violate notions of equity by treating members of passthrough entities differently from individuals. Next it demonstrates that a tax on passthrough entities would shift a greater share of the tax burden to middle-income individuals. Finally, the report encourages the administration and lawmakers to increase …

Do Serial Exchangers Get Cash, With Extra Boot, Under New Letter Ruling?, Bradley T. Borden, Kelly E. Alton, Alan S. Lederman

Bradley T. Borden

Related-party exchanges raise the issue of improper extension of the Section 1031(a)(3) 45-day identification and 180-day exchange periods. Related-party exchanges also call into question the amount of boot a related party may receive without triggering an abusive cash-out. A recent letter ruling involving two sequential related-party Section 1031 exchanges makes these issues doubly evident.

Series Llcs In Real Estate Transactions, Bradley T. Borden, Mathews Vattamala

Bradley T. Borden

Series limited liability companies are a fairly new form of business entity. Some observers worry that series limited liability companies are untested and business and property owners should wait to use them. Meanwhile, tax and business law practitioners are moving forward, recommending that their clients take advantage of the opportunities series limited liability companies present. This article reviews the growing popularity of series limited liability companies and the statutory framework of the Delaware series limited liability company statute. It suggests that any hesitancy to use series limited liability companies is unfounded and that they will continue to grow in popularity. …

The Law School Firm, Bradley T. Borden, Robert J. Rhee

Bradley T. Borden

This Article introduces the concept of the law school firm. The concept calls for law schools to establish affiliated law firms. The affiliation would provide opportunities for students, faculty, and attorneys to collaborate and share resources to teach, research, write, serve clients, and influence the development of law and policy. Based loosely on the medical school model, the law school firm will help bridge the gap between law schools and the practice of law.

The Liability-Offset Theory Of Peracchi, Bradley T. Borden, Douglas L. Longhofer

Bradley T. Borden

Peracchi v. Commissioner is a lightning rod for commentators and the bane of students of corporate income tax. In short, the decision makes no sense because it grants the maker of a note a section 1012 basis in the note, violating a fundamental principle of income taxation. Nonetheless, the decision helped preserve a fundamental aspect of corporate taxation—the tax-free formation of and contributions to controlled corporations. Because of its unorthodox application of the section1012 basis rules, the Peracchi decision is the subject of severe criticism. Unfortunately, commentators who criticize Peracchi generally fail to offer an alternative that recognizes general income …

The Allure And Illusion Of Partners' Interests In A Partnership, Bradley T. Borden

Bradley T. Borden

Favorable tax treatment and management flexibility make tax partnerships very popular. For starters, tax partnerships, unlike tax corporations, are not subject to entity-level taxes. Partnership taxable income flows through to the partners, and the partners report their shares of partnership taxable income on their individual tax returns. Partnership tax allocation rules determine the partners’ shares of partnership taxable income. Those rules rely upon the alluring concept of partners’ interests in a partnership. It seems intuitive that partners would know their interests in a partnership and be able to allocate partnership taxable income accordingly. This Article illustrates, however, that the concept …

Pip Factors: Examine With Low Expectations, Brad Borden

Bradley T. Borden

This article takes a critical look at the factors the income tax regulations use to define partners' intererests in a partnership. The article concludes that the factors do little to help determine partners' interests in the partnership.

Residual-Risk Model For Classifying Business Arrangements, Brad Borden

Bradley T. Borden

Tax law classifies business arrangements as one of three general structures: (1) disregarded arrangements, (2) tax partnerships, or (3) tax corporations. Since the enactment of the income tax in 1913, tax law has struggled unsuccessfully to develop an ideal model for classifying business arrangements. The current model’s sole virtue is its simplicity, derived from formalistic, elective attributes. Its greatest shortcoming may be that it disregards the reasons parties form business arrangements and the reasons they use economic items to reduce rent-seeking behavior and agency costs. That disregard often allows business participants to choose their tax classification and minimize their taxes, …

Related Party Like-Kind Exchanges: Teruya Brothers And Beyond, Bradley T. Borden, Kelly E. Alton, Alan S. Lederman

Bradley T. Borden

The Ninth Circuit recently held that the non-tax-avoidance exception of Section 1031(f) generally will be unavailable where the taxpayer defers tax through a related-party exchange and cannot establish that the related party will incur a higher "tax price." This article examines this new addition to the body of law governing related-party exchanges and discusses planning approaches that exist after the ruling.

Considering Tax Expenditures In State Budget Deliberations, Brad Borden

Bradley T. Borden

This is the manuscript of a talk given at a public forum on tax expenditures in Topeka, Kansas. It explains how tax expenditures erode tax bases and diminish the state's ability to raise revenue, and it suggests that states should treat tax expenditures like direct expenditures in budget deliberations. Finally, the talk demonstrates how tax expenditures can be unfair. Although the comments are specific to the state of Kansas, the principles apply to all governments. A video recording of the proceedings is available at http://tinyurl.com/y85j3w8.

Allocations Made In Accordance With Partners' Interests In The Partnership, Brad Borden

Bradley T. Borden

Tax law allocates partnership tax items in accordance with the partners' interests in the partnership if the allocations do not have substantial economic effect. Tax law also uses the partners' interests in the partnership to test whether certain allocations satisfy the test for substantiality. These rules that rely upon partners' interests in a partnership are at the heart of partneship taxation. Nonteless, tax law does a poor job of defining partners' interests in a partnership. This article illustrates the problems that arise because of that inadequate definition. It also recommends a few changes that could help remedy the existing shortcomings.

Like-Kind Exchanges And Qualified Intermediaries, Brad Borden, Paul L.B. Mckenney, David Shechtman

Bradley T. Borden

The economic downturn has depressed the real estate market, a significant component of the section 1031 industry. In its wake, the industry witnessed three major qualified intermediary failures. QI failures deprive exchangers of exchange proceeds and also create potential tax and legal liabilities for exchangers. This article analyzes those potential liablities and also discusses the cause of QI failures and actions that exchangers and QIs may consider to help safeguard exchange proceeds.

Workout-Driven Exchanges, Brad Borden, Todd D. Keator

Bradley T. Borden

Market forces in a depressed real estate market often lead to foreclosures, which may generate taxable gain to the debtor. Some foreclosure sales may qualify for Section 1031 nonrecognition, if the debtor properly structures the disposition. This Article discusses structures that help foreclosure transactions qualify for Section 1031 nonrecogntion. The Article also discusses the application of Section 1038 to recquisitions of exchanger-financed relinquished property.

Open Tenancies-In-Common, Brad Borden

Bradley T. Borden

Tax law (section 1031 in particular) has spawned a new investment vehicle—open tenancies in common. Tax law allows property owners to exchange into like-kind real property tax free, but finding suitable replacement property can be difficult. Real estate syndicators, recognizing a demand for ready-access replacement property, began offering undivided interests in large multi-million-dollar properties to individual investors exchanging out of smaller properties. Those offerings were the first open tenancies in common. Open tenancies in common are distinguished from traditional or close tenancies in common by the size of coowned property, the coowners’ mutual lack of acquaintance, and the separation of …

Aggregate-Plus Theory Of Partnership Taxation, Brad Borden

Bradley T. Borden

This Article presents a theory of partnership taxation. To provide context for the presentation, the Article examines the history and status of partnerships. That examination reveals humans have a natural tendency to form partnerships and partnerships create a significant challenge for lawmakers. The challenge is determining whether partnerships are entities separate from their members or aggregates of the members. After decades of debate and consideration, many lawmakers and commentators now view partnerships as entities. Tax law has not, however, adopted that view. Partnerships are subject to an aggregate tax regime that contains entity components.

Economic theory justifies tax law deviating …

Profits-Only Partnership Interests, Brad Borden

Bradley T. Borden

Profits-only partnership interests grant service-providing partners an interest in the profits of a partnership but not its capital. Such interests are a proverbial double-edged sword: they create economic arrangements needed in business, but provide opportunities for inequitable tax reductions. Business participants make economic decisions to use profits-only partnership interests to reduce agency costs and appropriable rents. The current law, however, empowers business participants to form partnerships that are equivalent to employment arrangements and use profits-only partnership interests to obtain long-term capital gains. Thus, with no economic consequences, they convert ordinary income (taxed at up to thirty-five percent) to long-term capital …

Taxing Shared Economies Of Scale, Brad Borden

Bradley T. Borden

Economies of scale exist if long-run average costs decline as output rises. All else being equal, the decline in average costs should lead to greater profitability, making economies of scale attractive to businesses. Nobel laureate George Stigler recognized that economies of scale should help determine the optimum size of a firm. To obtain economies of scale and optimum firm size, parties may integrate resources or grant access to resources without integrating. Such arrangements create shared economies of scale. Tax law must consider the effects of shared economies of scale and address them. In particular, the varying degrees of scale-sharing raise …

Section 1031 Qualified Intermediaries And The New Economy, Brad Borden

Bradley T. Borden

Industry estimates indicate that, over the past several years, section 1031 qualified intermediaries have lost as much as $700 million of exchange proceeds. Exchangers and their representatives must take steps to help prevent future losses. This article reviews three recent failures and discusses measures that should help reduce the risk of qualified intermediary failure in the new exchange environment. Lawmakers should also consider measures they can take to help prevent such losses in the future.

A Win-Win Proposal For Analyzing Profits-Only Partnership Interests, Brad Borden

Bradley T. Borden

The proper tax treatment of profits-only partnership interests is an unsolved aspect of tax law. The problem has manifested itself recently in the debate over the proper tax treatment of carried interests, a subset of profits-only partnership interests. Current law taxes holders of profits-only partnership interests based upon the character of income determined at the partnership level. Therefore, a partner who contributes only services to a partnership may be taxed at favorable long-term capital gains rates. One group of commentators recognizes such treatment as inequitable and recommends that at least a portion of partnership income allocated to holders of profits-only …

Financing Reverse Exchanges And Safeguarding Exchange Proceeds, Brad Borden

Bradley T. Borden

Over the last several years, reverse exchanges have become a fixture of section 1031. A fluid economy and a strained financial industry send a reminder that safe guarding exchange proceeds in reverse exchanges is paramount. This Article reviews reverse exchange structures, both safe harbor and non-safe harbor, and describes how such transactions must be financed to satisfy tax law requirements and safe guard exchange proceeds. The Article is adapted, with permission, from Chapter 5 of Tax-Free Like-Kind Exchanges.

The Like-Kind Exchange Equity Conundrum, Brad Borden

Bradley T. Borden

The tax-free treatment of like-kind exchanges presents one of tax law’s most compelling equity conundrums. Tax law generally does not tax property holders on the appreciation in the property’s value, but it does tax gain or loss recognized by property sellers and exchangers of non-like-kind property. In its basic Aristotelian form, equity requires that likes be treated alike, but it does not provide criteria for determining what is alike. Depending upon the criteria selected, exchangers of like-kind property can be similar to holders, or similar to sellers and exchangers of non-like-kind property. The equity conundrum is whether tax law should …