14 Wake Forest L. Rev. Online 1

Sam Kiehl[1]*


Should an independent school that maintains a § 501(c)(3) tax-exempt status be obligated to comply with Title IX? The answer comes down to how you define “federal financial assistance.”[2] Two recent federal court decisions from opposite ends of the country came out four days apart in July 2022, seeking to address this exact question. The U.S. District Court for the District of Maryland and the U.S. District Court for the Central District of California both expanded Title IX coverage, ruling that independent schools may be subject to Title IX based on maintaining a § 501(c)(3) tax-exempt status.[3] Both courts noted that the United States Supreme Court has never directly addressed whether a tax-exempt status under § 501(c)(3) constitutes federal financial assistance for purposes of Title IX.[4] No federal appellate court has considered the issue either. This Note argues Congress should amend 20 U.S.C. §§ 1681–89 (Title IX) to include a provision that defines “federal financial assistance” and specify that the term includes educational organizations that maintain a tax-exemption. By appropriately distinguishing how “federal financial assistance” is defined, Congress will ensure the judiciary is not operating in a legislative capacity while also fully honoring Title IX’s purpose.

Part I of this Note explores the connection between 26 U.S.C. § 501(c)(3) and 20 U.S.C. §§ 1681–89 and addresses the reasoning for why the Buettner-Hartsoe[5] and E.H. ex rel. Herrera[6] courts concluded that an independent school maintaining a § 501(c)(3) tax-exemption constitutes “federal financial assistance” for purposes of Title IX. Part II analyzes the appellate cases that have further defined the meaning behind terminology used in § 501(c)(3) and Title IX, and it considers several district court cases that have split on whether maintaining a tax-exemption constitutes “federal financial assistance.” Part III reviews scholarly arguments in favor of expanding the public policy doctrine to incorporate Title IX and tax-expenditure theory and ultimately concludes that each argument provides an inadequate or unlikely remedy.

Last, Part IV of this Note argues the Legislature should amend 20 U.S.C. §§ 1681–89 to include a provision which defines “federal financial assistance” and specifies that the term includes educational organizations that maintain a § 501(c)(3) tax-exemption. By doing so, Congress would honor the intent behind Title IX and fulfill the statute’s purpose. In addition, such legislation would prevent the judiciary from legislating by creating a judicial answer to a term not defined by the applicable legislation.

I. Bringing the Issue to Light: Buettner-Hartsoe and E.H. ex rel. Herrera

Both the Buettner-Hartsoe and E.H. ex rel. Herrera cases have brought the relationship between 26 U.S.C. § 501(c)(3) and Title IX to the forefront.[7] The most notable component of Title IX when considering the interplay between the statutes is § 1681(a), which states that “[n]o person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefit of, or be subjected to discrimination under any education program or activity receiving federal financial assistance . . . .”[8] Neither Congress, the IRS, nor the Supreme Court have provided an exact definition regarding what “federal financial assistance” fully entails. Meanwhile, 26 U.S.C. § 501(c)(3) provides a list of organizations that are exempt from taxation. This list states that any corporation and any community chest, fund, or foundation organized and operated exclusively for the following eight categories qualify for this exemption: (1) religious, (2) charitable, (3) scientific, (4) testing for public safety, (5) literary, (6) educational, (7) foster national or international amateur sports competition, or (8) prevention of cruelty to children or animals.[9] The crux of the issue returns to how “federal financial assistance” is defined under Title IX and whether it includes tax-exemptions under § 501(c)(3).

A. Buettner-Hartsoe v. Baltimore Lutheran High School Association

In Buettner-Hartsoe, the U.S. District Court for the District of Maryland considered five cases brought by separate women against an independent school, all alleging sexual assault and verbal sexual harassment by male students at the school.[10] The plaintiffs brought several of the claims under Title IX.[11] The defendant-school argued it was not subject to Title IX jurisdiction, as it was not a recipient of “federal financial assistance” during the times of the allegations.[12] Ultimately, the court found the defendant’s tax-exempt status maintained under § 501(c)(3) constitutes “federal financial assistance” for the purposes of Title IX, and the court deemed the plaintiffs had viable causes of action.[13]

To support this conclusion, the court first looked at how Title IX’s regulations clarify that a “recipient” under the statute is any entity or person to “whom Federal financial assistance is extended directly or through another recipient and which operates an education program or activity which receives such assistance.”[14] It further noted that neither the Supreme Court nor the Fourth Circuit had directly addressed the issue but provided that key decisions of both courts supported the District Court’s conclusion.[15] The cases that the court relied on involved the following issues: (1) when an entity qualifies as a direct, as opposed to indirect, recipient of “federal financial assistance” for purposes of Title IX;[16] (2) whether an institution must receive federal aid directly for the aid to qualify as “federal financial assistance” under § 501(c)(3);[17] (3) what the purpose and scope of tax-exemptions under § 501(c)(3) are;[18] (4) whether tax-exempt institutions must be in harmony with the public interest;[19] and (5) whether the remedies Congress created in Title IX were modeled after and comparable to those Congress created in Title VI.[20]

Additionally, the court referenced how the Eleventh Circuit had noted in dicta that tax-exemptions qualifying as “federal financial assistance” under Title IX were “neither immaterial nor wholly frivolous.”[21] The court concluded that enforcing the mandates of Title IX in schools with a § 501(c)(3) tax-exempt status aligns with the principal objectives of Title IX, which is to avoid the use of federal resources to support discriminatory practices and to ensure citizens have effective protection against discriminatory practices.[22] It thus found an independent school that maintains a § 501(c)(3) tax-exemption must comply with Title IX requirements.[23]

B. E.H. ex rel. Herrera v. Valley Christian Academy

Meanwhile, in E.H. ex rel. Herrera, the U.S. District Court for the Central District of California heard a suit that involved a female football player at a public high school alleging sex discrimination in violation of Title IX against a private school that refused to play the plaintiff’s football team entirely because of the plaintiff’s gender.[24] The defendant-school argued it did not derive financial assistance from the United States government and thus was not subject to Title IX.[25] The District Court noted that the Ninth Circuit had not addressed whether tax-exempt status confers “federal financial assistance” under Title IX.[26]

The District Court compared two district court cases that had come to opposite conclusions regarding whether tax-exempt status could subject an organization to the requirements of Title IX or Title VI.[27] In a somewhat more conclusory manner than the Buettner-Hartsoe court, the District Court found the “plain purpose of [Title IX] controlling” absent any controlling precedent or legislative history to the contrary.[28] The court noted that because Title IX’s purpose was to eliminate discrimination in programs benefiting from federal financial assistance, the school’s tax-exempt status qualified as “federal financial assistance” and obligated compliance with Title IX.[29]

II. Putting the Pieces Together: Analyzing Appellate and District Level Cases Dealing with Title IX and § 501(c)(3)

While no appellate court has directly addressed whether an educational organization maintaining a § 501(c)(3) tax-exemption must comply with Title IX requirements, there are a number of appellate decisions that address peripheral issues that may be melded together to answer this question. There are also several district level cases prior to Buettner-Hartsoe and E.H. ex rel. Herrera that have addressed the issue head-on.

A. Appellate Cases That Bring Clarity to Title IX and § 501(c)(3)

Grove City College v. Bell[30] is arguably the most vital Supreme Court case to the argument that an independent school maintaining a § 501(c)(3) tax exemption should be obligated to comply with Title IX.[31] In Grove City, the Supreme Court outlined its interpretation of federal financial assistance for civil rights statutory purposes, doing so in the context of defining what an “educational program or activity” is under Title IX.[32] The defendant, Grove City College, argued that neither it nor any education program affiliated with it received federal financial assistance within the meaning of Title IX.[33] Grove City College stated that just because some of its students received Basic Educational Opportunity Grants and used these funds to pay for their education did not alter the fact that it did not receive “federal financial assistance” per Title IX.[34] In Grove City, the Court stated there was no basis in Title IX for the view that only institutions that themselves apply for federal aid or receive checks directly from the federal government are subject to Title IX regulations.[35] The Court confirmed that an institution still qualifies as a recipient of “federal financial assistance” under Title IX even if the institution did not apply for the aid directly.[36] That the government granted the federal funds to Grove City College students rather than directly to one of the college’s educational programs did not preclude Title IX coverage.[37]

National Collegiate Athletic Ass’n v. Smith[38] is the next Supreme Court case that helps define key terms to identify whether a § 501(c)(3) tax-exemption qualifies as federal financial assistance for purposes of Title IX.[39] In this case, the Court defined “recipient” under 34 C.F.R. § 106.2.[40] The Court’s definition of “recipient” makes clear that an entity does not trigger Title IX coverage merely when it benefits from federal funding.[41] The Court stated that this definition is in accordance with Grove City Coll., noting that entities receiving federal financial assistance, whether directly or through an intermediary, are recipients within the meaning of Title IX, but entities that only benefit economically from federal assistance are not.[42]

Meanwhile, in Regan v. Taxation With Representation of Washington,[43] the Supreme Court addressed caveats to the exclusions provided for in 26 U.S.C. § 501(c)(3).[44] The Court ruled the provision in § 501(c)(3) that prohibits tax-exempt status for organizations that seek to influence legislation does not violate the First Amendment.[45] Notable for the argument that a tax-exemption constitutes federal financial assistance for purposes of Title IX, the Court concluded that tax exemptions are a form of subsidy that is administered through the tax system and “has much the same effect as a cash grant to the organization of the amount of tax it would have to pay on its income.”[46]

B. Modeled After Title VI: Title IX, § 504 of the Rehabilitation Act, and the Age Discrimination Act

Understanding “federal financial assistance” as defined in Title IX requires looking beyond the statute and identifying the connection between how the term is used in Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. In Cannon v. University of Chicago[47], the Supreme Court said the principal aim of Title IX was to “avoid the use of federal resources to support discriminatory practices” and “to provide individual citizens effective protection against those practices.”[48] Cannon also noted that Title VI served as a model for Title IX.[49] In coming to this determination, the Court looked to the legislative history and compared the comments of Congress when initially passing Title VI and Title IX.[50] When discussing Title VI, Senator Pastore noted the “purpose of [T]itle VI is to make sure that funds of the United States are not used to support racial discrimination.”[51] When pivoting to the discussion of Title IX, Representative Mink stated that “[a]ny college or university which has [a] … policy which discriminates against women applicants … is free to do so under [Title IX] but such institutions should not be asking the taxpayers of this country to pay for this kind of discrimination.”[52]

The Ninth Circuit noted in Schmitt v. Kaiser Foundation Health Plan of Washington[53] that not only did Title VI serve as a model for Title IX, but it also served as a model for the Age Discrimination Act and the Rehabilitation Act.[54] Accordingly, the court chose to interpret the four statutes similarly.[55] This is crucial, as any argument that states “federal financial assistance” should be defined a certain way regarding Title IX, likely must be able to support “federal financial assistance” being defined in the same manner when interpreting Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. The argument thus becomes significantly more expansive, and there are more potential pitfalls for a court or legislature seeking to define “federal financial assistance” in an overly broad manner.

When considering the importance of the connection between Title VI and Title IX, it becomes necessary to consider the public policy doctrine created by the Supreme Court in Bob Jones University v. United States.[56] Bob Jones was a significant case where the Supreme Court expanded the requirements that must be met to obtain tax-exempt charitable status by holding that a charitable organization may not violate “established public policy.”[57] In Bob Jones, the university was denied tax-exempt status because of its racially discriminatory admissions policy, and the university argued the practice was legal because it was based on religious doctrine.[58] The Court created the public policy doctrine, which supported the IRS’ argument that § 501(c)(3) implied that tax-exempt institutions had to meet common law definitions for charitable trusts, meaning they had to provide a public benefit and not be opposed to fundamental public policy.[59]

However, despite the creation of the public policy doctrine, the doctrine has not provided a significant amount of bite since the Court enacted it. Seventeen years later, in FDA v. Brown & Williamson Tobacco Corp.,[60] the Court noted that no matter how important an issue is, “an administrative agency’s power to regulate in the public interest must always be grounded in a valid grant of authority from Congress.”[61] This points to why the courts have not already used the public policy doctrine to incorporate Title IX. The Court noted that though it sought to effectuate the congressional purpose of protecting citizens as Title IX called for, it wanted to be cautious so as not to extend the scope of the statute beyond the intended parameters originally determined by Congress.[62]

Taking all the curated appellate court cases into consideration, no federal appellate court has directly considered whether an organization maintaining a tax-exempt status constitutes “federal financial assistance” for purposes of Title IX. However, the Eleventh Circuit has considered the issue most closely, as it provided in dicta in M.H.D. v. Westminster School[63] that allegations regarding an organization maintaining a tax-exempt status qualifies as “federal financial assistance” under Title IX provisions were “neither immaterial nor wholly frivolous.”[64] This is the most notable statement in support of the assertion that tax-exempt status under § 501(c)(3) qualifies as “federal financial assistance” under Title IX provisions from a United States federal appellate court. And though no appellate court has directly considered whether an organization maintaining a tax-exempt status constitutes “federal financial assistance” for purposes of Title IX, several district courts, besides the two most recent decisions, have either directly or peripherally considered the issue over the last forty years.

C. District Courts Addressing the Combined Issues of Title IX and § 501(c)(3)

In Fulani v. League of Women Voters Education Fund,[65] the Southern District of New York considered a suit brought by minor-party candidates alleging that, among other issues, they were excluded from debates sponsored by a nonprofit organization based on race and sex discrimination.[66] The court noted the entity was subject to Title VI and Title IX enforcement because it “receive[d] federal assistance indirectly through its tax exemption and directly through grants” from federal agencies.[67] In McGlotten v. Connally,[68] the District Court for the District of Columbia heard a suit brought by a black-American to enjoin the Secretary of Treasury from granting tax benefits to organizations that exclude non-whites from membership.[69] The D.C. Circuit considered whether tax benefits meet the definition of “federal financial assistance” within the terms of Title VI of the Civil Rights Act and whether Congress had clearly indicated that beneficiaries of tax-exemptions should not discriminate.[70] The court looked to how 42 U.S.C. § 2000d-1 defines “federal financial assistance” and ultimately held that tax-exemptions constitute “federal financial assistance” in the context of Title VI litigation.[71] Though the court noted nothing in the “massive legislative history” of the 1964 Civil Rights Act that indicated whether assistance provided through the tax system was intended to be treated differently than assistance provided directly, it deemed the plain purpose of Title VI controlling.[72] It stated that the statute’s plain purpose was to eliminate discrimination in programs benefitting from federal financial assistance.[73]

Meanwhile, Johnny’s Icehouse, Inc. v. Amateur Hockey Ass’n Illinois, Inc.[74] is the most recent district court case where the court concluded that an organization maintaining a § 501(c)(3) tax-exemption did not constitute a form of “federal financial assistance” and thus did not obligate the organization to comply with Title IX regulations.[75] The court’s reasoning centered on observations that income tax exemptions are “conspicuously absent” from the “laundry list” of Title IX regulations that define federal financial assistance.[76] However, this case is over twenty years old, and both the Buettner-Hartsoe and E.H. ex rel. Herrera courts found the court’s reasoning in Johnny’s Icehouse, Inc. unconvincing.[77] Bachman v. American Society of Clinical Pathologists[78] is an even earlier district court case where the court also found that tax benefits do not constitute “federal financial assistance” as defined in Title IX.[79] The court stated that only direct grants could qualify as federal financial assistance.[80] However, the Supreme Court rebuffed this line of reasoning a year later in Grove City College, which is notable because of the potential similarity between Title IX and § 504 of the Rehabilitation Act. Martin v. Delaware Law School of Widener University[81] is another district court case that goes against the proposition that a tax-exemption under § 501(c)(3) can constitute “federal financial assistance” in the context of the Rehabilitation Act.[82]

When viewing the aggregated appellate decisions that serve as building blocks for answering this question, as well as the inconsistent decisions that district courts have come to, it appears the issue is ripe for consideration by the courts. However, as indicated by courts noting the similarities between Title IX, Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act, whatever decision a court comes to has broad implications beyond simply how “federal financial assistance” is defined in relation to Title IX.

III. Inadequate and Unlikely Remedies: The Public Policy Doctrine and Tax-Expenditure Theory

Up to this point, courts and scholars have sought to better hold organizations accountable for anti-discrimination regarding race and sex when the organization maintains tax-exemption but does not otherwise receive federal funding. The most successful example has been the ruling by the Supreme Court in Bob Jones with the creation of the public policy doctrine.[83] Other notable attempts by scholars have included using tax-expenditure theory to support the reasoning for why tax-exempt charities receive “federal financial assistance” based on their favored tax status and thus should comply with civil rights laws.[84] However, concerns exist that these remedies are either inadequate or unlikely.

A. Critique of the Public Policy Doctrine as an Effective Tool

In Bob Jones, the Supreme Court expanded requirements for tax-exempt charitable status under § 501(c)(3) by holding that a charitable organization cannot violate “established public policy,” despite the fact that this limitation was not set out in the Internal Revenue Code.[85] Though the Court stated that violation of public policy, like discriminatory admission policies based on race, must be “established,” it did not provide clear boundaries for how to determine when a policy other than discrimination based on race is sufficiently established.[86] A number of arguments can be made by different parties, all of them equally advocating that public policy is offended by a certain issue. The reality is that the lack of parameters means it is unlikely a court will enforce any of them. The substantial gridlock in Washington, D.C. that comes from an increasingly polarizing political atmosphere makes it incredibly unlikely that the Supreme Court would use the public policy doctrine to issue blanket statements that certain actions and policies violate public policy.

The public policy limitation on charities did not initially come from the judiciary or legislature but instead came from the Treasury in a 1970 News Release.[87] This release indicated that the IRS could not legally justify providing a tax-exempt status based on the charitable exception in § 501(c)(3) to organizations that practice racially discriminatory practices.[88] The IRS justified its position by relying on what it found were clearly established federal policies against racial discrimination in education as outlined in Brown v. Board of Education[89] and further expanded on in the Civil Rights Act of 1964.[90] It was this policy that the Supreme Court later approved by creating the public policy doctrine in Bob Jones.[91] However, soon after, the Supreme Court indicated that the lack of set boundaries is an issue when considering whether an action falls under the public policy doctrine in FDA v. Brown & Williamson Tobacco Corp.[92] The Brown & Williamson Tobacco Corp. decision supports the argument that the Court is not going to expand the public policy doctrine further because no matter how important and controversial an issue is, the Court likely believes the Legislative branch should be creating legislation instead of the judiciary.

Since the public policy doctrine came from a Treasury News Release, later adopted by the Supreme Court, and did not come directly from the Legislature, using the public policy doctrine to incorporate an organization’s tax-exempt status to constitute “federal financial assistance” for the purposes of Title IX would likely be seen as extending the scope of the statute beyond the point where Congress indicated it should reach. Though the statement that sex discrimination is against public policy seems rational enough, the nuances of Title IX and how it applies to educational entities, including parochial schools in certain situations, means it is unlikely the Supreme Court today would find the public policy doctrine an appropriate avenue to enforce independent schools to maintain a § 501(c)(3) tax-exemption to comply with Title IX requirements. Especially as divisive as society is today, arguing for the expansion of the public policy doctrine to serve as a remedy for this issue is inadequate and unlikely to gain traction in Congress or with the public.

B. Critique of Tax-Expenditure Theory as an Effective Tool

Another remedy that has been proposed, this time primarily by academics as opposed to by courts or agencies, is for courts to apply tax-expenditure theory to determine whether tax-exempt organizations should be obligated to comply with anti-discrimination laws due to being recipients of government financial assistance.[93] Tax-expenditures are alternative policy means by which governments deliver financial support to individuals and companies.[94] The primary question addressed by tax-expenditure theory is whether the receipt of a tax benefit should be legally regarded as equivalent to a direct government grant of money.[95] It is possible to interpret tax-expenditure theory to posture that an organization’s § 501(c)(3) tax-exemption is the equivalent of a cash subsidy from the government. Though this notably only applies when an organization seeks to advocate for or implement social policy by using tax benefits and not when an organization uses a tax-exemption simply as a “further delineation of the appropriate tax base.”[96]

Ultimately, while this certainly is a viable option, it is unlikely to be successful. The primary concern is that while tax expenditure theory relies on current civil rights laws to address discrimination in charitable organizations in a broad manner, doing so based on the current legislation will only address some forms of discrimination but not others.[97] Of course, such legislation would protect individuals against discrimination on the basis of race, sex, gender, national origin, religion, and disability. But there are certain forms of discrimination in charitable organizations that use a § 501(c)(3) tax-exemption status that would not be protected, such as sexual orientation.[98] The use of tax expenditure theory becomes too broad of a tool and, in doing so, becomes a less effective tool in addressing discriminatory practices by organizations that maintain a § 501(c)(3) tax-exemption.

IV. Amendment of 20 U.S.C. § 1681 to Define Federal Financial Assistance

Due to the limitations of the proposed remedies listed above, it seems the most effective solution to addressing whether independent schools that maintain a § 501(c)(3) tax-exemption should be obligated to comply with Title IX is to amend Title IX to include a provision that defines “federal financial assistance” and specifies inclusion of educational entities that maintain a tax-exemption in the definition. This would further help differentiate how “federal financial assistance” is defined under Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act and why that definition should not have a direct bearing on how “federal financial assistance” is defined under Title IX. In doing so, this would eliminate concerns of the judiciary essentially creating legislation by applying “federal financial assistance” differently within the context of Title IX compared to Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. Most importantly, it would ensure that Congress and the courts honor Title IX’s purpose.

As stated above, in several cases the Supreme Court has attempted to clarify vagueness brought upon by the use of the phrase “federal financial assistance” in the first sentence of Title IX, § 1681(a), which says “[n]o person in the United States shall, on the basis of sex . . . be subjected to discrimination under any education program or activity receiving federal financial assistance . . . .” However, a murky understanding of the term remains. To amplify the problem, when attempting to define the term “federal financial assistance” specific to Title IX, one must look at how Congressional records show that Title IX was modeled after Title VI and is comparable to how the term is also used in § 504 of the Rehabilitation Act and the Age Discrimination Act.

In light of these problems, the most comprehensive solution is for Congress to amend Title IX to include a definition of “federal financial assistance.” This definition should be based on an understanding of the currently existing definition of “federal financial assistance” as provided for by the Supreme Court in Grove City, National Collegiate Athletic Ass’n v. Smith, and Cannon v. University of Chicago.[99] In addition, the definition should effectively mirror the plain purpose of Title IX, which is to ensure the removal of barriers that prevent people on the basis of sex from participating in educational opportunities of their choice. Congress could accomplish this via an amendment that adds a paragraph to Title IX following 20 U.S.C. § 1681(c), which defines “educational institution.” Said paragraph should be similar to the following:

For purposes of this chapter, federal financial assistance may include:

(1) A grant or loan of federal financial assistance, including funds made available for:

    1. The acquisition, construction, renovation, restoration, or repair of a building or facility or any portion thereof; and
    2. Scholarships, loans, grants, wages, or other funds extended to any entity for payment to or on behalf of students admitted to that entity, or extended directly to such students for payment to that entity.

(2) A grant of Federal real or personal property or any interest therein, including surplus property, and the proceeds of the sale or transfer of such property, if the Federal share of the fair market value of the property is not, upon such sale or transfer, properly accounted for to the Federal Government.

(3) Any other contract agreement or arrangement that has as one of its purposes the provision of assistance to any education program or activity, except a contract of insurance or guaranty.

(4) A grant or loan that is received directly or indirectly, even if an entity does not show a financial gain, in the sense of a net increment in its assets.

(5) A tax-exemption maintained by educational organizations under 26 U.S.C. § 501(c)(3).

(6) However, federal financial assistance does not include:

    1. A simple assertion that an entity receives something of value in nonmonetary form from the federal government’s presence or operations;
    2. Statutory programs or regulations that directly or indirectly support, or establish guidelines for, an entity’s operations;
    3. Programs owned and operated by the federal government; or
    4. Direct, unconditional assistance to ultimate beneficiaries, the intended class of private citizens receiving federal aid, such as social security payments and veterans pensions.[100]

A statutory amendment to define “federal financial assistance” will further Congressional intent regarding Title IX. As it stands now, independent schools may have the prerogative, as evidenced by the schools in Buettner-Hartsoe and E.H. ex rel. Herrera, to attempt to disregard what Title IX seeks to prevent: discrimination on the basis of sex.[101] This proposed amendment closes a loophole that independent schools may seek to exploit. It prevents schools that receive significant and tangible benefits by maintaining tax-exempt status under § 501(c)(3) from supporting discriminatory practices in education and also provides a broader base of individual citizens’ protection against those practices.

Notably, such an amendment does not impact parochial schools the same way it would impact independent schools that maintain a tax-exemption under § 501(c)(3). Educational institutions controlled by a religious organization are exempt from Title IX to the extent that the application of Title IX would be inconsistent with the organization’s religious tenets.[102] Thus, when categorizing independent schools, it is important to understand that an amendment would only impact independent schools, such as charter schools which may not receive public funds but that maintain a § 501(c)(3) tax-exemption; it would not impact parochial schools that already have certain exemptions provided for in 20 U.S.C. § 1681(a)(3).

Additionally, a benefit to amending Title IX as opposed to 26 U.S.C. § 501(c)(3) is that the charitable exemption exception contained in that statute includes a wide variety of organizations beyond just those organized for educational purposes. These include organizations operated for religious, charitable, scientific, testing for public safety, or literary purposes, as well as those that seek to foster national or international amateur sports competitions or that are designed to prevent cruelty to children or animals.[103] Amending § 501(c)(3) to remedy the issue of tax-exempt independent schools discriminating on the basis of sex would lead to questions of Title IX’s applicability outside of the educational context. Furthermore, even if Congress were to amend § 501(c)(3), there would still be ambiguity when it comes to how to define “federal financial assistance.” It would also not answer the question of if and how to differentiate how “federal financial assistance” is defined in Title IX compared to Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act.

Some district courts have not quite comprehended the magnitude of a decision to determine that an organization maintaining a tax-exemption constitutes “federal financial assistance” for purposes of Title IX. Doing so not only requires organizations to abide by Title IX requirements, but also would likely lead to an expansion of such organizations having to abide by Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act.[104] Title VI of the Civil Rights Act of 1964 and Title IX of the Education Amendments Act of 1972 are the principal laws that forbid discrimination based on race and sex, respectively, by private actors that receive federal financial assistance.  Both statutes condition federal funding on the promise that the recipient of the funds will not discriminate. Title VI, which the other statutes were modeled after, states that “[e]ach Federal department and agency which is empowered to extend Federal financial assistance . . . is authorized and directed to effectuate . . . this title . . . by issuing rules, regulations, or orders . . . which shall be consistent with achievement of the objectives of the statute authorizing the financial assistance in connection with which the action is taken.”[105] Section 1682 of Title IX almost repeats this definition word-for-word.

The Rehabilitation Act of 1973 and the Age Discrimination Act also impose civil rights restrictions based on a private actor’s receipt of federal financial assistance.[106] § 504 of the Rehabilitation Act was also modeled specifically after Title VI and may also provide guidance when analyzing Title IX.[107] However, Title IX, unlike Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act, only applies to educational entities such as colleges, universities, elementary and secondary schools, as well as any educational or training program operated by a recipient of federal financial assistance.[108] Each of the other statutes applies in a significantly broader manner.

Thus, the parallel nature of each of the statutes lends to a similar, if not the exact same, analytical framework being used when applied to cases under all four statutes. However, this limits each of the statutes because how “federal financial assistance” is defined in one statute then must be used in a similar manner in the other three statutes. This lack of flexibility can cut against each of the statutes in different ways. For instance, while Title VI covers employment only in limited circumstances, employment discrimination is clearly covered in Title IX.[109] Meanwhile, holding that “federal financial assistance” applies to all institutions maintaining a § 501(c)(3) tax-exemption, while appropriately applicable to educational organizations, cuts in an overly broad manner when applied to the Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. Defining the term in such a way could be especially harmful to employers that must comply with § 504 of the Rehabilitation Act and the Age Discrimination Act. This would subject employers to additional regulations that they have arguably sought to avoid by not accepting federal financial assistance, notwithstanding maintaining a tax-exemption. It also would be less likely to receive support in Congress as such an expansive definition would have considerable detractors that prefer less governmental interference in the free market.

The legislative history behind Title IX is also significant in showing that it is reasonable to believe Congress intended for there to be a distinction in how “federal financial assistance” applies in the context of Title IX compared to Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. Congress designed Title IX specifically with schools and educational programs in mind. The statute initially came to life in Congress when Senator Bayh of Indiana introduced an amendment with the purpose of combating the “continuation of corrosive and unjustified discrimination against women in the American educational system.”[110] This distinction is nowhere to be found in the other three statutes, as Title IX is the only statute of the four that is siloed off and applies specifically to discriminatory practices within education programs. Since the purpose of Title IX, as supported by the legislative history, is to eliminate discrimination on the basis of sex in education programs, specifying how “federal financial assistance” is defined in Title IX in contrast to how it is defined in Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act is appropriate in working towards achieving this goal.


Independent schools that choose to enjoy the benefits of a § 501(c)(3) tax-exemption should be obligated to comply with Title IX. However, a current gap exists in how “federal financial assistance” is defined under Title IX and if that same phrase should be defined similarly or differently when comparing Title IX with Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act. This gap makes it unclear whether Title IX applies to § 501(c)(3) organizations. Whether Title IX applies to those organizations has been considered peripherally by several appellate courts and directly by a number of district courts over the past forty years. To clarify that independent schools that maintain a tax-exemption should be obligated to comply with Title IX, the courts or legislature must clarify: (1) when an entity qualifies as a recipient of “federal financial assistance;” (2) whether the definition of “federal financial assistance” applies differently across Title IX, Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act; (3) what the purpose and scope of tax-exemptions under § 501(c)(3) are; and (4) whether Title IX, as it exists now, is fully accomplishing the purpose Congress set out for it to accomplish.

The most effective and comprehensive way to address this issue is for the Legislature to amend 20 U.S.C. §§ 1681–89 to include a provision that defines “federal financial assistance” and specifies including educational entities that maintain a tax-exemption. Such an amendment would faithfully fulfill Title IX’s purpose to ensure avoidance of the use of federal funds in aiding educational programs that support discriminatory practices based on sex and protect individuals against those discriminatory practices. Doing so would also provide clarity to both the courts and organizations on how to distinguish “federal financial assistance” as it is defined in Title IX as opposed to how it is defined in Title VI, § 504 of the Rehabilitation Act, and the Age Discrimination Act.

Furthermore, an amendment to Title IX by Congress would also save the judiciary from being put in a place where it is essentially being asked to legislate by finding a judicial answer to the question of whether maintaining a tax-exemption qualifies an educational organization as receiving “federal financial assistance” per Title IX. Up to this point, the Supreme Court has already had to interpret what Congress meant regarding the definition of “federal financial assistance” for civil rights statutory purposes in Grove City College, and the definition of “recipient” for purposes of 34 C.F.R. § 106.2 in National Collegiate Athletic Ass’n. The fact that a number of district courts in the time since the Supreme Court decided Grove City College and National Collegiate Athletic Ass’n have had to attempt to address whether an independent educational program that maintains a § 501(c)(3) tax-exemption is obligated to comply with Title IX means this is an issue still needing clarification. If Congress does not address the issue, it is that much more likely that courts will again be put into the position of having to determine what Congress’s intent was when drafting Title IX and whether it should apply to independent schools that maintain a § 501(c)(3) tax-exemption but receive no other form of federal financial assistance.

When first advocating for the adoption of Title IX, Senator Bayh sought to fight against the “sex discrimination that reaches into all facets of education,” and it was for this reason that Congress enacted Title IX.[111] The amendment of Title IX to define “federal financial assistance” to include independent educational entities that maintain a § 501(c)(3) tax-exemption and to obligate compliance with the statute furthers the goal of eliminating discrimination on the basis of sex in the field of education while providing continued protections for individuals in education.

  1. *. Third-year law student at the Wake Forest University School of Law. B.S. in Social Studies Education from the University of Oklahoma and will begin practicing with Conner & Winters, LLP in their Tulsa office following graduation. Many thanks to Dylan, Keegan, and the team at the Wake Forest Law Review Online for their partnership on this article. I am also forever grateful to my parents for encouraging my love of learning at my own pace, to Rob and Carilyn for fostering my connection with the law, and, most importantly, to Dr. Robin Rainey Kiehl for being the ultimate teammate, wife, and soon-to-be mother.
  2. . 20 U.S.C.A. § 1681(a) (West).
  3. . See Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass’n, No. CV RDB-20-3132, 2022 WL 2869041 at *5 (D. Md. July 21, 2022), motion to certify appeal granted, No. CV RDB-20-3132, 2022 WL 4080294 (D. Md. Sept. 6, 2022); E.H. ex rel. Herrera v. Valley Christian Acad., 616 F. Supp. 3d 1040, 1049–50 (C.D. Cal. 2022).
  4. . See Buettner-Hartsoe, 2022 WL 2869041, at *3; E.H. ex rel. Herrera, 616 F. Supp. 3d at 1049–50.
  5. . Buettner-Hartsoe, 2022 WL 2869041.
  6. . E.H. ex rel. Herrera, 616 F. Supp. 3d 1040.
  7. . See id.; Buettner-Hartsoe, 2022 WL 2869041.
  8. . 20 U.S.C.A. § 1681(a) (West).
  9. . 26 U.S.C.A. § 501(c)(3) (West).
  10. . Buettner-Hartsoe, 2022 WL 2869041, at *1.
  11. . Id.
  12. . Id.
  13. . Id.
  14. . Id. at *3 (referencing 34 C.F.R. § 106.2(i) (2023)).
  15. . Id.
  16. . Grove City Coll. v. Bell, 465 U.S. 555, 569–70 (1984).
  17. . Nat’l Collegiate Athletic Ass’n v. Smith, 525 U.S. 459, 468–69 (1999).
  18. . Regan v. Tax’n With Representation, 461 U.S. 540, 550–51 (1983).
  19. . Bob Jones Univ. v. United States, 461 U.S. 574, 591–92 (1983).
  20. . Cannon v. Univ. of Chi., 441 U.S. 667, 694–96 (1979).
  21. . M.H.D. v. Westminster Schs., 172 F.3d 797, 802 n.12 (11th Cir. 1999).
  22. . Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass’n, No. RDB-20-3132, 2022 WL 2869041, at *5 (D. Md. July 21, 2022) (quoting Cannon, 441 U.S. at 704).
  23. . Id. at *3. The court subsequently granted the school district’s motion for interlocutory appeal to the United States Court of Appeals for the Fourth Circuit to consider the issue of whether § 501(c)(3) tax-exempt status constitutes federal financial assistance under Title IX. See Buettner-Hartsoe, 2022 WL 4080294, at *1. The parties are currently in the pretrial stage of litigation regarding this interlocutory appeal.
  24. . E.H. ex rel. Herrera v. Valley Christian Acad., 616 F. Supp. 3d 1040, 1044 (C.D. Cal. 2022).
  25. . Id. at 1048–49.
  26. . Id. at 1050.
  27. . Id. (comparing Johnny’s Icehouse, Inc. v. Amateur Hockey Ass’n, 134 F. Supp. 2d 965, 972 (N.D. Ill. 2001) and McGlotten v. Connally, 338 F. Supp. 448, 461 (D.D.C. 1972)).
  28. . Id.
  29. . Id.
  30. . Grove City Coll. v. Bell, 465 U.S. 555 (1984).
  31. . Id. at 574–75.
  32. . Id. at 557.
  33. . Id. at 563.
  34. . Id.
  35. . Id. at 564.
  36. . Id. at 569–70.
  37. . Id.
  38. . Nat’l Collegiate Athletic Ass’n v. Smith, 525 U.S. 459 (1999).
  39. . Id. at 462.
  40. . Id. at 460. Part 106 of Title 34 of the Code of Federal Regulations contains regulations promulgated by the Office of Civil Rights within the Department of Education that concern nondiscrimination on the basis of sex in education programs or activities receiving federal financial assistance.
  41. . Id.
  42. . Id. at 460–61. The Court attempted to clarify where this line was drawn by noting that an entity does not open itself to Title IX obligations on the grounds it receives dues from its members, which receive federal financial assistance if the members do not earmark federal funds for the purpose of paying dues.
  43. . 461 U.S. 540 (1983).
  44. . Id. at 540.
  45. . Id.
  46. . Id. at 544.
  47. . 441 U.S. 677 (1979).
  48. . Id. at 704.
  49. . Id.
  50. . Id. at 704 n.6.
  51. . Id. (referencing 110 Cong. Rec. 7062 (1964)).
  52. . Id. (referencing 117 Cong. Rec. 39252 (1971)).
  53. . 965 F.3d 945 (9th Cir. 2020).
  54. . Id. at 953.
  55. . Id.
  56. . 461 U.S. 574, 603–04 (1983).
  57. . Id. at 591.
  58. . Id. at 577.
  59. . Id. at 579.
  60. . 529 U.S. 120 (2000).
  61. . Id. at 161.
  62. . Id.
  63. . 172 F.3d 797 (11th Cir. 1999).
  64. . Id. at 802 n.12.
  65. . 684 F. Supp. 1185 (S.D.N.Y. 1988).
  66. . Id. at 1186–87.
  67. . Id. at 1192.
  68. . 338 F. Supp. 448 (D.D.C. 1972).
  69. . Id. at 450.
  70. . Id. at 460.
  71. . Id. at 461.
  72. . Id.
  73. . Id.
  74. . 134 F. Supp. 2d 965 (N.D. Ill. 2001).
  75. . Id. at 972.
  76. . Id. at 971.
  77. . Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass’n, No. CV RDB-20-3132, 2022 WL 2869041 at *5 (D. Md. July 21, 2022); E.H. ex rel. Herrera v. Valley Christian Acad., 616 F. Supp. 3d 1040, 1049–50 (C.D. Cal. 2022).
  78. . 577 F. Supp. 1257 (D.N.J. 1983).
  79. . Id. at 1264–65.
  80. . Id.
  81. . 625 F. Supp. 1288 (D. Del. 1985).
  82. . Id. at 1298.
  83. . Bob Jones Univ. v. United States, 461 U.S. 574, 586 (1983).
  84. . David A. Brennen, Tax Expenditures, Social Justice, and Civil Rights: Expanding the Scope of Civil Rights Laws to Apply to Tax-Exempt Charities, 2001 B.Y.U. L. Rev. 167, 206–07 (2001).
  85. . Bob Jones Univ., 461 U.S. at 601–02.
  86. . Id.
  87. . Brennen, supra note 83, at 183 (citing I.R.S. News Release (July 10 1970), reprinted in 7 Stand. Fed. Tax Rep. (CCH) ¶ 6,790).
  88. . Id.
  89. . 347 U.S. 483, 495 (1954).
  90. . 2000 EO CPE Text, Private School Update, at 187.
  91. . Bob Jones Univ., 461 U.S. at 605.
  92. . 529 U.S. 120, 161 (2000).
  93. . Brennen, supra note 83, at 191–92.
  94. . IMF, Tax Expenditure Reporting and Its Use in Fiscal Management: A Guide for Developing Economies, Fiscal Affairs Department (Mar. 2019).
  95. . Nicholas A. Mirkay, Is It “Charitable” to Discriminate?: The Necessary Transformation of Section 501(c)(3) into the Gold Standard for Charities, 2007 Wis. L. Rev. 45, 80 (2007).
  96. . Id. at 80–81.
  97. . Id. at 66, 68.
  98. . Id. at 68.
  99. . Grove City Coll. v. Bell, 465 U.S. 555, 569 (1984); Nat’l Collegiate Athletic Ass’n v. Smith, 525 U.S. 459, 466–67 (1999); Cannon v. Univ. of Chi., 441 U.S. 677, 704 (1979).
  100. . 20 U.S.C. §§ 1681(c); U.S. Dep’t of Just., Title IX Legal Manual § III(A)(1) (2021) (modeled off of discussion of the scope of coverage in the Title IX manual regarding federal financial assistance).
  101. . Buettner-Hartsoe v. Balt. Lutheran High Sch. Ass’n, No. CV RDB-20-3132, 2022 WL 2869041 at *5 (D. Md. July 21, 2022), motion to certify appeal granted, No. CV RDB-20-3132, 2022 WL 4080294 (D. Md. Sept. 6, 2022); E.H. ex rel. v. Valley Christian Acad., 616 F. Supp. 3d 1040, 1049–50 (C.D. Cal. 2022).
  102. . 20 U.S.C. §§ 1681(a)(3); 34 C.F.R. § 106.12(a) (2020).
  103. . 26 U.S.C.A. § 501(c)(3) (West).
  104. . Mirkay, supra note 94, at 75 n.176.
  105. . 42 U.S.C. § 2000d-1.
  106. . Brennen, supra note 83, at 192.
  107. . Alexander v. Choate, 469 U.S. 287, 294 (1985).
  108. . 20 U.S.C.A. § 1681 (West).
  109. . See 20 U.S.C. §§ 1681–89; U.S. Dep’t of Just., Title IX Legal Manual § I (2021).
  110. . 118 Cong. Rec. 5803 (1972) (statement of Sen. Bayh).
  111. . Id.

By: Joseph C. Johnson

The child tax credit, found in § 24 of the Internal Revenue Code, normally provides taxpayers with a credit that reduces their overall tax liability for a given taxable year.[1] This credit is applied per qualified child.[2] The amount of credit to be applied to the taxpayer’s tax liability is subject to a “phase-out” based on income—the value of the credit is reduced depending on how much the taxpayer’s income exceeds a certain threshold amount for that taxable year.[3]

The American Rescue Plan created significant, albeit temporary, changes to the child tax credit.[4] Beginning in July of 2021, the child tax credit became the means by which millions of American families received monthly payments to ease some of the financial pressure created by the COVID-19 pandemic.[5] These were advance monthly payments—as opposed to a lump sum upon filing taxes—that amounted to half of the total value due to the families under the child tax credit.[6]  These families must now claim the remaining half when filing taxes for 2021 to receive the entire amount to which they are due.[7]  In total, families can receive up to $3,600.00 for each child under the age of six years and up to $3,000.00 for each child between the ages of six years and seventeen years.[8] 

The first payment alone from this expansion of the child tax credit kept approximately three million children from poverty in the month of July in 2021.[9]  The July 2021 payment reached over fifty-nine million children, and reduced monthly child poverty from 15.8 percent to 11.9 percent.[10]  The number of children that benefited from the American Rescue Plan’s expanded child tax credit increased to sixty-one million in August of 2021.[11]  It is estimated that an additional two to three million children live in households that qualify to receive the child tax credit but for whom the Internal Revenue Service do not have relevant information to determine eligibility; thus, these households did not receive the payment.[12]  Households that received the child tax credit payments most often spent the funds “on basic household needs such as food and utilities.”[13] 

Notwithstanding the plummeting child poverty rates and the expansive number of families that benefitted from the advance payments, the final payment was sent in December of 2021.[14]  The child tax credit will return to $2,000.00 per child for the 2022 taxable year without additional intervention from Congress.[15]  Congress rejected to extend the increased child tax credit, and refused to extend the monthly payments as the means of delivering the credit to taxpayers, thereby limiting the number of payments to only six.[16]  Accordingly, many families are struggling to accommodate a smaller monthly budget,[17] and monthly child poverty is “expected to be at its highest level since Biden took office.”[18]

President Biden’s “Build Back Better” agenda, which was not passed by Congress in December of 2021, proposed extending the expanded child tax credit system that was in use from July through December of 2021.[19]  However, despite opposition from Republicans and Democratic Senator Joe Manchin of West Virginia,[20] several Democratic lawmakers have voiced continuing dedication to the agenda.[21]  President Biden has suggested that separating the agenda into smaller chunks of legislation may prove to be more successful,[22] and House of Representatives Ways and Means Chair Richard Neal has conceded that there is “room here to negotiate,”[23] so all hope need not be lost in once again seeing advance child tax credit payments. 

The vast number of taxpayers who were eligible to receive the expanded child tax credit in the second half of 2021 illustrates the widespread need for additional support while the COVID-19 pandemic continues.  However, the failure to extend the payments into 2022 raises a concerning question: if keeping millions of children out of poverty while they suffer through a pandemic is not enough to motivate Congress to maintain the expanded payments, what will be?

[1] 26 U.S.C. § 24(a).

[2] Id.

[3] 26 U.S.C. § 24(b)(1).

[4] The American Rescue Plan, The White House, https://www.whitehouse.gov/wp-content/uploads/2021/03/American-Rescue-Plan-Fact-Sheet.pdf (last visited Jan. 24, 2022).

[5] Scott Horsely, How Biden’s Plan Could Help Reshape The Finances Of American Families, NPR (Mar. 13, 2021, 5:00 AM), https://www.npr.org/2021/03/13/976554398/how-bidens-plan-could-help-reshape-the-finances-of-american-families.

[6] Advance Child Tax Credit Payments in 2021, IRS, https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021 (last updated Jan. 11, 2022).

[7] Id.

[8] See 26 U.S.C. § 24(i)(3).  Section 24(i)(3) reflects the 2021 amounts, which are increased from the initial $1,000.00 value seen in 26 U.S.C. § 24(a), and further increased above the amount of $2,000.00 found in 26 U.S.C. § 24(h)(2) as a special rule for years 2018 through 2025.

[9] Zachary Parolin et al., Monthly Poverty Rates among Children after the Expansion of the Child Tax Credit, Poverty & Soc. Pol’y Brief, Aug. 20, 2021 at 1, 1.

[10] Id.

[11] Greg Iacurci, Child tax credit lifted 3 million kids from poverty in July, CNBC (Aug. 25, 2021 1:35 PM), https://www.cnbc.com/2021/08/25/child-tax-credit-lifted-3-million-kids-from-poverty-in-july.html.

[12] Id.

[13] Catherine Rampell, A eulogy for Biden’s expanded child tax credit. Maybe., Wash. Post (Jan. 20, 2022, 6:01 PM), https://www.washingtonpost.com/opinions/2022/01/20/eulogy-bidens-expanded-child-tax-credit-maybe/.

[14] Katie Teague & Peter Butler, Child tax credit: How to get your remaining money in 2022, CNET (Jan. 21, 2022, 1:15 PM), https://www.cnet.com/personal-finance/child-tax-credit-how-to-get-your-remaining-money-in-2022/.

[15] Lance Lambert, The monthly child tax credit payments are done—here’s what will replace it, Fortune (Jan. 18, 2022, 7:00 AM), https://fortune.com/2022/01/18/monthly-child-tax-credit-payments-end-build-back-better-manchin/.

[16] Id.

[17] Deepa Shivaram, Families are in distress after the first month without the expanded child tax credit, NPR (Jan. 21, 2022, 5:01 AM), https://www.npr.org/2022/01/21/1074413273/end-expanded-child-tax-credit-families-effects.

[18] Rampell, supra note 13.

[19] Shivaram, supra note 17.

[20] Id.

[21] Brian Faler, Some Democrats not ready to give up on child credit, Politico (Jan. 20, 2022, 2:16 PM), https://www.politico.com/news/2022/01/20/democrats-senate-child-tax-credit-527499.

[22] Shivaram, supra note 17.

[23] Faler, supra note 21.

By Alex Lewis

            Working remotely has become the new normal, and it may stay that way after COVID-19.[1] Although many professionals enjoy the safety, freedom, and flexibility that comes with remote work, a potential tax nightmare may be around the corner for some in 2021. If employees did not switch over their withholding once they started working remotely in a different state, those individuals could incur a higher tax bill in their resident state and possibly incur penalties.[2] Additionally, companies that now have employees working in states other than the business’s home office may unintentionally trigger income or sales tax nexus in their employees’ home states.[3] These employers may also be required to pay unemployment insurance tax in those states that employees now call home.[4] Although some state legislatures have released guidance for determining nexus and apportionment of income due to remote workers, many states have yet to address the issue.[5] Out of all the uncertainty caused by COVID-19, one thing is clear—preparing and paying income, payroll, and unemployment tax for both individuals and corporations could be complicated and expensive.

Individual Income Tax Implications 

            Typically, the state in which a taxpayer resides taxes all of their income, regardless of where it is earned.[6] Additionally, when a taxpayer works in more than one state during a year, the individual must, in most states, allocate their income to the respective state in which it was earned.[7] When this happens, the taxpayer’s resident state will give a tax credit to the taxpayer for the state income taxes paid to another state.[8]

            When employees began working remotely due to COVID-19, the taxpayer may now have less income to allocate to the state in which they normally worked (if it is located in another state).[9] Since less income will be allocated to the state in which they normally work, the amount of taxes due and the amount of credit that the taxpayer will be able to claim on their resident state income tax return will be lower.[10] The smaller credit could cause the taxpayer to have a much higher income tax liability in their resident state, which could result in tax penalties for failing to make estimated payments in their resident state.[11]

            Although some states have exempted income earned in the state because of COVID-19,[12] others have not.[13] Thus, employees should check with their employer and change their withholding requirements to their resident state to ensure that they do not incur tax penalties as a result of working remotely.[14]

Business Income/Payroll/Unemployment Tax Implications 

            Businesses that allowed their employees to work remotely due to the COVID-19 pandemic may face far more challenges. There are a variety of ways that states require businesses to apportion income.[15] Most states require businesses only to apportion income based on the sales made within the state.[16] Those states will likely be unaffected by the COVID-19 remote workforce. However, other states apportion income with a multi-factor model, which allocates income based on sales, property, and payroll.[17]

            The remote workforce will change these calculations because remote employees will change the amount of payroll allocated to each state. Some states have released guidance exempting income earned by employees in the state that were relocated due to COVID-19.[18] Under these exemptions, income earned by remote workers due to COVID-19 will not be included in the apportionment calculation.[19] Other states only allow an employer to exempt payroll from the apportionment calculation during periods when a government shelter-in-place mandate was in effect.[20] Thus, a business may need to determine the specific dates employees worked remotely and cross-check those dates with shelter-in-place mandate dates to calculate the payroll factor appropriately. In rare situations, a company may trigger nexus in a state, and an additional filing requirement, simply because they had a remote worker in the state, even though the business did not have any sales or property in the state.            

            States that do not have traditional corporate income tax regimes could cause further issues for companies. In extreme circumstances, companies may be required to register and pay certain income and other taxes.[21] For example, in Texas, a non-Texas entity does not have to pay their corporate franchise tax unless it (1) has over $500,000 of gross receipts from doing business in Texas; (2) obtains a use tax permit; or (3) has physical presence in the state.[22] Establishing physical presence includes having employees or representatives doing business in the state.[23] So, if a company normally does not have over $500,000 in gross receipts in Texas, but now has an employee working remotely in the state due to COVID-19, the entity must now pay Texas franchise tax. Washington’s business and occupation tax (“B&O”) has similar tax characteristics.[24] In Washington, a business must pay B&O tax if it (1) has physical presence nexus in Washington; (2) has more than $100,000 in combined gross receipts sourced to Washington; or (3) is organized or commercially domiciled in Washington. Thus, a remote worker could trigger nexus for a company even if they do not normally meet the $100,000 threshold.[25]

            Finally, companies that now have employees working remotely could cause the employer to pay unemployment insurance tax in the state in which the employee relocated.[26] Some states require an employer to file with the state and begin paying unemployment insurance tax once an employer has one employee working in the state.[27] In some circumstances, an employee may be exempt from triggering unemployment insurance taxes.[28]


            With so many changes happening for employers and workers, many taxpayers may not yet be worried about their next tax bill in 2021—but maybe they should be. Making sure that employers are withholding income to the correct state could alleviate future tax issues. Also, for businesses that are merely trying to stay afloat during the pandemic, the potential additional filing requirements will be an unwelcome surprise next year. Although some states have offered guidance on how to allocate payroll to the state, the nonuniformity in tax laws across states creates a hassle and could lead to a higher tax bill (or, at least, a higher tax preparation bill). States still have time to issue helpful guidance to employers regarding their payroll allocation. If corporations are lucky, some states may entirely waive the physical presence threshold that would otherwise trigger a filing requirement. Conversely, since most states are facing severe budget deficits, they may be less forgiving and will not waive any remote work performed by employees.[29] If more states follow Georgia’s guidance, employers will undoubtedly incur additional headaches trying to cross-check governmental shelter-in-place mandates with specific dates that employees worked remotely.[30] Nevertheless, with some employers now embracing remote work as a permanent solution, Americans may feel the pandemic’s tax effects for years come.[31]

[1] Why Remote Working Will Be the New Normal, Even After COVID-19, EY (Sept. 7, 2020), https://www.ey.com/en_be/covid-19/why-remote-working-will-be-the-new-normal-even-after-covid-19.

[2] Katherine Loughead, In Some States, 2020 Estimated Tax Payments Are Due Before 2019 Tax Returns, Tax Found. (May 22, 2020), https://taxfoundation.org/2020-quarterly-estimated-tax-payments-2019-tax-returns/.

[3] Daniel N. Kidney, State and Local Tax Implications of Remote Employees During the COVID-19 Pandemic, Wipfli (June 19, 2020), https://www.wipfli.com/insights/articles/tax-covid-19-remote-employee-nexus (stating that nexus is typically created by having “physical presence” in the state).

[4] Larry Brant, Having Employees Working Remotely May Become the New Norm—There May Be Tax and Other Traps Lurking Out There for Unwary Employers, Foster Garvey (May 26, 2020), https://www.foster.com/larry-s-tax-law/tax-traps-remote-employees-covid19.

[5] Coronavirus Tax Relief FAQs, Ga. Dep’t of Revenue, https://dor.georgia.gov/coronavirus-tax-relief-faqs (last visited Sept. 16, 2020).

[6] See Idaho Code § 63-3011; see also Credit for Taxes Paid to Another State, Va. Tax, https://www.tax.virginia.gov/credit-for-taxes-paid-to-another-state (last visited Sept. 16, 2020).

[7] See Mont. Admin. R. 42.15.110(3) (requiring an employee to only allocate income that is “sourced” to the respective state); see also Or. Dep’t of Revenue, Publication OR-17 Individual Income Tax Guide 47 (2019), https://www.oregon.gov/dor/forms/FormsPubs/publication-or-17_101-431_2019.pdf (requiring an employee to apportion income by taking the number of days worked in the respective state divided it by the total number of days worked everywhere in a year).

[8] Idaho Code § 63-3029(1).

[9] See Or. Dep’t of Revenue, supra note 7, at 47.

[10] Idaho Code § 63-3029(3)(a)(i).

[11] See Loughead, supra note 2 (stating that Delaware, Indiana, Montana, Nebraska, New Jersey, New York, Oklahoma, and Rhode Island require estimated state income tax payments).

[12] FAQ Articles, N.D. Tax, https://www.nd.gov/tax/faqs/articles/412-/ (last visited Sept. 16, 2020).

[13] Guidance for Individuals Temporarily Living and Working Remotely in Vermont, Vt. Dep’t of Taxes, https://tax.vermont.gov/coronavirus#temporarily (last visited Sept. 16, 2020).

[14] For example, assume an individual taxpayer normally lives in New York, but works in Massachusetts and has a taxable income of $100,000. In a normal year, the taxpayer will pay $5,050 (calculated using the 5.05 percent Massachusetts individual income tax rate) in tax to Massachusetts. Thus, the taxpayer will be able to claim a $5,050 credit for taxes paid to another state on their New York return, reducing the amount of taxes owed to New York. Now, assume that because of a stay-at-home order, the taxpayer works at home for 75 percent of the year, and only 25 percent of its income will be allocated to Massachusetts. Then, the taxpayer will only receive a $1,262.5 credit on their New York tax return, causing the taxpayer to underpay their taxes substantially unless a withholding change is made. If no change is made, the taxpayer may incur penalties. See 2019 Personal Income Tax Rates, Mass. Dep’t of Revenue, https://www.mass.gov/info-details/major-2019-tax-changes#2019-personal-income-tax-rates- (last visited Sept. 16, 2020) (providing Massachusetts state income tax rates); Who Must Make Estimated Tax Payments?, N.Y. State Dep’t of Tax’n & Fin. (Aug. 5, 2020), https://www.tax.ny.gov/pit/estimated_tax/who_must_make.htm.

[15] State Apportionment of Corporate Income, Fed’n of Tax Adm’rs (Feb. 2020), https://www.taxadmin.org/assets/docs/Research/Rates/apport.pdf.

[16] Id.

[17] Id.

[18] See Frequently Asked Questions About the Income Tax Changes Due to the COVID-19 National Emergency, Neb. Dep’t of Revenue, https://revenue.nebraska.gov/businesses/frequently-asked-questions-about-income-tax-changes-due-covid-19-national-emergency (last visited Sept. 16, 2020).

[19] See id.

[20] See Coronavirus, supra note 5.

[21] Texas: Franchise Tax, Economic Nexus Rule is Finalized, KPMG (Dec. 20, 2019), https://assets.kpmg/content/dam/kpmg/us/pdf/2019/12/19611.pdf

[22] 34 Tex. Admin. Code § 3.586(f).

[23] Id. § 3.586(d)(5).

[24] Out of State Business Reporting Thresholds and Nexus, Wash. State Dep’t of Revenue (Apr. 2020), https://dor.wa.gov/education/industry-guides/out-state-businesses#:~:text=1%2C%202020%2C%20a%20business%20must,sourced%20or%20attributed%20to%20Washington (last visited Sept. 16, 2020).

[25] Wash. Admin. Code § 458-20-193(102)(a)(ii) (stating that even the “slightest presence” of a single employee may trigger the physical presence nexus).

[26] Stephen Miller, Out-of-State Remote Work Creates Tax Headaches for Employers, SHRM (June 16, 2020), https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/out-of-state-remote-work-creates-tax-headaches.aspx.

[27] Out-of-State Employers with Employees Living in Idaho, Idaho State & Fed. Res. for Bus. (July 30, 2020), https://business.idaho.gov/out-of-state-employers-with-employees-living-in-idaho/.

[28] Occupations Exempted from Unemployment Insurance Coverage, Wash. State Emp. Sec. Dep’t https://esdorchardstorage.blob.core.windows.net/esdwa/Default/ESDWAGOV/employer-Taxes/ESD-exempt-professions-chart.pdf (last visited Sept. 16, 2020).

[29] States Grappling with Hit to Tax Collections, Ctr. on Budget and Pol’y Priorities (Aug. 24, 2020), https://www.cbpp.org/sites/default/files/atoms/files/4-2-20sfp.pdf.

[30] See Coronavirus, supra note 5.

[31] Why Remote, supra note 1.

By Agustin Martinez

Across the globe, the COVID-19 pandemic has devastated many lives,[1] including those of immigrants living in the United States.[2]  U.S. Citizenship and Immigration Services (“USCIS”) recently announced that it “will neither consider testing, treatment, nor preventative care (including vaccines, if a vaccine becomes available) related to COVID-19 as part of a public charge inadmissibility determination . . . even if such treatment is provided or paid for by one or more public benefits” as defined by the new public charge rule.[3]  USCIS’s announcement came days after several congressional leaders asked the Trump Administration to rescind the new public charge rule altogether, in light of the rule’s chilling effect on immigrants seeking COVID-19-related medical assistance.[4]

USCIS’s announcement clarified that obtaining COVID-19-related testing and treatment will not factor into a future public charge analysis, even if such testing or treatment is publicly-funded.  But what about the payments that millions of Americans will receive as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was recently signed into law by President Trump?[5]  Some immigrants, for example, recipients of Deferred Action for Childhood Arrivals, are expected to receive CARES Act payments.[6]  Will accepting these federally-funded payments negatively affect these immigrants’ chances of obtaining lawful permanent resident status (i.e., a green card) in the future as a result of the new public charge rule?  Although USCIS has not yet directly answered this question,[7] the answer is “no” based on existing law.  Immigrants who are eligible for CARES Act payments should rest assured that receiving this economic relief will not negatively impact any public charge determination in the future.[8]   

Under American immigration law, a person deemed likely to become a public charge is inadmissible, meaning that the person can be denied a green card, visa, or admission into the country.[9]  The new public charge rule does not change this basic principle.[10]  But it does significantly expand the types of publicly-funded programs that USCIS may take into account when assessing whether a person is likely to become a public charge in the future.[11]  Consequently, the new rule may cause immigrants who are eligible for CARES Act payments to think twice before accepting these publicly-funded payments.

The new public charge rule’s definitions[12] and USCIS’s policy manual[13] help answer whether an immigrant’s acceptance of a CARES Act payment will, in turn, be deemed acceptance of a public benefit as defined by the new rule.  Under this regulatory guidance, CARES Act payments are not public benefits, and therefore, USCIS should not consider acceptance of such payments during future public charge determinations.

The new public charge rule generally defines a public benefit as “[a]ny Federal, State, local, or tribal cash assistance for income maintenance (other than tax credits),” “Supplemental Nutrition Assistance Program (SNAP),” “Section 8 Housing Assistance under the Housing Choice Voucher Program,” “Section 8 Project-Based Rental Assistance,” “Medicaid,” or “Public Housing under section 9 of the U.S. Housing Act of 1937.”[14]  At first glance, it would seem that CARES Act payments fall within the “Federal, State, local, or tribal cash assistance for income maintenance” public benefit category.  That, however, would be an incorrect interpretation of the new rule for the simple reason that CARES Act payments are considered tax credits under the Act.[15]  Indeed, Congress specifically referred to these payments as tax credits within the CARES Act’s text.[16]  Thus, since the new public charge rule expressly excludes “tax credits” from its definition of public benefit, a CARES Act payment is not a public benefit as defined by the rule.[17]

USCIS also confirms, in its policy manual, that tax credits are not public benefits under the new rule.[18]  The agency further explains that “[c]ash emergency disaster relief – Stafford Act disaster assistance including financial assistance provided to persons and households under the Federal Emergency Management Agency’s Individuals and Households Program and any comparable disaster assistance provided by State, local, or tribal governments” does not mean “cash assistance for income maintenance”[19]  This “cash emergency disaster relief” carveout, along with USCIS’s decision to exclude COVID-19-related testing and treatment from future public charge determinations,[20] likely means that the agency will not interpret CARES Act payments as public benefits.

But even if a CARES Act payment was erroneously deemed a public benefit in an individual case, it is highly unlikely that the payment, alone, would result in the recipient being deemed a public charge.  That is because public charge determinations are, by law, forward-looking and based on the totality of the immigrant’s circumstances.[21]  It would be quite surprising—not to mention, inconsistent with both the Immigration and Nationality Act and the CARES Act—for a one-time payment, authorized by Congress to provide assistance in the midst of a global pandemic, to negatively impact a person’s green card eligibility in the future. To remove any chilling effect[22] and alleviate fear in the immigrant population, USCIS should confirm, like it did for COVID-19-related testing and treatment, that CARES Act payments are not public benefits as defined by the new public charge rule.  Even without this additional guidance, however, the law is clear that there should be no public charge repercussions when eligible immigrants receive CARES Act payments.

[1]  See Ed Yong, How the Pandemic Will End, Atlantic (Mar. 25, 2020), https://www.theatlantic.com/health/archive/2020/03/how-will-coronavirus-end/608719/.

[2]  See Miriam Jordan, ‘We’re Petrified’: Immigrants Afraid to Seek Medical Care for Coronavirus, N.Y. Times (Mar. 18, 2020), https://www.nytimes.com/2020/03/18/us/coronavirus-immigrants.html.

[3]  Public Charge, U.S. Citizenship & Servs. [hereinafter Public Charge] (emphasis added), https://www.uscis.gov/greencard/public-charge (last visited Apr. 4, 2020).  There are actually two new public charge rules.  One, which was promulgated by the Department of Homeland Security (“DHS”), applies to cases adjudicated by USCIS.  Public Charge, Immigrant Legal Res. Ctr. [hereinafter Immigrant Legal Res. Ctr.], https://www.ilrc.org/public-charge (last visited Apr. 4, 2020).  The other, which was promulgated by the Department of State (“DOS”), applies to cases involving individuals who go through a process outside the United States, at a consulate or embassy, to obtain lawful permanent resident status.  Id.  This article refers to a single “new public charge rule,” since both the DHS rule and the DOS rule are virtually identical.  Id.

[4]  Press Release, Torres: As USCIS Ends Public Charge Rule for Coronavirus Cases, Every American is Safer, Congresswoman Norma Torres (Mar. 16, 2020), https://torres.house.gov/media-center/press-releases/torres-uscis-ends-public-charge-rule-coronavirus-cases-every-american

[5]  See Tara Siegel Bernard & Ron Lieber, F.A.Q. on Stimulus Checks, Unemployment and the Coronavirus Plan, N.Y. Times (Apr. 3, 2020), https://www.nytimes.com/article/coronavirus-stimulus-package-questions-answers.html.  These cash payments are known by different names, including “economic impact payments,” “recovery rebates,” and “stimulus checks.”  Libby Kane & Tanza Loudenback, Everything We Know About the Coronavirus Stimulus Checks that Will Pay Many Americans Up to $1,200 Each, Bus. Insider (Apr. 3, 2020), https://www.businessinsider.com/personal-finance/coronavirus-stimulus-check-questions-answers-2020-4.

[6]  See Understanding the Impact of Key Provisions of COVID-19 Relief Bills on Immigrant Communities, Nat’l Immigration Law Ctr. 12 (Apr. 1, 2020) [hereinafter Understanding the Impact of Key Provisions], https://www.nilc.org/wp-content/uploads/2020/04/COVID19-relief-bills-understanding-key-provisions.pdf?fbclid=IwAR2yiNB-kyhr-33bQTVp7YcdNBZ4LeBbia6JUIzbGOhf6d1jJYY9Rzgjs_c (explaining the eligibility requirements for CARES Act payments, which include having a valid social security number); see also Monique O. Madan, Millions of Immigrant Families Won’t Get Coronavirus Stimulus Checks, Experts Say, Miami Herald (Mar. 26, 2020), https://www.miamiherald.com/news/local/immigration/article241531211.html (“Deferred Action for Childhood Arrivals (DACA) and Temporary Protected Status (TPS) holders would be able to qualify for the money because they are issued Social Security numbers.”).

[7]  See Public Charge, supra note 3 (explaining USCIS’s position as to COVID-19-related testing and treatment, but not CARES Act payments).

[8]  The question of which immigrants are eligible for CARES Act payments is beyond the scope of this article, but the sources cited supra note 6 provide some guidance on this question.

[9]  See 8 U.S.C. § 1182(a)(4)(A) (2018) (“Any alien who, in the opinion of the consular officer at the time of application for a visa, or in the opinion of the Attorney General at the time of application for admission or adjustment of status, is likely at any time to become a public charge is inadmissible.”); 8 C.F.R. § 212.21(a) (2019) (“Public charge means an alien who receives one or more public benefits, as defined in paragraph (b) of this section, for more than 12 months in the aggregate within any 36-month period (such that, for instance, receipt of two benefits in one month counts as two months).”); Immigrant Legal Res. Ctr., supra note 3 (“[Immigration] law says that those who are viewed as likely to become dependent on the government in the future as a ‘public charge’ are inadmissible.”).

[10]  See Immigrant Legal Res. Ctr., supra note 3 (providing basic background of public charge law before the new rule was implemented).

[11]  See 8 C.F.R. § 212.21(b) (listing the benefits that are considered “public benefits” for purposes of the new public charge rule); Immigrant Legal Res. Ctr., supra note 3 (“The rules expand the list of publicly-funded programs that immigration officers may consider when deciding whether someone is likely to become a public charge. Under the new rules, federally-funded Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), Section 8 housing assistance and federally subsidized housing will be used as evidence that a green card or visa applicant is inadmissible under the public charge ground.”).

[12]  8 C.F.R. § 212.21.

[13]  Chapter 10 – Public Benefits, U.S. Citizenship and Servs. [hereinafter Chapter 10 – Public Benefits], https://www.uscis.gov/policy-manual/volume-8-part-g-chapter-10 (last visited Apr. 4, 2020).

[14]  8 C.F.R. § 212.21(b)(1)–(6) (emphasis added).

[15]  See Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Con. § 2201 (2020) (providing that the Internal Revenue Code will be amended to state that “[i]n the case of an eligible individual, there shall be allowed as a credit against the tax imposed by subtitle A for the first taxable year beginning in 2020 an amount equal to the sum of—(1) $1,200 ($2,400 in the case of eligible individuals filing a joint return), plus (2) an amount equal to the product of $500 multiplied by the number of qualifying children (within the meaning of section 24(c)) of the taxpayer”) (emphasis added); see also Kane & Loudenback, supra note 5 (“The payment . . . is technically an advance tax credit meant to offset your 2020 federal income taxes.”) (emphasis added).

[16]  See H.R. 748 § 2201.

[17]  8 C.F.R. § 212.21(b)(1).

[18]  Chapter 10 – Public Benefits, supra note 13 (“Other benefits not considered public benefits in the public charge inadmissibility determination include, but are not limited to . . . Tax Credits . . . .”) (emphasis added).

[19]  Id. (footnote omitted).

[20]  Public Charge, supra note 3.

[21]  See 8 C.F.R. § 212.22(a) (“The determination of an alien’s likelihood of becoming a public charge at any time in the future must be based on the totality of the alien’s circumstances by weighing all factors that are relevant to whether the alien is more likely than not at any time in the future to receive one or more public benefits, as defined in 8 CFR 212.21(b), for more than 12 months in the aggregate within any 36–month period (such that, for instance, receipt of two benefits in one month counts as two months).”).

[22]  See Jordan, supra note 2.

8 Wake Forest L. Rev. Online 57

Rebecca Morrow*

I. Introduction

In early January 2018, I emailed my incoming Federal Income Tax students to welcome them to the course and tell them how to buy the outdated textbook. “What an exciting time to be taking Tax!” I wrote. I was excited, too—if you count being nauseous.

The spring 2018 class started just three weeks after President Trump signed the Tax Cuts and Jobs Act (“TCJA”) in to law. Prior to the TCJA, we had called the Tax Code “the Internal Revenue Code of 1986, as amended.” This reference made sense because the Reagan-led tax reform of 1986—a reform that followed years of deliberation and expert input, was partially bi-partisan, and centered on a guiding principle of broadening the tax base while lowering tax rates[1]—was so extensive that later changes to tax law were seen as mere amendments to the 1986 reform. After the TCJA, it wasn’t even clear whether we would still refer to the Code that way.

II. Rush Shipping of an Unwanted Christmas Present

Like the 1986 reform, the TCJA was sweeping. Unlike the 1986 reform, it followed a rushed and often closed process, passed via a party-line vote in the House[2] and Senate,[3] and was not anchored to a guiding principle.[4] At one point, Paul Ryan argued that the TCJA aimed to promote “traditional” families and increase the birth rate.[5] Where’d that come from? A goal of lowering taxes certainly motivated the TCJA.[6] But then a slew of apparently competing goals led to a slew of unrelated and sometimes competing changes.[7] Many opponents have levied substantive criticisms at the TCJA because of its rushed process, partisanship, and lack of a guiding principle.[8] For purposes of this reflection, these features simply made it more difficult to make sense of the new law quickly. Law professors had little time to learn the new law in advance of it being passed. Legislative history explaining the new provisions was sparse. And the lack of a guiding principle meant that we had to read the new law without a frame for interpretation. Lawyers and accountants of course faced the same challenges, as did taxpayers. The TCJA was a radical change, and we were missing some tools (lead time, legislative history, and guiding principles) that had helped make sense of the 1986 reform.[9]

However, now that several months, and even a summer, has passed, I can see that teaching tax in a semester that began less than a month after the TCJA passed had some huge advantages from a pedagogical perspective. The main purpose of this article is to reflect on those advantages.

III. It Was Just Us and the Statute

First, my primary objective in Federal Income Tax is to teach students to read the Code. In my syllabus, I ask students to “make friends with the Tax Code,” explaining that “while treatises, textbooks, cases, and other sources can be helpful . . . [t]o understand federal income tax and keep up with changes in tax law, students must become comfortable reading the Tax Code.” The Tax Code is popularly viewed as incomprehensible gobbledygook. However, as I assert to students, “while the Tax Code can be dense and detailed, it is also precise and often logical.” Teaching students to rely on the Tax Code as a primary authority is difficult for the same reason that it is important. Second and third year law students—the students who are eligible to take Federal Income Tax—are often quite good at making sense of case law, making sense of textbooks, and applying both to factual scenarios. Their first-year classes taught them these skills. However, first year classes—and law school generally—teaches too little about how to read statutes. Criminal lawyers, immigration lawyers, family law lawyers and others primarily work in statutes. Thus, the most important job of my class is to teach students how to read, interpret, and apply the complicated statute that is the Tax Code.

Reading statutes is different. Statutes cannot be skimmed. When a statute says, “for purposes of this Title,” it means something very different from “for purposes of this section.” Statutes require attention to cross references that are often as sparse as “for purposes of paragraphs (1) and (2) of subsection (a).” Statutes require attention to structure. Paragraphs are parts of subsections. Thus, a student reading paragraph (2) needs to realize that she is reading (h)(2), meaning that any limiting language in (h) will also apply to (2). And most importantly, statutes require that readers follow the first rule of statutory interpretation, “keep reading.”

Since I have always viewed Federal Income Tax as a unique opportunity to teach students statutory interpretation skills, and since I aim to test what I teach, in past semesters I have told students in advance that the final exam may require them to interpret a Code provision that they have never encountered before. They must apply their statutory interpretation skills in a new context. I consider this approach fair game—transfer of learning, in pedagogical terms—but the timed nature of an exam limits how extensively I can use it. Post TCJA, the approach of using unfamiliar Code provisions was unnecessary. Students had no choice but to develop and repeatedly practice statutory interpretation skills and to demonstrate those skills on the final. There was no E&E, no model answers, no Nutshell—in other words, no legal Cliff’s Notes for tax that incorporated the TCJA. Indeed, students knew that the TCJA had changed tax so extensively that secondary sources and already-written outlines would be of little help. Their only choice (and mine) was to rely primarily, and overwhelmingly, on the Code itself.

IV. The First Rule of Statutory Interpretation is Keep Reading

As for the first rule of statutory interpretation, “keep reading,” the TCJA hit this home. In prior semesters, I would use an example like section 165 to show that the Tax Code often states a general rule like the rule of 165(a) that losses are deductible as though it is absolute, but then includes a later provision to turn that general rule nearly on its head. Section 165(c), for example, provides that for an individual, losses are deductible only if they are trade or business losses, investment losses, or casualty or theft losses. Losses in value on the cars taxpayers use to commute, homes taxpayers live in, and jewelry taxpayers wear are nondeductible despite the broad language of 165(a). As I explain, the Code often states a general rule as though it is absolute and has a later provision that nearly turns the general rule on its head because many Code provisions apply to many types of taxpayers. Section 165(c)’s loss disallowance nearly reverses 165(a)’s loss allowance “for an individual.” For a corporation, which also uses section 165, section 165(c) does not apply and the 165(a) general loss allowance rule does more work.

The TCJA is written into the Code in a way that hits home the necessity that students “keep reading.” As a general matter, the TCJA’s provisions are not subsection (a) of their relevant sections. They are 1(j) (imposing new rates that cap at 37%) and 67(g) (eliminating miscellaneous itemized deductions) and 68(f) (providing that section 68’s limitation on itemized deductions, the so-called Pease limitation, is eliminated) and 151(d)(5) (noting that the personal exemptions detailed in 151 do not, in fact, exist). The TCJA hides out in subsections like (j), (g), (f), and (d)(5) for a very important reason. The TCJA is not a new, permanent law with respect to individual taxpayers. Instead, the overwhelming majority of the TCJA’s provisions for individual taxpayers apply “[i]n the case of a taxable year beginning after December 31, 2017, and before January 1, 2026.” The pre-TCJA provisions still live in the Code because they will, by operation of law, automatically apply again in tax years beginning 2026. Now, to be fair, it is unlikely that the pre-TCJA Code will spring back in full force and effect in 2026. There are many years between now and 2026 for those provisions-in-waiting to be amended. Taxpayers will grow accustomed to the benefits that they have received under the TCJA and demand that many of those benefits be made permanent. The more accurate reason that the pre-TCJA provisions live in the Code is that the proponents of the TCJA had to pretend that those provisions would spring back into full force and effect in tax years beginning 2026[10] in order to achieve the budget numbers they needed to make the TCJA an act that could be passed with only 51 Senate votes.[11] Because the TCJA does not add to the federal deficit outside of a ten-year budget window, it complies with the Byrd Rule[12] and qualifies as a reconciliation bill. Thus, passing the TCJA “require[d] only a simple majority to pass, debate time in the Senate [was] limited, amendments [were restricted], the bill [could] not be filibustered, and final passage require[d] a simple majority.”[13]

V. The Best Teacher is a Student

Finally, teaching Federal Income Tax weeks after the TCJA passed was humbling. I spent hours trying to distinguish between drafting errors and simply unfortunate or frustrating features of the new Code.[14] It is good to be reminded of the difficulty of a subject while teaching it. This reminder encourages a desirable and a deserved empathy with students. It improves the ability to identify which concepts are difficult and require slow, clear coverage and opportunities for repetition. While teaching Federal Income Tax post-TCJA, I was simultaneously learning a great deal.

VI. Marketability High and Increasing

In addition to offering pedagogical advantages, the TCJA made my class even more valuable for students anticipating the job market. Tax professors like it when our students decide to pursue careers in tax law. We know that tax lawyers tend to be in demand, protected from economic downturns, highly regarded, and often professionally content.[15] The TCJA only increased the advantages of becoming a tax lawyer, particularly for new lawyers. As corporate tax lawyer, David Miller explains,

It’s really the best time to be a young tax lawyer. . . . First, the new law will create tremendous demand for a young lawyer’s services, and it’s always nice to be appreciated. Second, although I’ve practiced for more than 25 years, I know no more about the new tax law than a first-year associate who has been following it closely. In an instant, they can catch up to my career’s worth of knowledge.[16]

In sum, my first semester teaching Federal Income Tax post-TCJA, revealed considerable pedagogical advantages of the post-TCJA tax law teaching world.

VII. But Pedagogy is not Everything

Unfortunately, pedagogy is not everything. Although I can see the TCJA’s impacts within my classroom as positive, its external impacts are overwhelmingly negative. Tax professors may feel the harms of the TCJA personally. As Parker Palmer describes in The Courage to Teach, we professors “were drawn to a body of knowledge because it shed light on our identity as well as on the world.”[17] Tax law shed light on my identity and my view of the world. Unlike some of my peers in other legal fields, I’ve never been a perfectionist. I admire vast regimes that do a lot of work.[18] I like detail, rigidity, and complex systems. I think of tax, as Sam Donaldson so beautifully described it, as like the human body:

The Code is a carefully crafted work of political compromise. Like all of us, it contains some fat that could be trimmed, an organ or two that could be severed without damage to the body, and maybe some features that are less appealing to look at than others. It also has an inner beauty and an intricate structure that generally works to raise revenues for the many programs that benefit the taxpayers from whom it collects. While there are many exceptions to the basic themes, the Code is generally predictable to one who understands the themes and the political pressures that shape the exceptions.[19]

I lament that the words of the Internal Revenue Code—complicated and imperfect though they may have been—were treated so recklessly by the TCJA. The TCJA seems an ill-considered, prominent, and regrettable tattoo.[20]

And worse than a self-imposed harm to a carefully crafted statute, the TCJA will do real, irreparable damage. It will take one of America’s greatest failings—income inequality—and dramatically exacerbate it.[21] Under the TCJA, owners won and laborers lost;[22] high earners won and low earners lost;[23] and perhaps most significantly, the currently affluent won while the future needy lost.[24] As President Trump declared, the TCJA was not a reform, it was a “cut, cut, cut.”[25] In the end, Spring 2018 was a semester in which the subject that chose me let me down, but the students who chose my class buoyed my optimism for the future.

* Professor of Law, Wake Forest University. I would like to thank Mike Garrigan for encouraging me to write this reflection and for improving its content, Sara Kathryn Mayson for assisting me with research, and my Spring 2018 tax students for making teaching a joy.

  1. See infra note 4. However, at least one important change that reflected the base-broadening approach of the 1986 reform—the elimination of a preferential rate for capital gains—was short lived. By 1990, capital gains were again taxed at preferential rates.
  2. 163 Cong. Rec. H10214 (daily ed. Dec. 19, 2017). Every member of the House of Representatives who voted for the TCJA (227 yea voters) was Republican. Every Democratic member of the House of Representatives voted against the TCJA, as did 12 Republican representatives (typically from blue states) for a total of 203 nay voters.
  3. 163 Cong. Rec. S8141–42 (daily ed. Dec. 19, 2017); Jasmine C. Lee & Sara Simon, How Every Senator Voted on the Tax Bill, N.Y. Times (Dec. 19, 2017), https://www.nytimes.com/interactive/2017/12/19/us/politics/tax-bill-senate-live-vote.html. All 51 Republican Senators voted for the TCJA, except for Senator John McCain, who was undergoing cancer treatment. All 48 Democratic Senators voted against the TCJA.
  4. Angela Morris, Brew a Pot of Coffee, This Big Law Tax Attorney is Burning the Midnight Oil, Law.com (Dec. 20, 2017) (“The biggest difference between the 1986 act and the current tax bills is that the 1986 act was preceded by two years of detailed proposals; the tax policies behind the 1986 proposals were relatively clear; the tax community had the opportunity to comment on the proposals; and Congress was responsive to the comments. The current [TCJA] bills have been drafted in a matter of months; there is no evident tax policy underlying some of the proposals; and Congress has not asked for comments or been responsive to them. As a result of these differences, the current bills will give rise to unexpected consequences—some of which taxpayers will exploit and others of which will create unintended tax liability.”).
  5. Paul Ryan, House Speaker Weekly Briefing, C-Span (Dec. 14, 2017), https://www.c-span.org/video/?438578-1/speaker-ryan-representative-farenthold-made-right-decision-retire (“This is going to be the new economic challenge for America: people. Baby boomers are retiring—I did my part, but we need to have higher birth rates in this country.”); see also PBS NewsHour, What You Need to Know Now That the GOP Tax Bill Is Law, YouTube (Dec. 20, 2017), https://www.youtube.com/watch?v=E0DVS_GwKxw (observing that the TCJA “actually does a great deal for traditional families” following Speaker Paul Ryan’s position that child birth rates need to increase in the U.S.).
  6. See Tara Palmeri, ‘The Cut Cut Cut Act’: Trump, Hill Leaders Differ on Tax Overhaul Bill’s Name, ABC News (Nov. 2, 2017, 9:48 AM) https://abcnews.go.com/Politics/trump-hill-leaders-disagree-upcoming-tax-reform-bill/story?id=50863220 (“President Donald Trump had told senior congressional leaders that he wants to name the bill “the Cut Cut Cut Act . . . .”).
  7. For example, the TCJA introduced a new and complicated deduction to incentivize certain forms of income-seeking, section 199A, while simultaneously eliminating a long-standing and simple deduction that previously incentivized taxpayers to move for higher paying jobs, section 217. See 26 U.S.C.A. § 217(k) (West 2017) (suspending the deduction for moving expenses through 2025). In an apparent effort to simplify tax law, the TCJA eliminated personal exemptions including for taxpayer’s dependents, but then expanded and added complexity to the child tax credits that taxpayers receive for many of the same dependents. See id. § 151(d)(5); id. §24(h). And while the TJCA aimed to dramatically cut taxes across the board, it increased taxes for certain taxpayers by capping the deduction for state and local taxes and changing the rules for the treatment of alimony payments. See id. § 164; id. § 215.
  8. See, e.g., Brian Faler, ‘Holy Crap’: Experts Find Tax Plan Riddled with Glitches, Politico (Dec. 6, 2017, 5:04 AM) https://www.politico.com/story/2017/12/06/tax-plan-glitches-mistakes-republicans-208049 (“‘The more you read, the more you go, “Holy crap, what’s this?”’ said Greg Jenner, a former top tax official in George W. Bush’s Treasury Department. ‘We will be dealing with unintended consequences for months to come because the bill is moving too fast.’ . . . What is unusual is the sheer scope of the legislation now before lawmakers, and the speed with which it’s moving through Congress. . . . That breakneck pace means there hasn’t been much time for feedback from experts outside the Capitol. . . . Some of the fixes could be expensive, potentially throwing lawmakers’ budget numbers out of whack.”).
  9. This is not to say that the 1986 reform was a model tax reform. Many economists fault the 1986 tax reform for increasing income inequality, forcing damaging cuts to government programs, and expanding the deficit.
  10. See Bob Bryan, Here’s Why Senate Republicans are Making Tax Cuts for Average Americans Temporary, Business Insider (Nov. 15, 2017, 12:08 PM) https://www.businessinsider.com/trump-gop-tax-plan-senate-bill-why-individual-tax-cuts-temporary-2017-11 (“Sen. Orrin Hatch, chair of the Senate Finance Committee and author of the bill, has admitted that the original version of the Senate’s TCJA did not meet such a requirement. Making the individual cuts temporary could allow the bill to meet those requirements.”).
  11. Jeff Stein, Republicans explain why their tax cuts are temporary, but not really temporary, Wash. Post: Wonkblog (Nov. 30, 2017), https://www.washingtonpost.com/news/wonk/wp/2017/11/30/republicans-explain-why-their-tax-cuts-are-temporary-but-not-really-temporary/?utm_term=.9aa1287a9d92 (explaining that Republican lawmakers made individual tax cuts temporary so that the TCJA would not “drive up the deficit 10 years after passage,” would therefore comply with the Byrd rule, and could therefore be passed with a simple majority. However even before the temporary cuts were passed, Republican lawmakers expressed their collective intent that these cuts would later be extended, noting that “it would be extremely difficult not to continue” tax cuts for individuals).
  12. 2 U.S.C. § 644 (2012).
  13. Tori Gorman, S. Comm. on the Budget, 114th Cong., Bulletin on Reconciliation Debate, Byrd Rule, 2016 Budget Process (2015), https://www.budget.senate.gov/imo/media/doc/Reconciliation%20BB062315[1].pdf.
  14. One unfortunate feature of the TCJA involves the brackets for various preferred rates applicable to long-term capital gains and qualified dividends. Under prior law, the 0% preferred rate applied whenever ordinary income was taxed at 10% or 15%; the 15% preferred rate applied whenever ordinary income was taxed at 25%, 28%, 33%, or 35%; and the 20% preferred rate applied whenever ordinary income was taxed at 39.6%. Pursuant to the TCJA, the preferred rates now break at points that are $100 or $200 off the breaking points for ordinary income rates. So, for example, an unmarried individual goes from the 0% to 15% preferred rate at $38,600 of taxable income but goes from the 12% to 22% ordinary income rate at $38,700. Compare 26 U.S.C.A. § 1(j)(5)(B)(i)(III) (West 2017) (beginning the 15% preferred rate at over $38,600) with 26 U.S.C.A. § 1(j)(2)(C) (West 2017) (beginning the 22% ordinary income rate at over $38,700). Similar $100 or $200 mismatches appear on the tax rates for all filing statuses and are certainly an unfortunate feature of the new Code that makes teaching it, and understanding it, more difficult without much justification. Another unfortunate feature of the new Code is section 199A, which NYU Tax Law Professor Daniel Shaviro described prior to its passage as the “worst provision ever even to be seriously proposed in the history of the federal income tax.” Daniel Shaviro, Apparently income isn’t just income any more, Start Making Sense (Dec. 16, 2017, 10:30 AM), http://danshaviro.blogspot.com/2017/12/apparently-income-isnt-just-income-any.html.
  15. Linda Galler, Why Do Law Students Want to Become Tax Lawyers?, 68 Tax Law. 305, 309 (2015) (“Given the substantive difficulty of tax law, expertise matters. Therefore, time invested in learning new concepts or techniques can pay dividends over the course of a career. . . . Moreover, tax law is relevant in both good economic times and bad; there are tax issues in mergers and acquisitions, and there are tax issues in bankruptcy and foreclosures. So it is likely that one can make a living over the long haul.”); id. (“[Tax lawyers’] expertise is invaluable to clients and colleagues, when we talk, people listen.”); id. at 310 (“Recent studies of the relative levels of contentment of lawyers in many areas of practice confirm . . . that tax lawyers are likely to be at the top.”).
  16. Morris, supra note 4.
  17. Parker J. Palmer, The Courage To Teach: Exploring the Inner Landscape of a Teacher’s Life 26 (10th Anniversary ed. 2007).
  18. Organizations like federal, state, and local governments and broad exempt organizations like the Bill & Melinda Gates Foundation and the United Way that do the hard work of balancing competing demands rather than the easier work of advancing single policy goals. See What We Do, Bill & Melinda Gates Found., https://www.gatesfoundation.org/What-We-Do (last visited Oct. 17, 2018) (advancing causes in five diverse program areas spanning six continents); Our Focus, United Way Worldwide, https://www.unitedway.org/our-impact/focus (last visited Oct. 17, 2018) (focusing philanthropic efforts in three areas: education, income and health).
  19. Samuel A. Donaldson, The Easy Case Against Tax Simplification, 22 Va. Tax Rev. 645, 745–46 (2003).
  20. As wise people often say, nothing good happens after midnight. See, e.g., Phil Mattingly, et al., Senate Approves GOP Tax Plan, House to Revote Wednesday, CNN (Dec. 20, 2017), https://www.cnn.com/2017/12/19/politics/republican-tax-plan-vote (“In a vote in the early Wednesday morning hours, the Senate approved the final version of the first overhaul of the US tax code….”); See also Tim Scott (@SenatorTimScott), Twitter (Dec. 19, 2017, 12:48 AM), https://twitter.com/senatortimscott/status/943357328702824449?lang=en (“Great news! The Senate just passed the Tax Cuts and Jobs Act.”).
  21. Cong. Budget Office, The Distribution of Household Income, 2014, at 31 (2018), https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53597-distribution-household-income-2014.pdf (“The increase in income inequality over the 36-year period examined here largely stems from the significant increase in inequality in market income—labor income, business income, capital income (including realized capital gains), and other nongovernmental sources of income—which has been driven primarily by substantial income growth at the top of the distribution.”).
  22. Annie Nova, New tax law takes a hatchet to these worker expenses, CNBC (Feb. 1, 2018, 2:49 PM) https://www.cnbc.com/2018/02/01/unreimbursed-employee-expenses-could-hurt-taxpayers.html (quoting Seth Harris, a deputy labor secretary under President Barack Obama) (“The really big story of the tax bill is that it favors capital over labor . . . . It’s heavily skewed to benefit people who get money without working, as opposed to those who labor for a living.”).
  23. Tax Policy Center, Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act, at 1 (2017), https://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act/full (“In general, higher income households receive larger average cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th and 99th percentiles of the income distribution. On average, in 2027 taxes would change little for lower- and middle-income groups and decrease for higher-income groups.”).
  24. Joint Comm. on Tax’n, JCX-69-17, Macroeconomic Analysis of the Conference Agreement for H.R. 1, The “Tax Cuts and Jobs Act” at 9 Table 1 (2017) (initially projecting that the TCJA would cause $1.071 trillion less revenue to be collected from 2018-2027). More recent projections are worse. See, e.g., Letter from Keith Hall, Director, Congressional Budget Office to Kevin Brady, Chairman, Committee on Ways and Means, U.S. House of Representatives (Dec. 15, 2017) (https://www.cbo.gov/system/files?file=115th-congress-2017-2018/costestimate/53415-hr1conferenceagreement.pdf) (“According to CBO’s and JCT’s estimates, enacting H.R. 1 [the TCJA] would reduce revenues by about $1,649 billion and decrease outlays by about $194 billion over the period from 2018 to 2027, leading to an increase in the deficit of $1,455 billion over the next 10 years.”). To cover the resulting deficits, future generations will face cuts in government programs, tax increases, or both.
  25. See supra note 6.

Closeup of assorted coins.

By Sarah Walton

On January 8, 2016, the Fourth Circuit issued a published opinion in the case of Route 231, LLC v. Commissioner of Internal Revenue. The Fourth Circuit affirmed the tax court’s holding that Route 231 should have classified a portion of its capital contributions as gross income.

The IRS Concludes that Route 231 Misclassified a Portion of its Capital Contributions

Route 231, LLC (“Route 231”) is a limited liability company incorporated in Virginia. In 2005, Route 231 reported $8,416,000 in capital contributions on its tax return. Part of this sum included $3,816,000 in tax credits (the “tax credit”) from Virginia Conservation Tax Credit FD LLLP (“Virginia Conservation”), which had recently acquired a one percent membership interest in Route 231. This tax credit originated from a transaction in which Route 231 donated some of its land for conservation purposes.

The IRS audited Route 231 and concluded that it should have classified the $3,816,000 as gross income. Route 231 disputed the determination at the United States Tax Court, arguing that it was a capital contribution. The Tax Court disagreed, holding that the $3,816,000 was considered “property” under I.R.C. § 707. The court reasoned that under I.R.C. § 707, this transaction should have been classified as a “disguised sale,” which is reported as gross income. Route 231 appealed the Tax Court’s judgment.

The Fourth Circuit Rejects Route 231’s Argument that the Transaction Was Properly Classified as a Capital Contribution

On appeal, Route 231 argued that the transaction was a non-taxable capital contribution because it allocated part of the partnership’s assets to Virginia Conservation. The Fourth Circuit started its analysis by describing the tax benefits that a corporation receives when it makes a contribution to a partnership’s capital, as opposed to a sale of assets. Sales of assets are taxable, whereas contributions to a partnership’s capital are tax-free. Thus, companies cannot classify a transaction as a capital contribution when the substance of the exchange would otherwise make it taxable. Further, 26 C.F.R. § 1.707-3 provides examples of instances in which transactions could be considered “sales,” and therefore taxable, rather than capital contributions. The regulation prescribes one of these instances as when “the transfer of money or other consideration by the partnership to the partner is disproportionately large in relationship to the partner’s general and continuing interest in partnership profits.”

Ultimately, the Fourth Circuit rejected Route 231’s argument. The court reasoned that Route 231’s operating agreement with Virginia Conservation directly addressed a money transfer and therefore constituted a sale. Further, the court also reasoned that Virginia Conservation had a one percent interest in the company, yet received ninety-seven percent of Route 231’s tax credits for this particular entry. As a result, this transaction should have been classified as gross income, which is taxable.

The Fourth Circuit Rejects Route 231’s Argument that the $3,816,000  Should Have Been Reported as Income in 2006

Route 231 also argued that even if the transaction should have been reported as gross income, this income should have been reported in 2006. The Fourth Circuit reasoned that the income should have been reported in 2005 because the transaction occurred in 2005. Further, because Route 231 already asserted in its 2005 return that the transaction applied to that tax year, it could not argue that the income should have been reported during a different tax year. As a result, the Fourth Circuit rejected this argument.

The Fourth Circuit Affirms the Tax Court’s Holding

The Fourth Circuit affirmed the tax court’s decision, holding that the transaction should have been classified as “gross income” on Route 231’s 2005 tax return.



By: Lauren Durr Emery

In Susquehanna Bank v. United States of America/ Internal Revenue Service, the Fourth Circuit examined competing claims from Susquehanna Bank  and the Internal Revenue Service (IRS) to a company’s assets following its filing of Chapter 11 bankruptcy.

On September 20, 2004, the IRS assessed tax deficiencies in excess of $60,000 from Restivo Auto Body, Inc. (Restivo) for unpaid employment taxes.  However, the IRS did not file a lien until January 10, 2005.  On January 4, 2005, Restivo borrowed $1 million from Susquehanna Bank secured by a deed of trust for two parcels of property.  Susquehanna Bank did not record the deed until February 11, 2005.    In April of 2011, Restivo filed for Chapter 11 bankruptcy and Susquehanna sought a declaratory judgment from the court that its security interest had priority over the tax lien filed by the IRS.

Though federal law governs federal tax liens, 26 U.S.C. §6323(h)(1)(A) gives an IRS tax lien only those protections that local law would afford  to “a subsequent judgment lien arising out of an unsecured obligation.”  Thus, the court had to examine Maryland law to see if any of its provisions gave the bank priority in those circumstances.

Does a bank’s security interest in a parcel of land have priority over a federal tax lien if it was secured by a deed of trust executed before the lien, but not recorded until after?

The district court found that the security interest held by the bank had priority over the federal tax lien for two reasons.  First, the district court found that Md. Code Ann., Real Prop. § 3-201 allows a deed of trust’s effective date, upon recordation, to be the date when the deed of trust was executed.  In this way, it concluded, that though the deed of trust was recorded on February 11, 2005, the relation-back provision meant it was effective as of January 4, 2005 when the deed was executed.  In this way, Susquehanna’s interest had priority.  Second, the district court found that the bank’s security interest would have taken priority even if the deed had never been recorded based on Maryland’s doctrine of equitable conversion.  This doctrine entitles the holder of a deed of trust to the same protections as a bona fide purchaser, who takes title free and clear of all subsequent liens regardless of recordation.”

Fourth Circuit says Maryland’s relation-back provision does not give Susquehanna Bank priority over IRS

The Fourth Circuit held that the district court erred in its application of the relation-back provision in Md. Code Ann., Real Prop. § 3-201.  It reasoned that the deed was only subject to the relation-back protections after it had been recorded.  Thus, since the deed was not recorded until February 11, 2005, it did not yet relate back by when the IRS had filed its tax lien on January 10, 2005.

Fourth Circuit finds Susquehanna Bank does have priority over the IRS tax lien as a result of equitable conversion

Under Maryland’s doctrine of equitable conversion, when lenders, like Susquehanna Bank, receive a conditional deed to secure repayment of its loan, it receives the same protections as a bona fide purchaser for value.  In contrast, the IRS is treated as a judgment creditor and its claim is “subject to prior, undisclosed equities” and “must stand or fall by the real and not apparent rights of the defendant in the judgment.”  Thus, upon the execution of the deed of trust on January 4, 2005, Susquehanna Bank secured an interest in the property which precedes the IRS tax lien of January 10, 2005.

Dissent: Susquehanna Bank’s interest is not protected by equitable conversion

In Judge Wynn’s dissent, he argues that Restivo never had an unencumbered title which it could convey to Susquehanna Bank.  Instead, he states that the federal tax lien arose at the time of the original assessment on September 20, 2004.  Judge Wynn explains that this is a tax lien, rather than a judgment lien as the majority argues, and thus is governed solely by federal law.  Thus, this lien did not need to be filed or recorded in order to have priority.  Instead, he argues that the case should be governed by the principle “first in time is first in right.”

By: Edward Lee*

The Copyright Act of 1976 is nearing its fourth decade of existence.[1]  By historical standards, that longevity puts the 1976 Act “on the clock” for a major revision in the near future.  Indeed, given the incredible advances in digital technologies and the Internet—all of which were unforeseen by Congress back in 1976—the need for a major revision and modernization of copyright law may already be upon us.[2]

This time around, however, Congress faces a challenge it has never faced before.  In none of the five previous copyright acts did Congress have international treaty obligations effectively limiting the alternatives available for reform.[3]  The Berne Convention and the TRIPS Agreement—which the United States joined in 1989 and 2004, respectively—set forth numerous minimum standards of copyright law and restrict the scope of permissible copyright exceptions.[4]  Although these agreements do allow some flexibility for countries to shape their own copyright laws in some respects, in other areas the requirements are more fixed.[5]  A number of basic features of copyright law—a set of required exclusive rights including rights for derivative works, a ban on formalities for foreign works, and a term that lasts at least the life of the author plus fifty years—are now all set in Berne stone.[6]  TRIPS adds to the calcification of copyright by imposing additional requirements on countries.[7]

Of course, one way of dealing with the international copyright treaties would be to modernize them as well.  Indeed, some of the provisions of the Berne Convention, which date back to the early 1900s, if not earlier, may need modernizing more than the U.S. Copyright Act.[8]  Amending international copyright treaties, however, requires agreement by a consensus or the unanimity of member countries.[9]  Getting consensus among World Trade Organization (“WTO”) countries about a major copyright revision—such as abandoning some of the outdated Berne features—would be difficult, to say the least.  No doubt it would be more difficult than getting a simple majority of Congress to enact a revision of U.S. copyright law.

Thus, at least in the short-term, Congress may be better off exploring options for reforming copyright law within the current TRIPS/Berne framework, while working in the long-term with the Executive Branch and U.S. Trade Representative to modernize international IP agreements.  That way, the United States can begin to modernize its copyright law instead of waiting for consensus among WTO and Berne countries on copyright reform.  The downside, however, is that many U.S. reform proposals may face the same stumbling block: the Berne Convention and TRIPS Agreement may restrict, if not preclude, many copyright reforms in domestic law.  “Can’t do it because it’s a Berne violation” has become an all-too-common refrain to torpedo numerous ideas for improving or modernizing our copyright system.[10]  Because of these international requirements, the ability of WTO countries to enact new, innovative approaches to copyright law is circumscribed.

To deal with this problem, this Article offers a new alternative for copyright reform: tax law.  I call this approach the “tax fix” for copyright law, in that tax law is used to fix problems or inefficiencies in our copyright system.  Using the tax system as a way to modernize our copyright system offers several advantages.  Most important, tax law can fix problems in our copyright system without violating the Berne Convention or TRIPS Agreement, and without requiring amendment to either treaty.  Tax law can also be used to incentivize the copyright industries to adopt new, innovative approaches to copyright in ways that voluntary reforms like Creative Commons cannot.  The tax fix has the added benefit of offering, beyond the “one size fits all” approach, greater tailoring of copyrights by both industries and individuals—which may, in turn, lead to greater efficiency.

Part I discusses the need for a major revision of copyright law in the twenty-first century.  Past historical practice and new technological changes both suggest a major revision of copyright law is due.  Yet two major obstacles—political stalemate and international treaty obligations—dim the prospect for achieving the necessary modernization of copyright law.

Part II introduces the concept of the tax fix for copyright law and shows its possible advantages.  Tax is one method that is given a great deal of consideration in other areas where incentives are important, but, surprisingly, is discussed hardly at all in copyright law.  The tax fix is not a panacea for the inefficiencies and obsolescence in our copyright system.  Nor is it meant as the sole method of modernizing copyright law.  Instead, the tax fix is offered as another possible tool in the toolbox of options for Congress to modernize the copyright system.

Part III explains how the tax fix can address inefficiencies within our copyright system.  Two types of tax fixes are offered: (1) a “copyright gains” tax, which establishes a preferential tax rate for income derived from certain socially beneficial initiatives related to copyrighted works, and (2) a copyright tax credit that grants a credit for such initiatives.  For illustrative purposes, this Article shows how tax law can be used to reduce the problem and inefficiencies created by orphan works and the lack of copyright registration, lengthy copyright terms, and the lack of clear copyright exemptions.  It also illustrates how tax law can be used to help address the problem of spiraling costs of textbooks in schools.  Although the solutions offered by the tax fix are not perfect, they are second-best alternatives that may give Congress a more flexible way to address some of the inefficiencies of our copyright system, without requiring any change in our international treaty obligations.  Part IV addresses possible concerns.

I.  The Copyright Paradox: Modernizing Copyright
Law in the Twenty-First Century

This Part discusses the paradox copyright law faces today: a major revision to the Copyright Act of 1976 is needed more than ever, but it is even harder to achieve such reform today.  This paradox will plague Congress’s efforts to enact a major copyright revision that can deal with the advances in technology of the twenty-first century.

A.     Need for Copyright Reform

1.     Historical Practice: The Forty-Year Cycle of Revision

If historical practice is a guide,[11] then the U.S. copyright system is due for a general revision or major updating.  The Copyright Act has undergone general revisions roughly every forty years,[12] which means that the next revision should be made by 2016.

The pattern of revision is rather striking.  The 1790 Act, the first copyright act in the United States,[13] was replaced by the 1831 Act.[14]  The 1831 Act was replaced by the 1870 Act,[15] which was later replaced by the 1909 Act.[16]  Finally, the 1909 Act was replaced by the current 1976 Act.[17]  Although the 1976 Act took longer than forty years from its predecessor to enact, Congress began studies for copyright reform overseen by the Copyright Office starting in 1955, or forty-six years from the enactment of the 1909 Act.[18]  (In between and after these major revisions, other amendments were enacted to the then-existing Act.)

In each revision, Congress attempted to modernize copyright law to address the changing time period and new types of works and technologies.  From its inception, copyright law has struggled to keep pace with the advances in technology—for example, the printing press, pianola, camera, radio, film, television, VCR, computer, and now the Internet, digital technologies, and social media.  The history of copyright suggests that Congress should begin to study whether a general revision or major updating of the Copyright Act is needed for the twenty-first century.  The last general revision occurred more than thirty-five years ago, long before the incredible advances brought on by the Internet.  As Pamela Samuelson encapsulates, “the 1976 Act was passed with a 1950s/60s mentality built into it, just at a time when computer and communication technology advances were about to raise the most challenging and vexing copyright questions ever encountered.”[19]

2.     Inefficiencies of the Copyright System in the Twenty-First Century

The forty-year lifespan of previous copyright acts tells only half the story.  The more important reason a copyright revision is needed is that the current 1976 Act is showing its age.[20]  It has produced glaring inefficiencies, which have become more pronounced in our digital age.

a.  Notice Externalities and Orphan Works

One clear deficiency is the creation of a copyright system that grants relatively long terms of copyright for all works—for individuals, the life of the author plus seventy years—while allowing those works to go unregistered, meaning there is no public record or registry identifying titles or owners of most copyrighted works.[21]  Currently, copyright registration is required in the United States only to bring a copyright infringement lawsuit for works originating in the United States.[22]  Foreign works are not subject to this requirement because the Berne Convention prohibits the use of formalities by member countries in such instance.[23]  Copyright registration in the United States also entitles the copyright owner to elect possible statutory damages in lieu of actual damages and attorneys’ fees in successful litigation.[24]  However, because so few copyright lawsuits are ever brought,[25] the incentives for registration of U.S. works are modest and are probably more relevant to the major U.S. copyright industries, such as publishing, music, and movies.

The lack of an effective registration system for copyrighted works produces substantial “notice externalities,” to borrow a term coined by Peter Menell and Michael Meurer.[26]  These notice externalities impose huge external costs on the ability of the public to use and license copyrighted works.  Put simply, for many works, there is no way for the public to figure out who owns the copyright.

This combination of lengthy terms and lack of registration contributes to the so-called “orphan works” problem, meaning it is practically impossible for people to locate or identify the copyright holder of many copyrighted works, especially those published decades ago, in order to seek permission to use the works.[27]  Without registration or registry of owners, the works have become effectively “orphaned.”  And, because copyright law still protects these orphan works, people who wish to utilize the works cannot do so out of fear of being sued.[28]

A major reason for the orphan works problem is the lack of an effective copyright registration system—which is ironic with all the modern technology and vast databases we have.  Even with wondrous technologies at our disposal, our copyright system is stuck in the 1908 Berne Convention world of no formalities.[29]  In other areas of property, such as title to land, ownership of a patent, or trademark registration, a public registry facilitates transactions related to a property in the registry by enabling the public to locate the relevant owner.[30]  Because our copyright system lacks a comprehensive database of works under copyright,[31] the public may have no practicable way of locating the relevant owner of a work, particularly if the work was created long ago, such as in the 1920s or 1930s.

Empirical studies have identified an alarming number of orphan works both here and abroad.  In response to the U.S. Copyright Office study, Carnegie Mellon University (“CMU”) conducted a three-year survey of its own collection.  CMU determined that copyright owners could not be located for 22% of the books in its survey.[32]  The percentage of orphan works jumped to over 60% for older works published in the 1920s.[33]  Moreover, even when copyright owners were identified, 36% of them did not reply at all to CMU’s multiple letters.[34]  Cornell University Library faced similar problems and could not locate the copyright owners of 58% of 343 copyrighted monographs in its collection, while spending over $50,000 in staff time dealing with copyright issues.[35]  The Library of Congress estimated in 1993 that 80% of films created before 1929 were orphan works and were at risk of deterioration due to the inability to get permission to preserve the films.[36]  A study in the United Kingdom estimated that UK museums, galleries, and archives may have over 50 million orphan works.[37]  According to a British Library estimate, 40% of all printed works are orphan works, and more than 50% of sound recordings surveyed in its collection are orphan works.[38]

Congress is well aware of the orphan works problem, but, unfortunately, has failed to address it.  In 2006, after a year of studying the issue, the Copyright Office issued its Report on Orphan Works, which recommended that Congress enact a copyright provision to allow good faith users to use an orphan work without a license if they could not find the copyright holder of the orphan work after a reasonably diligent search.[39]  If the copyright holder later appeared, the user would have to pay reasonable compensation to the copyright holder for use of the work.[40]  Both the House and Senate held hearings, and several bills modeled in part on the Copyright Office proposal were entertained.[41]  However, Congress has yet to put any of the bills to a full vote.[42]  Congress’s inaction on the orphan works problem even appeared to draw thinly veiled criticism from the Department of Justice in its objection to the proposed settlement of the Google Book Search case, in which the private parties attempted to solve the orphan works problem on their own by setting up a Book Rights Registry.[43]

b.  Obsolescence in an Age of Digital Technologies

Another deficiency is the 1976 Act’s construction based on a model of printing and analog technologies—a framework that translates poorly with today’s digital technologies, which routinely make copies of works by their operation.[44]  Not surprisingly, the two most substantial studies on copyright reform to date—Samuelson’s Copyright Principles Project in the United States and Ian Hargreaves’s Review in the United Kingdom—both identified the advances in digital technologies as a major reason why reform of copyright laws is needed today.[45]

By their design, digital technologies produce digital copies of material incidental to their operation.  For example, a digital copy of a computer’s operating system is created in random-access memory (“RAM”) every time a person turns on the computer.[46]  Whenever a person views a website, a copy is downloaded onto the computer’s RAM and cache or temporary Internet folder.[47]  In order to access the website, copies of the webpage are transmitted internally through the Internet and an Internet service provider’s lines.[48]  When a person uses Google or another search engine to find a website, the ability to find the website was created by the search engine’s ability to create an index of websites with digital copies stored on the search engine’s servers.[49]  The 1976 Act does not directly address the legality of any of these digital copies but, instead, relegates them to potential infringement claims as a violation of the right to copy.[50]  Courts have struggled to make sense of when the use of digital copies (including ones internal to a machine) should be considered infringing or permissible fair use.[51]  This lack of clarity in the law can chill investment in and development of new digital technologies.[52]

Even when Congress has enacted updates to the 1976 Act to address digital technologies, the results have not been reassuring.  The Digital Performance Right in Sound Recordings Act of 1995 (“DPRA”) is, put charitably, a complete failure in legislative drafting.  As David Nimmer put it, “[T]his amendment was by far the worst thing that had happened to date to copyright law. . . . The DPRA is a masterpiece of incoherence.”[53]  DPRA recognized a right of digital public performance for sound recordings (relevant to webcasting of music) and amended § 114 to define limitations of that right.[54]  Yet the provisions defining those limitations are, to borrow the then-Register of Copyrights Marybeth Peters’s assessment, “utterly incomprehensible to most people.”[55]

The safe harbors afforded to Internet service providers (“ISPs”) under the Digital Millennium Copyright Act of 1998 (“DMCA”) have done a better job of modernizing copyright law.  The DMCA safe harbors provide ISPs immunity from copyright liability if they meet certain requirements, such as complying with the “notice-and-takedown” requirement for allegedly infringing material stored by their users on their servers.[56]  The notice-and-takedown procedure—although not without its abuses and deficiencies[57]—has provided a decent way to divide the burdens of monitoring possible copyright infringement online.[58]  Yet, even with their successes, the DMCA safe harbors have not kept up with advances in technology.  Drafted in 1998, the DMCA safe harbors did not anticipate social media and Web 2.0 technologies that encourage user sharing of and interactivity with material on the Internet.[59]  The billion-dollar lawsuit against YouTube, now on appeal, is a byproduct of the lack of clarity in the DMCA safe harbors’ application to new technologies.[60]

The many complex issues of copyright law raised by digital technologies demand a more comprehensive and coherent approach.  In 1976, Congress did not have the opportunity to devise a copyright system specifically for our digital age.[61]  In the next copyright revision, Congress will have that chance.

c.  “One Size Fits All” Approach

One of the lessons to draw from these examples is that copyright law must become more adept and flexible.  It must be revised and modernized to address the glaring, chronic inefficiencies in the copyright system, such as the orphan works problem and huge notice externalities.  It also must transform its monolithic approach to copyright into a more nimble approach that helps to foster innovation in both content production and technologies.[62]

A growing body of research indicates that applying a monolithic or “one size fits all” approach to copyright for all works is inefficient, in that the social benefit of many works is not ever realized.[63]  The orphan works problem provides one good example—granting all works the same long term of copyright protection leads to under-utilization of the works because some owners abandon them but are still protected by copyrights for their works.  By some estimates, only two percent of all copyrighted works are commercially exploited,[64] yet the Copyright Act grants all works copyrights as if they all will be commercially exploited for generations.  Another example of inefficiencies in our copyright system is the application of the long term of copyright (ninety-five years) to computer software, given the short shelf life of software.[65]

B.     Obstacles to U.S. Copyright Law Revisions

Although a revision of the Copyright Act is needed to modernize copyright law, two major roadblocks stand in its way: (1) politics, and (2) international treaties.

1.     Political Stalemate in Congress

Copyright issues have become intensely politicized and polarized in the United States.[66]  Copyright industries disagree with ISPs over the scope of liability or safe harbor protection for ISPs for infringing activity conducted by their users.  Copyright holders want more liability and duties imposed on ISPs, while ISPs want greater protection afforded to them by the safe harbors.[67]  Moreover, copyright industries typically want a broader scope and duration of copyrights and stronger enforcement provisions against infringers.[68]  However, public interest groups representing libraries, educators, and users typically seek a narrower scope of copyright and a greater recognition of exemptions or activities as fair use.[69]  The debates over copyright—too often called a “war”—have sometimes degenerated into name-calling and vitriol, even resulting in threats of bodily harm.[70]

Disagreement among copyright stakeholders translates into political stalemate in Congress because copyright legislation is drafted by lobbyists employed by the stakeholders, not by members of Congress or their staff.[71]  Under this culture in which copyright lobbyists control the shape and even the language of copyright bills, the passage of a bill may depend more on getting lobbyists to agree than on the actual merits of the bill.

The Copyright Act of 1976 took decades of study, hearings, and debate before Congress eventually reached an agreement.[72]  The agreement was, in part, facilitated by the Copyright Office’s oversight in conducting meetings with and brokering compromise among various stakeholders.[73]  In today’s even more polarized environment, one can only imagine how long it might take to reach a compromise among stakeholders on major issues needed for reform.  At the 2011 Annual Meeting of the Copyright Society of the U.S.A., former Register of Copyrights Marybeth Peters applauded the discussion of reforms to the Copyright Act, but soberly admitted that we are “not ready” to undertake such reforms.[74]

2.     International Obligations Under Berne/TRIPS

Even if politics were not a major obstacle to copyright reform, international treaties pose hurdles of their own.  The United States is a member of the Berne Convention and the TRIPS Agreement, both of which establish “minimum standards” or requirements for copyright law.[75]  TRIPS incorporates Articles 1 through 21 and the Appendix of the Berne Convention, so there is overlap between the two.[76]

Given the minimum standards required by Berne and TRIPS, copyright reform in the United States cannot be written on a blank slate.  Reforms must consider how a country’s international obligations will be satisfied, or the country may risk a challenge to its law before the WTO.  The minimum standards of Berne apply only to foreign works (i.e., how each country treats works from foreign countries), meaning each country has discretion to use a different approach for its own domestic works.[77]  More often than not, however, countries adopt a single approach under copyright law for both domestic and foreign works.[78]

So how do Berne and TRIPS limit the field of options for revising or modernizing copyright law?  They limit the field by codifying a particular model of copyright—what rights it entails, how long it should last, and what exceptions can be allowed.  These so-called “minimum standards” of copyright allow some flexibility, but typically do not allow a dramatic departure from the conception of copyright the treaties envision.

For example, several of the minimum standards of Berne, which are also incorporated into TRIPS, present obstacles for recent proposals for copyright reform.  In the debate over orphan works, some proposals seek to require registration of copyrighted works in order to create a public record of copyright owners, so that would-be licensees can seek permission from the copyright owner of a work.[79]  Article 5(2) of Berne, however, prohibits “any formality,” such as registration, being imposed as a condition on “[t]he enjoyment and exercise of” copyright for foreign works.[80]  To avoid this prohibition, Chris Sprigman proposes that unregistered works be subject to a “‘default’ license that allows [third-party] use [of the unregistered works] for a predetermined fee.”[81]  It is at least debatable whether Sprigman’s proposal violates Berne (or Article 13 of the TRIPS Agreement, which limits copyright exceptions[82]).

Likewise, in the debate over copyright terms, some proposals seek to shorten the term of copyright so that works that are not commercially exploited will enter the public domain sooner.[83]  Article 7(1) of Berne, however, requires a minimum term of the life of the author plus fifty years for foreign works.[84]  Unless Congress wanted to create shorter terms only for U.S. works, the proposal to reduce the copyright term below the Berne minimum standard is not a viable option.  Moreover, even if Congress adopted shorter terms only for U.S. works, thus complying with Berne Article 7(1), such an amendment could disadvantage U.S. authors abroad.  Article 7(8), also known as the “rule of the shorter term,” creates a default approach requiring, absent legislation to the contrary, that countries give foreign works a shorter term from their country of origin rather than a longer term that applies to domestic works.[85]  The rule of the shorter term thus puts pressure on countries to increase their copyright terms to whatever is the longest term of copyright recognized by a Berne country, in order to avoid having their citizens’ works subjected to a shorter term in the longest-term country in Berne.  The Sonny Bono Copyright Term Extension Act of 1998 (which extended the term of U.S. copyrights to life plus seventy years to match the European Union’s term) was justified precisely on this ground.[86]

In short, given the minimum standards of copyright under Berne and TRIPS, member countries do not have complete freedom to alter dramatically their copyright laws—at least not without potentially violating international treaty obligations.  The challenge for Congress is to figure out a way to modernize U.S. copyright law within the constraints set by these international agreements, or to have those agreements changed as well.

II.  The Tax Fix for Copyright Law

This Part lays out the theory for using the Tax Code to achieve copyright reforms and objectives.  Surprisingly, tax law has been underutilized in promoting the goals of copyright.  This Part explains why Congress should consider using tax incentives to further copyright objectives and reform.

A.     Using the Tax Code to Achieve Non-Tax Goals

Historically, Congress has used the Tax Code to achieve a variety of “non-tax” goals, meaning substantive policy goals outside of taxation.[87]  Indeed, the Tax Code is littered with provisions of this kind.[88]  Many of these provisions offer tax incentives through “deductions, credits, exclusions, exemptions, deferrals, and preferential rates,”[89] in order to incentivize certain conduct or activity.  For example, to encourage enrollment in higher education and to help offset some of its increasing costs, the Tax Code provides a modest deduction for certain tuition expenses.[90]  The Tax Code also offers a modest tax credit for eligible businesses to conduct research and development.[91]  Sometimes, the Tax Code imposes unfavorable treatment (commonly called Pigouvian taxes after the theorist who championed their use) to discourage people from certain activities, such as smoking or excess fuel consumption.[92]  Although the substantive policy goals are quite diverse, all of these “non-tax goal” provisions typically seek to incentivize activity or conduct through the Tax Code by creating either more or less favorable treatment under the Code.  When the tax incentives cost the government revenue (in terms of lost tax revenue), they are called “tax expenditures.”[93]

Using the Tax Code as a method to address important societal issues or initiatives has become a popular option for pursuing policy and reform proposals.  To address the epidemic problem of obesity in the United States, proposals to tax junk food and soda have been offered.[94]  To promote more environmentally responsible or “green” technology and energy consumption, the Tax Code contains several tax credits and incentives.[95]  The Obama Administration’s controversial individual health care mandate attempts to fix the problem of the lack of health care insurance for millions of people and escalating health care costs by taxing individuals who choose not to have health care coverage.[96]  Likewise, the preferential treatment of long-term capital gains in the Tax Code—which are taxed at a lower rate than ordinary income—is justified as a way to encourage entrepreneurial investments and risk-taking that might lead to innovation.[97]  The several tax benefits for homeowners are justified as serving “important non-tax policy objectives such as encouraging investment in commodity, enhancing the stability of neighborhoods, and increasing the willingness of property owners to fund local schools through property taxes.”[98]  In response to the recent housing crisis, Congress amended the Tax Code to provide tax credits for first-time and other homebuyers.[99]

Of course, some tax experts are skeptical about whether the Tax Code is the proper forum for pursuing non-tax policy objectives.  In his seminal article, Stanley Surrey argued that direct government expenditures to achieve a policy goal are preferable to indirect expenditures through the Tax Code because “a resort to tax incentives greatly decreases the ability of the Government to maintain control over the management of its priorities,” while complicating the Tax Code, reducing its overall transparency, and possibly entrenching certain tax exemptions that have outlived their usefulness.[100]  Surrey’s critique has generated a longstanding debate over the desirability of non-tax policy uses of the Tax Code,[101] a debate that is likely to intensify as national debt reduction continues to be a hot button issue.  This Article does not attempt to resolve this debate but will offer a response in Part IV to some of the concerns raised by tax expenditures.  Suffice it to say, Congress has frequently used the Tax Code to further important national objectives.  Using tax to further copyright objectives would not be an anomaly.

B.     Current Uses of Tax Related to Copyrighted Works

1.     Federal Tax Code

For whatever reason, tax incentives have rarely been used for copyright or other intellectual property objectives.  Royalties from copyrights are taxed as ordinary income at the general tax rates for that income earner.[102]  The Code excludes copyrights from being treated as a capital asset with its potential benefit of the lower capital gains tax rate.[103]  Copyrights are essentially an afterthought in the Tax Code, if a thought at all.

One small exception is the recent amendment in the Tax Code that allows sales of copyrights of musical works to be taxed at the preferential capital gains rate (currently fifteen percent[104]).  In 2005, Congress created an exception for musical works that allows songwriters to elect to receive the capital gains tax rate for sales of their compositions.[105]  The Nashville Songwriters Association lobbied for the capital gains treatment of sales of copyrights in musical compositions, under a bill originally titled the Songwriters Capital Gains Tax Equity Act.[106]  The Association argued that the new law would bring equity to the treatment of songwriters compared to music publishers who historically could invoke capital gains treatment for sales of their copyrighted songs.[107]  The Association also argued that the tax break could help save the profession of songwriting given the losses allegedly caused by music file sharing.[108]

The songwriter capital gains rate provides a poor example of using tax to achieve copyright ends.  The scope of the tax break is quite limited.  No other individual authors get the benefit of capital gains treatment except for songwriters.[109]  (By contrast, all patentees are eligible for the capital gains rate for the sale of their patents.[110])  Moreover, the policy behind the songwriter capital gains rate would appear to incentivize songwriters to sell their copyrights to others, instead of retaining their works and earning income through licensing.  Congress could use tax law far more comprehensively and sensibly to achieve copyright goals.

2.     State Tax Codes

The states have used their tax codes in ways that more directly incentivize the creation of copyrighted works than has the federal government.  That is somewhat surprising, given that copyright law for fixed works is exclusively governed by federal law.[111]  Most states and Puerto Rico have special tax incentives to lure film studios to create movies within their state borders.[112]  The primary goal of these state tax incentives is to spur the state economies with the money spent by film studios on location (e.g., food and lodging) and with the added tourism and interest drawn to the area.[113]  Yet an additional benefit is that the film industry receives, in effect, a state subsidy to create a film in a particular state.  With the savings in expenses made possible by the tax breaks, some movie studios can presumably afford to invest in the creation of other films.  As with most tax expenditures, however, the tax breaks for movies remain controversial, especially as many states face budget crises in the economic downturn.[114]

C.     The Theory of the Tax Fix for Copyright Law

The popularity of state tax incentives for film creation begs the question whether Congress should consider making greater use of tax incentives for copyrighted work under federal law.  Anecdotal evidence from the film industry suggests that movie studios are highly responsive to tax incentives to locate a movie production within a state to obtain a tax break.[115]  Although the jury is still out on whether the film tax incentives have succeeded in boosting state economies, the evidence indicates that film studios have utilized the tax breaks in various states.[116]  For example, New Mexico’s twenty-five percent tax refund for in-state movie production has reportedly brought in an estimated $600 million from 2003 to 2008 based on film productions of such high profile movies as No Country for Old Men, Terminator Salvation,Indiana Jones and the Kingdom of the Crystal Skull, and Transformers.[117]  Although these state tax incentives for film production are not copyright reforms or efforts to modernize copyright law, they do provide an example of how the tax system can be used alongside copyright law.  This Part explains why Congress should go one step further and use tax incentives as a way to achieve copyright goals.

D.    Innovating Copyright Law Within International Copyright

1.     Treaties

A major advantage of using the tax system to modernize copyright law is the flexibility the tax system offers.  By using the Tax Code instead of the Copyright Act, Congress has the freedom to consider a variety of copyright reforms that would not present any problems under international treaties.  Neither the Berne Convention nor the TRIPS Agreement speaks to, much less restricts, the ability of countries to impose taxes or create tax incentives related to copyrights.[118]

Moreover, the tax fix is better than the current way typically used to get around the Berne Convention—that is, treating domestic and foreign works differently.  Because the Berne Convention only regulates works of foreign origin, countries can impose requirements on domestic works that would otherwise violate Berne if applied to foreign works.[119]  For example, the U.S. Copyright Act requires registration as a precondition to bringing a copyright lawsuit for “United States works”—meaning works first published in the United States or, if unpublished, created by a U.S. national or resident.[120]  Foreign works have no registration requirement under U.S. law because of Berne’s ban on formalities for foreign works.[121]  Likewise, some recent proposals to shorten the term of copyright in the United States adopt the same limitation to U.S. works, in order to avoid Berne’s minimum standard of a term that lasts the life of the author plus fifty years.[122]

The differential treatment of domestic versus foreign works has several disadvantages.  First, it complicates the Copyright Act by having a two-track system: one for domestic works and another for foreign works.  Second, it has the effect of treating one’s own nationals worse than foreigners—a form of reverse discrimination that becomes less palatable as the disparities mount.  In addition, it may encourage strategic behavior among some copyright holders to publish first their works abroad, so their works will be treated as foreign works for the purposes of Berne.[123]  This strategic behavior might result in “off-shoring” of U.S. jobs and publishing resources for books, music, movies, and other works.

By contrast, the tax fix avoids these problems.  A two-track system is not created in the Copyright Act.  There is no reverse discrimination between nationals and foreigners.  Each group would be treated the same under both copyright and tax law.  Without any preferential treatment for foreign works under the law, the need for strategic behavior and off-shoring of jobs and resources outside the United States would be minimized.

2.     Incentivizing Greater Choices for Copyright Holders

Another advantage of the tax fix is that it will help to achieve greater tailoring of copyrights to particular individuals, industries, or circumstances.  As Michael Carroll and others have shown, the “one size fits all” model of our current copyright system (by which most works are treated under the same general approach) is inefficient: “In particular, this policy imposes uniformity cost on society by failing to supply fine-grained rights tailored to the economic circumstances of different classes of authors and inventors.”[124]  For example, copyright law treats computer software the same as a literary work, even though software is functional and extremely short-lived in terms of its use.[125]  Likewise, small-time authors who have no intention of commercially exploiting their works and who may not even care about copyright, receive, nonetheless, the same rights under copyright as those authors who commercially exploit their works.[126]

Instead of the “one size fits all” approach under the Copyright Act, tax law can give copyright holders a menu of options, with tax incentives, for how they might tailor their copyrights to their own particular circumstances.  Thus, instead of Congress deciding how best to tailor copyrights among copyright holders—a task that may be fraught with error, given the huge amount of information needed—each copyright holder, who arguably has the most information related to the copyright in question, can decide whether to elect from an assortment of self-tailoring options required for the tax benefits.  The tailoring by each copyright holder may lead to greater efficiency.  For example, instead of a ninety-five-year copyright, software companies may opt for shorter terms of copyright that correspond to the actual life span of software.  Although the Copyright Act already includes some modest tailoring with respect to sound recordings, architectural works, useful articles, and certain industry-specific exemptions,[127] tax law can provide even greater tailoring, individual taxpayer by individual taxpayer.  Presumably, each copyright holder is in a better position than Congress to make the most efficient choice of how to tailor a copyright to her own circumstances.

3.     Breaking the Political Stalemate Over Copyright Revision

A final reason Congress should consider a tax fix for copyright law is that enacting a set of copyright tax breaks may be more politically feasible than a major overhaul of the copyright system.  If history is a guide, we can expect any major overhaul of the copyright system to provoke an intense battle among stakeholders.  The Copyright Act of 1976 took decades of study, hearings, and debate before Congress eventually reached an agreement.[128]  The tenor of copyright debates today is even more divisive.[129]

By contrast, with completely voluntary options under the proposed tax fix, copyright industries would have no reason to object.  The Copyright Act would remain the same, and many copyright holders could benefit financially from the proposed tax breaks.  The tax fix has the potential of undoing the stalemate that has plagued copyright debates in the past.  Depending on the proposal, Congress could justify the tax breaks for copyright holders as a way to spur greater efficiency in the copyright system, as well as greater innovation in the production and use of copyrighted works.

III.  Proposal: The Copyright Gains Tax and
Copyright Tax Credit

This Part outlines several proposals that use tax incentives to further copyright reform objectives.  Two types of tax provisions are discussed: (1) a copyright gains tax and (2) a copyright tax credit.

A.     Copyright Registration as a Prerequisite to Tax Breaks

Before discussing the proposed copyright tax breaks, we should discuss a prerequisite that would apply in either situation.  In order to obtain the copyright tax break, the copyright holder would be required to register its work in the Copyright Office.[130]

This proposal would alleviate the growing orphan works problem and incentivize the registration of copyrighted works.  As the Copyright Office recognized, the orphan works problem “is, in some respects, a result of the omnibus revision to the Copyright Act in 1976,” which eliminated “the requirement that a copyright owner file a renewal registration in the 28th year of the term.”[131]  Under the 1909 Act, the renewal registration precluded an orphan works problem in two ways: (1) works that were not renewed in the twenty-eighth year automatically forfeited their copyrights, and (2) works that were renewed could be located (along with relevant information about the copyright owners) in the Copyright Office registry.[132]  Though renewal registration had been a feature of U.S. copyright law since 1790, Congress eliminated it in 1976 so the United States could join the Berne Convention.[133]  Joining Berne was perceived as a way for the United States to assume “a more prominent role in the international copyright community.”[134]  But, as the Register of Copyrights Marybeth Peters conceded, “there is no denying that [the changes in the Copyright Act of 1976] diminished the public record of copyright ownership and made it more difficult for the business of copyright to function.”[135]

The proposal addresses this problem by requiring copyright registration as a precondition for obtaining any copyright tax break.  A copyright holder would have to register its work in order to be eligible for the tax break.  In order to create added incentive to register the work early in the term of copyright, Congress could set a time period for registration, such as within five years of creation of the work.  The five-year window might encourage the owners of works that are not commercially exploited to register their works anyway, in the hopes of one day monetizing their creations.  Copyright holders that fail to register within the first five years of copyright would not be eligible to obtain a copyright tax break.  Having a uniform period for registrations of all works would make it easier to educate the public on when registration would be required to receive a tax break.  The incentive to register copyrighted works under the proposal might decrease the problem of orphan works by encouraging more registrations of works over time than under the current system.[136]  And it would do so without violating Berne’s prohibition on formalities.  In short, a voluntary registration to receive a tax break is not a copyright formality.[137]

B.     The Copyright Gains Tax

A preferential tax rate is one way to structure a tax incentive to pursue copyright reform objectives.  Similar to the capital gains tax rate,[138] the proposed “copyright gains” tax provides a lower tax rate for income generated from copyrighted works, provided the copyright holder satisfies whatever requirements set by the copyright reform measure.  I discuss below two different copyright reform proposals: (1) shorter copyright terms and (2) mass licenses of works to the public.  These proposals are offered for illustrative purposes; other copyright reforms can be substituted in their place.[139]  The key takeaway is seeing how tax can facilitate a more flexible approach to copyrights to achieve public ends—the constitutional goal of the Copyright Clause.[140]

1.     Proposal 1: Opting for Shorter Copyright Terms

Assume Congress decides to pursue the objective of encouraging shorter terms of copyright at the election of the copyright owner.[141]  This policy could yield three benefits.  First, encouraging shorter copyright terms might reduce the problem of orphan works.  Older copyrighted works, whose owners are more likely to have since died or become defunct, are more susceptible to becoming orphan works. Second, allowing copyright owners to choose their own copyright terms avoids the inefficiencies of the current “one size fits all” approach to copyright.  Numerous works are not commercially exploited at all, and some commercial works (such as software) are exploited only for a few years.  For these works, a copyright that lasts the life of the author plus seventy years (or ninety-five years in the case of works-made-for-hire) makes no economic sense.  Third, shorter terms of copyright can spur, much sooner, follow-on creations and innovation based on works that have entered the public domain.

a.  Basic Tax Structure

Instead of changing the copyright term itself in the Copyright Act, Congress could enact a special tax break for copyright holders who voluntarily shorten the length of their copyrights.  Under our current law, copyright holders always have the option of choosing to abandon their copyrights or donate their works to the public domain.[142]  Of course, few copyright holders ever do so because they have very little incentive to donate their works to the public domain under the current system.  However, the tax fix for copyright terms can provide that incentive by rewarding copyright holders who choose shorter terms of copyrights by their own initiative.

Imagine one possible scenario.  Congress enacts a tax break for copyright holders who elect to give up some of their copyright terms under the following graduated series of favorable tax rates on royalties.  Because the Copyright Act uses different metrics for copyright terms depending on whether the author is an individual or a corporation,[143] two tax tables are provided.


Table 1:  Copyright Gains Tax Rates for Shorter Terms

Corporate Author

Term of Copyright Chosen

Copyright Gains Tax Rate

Corporate Author elects a 1-year

5% of standard rate applies

Corporate Author elects a 5-year

10% of standard rate applies

Corporate Author elects a 50-year

50% of standard rate applies

Corporate Author elects a 70-year

70% of standard rate applies

Corporate Author keeps full term of
95 years

Standard rate applies

Individual Author

Term of Copyright Chosen

Copyright Gains Tax Rate

Individual Author elects a 1-year

5% of standard rate applies

Individual Author elects a 5-year

10% of standard rate applies

Individual Author elects life term

40% of standard rate applies

Individual Author elects a 50-year

50% of standard rate applies

Individual Author elects a 70-year

70% of standard rate applies

Individual Author keeps full term of
life plus 70 years

Standard rate applies


The proposed tax table attempts to treat individual and corporate authors the same in terms of the tax benefit gained.  The one difference is that the copyright terms for individual authors are defined by the life of the author plus seventy years, whereas corporate authors have a fixed term of ninety-five years from publication of the work (or 120 years from creation, whichever is sooner).  Thus, the tax table gives the option for the individual author to elect to receive a copyright for a work only during her lifetime.  Of course, the number of years in the life of the author varies according to when the work is created and when the author dies.

Under the proposal, an author can elect a one-year term of copyright and receive a tax rate of 5% of the standard tax rate for royalties for the copyright holder’s income tax bracket.  For example, as depicted in Table 2, if an author falls within the highest tax bracket of 35%, her copyright gains tax rate would be only 2% of income generated from the work.[144]  If the author elects a five-year copyright, her copyright gains tax rate would be 4%.  Electing a copyright for the life of the author would receive a tax rate of 14%.  A fifty-year copyright would receive a tax rate of 18%, and a seventy-year copyright would receive a tax rate of 25%.  If the copyright owner keeps the entire term of copyright, she would be taxed at her normal rate of 35%.  In each case, the copyright owner decides whether to lower her term of copyright and receive a tax break in return.

Table 2:  Copyright Gains Tax for Author from
Highest Tax Bracket of 35%

Term of Copyright Chosen

Tax Rate on Royalties

Individual Author elects a 1-year copyright


Individual Author elects a 5-year copyright


Individual Author elects life term


Individual Author elects a 50 year copyright


Individual Author elects a 70 year copyright


Individual Author keeps full term of life
plus 70 years



The tax break afforded to the copyright holder would apply or carryover for the remainder of the copyright term on the work in question.[145]  Congress could amend the general tax rates, which would affect the final copyright gains tax rate, but the discount percentages would remain at five, ten, forty, fifty, and seventy percent.  Of course, the tax rates above are merely illustrative.  The amounts can be lowered or increased, depending how much incentive Congress hoped to create.  The vital point is that Congress has considerable flexibility to incentivize copyright holders to shorten their terms of copyright.

b.  Advantages of Using Tax Instead of Copyright

The beauty of the tax fix is that it completely bypasses Berne.  First, Berne requires countries to recognize a copyright term of at least the life of the author plus fifty years.[146]  Thus, if Congress wanted to lower the copyright term to a shorter term for all works, Berne would forbid it.  A tax incentive, however, could help to achieve the same goal of shortening copyright terms without violating Berne.

Second, Berne establishes a default rule known as the “rule of the shorter term.”[147]  It states: “[U]nless the legislation of that country otherwise provides, the term shall not exceed the term fixed in the country of origin of the work.”[148]  The rule means that countries with terms longer than the life of the author plus fifty years (e.g., the European Union has a term of life of the author plus seventy years) can give a shorter term to a work whose country of origin only provides for such shorter term.  For example, before Congress enacted the Sonny Bono Copyright Term Extension Act, EU countries could give U.S. works the shorter term of life of the author plus fifty years—that is, “the term fixed in the country of origin of the work.”[149]  Even though the U.S. works in the European Union receive copyrights from EU countries, those European copyrights for the U.S. works received a copyright term shorter than what EU works received.[150]  The shorter term puts pressure on countries in the Berne Convention to raise their copyright terms whenever one country raises its term above the rest.  The United States did exactly that when the European Union raised its copyright term.[151]

The tax fix avoids the rule of the shorter term—and the disadvantage imposed on nationals from a country with a shorter term.  Even if U.S. authors elect to give up part of their copyright terms, the copyright term in the Copyright Act still remains the same.  Thus, the tax incentive for copyright holders to reduce their own copyright terms would not alter, in any way, “the term fixed in the country of origin of the work.”[152]  The United States could adopt the tax fix, without disadvantaging U.S. works abroad, while achieving shorter copyright terms through voluntary choice by copyright holders.

c.  Hypothetical Example: The Blair Witch Project

To illustrate how the copyright gains tax would operate in practice, consider a hypothetical example using the independent film, The Blair Witch Project.  The small budget movie became a surprise box-office mega-hit, earning over $140 million in 1999.[153]  The movie cost only $500,000 to $750,000 to make,[154] so most of the earnings constituted income subject to tax (assuming no clever Hollywood accounting was used[155]).

The high amount of income generated from the movie would put it at the highest tax rate.  For simplicity, I will use the current 2011 tax rate of 35% in this hypothetical, instead of the 1999 tax rate.[156]  Assuming the high-end estimate of the production expenses of $750,000, and applying the income forecast method of depreciation under § 167(g) of the Tax Code,[157] with an assumption that most of the movie’s earnings occurred within the first ten years of the movie’s distribution,[158] most of the costs (let’s say $724,100) can be deducted immediately.  The owner of the movie would have $139,814,999 in income, subject to a 35% tax—or $48,935,250 in tax.

Under the proposal, the copyright owner of The Blair Witch Project could elect to reduce its federal tax by agreeing to a shorter copyright term. The options would be as follows:


Table 3:  The Blair Witch Project Income
Under Copyright Gains Tax

Copyright Term

Tax Rate

Income Tax

Tax Savings

1-year copyright




5-year copyright




50-year copyright




70-year copyright





Although the copyright holder would have to exercise its business judgment in deciding which tax incentive to select, the copyright holder might prefer a five-year copyright over a one-year copyright, or a fifty-year copyright over a seventy-year copyright.  The tax savings afforded by a one-year copyright over a five-year copyright is only $2.79 million, while having four more years of copyright would enable the copyright holder to make a derivative work (e.g., a sequel) exclusively during that period.  If the copyright holder desired a copyright term longer than five years, a fifty-year copyright might be preferred because it provides close to $10 million in additional tax savings beyond a seventy-year copyright.  The present value of any income derived in years fifty-one through seventy of the copyright term probably would not compare to the $10 million in extra tax savings now.

In terms of mechanics, the copyright holder would have to register the copyright for The Blair Witch Project and also file notice of its decision to abandon its copyright after the chosen number of years.  The public notice would be contained in the copyright registration, all accessible online, similar to disclaimers in trademark registration.

The example illustrates how tax incentives might induce copyright holders to elect to have shorter terms of copyright, perhaps even as short as five years or less.  Although The Blair Witch Project provides an extreme example of massive profits from a work, it shows the attractiveness of a copyright gains tax.  Of course, the precise tax rates set for the copyright gains tax would require further study and debate.  The numbers above are meant for heuristic purposes.

2.     Proposal 2: Opting for Licenses for Public Use of a Work
a.  Basic Tax Structure

The copyright gains tax can also be used for other copyright objectives.  Imagine Congress wanted to encourage copyright holders to allow greater exploitation of their works, including in derivative works.  This initiative could spur greater follow-on creations, earlier in the term of the copyright.[159]  Instead of having to wait until the work enters the public domain, the public could exploit the works in ways greater than allowed currently under copyright law.  A copyright gains tax would apply if a copyright holder elected, within the first five years of copyright, to adopt a free, mass license to allow the public to make derivative works for the remainder of the copyright.  The mass license could be a Creative Commons license, which is a popular way for copyright holders to mass license their works.[160]  For example, the Creative Commons-By license requires the follow-on user to provide attribution to the original author in using the work.[161]  The election period might be set at the first five years of copyright for a work, in order to allow the public to use the work when it is recent and to maximize the amount of time afforded to the public to utilize the work in making new, derivative works.

The precise tax rates set would require further study and debate.  For illustrative purposes, the copyright gains tax for allowing derivative works could be set as follows:


Table 4:  Copyright Gains Tax for Copyright
Holders’ Mass Licenses

Election By Copyright Holder

Copyright Gains Tax Rate

Author elects derivative work (“DW”)
mass license, including commercial
and noncommercial uses

60% of standard rate applies

Author elects DW mass license, only for
noncommercial uses

90% of standard rate applies


Thus, the copyright holder receives a ten percent discount on the standard tax rate on income generated from a work for which it has authorized a mass license to the public to make derivative works only for noncommercial purposes.  Similarly, a copyright holder receives a forty percent discount on the standard tax rate on income generated from a work for which it has authorized a mass license on the public to make derivative works for both commercial and noncommercial purposes.  The greater discount is given to allowing commercial derivative works, in part because those works will possibly generate economic activity and further income subject to tax.  The added tax revenue could help offset the losses in tax revenue created by the preferential copyright gains tax rate.

b.  Advantages of Using Tax Instead of Copyright

As in the case of shorter copyright terms, the main advantage of using the Tax Code here is that it achieves greater flexibility without raising Berne Convention problems.  Articles 12 and 14 of Berne require countries to recognize a set of adaptation rights—commonly known under the umbrella of the right to make derivative works.[162]  Thus, the United States could not substantially diminish the right to make derivative works, at least not for foreign works, without violating the Berne Convention.  Moreover, the right to make a derivative work arguably serves a useful purpose in incentivizing authors to create not only a first work but also, potentially, a derivative work.  The copyright gains tax, however, could make the derivative work right more flexible.  The flexibility could incentivize copyright holders to promote socially productive re-uses of their works.  For example, the growth of noncommercial fan-fiction online—short stories created by third parties based on famous works like Harry Potter—currently occupies an uncertain status between possible infringement and fair use.[163]  One easy way to clear up this uncertainty is to encourage authors themselves to mass license their works.

c.  Hypothetical Example: The Blair Witch Project

Let us return to the example of The Blair Witch Project.  Imagine the copyright holder grants the public a mass license to use the movie in noncommercial derivative works, such as remix videos.[164]  The mass license would be recorded in the Copyright Office, along with the registration of the work.  Copies of the work could be required to indicate a mass license has been granted to the public for reuse of the work (such as by the Creative Commons symbols).  As shown in Table 5 below, under the copyright gains tax rate, the copyright holder would be taxed at 90% of the standard tax rate that applies—meaning the rate would lower from the highest tax rate of 35% to the discounted rate of 32%.  Applying the preferential rate would lower the tax from $48,935,250 to $44,740,800, a decent savings of $4.2 million.

The copyright holder can obtain an even larger tax benefit of 60% of the standard rate by opting to allow commercial derivative works as well.  In such case, the tax rate would lower from 35% to 21%, with a tax of $29,389,500—which equals a tax savings of $19.6 million.

Table 5:  The Blair Witch Project Income
Under Copyright Gains Tax

Mass Copyright License

Tax Rate

Income Tax

Tax Savings

Noncommercial DWs




All DWs





In essence, through the tax expenditure of the copyright gains tax, the government is investing in follow-on creations and innovation from copyrighted works.

C.     Copyright Tax Credits

1.     Structure of Copyright Tax Credit

Another way to use the Tax Code to further copyright objectives is through tax credits.[165]  Typically, a tax credit would provide a smaller tax benefit than a preferential tax rate.  Deductions reduce one’s taxable income and thus translate into different amounts depending on the taxpayer’s tax bracket; tax credits, however, offer dollar-for-dollar amounts reducing one’s tax liability, irrespective of tax bracket.[166]  A tax credit allows Congress to set fixed dollar amounts for reducing one’s tax instead of having the tax benefit fluctuate, such as in a tax rate, although the amount of the tax credit could be made to change to different levels of income.  For example, the child tax credit is up to $1,000 for each qualifying child under seventeen years old.[167]  Tax credits can also be made refundable, meaning if the amount of tax owed by the taxpayer in a given year is less than the amount of tax owed, the difference between the credit and tax owed is refunded by the federal government to the taxpayer.[168]  Alternatively, the tax credits can be nonrefundable but subject to “carry over,” or used in following tax year(s) when there is positive income.[169]

As in the case of the copyright gains tax, the proposed copyright tax credits would be dependent on copyright registration of a work by the same year the tax credit is sought.  The next step would be identifying a copyright objective worthy of a tax credit.

Imagine Congress wants to incentivize authors to allow more free uses of their copyrighted works in schools, in order to encourage learning with a greater diversity of materials and to help defray the rising costs of education.[170]  A tax credit could be awarded to any copyright holder for each school that requested and received permission to use its work in the classroom for free.  As shown in Table 6, the tax credit might be set at, let’s say, $50 per school to which the author granted free use—including copying, public performances, and adaptations—of part of a copyrighted work in the classroom or at school, and $150 for each school granted free use of an entire copyrighted work.  The tax credit could be in addition to any deduction allowed for donation of material to a charitable institution,[171] given that the donation here would encompass acts of copying, performing, and adapting not measured within the amount for donation of copies of works.  A cap can also be set on the maximum amount of copyright tax credits (e.g., $15,000) that a taxpayer can claim each year.

Table 6:  Copyright Tax Credit for
Free Educational Licenses

Free Educational License

Tax Credit


Part of work licensed

$50 per school

$15,000 total

Entirety of work licensed

$150 per school

$15,000 total


2.     Advantages of Using Tax Instead of Copyright Exemptions

Again, the main advantage of using the Tax Code instead of copyright law is to provide greater flexibility to copyright in a way that skirts any problems with international obligations.  Instead of creating broad copyright exemptions for schools that could be subject to international challenge in the WTO, Congress could use tax credits to promote the same objectives without raising any issue of compliance with the Berne Convention or the TRIPS Agreement.  In addition, the proposed copyright tax credits have the added benefit of promoting education and potentially helping to address the escalating costs of education, including textbooks, which are trending to an annual cost of $1,000 per college student.[172]

a.  Hypothetical Example: Open-Source Textbooks

To understand how the proposed copyright tax credit would operate, imagine Author creates an “open source” digital textbook free for others to use and copy.  Twenty schools adopt the textbook for use in their classrooms.  The digital copies are disseminated for free to the students in each school.  As depicted in Table 7, Author is able to receive a tax credit of $3,000 (20 times $150) for sharing her entire textbook with twenty schools.  To obtain the tax credits, Author would have to register the copyright, keep proper records of the names of the schools receiving the textbook (subject to audit), and indicate, on the tax form, her election of the copyright tax credits.  If the same schools use Author’s textbook the following year, Author would be entitled to the same tax credit.


Table 7:  Open Source Textbook with Free Educational License in 20 Schools

Free Educational License

Tax Credit



Entirety of work licensed

$150 per school




IV.  Addressing Concerns

This final Part addresses objections to the tax fix to copyright law.  Although the tax fix affords greater flexibility to copyright initiatives without raising any international treaty concerns, it may produce other side effects worth considering.

A.     Tax Concerns

1.     Tax Expenditures and Revenue Depletion

The biggest objection to the proposals above is their cost.  Congress must consider the costs and benefits of the proposals, informed by analysis by economists and policymakers.  To be sure, the debt crisis and economic downturn in the United States pose many challenges for U.S. fiscal policy.[173]  Some experts may question the desirability of tax cuts when the economy is weak and the federal government faces huge budget deficits.[174]  The issue is at least debatable.  In 2009, the Obama Administration cut taxes for the middle class in an effort to stimulate the economy.[175]  In 2011, Democrats and Republicans both were proposing different tax cuts as a way to boost the economy.[176]  In any event, Congress will not likely consider copyright reforms until later this decade, at a time when the U.S. economy is (hopefully) better.  Congress can always adopt smaller tax breaks as a part of an incremental approach to copyright reform.  And, to the extent the current debate over reforming the U.S. tax system will force Congress to make the tax system more transparent and with fewer loopholes, the current debate may pave the way for the kind of copyright reform proposed herein.  From an economic view, giving preferential tax rates in a way that incentivizes the creation of more copyrighted works makes sense, given how much the copyright industries contribute to U.S. GDP and exports overseas.[177]

The proposed copyright tax reforms may not necessarily lead to large tax expenditures over the long run.  Stimulating the creation of more works much sooner during the copyright term is one of the primary goals of the proposed copyright gains tax.  Copyright holders are incentivized, with a preferential tax rate, to allow their works to be used and adapted by many more people—including commercially—much sooner than before.  Instead of waiting ninety-five years to see the mass public exploitation of works, now such exploitation could occur in five years or less.  The potential proliferation of follow-on creations to existing, popular works could generate significant income—itself subject to tax—that would not have been created without the copyright gains tax incentive.

Indeed, one attractive feature of the copyright gains tax is that the works that would cost the most in terms of tax expenditures (meaning they generate the most income that is then subject to a lower tax rate at the election of the copyright owner) would also have the greatest potential of spurring commercial follow-on creations that can generate even more income.  The most popular works commercially are likely to be the most attractive for people to adapt and build on—and the most likely to lead to other income-generating derivative works.  In other words, popularity can be monetized—and then taxed.

While many follow-on creations or derivative works would not generate income subject to tax, it is likely that some would.  In the movie industry, Hollywood studios have routinely made large revenues from adaptations of public domain works—including the incredibly successful movies Snow White and the Seven Dwarfs (which grossed nearly $185 million in 1937), Pinocchio ($84 million in 1940), and Aladdin ($217 million in 1992).[178]  The proposal would enhance the possibility of income generation from derivative works because the underlying works would be more contemporary—which enhances the marketability of follow-on creations.  For example, a sequel to Harry Potter, Twilight, or Glee would likely be more marketable today than in the year 2081.

In addition, the copyright gains tax might attract new entrants—meaning new creators—into content production, which might in turn generate even more taxable income than would otherwise have arisen.  For example, the preferential copyright gains tax might make it more economically feasible for “starving artists” to make a living and pursue their passion as a profession.[179]  Among the new entrants to creative professions may be a few who become the next J.K. Rowling or Justin Bieber, in terms of their commercial success—again generating income subject to tax.

Even if the new entrants have only modest commercial success, the number of new entrants in the so-called “long tail”[180] may be large enough to yield a decent source of additional income subject to tax.  Also, the added incentives to register copyrighted works may lead to an increase in registrations.  People who might not otherwise register their works might be induced to register, in order to preserve the possibility of a tax benefit.  The fee for registration, although modest, could generate more revenues for the government in the long-term.[181]

The multiple ways in which new income streams might be generated under the copyright gains tax are arguably less prone to manipulation than under the capital gains tax.  The majority of capital gains are derived from sales of stocks, and of business and rental real estate.[182]  Thus, the problem of “lock-in” occurs with capital investments because investors may hold on to their stocks and other investments in order to avoid having to pay tax on gains accrued from their sale.[183]  By contrast, the copyright gains tax would probably not lead to a “lock-in” effect because most creators probably have an incentive to share and market their works commercially, instead of holding on to them.

The Blair Witch Project example shows how additional tax revenues might be generated from the copyright gains tax.[184]  Imagine that the copyright owner of the movie opted for the five-year copyright, thereby saving $43.3 million from the preferential rate of tax in 2011.  That $43.3 million represents the tax expenditure the federal government made in enacting the copyright gains tax as applied to the movie.  The tax expenditure by the federal government might be recovered in several ways.

First, the copyright owner might use part of the $43.3 million to finance a sequel.  The production of the sequel would very likely pump money into local businesses where the film is produced.  Even if the sequel performed only one third as well as the first movie and earned $46.2 million at the box office, the tax owed by the copyright holder could be over $15 million, depending on how much the sequel cost to produce.  Second, the creation of other derivative works of The Blair Witch Project—merchandise, video games, toys, and the like—by the copyright owner or third parties could also generate more income subject to tax.  According to movie industry expert Steven Gaydos, merchandising can generate between $50 and $200 million if the movie is popular.[185]  For example, in 2002, the Harry Potterfranchise generated $11.8 million simply based on sales of Harry Potter cookies, candy, and gum.[186]  In total, Harry Potter amassed a staggering $7 billion in merchandising sales and $1.5 billion in video game sales worldwide.[187]  Third, the financial attractiveness of the copyright gains tax for The Blair Witch Projectmight lure other creators to enter the field who might not otherwise have pursued creative professions.  To the extent those new entrants produce taxable income from their copyrighted works, some of the loss in tax revenue from copyright holders’ election of the copyright gains tax would be further offset.

Thus, the copyright gains tax can spur a greater number of creative works much sooner than under the current copyright system, without necessarily causing huge tax expenditures for the federal government.  The income generated from the follow-on creations would be taxed and help to offset the loss in tax revenue from the preferential rate.  Moreover, noncommercial follow-on creations provide a social benefit or positive externalities in their own right in a way that is not captured by income.

2.     Gaming the System and Tax Fraud

As with any tax provision, the proposed copyright gains tax and copyright tax credit will be susceptible to clever attempts by some taxpayers to game the system, if not commit outright tax fraud.  For example, in the past, some corporations have set up foreign companies in order to minimize or avoid U.S. tax exposure—a practice of expatriation that Congress attempted to discourage in 2004 by closing the tax loophole.[188]  Drafters of the copyright tax breaks must vet the provisions and attempt to formulate them in a way that minimizes the potential for similar gaming of the system.  But, as one court put it, “[e]ven the smartest drafters of legislation and regulation cannot be expected to anticipate every device.”[189]  Accordingly, the IRS should monitor the implementation of the copyright tax fixes to identify any gaming of the system, so Congress might close any loopholes.

3.     Unequal Tax Treatment of Other IP

The proposal for copyright “tax fixes” begs the question whether the Tax Code should be used in a similar way for the patent and trademark systems.  As Jeffrey Maine and Xuan-Thao Nguyen have identified, principles of horizontal tax equity demand consideration of treating the taxation of income generated from different intellectual property alike, if they are truly similarly situated.[190]  However, some of the problems addressed by the proposed tax fixes are idiosyncratic to copyright.  The optional registration system, lengthy terms, and problem of orphan works are not present in the patent or trademark systems.[191]  The potential benefits from incentivizing greater uses of IP, though, are relevant to both copyright and patent.  A similar tax incentive for patent holders authorizing mass licenses to create derivative inventions might also be considered.

B.     Copyright Concerns

Some may object to the specific copyright reforms proposed, particularly the incentives for shorter terms and more liberal licenses for derivative works.  Some copyright holders would argue that they need a longer term and even more rights and enforcement measures, given the ease of infringement on the Internet today.  On the flip side, some public interest advocates might criticize the copyright gains tax proposals because the copyright gains tax does not reward noncommercialproductions.  Each objection is discussed in turn.

1.     Need for Stronger Copyright?

No doubt some copyright holders may desire longer terms of copyright and even more rights.  The history of copyright in the United States has demonstrated that copyright industries have been incredibly successful in obtaining expansions and extensions of copyright over time.[192]

Whether or not these expansions and extensions should be ratcheted even higher in the twenty-first century is a policy debate that I do not undertake here.  One attractive feature of the tax fix proposal is that it leaves the current high levels of copyright protection and long copyright term completely untouched.  While the Copyright Act remains the same, the Tax Code adds greater incentives and flexibility to accommodate a diverse group of copyright holders—some of whom may prefer maximalist copyright protection, others of whom may prefer maximalist tax benefits.  Under the tax fix, the “one size fits all” approach of the Copyright Act is modified, but only for those copyright holders who want to modify it.  In popular parlance, the tax fix is an “opt in” system.[193]

It is also important to bear in mind that the particular copyright proposals offered above are meant as illustrations of how the Tax Code can be used to facilitate copyright objectives.  One need not agree with the copyright proposals in order to see the attractiveness of using the Tax Code to further copyright goals, whatever they may be.

2.     No Tax Help for Noncommercial Works?

Public interest advocates might criticize the tax proposals as biased against amateur creators and noncommercial works.  Creators of noncommercial works are not able to benefit from a preferential copyright gains tax rate.  If no income is derived from a work, there is no “gain” to tax.

The criticism is valid, but only to some extent.  Even noncommercial creators can benefit from the copyright gains tax if it is successful in inducing other copyright owners to allow their works either to enter the public domain sooner or to be mass-licensed for public use.  The noncommercial creators benefit directly by having more underlying material—both commercial and noncommercial works—from which to draw.  Moreover, under the copyright tax credit for educational uses of copyrighted works, the author does not need to generate income from her own works in order to benefit from the tax credit.  The tax credit applies whether or not the work has generated income.

C.     Administrative Concerns

1.     Complicating the Tax Code and Copyright Act

Another objection to the tax fix to copyright law is that it would further complicate the Tax Code and copyright law, both of which are already complicated, if not incomprehensible, enough.[194]  Using a tax fix—using tax law to further copyright objectives—would only exacerbate the difficulty for the public to understand tax and copyright.  It may yield a “double whammy” in terms of complicating both laws.

The criticism of complexity is valid.  The tax fix to copyright law will make things more complicated.  Drafters of the tax fix should strive to design a copyright gains tax and credit that will be easy to understand.  Also, the tax forms and schedules for the copyright gains tax and tax credit should be written in a user-friendly format.  Just as with any change to the Tax Code or Copyright Act, programs should be developed to educate the public about the changes.  To the extent that complexity is unavoidable, it may be a tradeoff for making the Copyright Act more flexible for the twenty-first century.  The tradeoff may be worth making if the potential social benefit is great, and the amount of complexity added is not too onerous for the public to understand.

2.     Coordination of Tax and Copyright Components

One final objection is administrative: the tax fix will require coordination between the Internal Revenue Service and Copyright Office.  Such interagency coordination may be difficult to achieve.  Yet the IRS is a relatively well-functioning agency in managing tax filings of millions of U.S. residents each year.[195]  The Copyright Office has not had as large an administrative responsibility as the IRS, but the proposals do not require the Copyright Office to do much more than overseeing the registration process—something it has historically done.  The key additional component would be ensuring that taxpayers who invoke the copyright tax breaks have registered their works and recorded the relevant information concerning their copyrights (e.g., shorter term, mass licenses to the public) in the Copyright Office.  But this burden can be handled by a requirement of disclosure of copyright registration on the tax form, plus the penalty of perjury that governs tax forms.[196]  Successful coordination among patent offices in the United States, Europe, and Japan in sharing information and reviewing patent applications under the Trilateral Review suggests that interagency coordination between the IRS and Copyright Office would be feasible.[197]  If three countries can coordinate their offices, then two agencies within the United States should be able to coordinate as well.


The U.S. Copyright Act of 1976 is due for a major revision to update copyright law and reduce the inefficiencies of the copyright system.  This Article proposes using the Tax Code as an alternative way to reform or modernize copyright law.  The main advantage of this approach is that it allows Congress much greater flexibility for reforms that do not implicate, much less violate, the international obligations of the Berne Convention or TRIPS Agreement.  The approach also may be more efficient in allowing copyright holders to tailor copyrights to their own situations and needs, instead of imposing a “one size fits all” approach on all copyright holders.

       *   Professor of Law, Director, Program in Intellectual Property Law, IIT Chicago-Kent College of Law, Norman and Edna Freehling Scholar.  Many thanks to Jonathan Band, Evelyn Brody, Stephanie Hoffer, and Thomas Shinnick for comments on earlier drafts, and to the participants of the Intellectual Property Scholars Conference 2011 and faculty workshops at Chicago-Kent College of Law and Marquette University Law School.  I benefited from conversations with Kathleen Courtney regarding state tax incentives in film production, David Jakopin regarding tax and IP, Bruce Nash regarding Hollywood accounting, and Pamela Samuelson regarding copyright reform.  Michael Johnson and James Baldwin provided excellent research assistance.  Tom Gaylord and Claire Alfus provided invaluable help in, respectively, tracking down sources and creating the tables.

      [1].   See Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541.

      [2].   See Pamela Samuelson, Preliminary Thoughts on Copyright Reform, 2007 Utah L. Rev. 551, 553–54.

      [3].   See infra notes 75–86 and accompanying text.  The United States joined the Universal Copyright Convention (“UCC”) in 1955, but the UCC accommodated the former U.S. approach to copyright (with formalities) and lacked an enforcement mechanism to stop violations.  See Universal Copyright Convention, Sept. 6, 1952, revised July 24, 1971, 25 U.S.T. 1341, 943 U.N.T.S. 178; Robert S. Chaloupka, International Aspects of Copyright Law, 15 Int’l HR J. 18, 18–19 (2006); Tyler Ochoa,Protection for Works of Foreign Origin Under the 1909 Copyright Act, 26 Santa Clara Computer & High Tech. L.J. 285, 299–300 (2010).

      [4].   See Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, revised July 24, 1971, 1161 U.N.T.S. 18338 [hereinafter Berne Convention]; Agreement on Trade-Related Aspects of Intellectual Property Rights arts. 9–14, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 33 I.L.M. 1125, 1197–1226, 1869 U.N.T.S. 299, 304–17 (1994) [hereinafter TRIPS Agreement].  The TRIPS Agreement incorporates Articles 1 through 21 and the Appendix thereto of the Berne Convention, thereby including them within the scope of WTO enforcement proceedings.  See TRIPS Agreement, supra, art. 9(1).

      [5].   Peter K. Yu, TRIPS and Its Achilles’ Heel, 18 J. Intell. Prop. L. 479, 483–84, 492 (2010) (“[M]ore than two-thirds of the provisions [in TRIPS] sought to introduce, in a single undertaking, new substantive minimum standards on which there was no prior international consensus.”).       See generally Graeme B. Dinwoodie & Rochelle Cooper Dreyfuss, A Neofederalist Vision of the International Intellectual Property Regime: The Resilience of the TRIPS Agreement to Technological and Social Change (forthcoming Mar. 2012) (arguing that TRIPS is best understood as allowing considerable flexibility for member countries to meet minimum standards); Edward Lee, The Global Trade Mark (unpublished manuscript) (on file with the author) (discussing extent to which TRIPS allows varied approaches among members).

      [6].   See Berne Convention, supra note 4, arts. 1–18, (setting forth minimum standards of copyright).

      [7].   See TRIPS Agreement, supra note 4, arts. 9–14.

      [8].   For example, the ban against formalities in Berne Article 5(2) dates back to 1908.  See Daniel Chow & Edward Lee, International Intellectual Property 96–97 (2006).  Some scholars question the continuing abidance to this early twentieth century rule, which makes it difficult to identify and locate copyright owners.  See Stef van Gompel, Formalities in the Digital Era: An Obstacle or Opportunity? in Global Copyright: Three Hundred Years Since the Statute of Anne, from 1709 to Cyberspace 395, 395–98 (Lionel Bently et al. eds., 2010); see also Stef van Gompel, Formalities in Copyright Law: An Analysis of Their History, Rationales and Possible Future 15–51 (2011) (discussing how formalities function in intellectual property systems).  Likewise, the rule of the shorter term in Article 7(8) requires countries to give, absent legislation to the contrary, foreign works a shorter term of copyright as set by their country of origin instead of the longer term granted to domestic works.  Berne Convention, supra note 4, art. 7(8).  This provision, which also dates back to 1908, was adopted to create a transition and an incentive for newly joining countries that had shorter terms to raise their terms to the minimum standard of the life of the author plus fifty years.  See Chow & Lee, supra, at 218.  Because all Berne countries are now required to have a term of at least the life of the author plus fifty years, the original reason for the rule of the shorter term is no longer relevant.  Yet, a negative effect of the rule is that it puts pressure on all member countries to raise their copyright terms to whatever is the longest term recognized by any member; otherwise, the other countries’ citizens might be disadvantaged with a shorter term in the country that has a longer term.  See id. at 219.

      [9].   See Marrakesh Agreement Establishing the World Trade Organization, art. X, ¶ 8, Apr. 15, 1994, 33 I.L.M. 1144, 1867 U.N.T.S. 154 (1994) (declaring that a consensus of members is required for amendment to TRIPS Agreement); Berne Convention, supra note 4, art. 27(3) (declaring that “any revision of this Act . . . shall require unanimity of the votes cast”).

    [10].   See, e.g., Jane C. Ginsburg, The U.S. Experience with Mandatory Copyright Formalities: A Love/Hate Relationship, 33 Colum. J.L. & Arts 311, 345 (2010); Ruth L. Okediji, The Regulation of Creativity Under the WIPO Internet Treaties, 77 Fordham L. Rev. 2379, 2391 (2009); Aryeh L. Pomerantz, Obtaining Copyright Licenses by Prescriptive Easement: A Solution to the Orphan Works Problem, 50 Jurimetrics J. 195, 203–04 (2010); R. Anthony Reese, Photographs of Public Domain Paintings: How, If At All, Should We Protect Them?, 34 J. Corp. L. 1033, 1052–53 (2009); Christina M. Costanzo, Comment, Have Orphan Works Found a Home in Class Action Settlements?, 83 Temp. L. Rev. 569, 586–87 (2011).

    [11].   Cf. Eldred v. Ashcroft, 537 U.S. 186, 200 (2003) (“To comprehend the scope of Congress’ power under the Copyright Clause, ‘a page of history is worth a volume of logic.’” (quoting New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921))).

    [12].   See        Samuelson, supra note 2, at 556.

    [13].   See Act of May 31, 1790, ch. 15, 1 Stat. 124 (repealed 1831) [hereinafter 1790 Act].

    [14].   See Act of Feb. 3, 1831, ch. 16, 4 Stat. 436 (repealed 1870) [hereinafter 1831 Act].

    [15].   See Act of July 8, 1870, ch. 230, 16 Stat. 198 (repealed 1909) [hereinafter 1870 Act].

    [16].   See Act of Mar. 4, 1909, ch. 320, 35 Stat. 1075 (repealed 1976) [hereinafter 1909 Act].

    [17].   See Act of Oct. 19, 1976, Pub. L. No. 94-553, 90 Stat. 2541 (effective Jan. 1, 1978) [hereinafter 1976 Act].

    [18].   See Legislative Appropriations Act of 1955, ch. 568, 69 Stat. 499; Howard B. Abrams, Copyright’s First Compulsory License, 26 Santa Clara Computer & High Tech. L.J. 215, 221 n.33 (2010).

    [19].   Samuelson, supra note 2, at 555.

    [20].   See Jessica Litman, Real Copyright Reform, 96 Iowa L. Rev. 1, 3 (2010) (“The statute was not well-designed to withstand change, and has aged badly.”).

    [21].   See 17 U.S.C. §§ 302–04, 408 (2006).  For U.S. works, registration is a requirement to bring an infringement lawsuit, but relatively few copyright lawsuits are brought each year.  See Edward Lee, Warming Up to User-Generated Content, 2008 U. Ill. L. Rev. 1459, 1476–77 (stating that in 2006, only 4944 copyright suits were filed, with most not ever going to trial).

    [22].   See 17 U.S.C. § 411 (2006).

    [23].   See Berne Convention, supra note 4, art 5(2).

    [24].   See 17 U.S.C. §§ 504–05.

    [25].   See Lee, supra note 21, at 1476–77 (stating that just roughly 5000 suits were filed in 2006).

    [26].   See Peter S. Menell & Michael Meurer, Notice Failure and Notice Externalities (Bos. Univ. Sch. of Law Working Paper No. 11-58, 2011), available athttp://www.bu.edu/law/faculty/scholarship/workingpapers/documents

    [27].   See Joshua O. Mausner, Copyright Orphan Works: A Multi-Pronged Solution to Solve a Harmful Market Inefficiency, 12 J. Tech. L. & Pol’y 395, 398 (2007).

    [28].   See id.

    [29].   See Berne Convention, supra note 4, art. 5(2).

    [30].   See William M. Landes & Richard A. Posner, Indefinitely Renewable Copyright, 70 U. Chi. L. Rev. 471, 477 (2003) (“Equally immense tracing costs would be required to determine the ownership of a parcel of land if titles to land were not recorded in a public registry.  It is not perpetual property rights but the absence of registration that creates prohibitive tracing costs.”).

    [31].   See Mausner, supra note 27, at 412.

    [32].   See Letter from Denise Troll Covey, Principal Librarian for Special Projects, Carnegie Mellon Univ., to Jule L. Sigall, Assoc. Register for Policy & Int’l Affairs, U.S. Copyright Office (Mar. 22, 2005) (on file with Carnegie Mellon Univ. Libraries), available at http://www.copyright.gov/orphan/comments

    [33].   Id.

    [34].   Id.

    [35].   See Letter from Sarah E. Thomas, Carl A. Kroch Univ. Librarian, Cornell Univ. Library, to Jule L. Sigall, Assoc. Register for Policy & Int’l Affairs, U.S. Copyright Office (Mar. 23, 2005), available at http://www.copyright.gov/orphan/comments/OW0569-Thomas.pdf.

    [36].   See Librarian of Congress, Report on Film Preservation 1993: A Study of the Current State of American Film Preservation 5 (1993).

    [37].   See JISC, In From the Cold: An Assessment of the Scope of “Orphan Works” and Its Impact on the Delivery of Services to the Public 18 (2009), available athttp://www.jisc.ac.uk/publications/reports/2009/infromthecold.aspx; see also Katharina de la Durantaye, Finding a Home for Orphans: Google Book Search and Orphan Works Law in the United States and Europe, 21 Fordham Intell. Prop. Media & Ent. L.J. 229, 236–37 (2011) (discussing the results of various studies).

    [38].   See Gowers Review of Intellectual Property 69 (2006), available at www.official-documents.gov.uk/document/other/0118404830/0118404830.pdf [hereinafter Gowers Review]; The British Library Manifesto, Intellectual Property: A Balance 3 (2006), available at http://www.cpic.ru/news/IP

    [39].   Register of Copyrights, Report on Orphan Works 95 (2006) [hereinafter Orphan Works Report], available at http://www.copyright.gov

    [40].   See id. at 96.

    [41].   See Orphan Works Act of 2008, H.R. 5889, 110th Cong. (2008); Shawn Bentley Orphan Works Act of 2008, S. 2913, 110th Cong. (2008); see also The “Orphan Works” Problem and Proposed Legislation: Hearings Before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Committee of the Judiciary, 110th Cong. 131 (2008).

    [42].   See Betsy McKenzie, Orphan Works, Out of the Jungle (Apr. 18, 2011, 9:40 AM), http://outofthejungle.blogspot.com/2011/04/orphan-works.html.

    [43].   See Statement of Interest of the United States of America Regarding Proposed Class Action Settlement, Authors Guild, Inc. v. Google Inc., No. 05 CV 8136-DC (S.D.N.Y. Nov. 19, 2009), at 3 (“In particular, the rediscovery of currently unused or inaccessible works and the digitization of those works in formats that are accessible to persons with disabilities are important public policy goals.  The United States believes that, although the actions of private entities and Congress (if necessary), steps should be taken to advance these objectives.”), available at http://www.justice.gov/atr/cases/f250100/250180.pdf.

    [44].   See Samuelson, supra note 2, at 554–55.

    [45].   See Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property 3 (2011) [hereinafter Hargreaves Review] available athttp://www.ipo.gov.uk/ipreview-finalreport.pdf; Pamela Samuelson & Members of the CPP, The Copyright Principles Project: Directions for Reform 2–3, 18–19 (2010) [hereinafter Copyright Principles Project], available at http://www.law.berkeley.edu/files/bclt_CPP.pdf.

    [46].   See, e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 (9th Cir. 1993).

    [47].   See John S. Sieman, Comment, Using the Implied License to Inject Common Sense Into Digital Copyright, 85 N.C. L. Rev. 885, 891 (2007).

    [48].   See Hannibal Travis, Opting Out of the Internet in the United States and the European Union: Copyright, Safe Harbors, and International Law, 84 Notre Dame L. Rev. 331, 362–63 (2008).

    [49].   See Sieman, supra note 47, at 889–91.

    [50].   See 17 U.S.C. § 106 (2006).  In 1998, Congress created the DMCA safe harbors for ISPs for certain activities of providing Internet access, caching, storage, and location tools.  See id. § 512.

    [51].   See Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121, 139 (2d Cir. 2008); CoStar Grp., Inc. v. LoopNet, Inc., 373 F.3d 544, 546 (4th Cir. 2004); MAI Sys., 991 F.2d at 522–23 (RAM copies infringing); see also Edward Lee, Technological Fair Use, 83 S. Cal. L. Rev. 797, 801–02 (2010).

    [52].   See Hargreaves Review, supra note 45, at 3 (“Digital communications technology involves routine copying of text, images and data, meaning that copyright law has started to act as a regulatory barrier to the creation of certain kinds of new, internet based businesses.”).

    [53].   David Nimmer, Codifying Copyright Comprehensibly, 51 UCLA L. Rev. 1233, 1336 (2004).

    [54].   17 U.S.C. §§ 106(6), 114(d) (2006).

    [55].   See Ralph Oman, Going Back to First Principles: The Exclusive Rights of Authors Reborn, 8 J. High Tech. L. 169, 173 (2008).

    [56].   See 17 U.S.C. § 512 (2006).

    [57].   See Wendy Seltzer, Free Speech Unmoored in Copyright’s Safe Harbor: Chilling Effects of the DMCA on the First Amendment, 24 Harv. J.L. & Tech. 171, 176 (2010) (criticizing DMCA safe harbor process as chilling speech and raising First Amendment concerns); Jennifer M. Urban & Laura Quilter, Efficient Process or “Chilling Effects”? Takedown Notices Under Section 512 of the Digital Millennium Copyright Act, 22 Santa Clara Computer & High Tech. L.J. 621, 684 (2006) (discussing a study showing copyright holders file questionable takedown notices in 22.5% of DMCA notices surveyed).

    [58].   See Edward Lee, Decoding the DMCA Safe Harbors, 32 Colum. J.L. & Arts 233, 252–55, 259–60 (2009).  Several countries have adopted similar approaches to ISP safe harbors requiring a notice-and-takedown process.  See Broder Kleinschmidt, An International Comparison of ISP’s Liabilities for Unlawful Third Party Content, 18 Int’l J.L. & Info. Tech. 332, 337–53 (2010) (discussing approaches in the United States, European Union, Canada, Australia, and New Zealand).

    [59].   See Brandon Brown, Fortifying the Safe Harbors: Reevaluating the DMCA in a Web 2.0 World, 23 Berkeley Tech. L.J. 437, 437 (2008).

    [60].   Viacom Int’l Inc. v. YouTube, Inc., 718 F. Supp. 2d 514, 516, 518–19, 526–27 (S.D.N.Y. 2010); see also Lee, supra note 58, at 258–59.

    [61].   See Samuelson, supra note 2, at 551–54.

    [62].   See generally Joseph P. Liu, Regulatory Copyright, 83 N.C. L. Rev. 87, 102–05 (2004) (discussing regulatory copyright and its affect on industries); Timothy Wu, Copyright’s Communications Policy, 103 Mich. L. Rev. 278, 279 (2004) (“[T]he main challenges for twenty first century copyright are not challenges of authorship policy, but rather new and harder problems for copyright’s communications policy: copyright’s poorly understood role in regulating competition among rival disseminators.”).

    [63].   See, e.g., The Structure of Intellectual Property Law: Can One Size Fit All? (Annette Kur & Vytautas Mizaras eds., 2011) (collecting fourteen articles on intellectual property law); Michael W. Carroll, One Size Does Not Fit All: A Framework for Tailoring Intellectual Property Rights, 70 Ohio St. L.J. 1361, 1389–90 (2009).

    [64].   See Gowers Review, supra note 38, at 69.

    [65].   See Bruce Abramson, Promoting Innovation in the Software Industry: A First Principles Approach to Intellectual Property Reform, 8 B.U. J. Sci. & Tech. L. 75, 135 (2002).

    [66].   See Jessica Litman, The Politics of Intellectual Property, 27 Cardozo Arts & Ent. L.J. 313, 317 (2009); Copyright Principles Project, supra note 45, at 4.

    [67].   See Jessica Litman, War Stories, 20 Cardozo Arts & Ent. L.J. 337, 337 (2002); Copyright Principles Project, supra note 45, at 20.

    [68].   See Litman, supra note 67.

    [69].   See Laura N. Gasaway, Impasse: Distance Learning and Copyright, 62 Ohio St. L.J. 783, 810–14 (2001); Litman, supra note 66, at 315.

    [70].   See William Patry, Moral Panics and the Copyright Wars 11–14 (2009); Litman, supra note 66, at 315.

    [71].   See Litman, supra note 66, at 314.

    [72].   See Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 743 (1989) (stating that the 1976 Copyright Act, “which almost completely revised existing copyright law, was the product of two decades of negotiation by representatives of creators and copyright-using industries, supervised by the Copyright Office and, to a lesser extent, by Congress”).

    [73].   Id.

    [74].   Marybeth Peters, Statement at Annual Meeting, Copyright Society of the USA, Panel on “To Reform or Not to Reform: That Is the Question” (June 10, 2011).

    [75].   See        Rochelle Cooper Dreyfuss & Roberta Rosenthal Kwall, Intellectual Property 218–20 (Robert C. Clark et al. eds., 2d ed. 2004).

    [76].   TRIPS Agreement, supra note 4, art. 9.  The key practical difference between the two is that TRIPS is subject to enforcement proceedings under the WTO’s Dispute Settlement Body, whereas the Berne Convention has no comparable enforcement body.  See Overview: The TRIPS Agreement, World Trade Org., http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm (last visited Feb. 10, 2012).

    [77].   See Berne Convention, supra note 4, art. 5(3) (“Protection in the country of origin is governed by domestic law.”).

    [78].   See Chow & Lee, supra note 8, at 95–96.

    [79].   See, e.g., Christopher Sprigman, Reform(aliz)ing Copyright, 57 Stan. L. Rev. 485, 552, 555 (2004).

    [80].   Berne Convention, supra note 4, art. 5(2).

    [81].   Sprigman, supra note 79, at 555.

    [82].   See TRIPS Agreement, supra note 4, art. 13.

    [83].   See Lawrence Lessig, Free Culture: How Big Media Uses Technology and the Law to Lock Down Culture and Control Creativity 287–93 (2004).

    [84].   Berne Convention, supra note 4, art. 7(1).

    [85].   Id. art. 7(8).

    [86].   See Eldred v. Ashcroft, 537 U.S. 186, 205–06 (2003).

    [87].   See Stanley S. Surrey, Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures, 83 Harv. L. Rev. 705, 707 (1970).

    [88].   See, e.g., I.R.C. §§ 21-26 (2006) (various personal credits); id. §§ 27, 30-30D (other credits); id. §§ 31-36A (refundable credits); id. §§ 38-45Q (business related credits); id. § 54 (credit to holders of clean renewable energy bonds); id. § 54A-54F (qualified tax credit bonds); id. § 54AA (credit for Build America bonds).

    [89].   Surrey, supra note 87, at 706; see also id. at 713.

    [90].   I.R.C. § 25A, 222 (2006); see also Bradley R. Palmer, Uncle Sam, Tuition Costs, and the Changing Economy: Tax Incentives for Education Expenses and How to Improve Them, 38 J.L. & Educ. 345, 345 (2009).

    [91].   I.R.C. § 41 (2006); see also Evan Wamsley, Note, The Definition of Qualified Research Under the Section 41 Research and Development Tax Credit: Its Impact on the Credit’s Effectiveness, 87 Va. L. Rev. 165, 166 (2001).

    [92].   See A. C. Pigou, The Economics of Welfare 192 (4th ed. 1932); W. Kip Viscusi, The Governmental Composition of the Insurance Costs of Smoking, 42 J.L. & Econ. 575, 581–83 (1999).

    [93].   See Surrey, supra note 87, at 706.

    [94].   See Jeff Strnad, Conceptualizing the “Fat Tax”: The Role of Food Taxes in Developed Economies, 78 S. Cal. L. Rev. 1221, 1224–25 (2005).

    [95].   See Richard P. Manczak & Jeffrey D. Moss, “Green” Tax Incentives, 90 Mich. B. J. 27, 28–29 (2011); see, e.g., I.R.C. §§ 45, 48, 136, 168 (2006).

    [96].   See Patient Protection and Affordable Care Act, § 1501(b), 124 Stat. 244 (codified at 26 U.S.C. § 5000A), amended by Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (2010); Florida v. U.S. Dep’t of Health & Human Servs., 648 F.3d 1235, 1255–60 (11th Cir. 2011) (explaining the individual mandate in the Tax Code).

    [97].   See Helvering v. Hammel, 311 U.S. 504, 509 (1941) (citing H.R. Rep. No. 67-350, at 8 (1921)) (justifying preferential rate for capital gains “as the means of encouraging profit-taking sales of capital investments”); Noël B. Cunningham & Deborah H. Schenk, The Case for a Capital Gains Preference, 48 Tax L. Rev. 319, 340–41 (1993).

    [98].   John G. Steinkamp, A Case for Federal Transfer Taxation, 55 Ark. L. Rev. 1, 32 (2002).  See generally Cunningham & Schenk, supra note 97 (discussing the arguments in favor of and opposing a lower tax rate for capital gains versus ordinary income).

    [99].   See The Homebuyer Assistance Improvement Act of 2010, Pub. L. No. 111-198.

   [100].   See Surrey, supra note 87, at 731–32.

   [101].   For more on Surrey’s view, see Stanley S. Surrey, Pathways to Tax Reform: The Concept of Tax Expenditures 30–31 (1973).

   [102].   I.R.C. § 61 (2006) (including royalties with gross income).

   [103].   See id. § 1221(a)(3) (stating that capital asset does not include “a copyright, a literary, musical, or artistic composition”).

   [104].   Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, tit. III, sec. 301, § 301(a)(2), 117 Stat. 752, 758 (2002).

   [105].   See I.R.C. § 1221(b)(3) (2006) (“At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).”); Spencer Anastasio, Copyright Tax in the New Millennium, Ent. & Sports Law., Fall 2007, at 1, 24–25 (2007) (discussing the capital gains rate tax exception for sold musical compositions or copyrights in musical works).

   [106].   See Capital Gains Tax Equity Act Becomes Law, Nashville Songwriters Assoc. Int’l (May 11, 2006), http://legislative.nashvillesongwriters.com/news.php?viewStory=49.

   [107].   See Tax Cut Package Contains Breaks for Songwriters, Broadcast Music, Inc., (May 11, 2006), http://www.bmi.com/news/entry/334803.

   [108].   See Capital Gains Tax Equity Act Becomes Law, supra note 106.

   [109].   Xuan-Thao Nguyen & Jeffrey A. Maine, Equity and Efficiency in Intellectual Property Taxation, 76 Brook. L. Rev. 1, 25 (2010).

   [110].   I.R.C. § 1235 (2006); Nguyen & Maine, supra note 109, at 14.

   [111].   See 17 U.S.C. § 301 (2006) (describing preemption of state law).

   [112].   See Joshua R. Schonauer, Star Billing? Recasting State Tax Incentives for the “Hollywood” Machine, 71 Ohio St. L.J. 381, 386 & n.29 (2010) (discussing the benefits of low-cost destinations for film shoots); Producers Guild of America, http://www.filmusa.org (displaying a chart of states with tax incentives for movies) (last visited Feb. 10, 2012).

   [113].   Schonauer, supra note 112, at 387–91.

   [114].   See, e.g., Alan Wirzbicki, Is the Massachusetts Film Tax Credit Worth the Cost?, Boston Globe (Jan. 14, 2011, 5:11 PM) http://www.boston.com

   [115].   See, e.g., Michael Cieply, Jitters Are Setting In for States Giving Big Incentives to Lure Film Producers, N.Y. Times, Oct. 12, 2008, at A26.

   [116].   See id. (discussing films made in Louisiana, Rhode Island, New Mexico, Michigan).

   [117].   Schonauer, supra note 112, at 398–99; Cieply, supra note 115, at A26.

   [118].   Although another WTO agreement does limit countries from using taxes that constitute “export subsidies,” the limitation is narrowly defined to subsidies that are “contingent . . . upon export performance.”  Appellate Body Report, United States—Tax Treatment for Foreign Sales Corporations, ¶ 3 WT/DS108/AB/RW (Jan. 14, 2002); Agreement on Subsidies and Countervailing Measures (“SCM Agreement”), World Trade Org., http://www.wto.org/english
/tratop_e/scm_e/subs_e.htm (last visited Feb. 10, 2012).  None of the tax incentives for copyright law contemplated by this Article would fall within this definition of export subsidy.  Moreover, the General Agreement on Tariffs and Trade (“GATT”) does prohibit some tax measures that discriminate against foreign goods (a violation of national treatment).  See General Agreement on Tariffs and Trade art. III, Oct. 30, 1947, 61 Stat. A3, 55 U.N.T.S. 188 [hereinafter GATT]; Alan C. Swan, NAFTA Chapter 11—”Direct Effect” and Interpretive Method: Lessons from Methanex v. United States, 64 U. Miami L. Rev. 21, 63–64 (2009).  The taxes proposed herein do not discriminate against foreigners.

   [119].   See Berne Convention, supra note 4, art. 5 (“Authors shall enjoy, in respect of works for which they are protected under this Convention, in countries of the Union other than the country of origin, the rights which their respective laws do now or may hereafter grant to their nationals, as well as the rights specially granted by this Convention.”) (emphasis added).

   [120].   See 17 U.S.C. § 411 (2006) (requiring registration for “United States work”); id. § 101 (defining “United States work”).

   [121].   See Berne Convention, supra note 4, art 5(1).

   [122].   Id. art. 7(1); see, e.g., Sprigman, supra note 79, at 554 (discussing the proposed Public Domain Enhancement Act, H.R. 2601, 108th Cong. (2003)).

   [123].   See Berne Convention, supra note 4, art. 5(4)(a) (stating that a work’s country of origin is the country in which the work was first published).

   [124].   See Carroll, supra note 63, at 1389 (emphasis omitted).

   [125].   1 Melville B. Nimmer & David Nimmer, Nimmer on Copyright §§ 2.04[C][2], 2.04[C][5] (Matthew Bender, rev. ed. 2011).

   [126].   See id. § 5.01[A] (stating that copyright vests in the author at the time of creation without qualification).

   [127].   See, e.g., 17 U.S.C. §§ 111, 113–114, 118–120, 122 (2006).

   [128].   U.S. Copyright Office, General Guide to the Copyright Act of 1976, at 1:1–1:3 (Sept. 1977), available at http://www.copyright.gov/reports/guide-to

   [129].   See, e.g., Cong. Budget Office, Copyright Issues in Digital Media, at viii (Aug. 2004), available at http://www.cbo.gov/ftpdocs/57xx/doc5738/08-09
-Copyright.pdf (“Because of the growing number and diversity of interests with a stake in the digital copyright debate, many observers believe that the Congress may need to legislate a balance in copyright law between private incentives and societal gains.”).

   [130].   Private registries could be also used if the Copyright Act is revised to include third-party registrations as some commentators have proposed.  See Copyright Principles Project, supra note 45, at 24.

   [131].   See Orphan Works Report, supra note 39, at 3.

   [132].   See 1909 Act § 23, supra note 16 (requiring renewal registration in the twenty-eighth year of copyright).

   [133].   See Orphan Works Report, supra note 39, at 3.

   [134].   See id.

   [135].   Register of Copyrights Marybeth Peters, The Importance of Orphan Works Legislation, U.S. Copyright Office (Sept. 25, 2008), http://www.copyright.gov/orphan/.

   [136].   The tax incentives would probably affect a much greater number of works because many more works are commercially exploited than are ever involved in a lawsuit (which requires registration as a precondition).  See Lee, supra note 21, at 1542–43.

   [137].   Cf. 1 Sam Ricketson & Jane C. Ginsburg, International Copyright and Neighboring Rights: The Berne Convention and Beyond §§ 6.107-6.108, at 328–29 (2d ed. 2005) (noting that countries may use “carrots” to encourage registration because Berne “merely bars making compliance [with registration] mandatory for non-domestic works”).

   [138].   See I.R.C. § 1(h) (2006).

   [139].   It goes beyond the scope of this Article to justify or debate the merits of the copyright reforms discussed.  For the purposes of this Article, the merits of a particular copyright reform are not essential to understanding the method of using the Tax Code to further copyright objectives.

   [140].   See Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 349 (1991) (“The primary objective of copyright is not to reward the labor of authors, but ‘[t]o promote the Progress of Science and useful Arts.’”).

   [141].   An extensive debate over the (de)merits of lengthy copyright terms followed the Supreme Court’s upholding of the constitutionality of the Sonny Bono Copyright Term Extension Act of 1998, which extended the terms of copyrights by twenty more years.  See Eldred v. Ashcroft, 537 U.S. 186, 222 (2003); see alsoGowers Review, supra note 38, at 52 (discussing the estimated economic effects of Eldred on the music industry); Marshall Leaffer, Life After Eldred: The Supreme Court and the Future of Copyright, 30 Wm. Mitchell L. Rev. 1597, 1599–1606 (2004) (discussing the Eldred decision and its consequences for Article I, Congress, and the First Amendment).

   [142].   See Nat’l Comics Publ’ns v. Fawcett Publ’ns, 191 F.2d 594, 597–98 (2d Cir. 1951).

   [143].   See generally Catherine L. Fisk, Authors at Work: The Origins of the Work-for-Hire Doctrine, 15 Yale J.L. & Human. 1 (2003) (describing the evolution of Congress’s treatment of corporate authorship under the “works made for hire” exception to the Copyright Act); see also Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989) (discussing the “works made for hire” doctrine).

   [144].   For simplicity, I have rounded all percentages in the tax rates to the nearest whole number.

   [145].   Alternatively, if Congress wanted to create a more limited tax benefit, it could limit the preferential copyright gains tax rate to one year or a few years.

   [146].   Berne Convention, supra note 4, art. 7(1).

   [147].   Id. art. 7(8).

   [148].   Id.

   [149].   Id.

   [150].   Lisa M. Brownlee, Recent Changes in the Duration of Copyright in the United States and European Union: Procedure and Policy, 6 Fordham Intell. Prop. Media & Ent. L.J. 579, 614–15 (1996).

   [151].   Michael Landau, Fitting United States Copyright Law into the International Scheme: Foreign and Domestic Challenges to Recent Legislation, 23 Ga. St. U. L. Rev. 847, 858–59 (2007).

   [152].   Berne Convention, supra note 4, art. 7(8) (emphasis added).

   [153].   See The Blair Witch Project, Box Office Mojo, http://www.boxofficemojo.com/movies/?id=blairwitchproject.htm (last updated Oct. 27, 2011) (stating total domestic gross of $140,539,099).

   [154].   See John Young, “The Blair Witch Project” 10 Years Later, Ent. Wkly., (July 9, 2009, 8:29 PM), http://popwatch.ew.com/2009/07/09/blair-witch/.

   [155].   For more on the questionable accounting methods used by Hollywood studios, see Bill Daniels et al., Movie Money: Understanding Hollywood’s (Creative) Accounting Practices 10 (1998); Roman M. Silberfeld & Bernice Conn, The Red and the Black, L.A. Law., May 2011, at 36.

   [156].   In 1999, the top corporate tax rate in the United States was forty percent.  See Chris Edwards, The U.S. Corporate Tax Rate and the Global Economy, Tax and Budget Bulletin, No. 18, Sept. 2003, at 2, available at http://www.cato.org/pubs/tbb/tbb-0309-18.pdf.  So, if I used forty percent instead of thirty-five percent, the amount of taxes would be even higher.

   [157].   See I.R.C. § 167(g) (2006).

   [158].   I assumed the movie made only $5 million in profit in the nine years following its release.

[159].  For more on how the derivative works right can retard follow-on creations, see Christina Bohannan, Taming the Derivative Works Right: A Modest Proposal for Reducing Overbreadth and Vagueness in Copyright, 12 Vand. J. Ent. & Tech. L. 669, 677–81 (2010); Glynn S. Lunney, Jr., Copyright, Derivative Works, and the Economics of Complements, 12 Vand. J. Ent. & Tech. L. 779, 782 (2010); Jed Rubenfeld, The Freedom of Imagination: Copyright’s Constitutionality, 112 Yale L.J. 1, 53 (2002).

   [160].   See Michael W. Carroll, Creative Commons and the New Intermediaries, 2006 Mich. St. L. Rev. 45, 47–48 (2006).

   [161].   See About the Licenses, Creative Commons, http://creativecommons.org
/licenses/ (last visited Jan. 17, 2012)       .

   [162].   See Berne Convention, supra note 4, arts. 12, 14.

   [163].   See Lee, supra note 21, at 1530–31.

   [164].   Id. at 1508–09.

   [165].   See generally Brian H. Jenn, The Case for Tax Credits, 61 Tax Law. 549 (2008) (describing the benefit of tax credits over deductions and exclusions).

   [166].   See, e.g., Jeffrey D. Moss, Solar Panels, Tax Incentives, and Your House, Prob. & Prop., Jan.–Feb. 2010, at 17, 18 (2010).

   [167].   I.R.C. § 24 (2006).

   [168].   Janet E. Milne, Environmental Taxation in the United States: The Long View, 15 Lewis & Clark L. Rev. 417, 443 n.131 (2011).

   [169].   See, e.g., Moss, supra note 166, at 20 (discussing carryover for North Carolina renewable energy tax credit).

   [170].   College tuition has risen, on average, over 136% during the past twenty years.  See Laura Meckler & Stephanie Banchero, U.S. News: Obama Plans to Curb Tuition, Wall St. J., Jan. 28, 2012, at A3.

   [171].   See I.R.C. § 170 (2006) (allowing tax deductions for contributions to charitable institutions).

   [172].   See Natsuko Hayashi Nicholls, Scholarly Publ’g Office, Univ. of Mich. Library, The Investigation into the Rising Costs of Textbooks 4–5 (2009), available at http://hdl.handle.net/2027.42/78553; see also id. at 5 (“[B]etween December of 1986 and December of 2004, textbook prices have increased at twice the rate of inflation, increasing by 186 percent, whereas tuition and fees increased by 240 percent and overall price inflation grew by 72 percent.  While increases in textbook prices have followed close behind tuition increases, the estimated cost of textbooks and supplies for the average four-year undergraduate student was $898 for the academic year 2003–2004, or about 26 percent of the cost of tuition and fees at four-year public institutions.”) (citation omitted).

   [173].   See Peter Coy, Why the Debt Crisis Is Even Worse Than You Think, Businessweek, (July 27, 2011, 11:05 PM), http://www.businessweek.com

   [174].   See The Fallacy of Using Tax Cuts to Fix Recession, NPR (Feb. 16, 2009), available at http://www.npr.org/templates/story/story.php?storyId
=100746977 (interview with David Cay Johnston).

   [175].   See Heidi Przybyla & John McCormick, Poll: Americans Don’t Know Economy Expanded with Tax Cuts, Bloomberg, (Oct. 29, 2010, 11:19 AM), http://www.bloomberg.com/news/2010‑10‑29/poll‑shows‑americans‑don‑t‑know‑economy-expanded-with-tax-cuts.html (“The Obama administration has cut taxes—largely for the middle class—by $240 billion since taking office . . . .”).

   [176].   See Opinion, An Inferior Tax Cut: A Temporary Payroll Break Won’t Help Growth or Hiring, Wall St. J., Aug. 20, 2011, at A12 (discussing Democrat payroll tax cut plan and Republican plan for tax cuts for individuals and businesses).

   [177].   See Int’l Intellectual Prop. Alliance (IIPA), Copyright Industries in the U.S. Economy: The 2003–2007 Report 5–7 (2009), available athttp://www.iipa.com/pdf/IIPASiwekReport2003-07.pdf.

   [178].   Brief for Peter Decherney as Amicus Curiae Supporting Petitioners, Golan v. Holder, 131 S. Ct. 1600 (2011) (No. 10-544), 2011 WL 2470832 app. A.

   [179].   See Jane C. Ginsburg, The Author’s Place in the Future of Copyright, 45 Willamette L. Rev. 381, 387–94 (2009) (arguing that the copyright system should be designed in part to facilitate professional authors).

   [180].   See generally Chris Anderson, The Long Tail: Why the Future of Business is Selling Less of More (2006).

   [181].   The fee in 2011 is $50 for paper registration and $35 for electronic registration.  Registering a Work (FAQ), U.S. Copyright Office (last modified Mar. 22, 2010), http://www.copyright.gov/help/faq/faq-register.html.

   [182].   See Staff of S. Comm. on the Budget, 110th Cong., Tax Expenditures 390–91 (Comm. Print 2008).

   [183].   See Nonna A. Nato, Cong. Research Serv., R41480, Raising the Tax Rates on High-Income Taxpayers: Pros and Cons 17 (2010).

   [184].   The Blair Witch Project is a rare example of a mega-blockbuster movie that cost very little to produce so the amount of potential tax savings for the movie may be larger than what would be typical in the “long tail” of creative productions.  See generally Anderson, supra note 180 (discussing how many, smaller-income-generating works may produce substantial income in aggregate).  As an example of a potentially large tax savings, it provides a good measuring stick to test the desirability of the copyright gains tax.

   [185].   See Emma Clark, How Films Make Money, (Nov. 12, 2001), BBC News, http://news.bbc.co.uk/2/hi/business/1646640.stm.

   [186].   See Allison Linn, Retailers Hope Harry Potter Proves Magical, MSNBC (July 16, 2007), http://www.msnbc.msn.com/id/19745297/ns/business

   [187].   See Ethan Smith, Michelle Kung & Robert A. Guth, Potter Studio Tries to Keep Profits from Going Poof!, Wall St. J., July 15, 2011, at A1.

   [188].   See Michael S. Kirsch, The Congressional Response to Corporate Expatriations: The Tension Between Symbols and Substance in the Taxation of Multinational Corporations, 24 Va. Tax Rev. 475, 505–07, 545 (2005); I.R.C. § 7874 (2006); see also id. §§ 951-65, 1291-98 (provisions governing tax treatment of controlled foreign corporations and passive foreign investment companies).

   [189].   ASA Investerings P’ship v. Comm’r, 201 F.3d 505, 513 (D.C. Cir. 2000).

   [190].   Nguyen & Maine, supra note 109, at 14.

   [191].   See Orphan Works Report, supra note 39, at 15.

   [192].   See, e.g., Prioritizing Resources and Organization for Intellectual Property Act of 2008, Pub. L. No. 110-403, 122 Stat. 4256.

   [193].   See Marc H. Greenberg, Reason or Madness: A Defense of Copyright’s Growing Pains, 7 J. Marshall Rev. Intell. Prop. L. 1, 27 n.137 (2007).

   [194].   See Lee, supra note 21, at 1539 (“This inherent uncertainty makes the Copyright Act even worse than the Tax Code, which, despite its complexity, provides millions of taxpayers at least with enough certainty for them to figure out how much taxes to pay each year—even providing the public with the option of electing the simpler, standard deduction.”); Michael J. Madison, Rewriting Fair Use and the Future of Copyright Reform, 23 Cardozo Arts & Ent. L.J. 391, 396 (2005) (“[T]he complexity of the copyright statute already compares unfavorably to the tax code . . . .”); see also U.S. Dep’t of the Treasury, Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance 25 (2009); Tax Code Complexity: New Hope for Fresh Solutions: Hearing Before the S. Comm. on Fin., 107th Cong. 39–40 (2001) (statement of Richard M. Lipton, Chair, Section on Taxation, American Bar Association).

   [195].   See Statistics: Individual Tax, IRS Tax Stats (Apr. 18, 2011), http://www.irs.gov/newsroom/article/0,,id=238634,00.html.

   [196].   In addition, the IRS and Copyright Office can coordinate their electronic databases to match up a tax filing to a registered copyrighted work.

   [197].   See Significant Achievements, Trilateral, http://www.trilateral.net
/about/achievements.html (last visited Feb. 10, 2012).