A Taxing Blog

Friday, August 22, 2003
Deals Class  
I taught my first Deals class of the semester yesterday -- and discovered I still had a bit a nerves, even though this is now my fourth semester teaching. Well, they say that being a little nervous is good. I'm not sure why they say that, but it's nice to hear. The students seem like a bright and enthusiastic bunch -- it should be a great semester.

Some Taxing Blog readers asked me about the Deals class and what it's about. Here's a syllabus.

The goal of the course is to talk about what transactional lawyers do. (Unlike most law school courses, which teach you what appellate litigators do.)

In the first part of the course, we look at the lawyer's role in identifying and managing business risks, or what Prof Ron Gilson calls "Transaction Cost Engineering."

Every deal has information problems and behavior problems, and deal lawyers spend most of their time identifying these risks and allocating them (often, but not always, to the most efficient risk bearer) through private, contractual solutions.

So, for example, Buyer might be concerned that Seller's assets aren't as good as Seller says; Buyer's lawyer might (1) add a representation to the Stock Purchase Agreement (2) design an earnout clause in the purchase price (3) get a third party to assess the value of the assets, (4) investigate Seller's reputation, and so on. This isn't "law" as we normally think of it, but it's the bulk of what transactional lawyers do.

This is even true of tax lawyers to some extent, except we argue about tax risk instead of business risks. In my brief experience in practice, I spent many hours figuring out how best to disclose tax risks to prospective securities purchasers, or arguing with opposing counsel over who should be liable if there was a hidden tax liability, and so on.

The second part of the Deals course looks at the lawyer's role in exploiting the gap between the economics of a deal and its legal, tax, accounting, securities, or other regulatory treatment. We'll be looking at this from both a "nonabusive" planning standpoint (stock for stock deal vs. stock for assets deal) and also from an abusive Enron-style gamesmanship standpoint. (Now if I could only figure out how to draw a line between the two.)

The last part of the course is a series of case studies. This year we will do a venture capital transaction, a securitization, and an asset purchase deal from a Chap 11 Debtor. We will also do a few negotiation and drafting simulations inside and outside of class.

Should be fun.

I'm redesigning the class on a fairly continuous basis, so any comments would be welcomed at fleischer at law dot ucla dot edu.

Wednesday, August 20, 2003
Good News  
My latest piece, Tax Reality Bites, has been accepted for publication by Tax Notes and should be in the September 1 issue. That is the nice thing about Tax Notes, you submit and, one month later, you get to see your piece published. I hope readers will take a look at the piece (I am assuming most readers here have access to Tax Notes) and will send me any comments that they might have.

Speaking of Tax Notes, I have been reading a lot lately about the Service's decision to cut down on 355 rulings. It sounds like they want to move the resources elsewhere. I may discuss in more detail later as I get a sense of the issue (if there is one). It just shows how easy it is to become cut off from the practice when you have been an academic for a few years. I am actually trying to think of ways to stay more active in the cutting edge stuff and any suggestions are welcome.

Tuesday, August 19, 2003
The Rational Exuberance of Structuring Venture Capital Startups  
I've (finally) posted my "job talk" paper, The Rational Exuberance of Structuring Venture Capital Startups, on SSRN. Here's the abstract:

This Article takes the bursting of the dot com bubble as an opportunity to reevaluate the tax structure of venture capital startups. By organizing startups as corporations rather than as partnerships, investors and entrepreneurs seem to leave money on the table by failing to fully use tax losses - especially since the vast majority of startups fail. Conventional wisdom attributes the lack of attention paid to losses to a "gambler's mentality" or optimism bias. I argue here that the use of the corporate form is, in fact, rational, or at least that there is a method to the madness.

I make four main points. First, the tax losses are not as valuable as they might seem; tax rules prohibit many investors from capturing the full benefit of the losses. Second, the VC professionals who structure the deals do not personally share in the losses, so they have little reason to care about the tax effects of the losses. Third, gains are taxed more favorably if the startup is organized as a corporation from the outset, and again, this favorable treatment of gains is especially attractive to the VC professionals - further evidence that agency costs may be playing a role here. Fourth, corporations are less complex than partnerships: organizing as a corporation minimizes legal costs and simplifies employee compensation and exit strategy.

I submitted it to the law reviews last week, and I've gotten one offer and an encouraging inquiry from an editor at a top 20 review. Keep your fingers crossed.

Meanwhile, I'm working on the next article, which examines the normative implications of how the tax system treates venture capital -- should we use the tax system to subsidize venture capital, and if so, how? I'll post more on this next week.

Monday, August 18, 2003
Dynamic Scoring  
Rudolph Penner has a column on the process of scoring bills for the CBO. (Link via the Tax Policy Center at Brookings.)

Penner writes a great lede for the story:

Despite what you think, the most important form of scoring in Congress has nothing to do with sex.

I wonder if he's willing to write an opener for my next law review article.

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