Category: Regulatory

Making Copies! The Fourth Circuit Defines Taxable Costs Associated With eDiscovery

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Can this happen to your client? Your client gets sued, is forced to spend over $100,000 on eDiscovery despite you making all the right objections, you deliver a clean victory on dispositive motions and the District Court awards costs of … $200. Here is what happened in the Fourth Circuit and what you can do to help your clients avoid the same fate:

The Fourth Circuit just decided the scope of taxable eDiscovery costs under 28 U.S.C. § 1920(4) in Country Vintner of North Carolina v. E. & J. Gallo Winery, Inc., __ F.3d __, 2013 WL 1789728 (4th Cir. Apr. 29, 2013). Section 1920(4) allows the District Courts to “tax as costs … [f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Id. 1   Under Federal Rule of Civil Procedure 54(d)(1), the cost of making copies “should be allowed to the prevailing party.” As an initial matter, the Fourth Circuit concluded that section 1920(4) applies to the costs related to documents produced in discovery – not just used at trial or in connection with a dispositive motion. Country Vintner, 2013 WL 1789728, *7. The Fourth Circuit then examined the meaning of “making copies,” and held that section 1920(4) “limits taxable costs to … converting electronic files to non-editable formats and burning files onto discs.” Id., *9. 2   In reaching that conclusion, the Fourth Circuit explicitly rejected the argument that “ESI processing costs constitute[d]” “making copies” under Section 1920(4). Id., *7. As a consequence, Appellant Gallo was awarded only $218.59 out of the $111,047.75 in eDiscovery costs it sought.

What does that mean?

Appellant Gallo sought more than $70,000 for “indexing” and “flattening” ESI – processing methods that extracted irrelevant files and duplicates, made the remaining data searchable, and organized the data; spent more than $15,000 extracting and organizing metadata and preparing it for review; less than $100 on electronic bates numbering; and over $20,000 on quality assurance and preparing the document production. None of these costs were taxed. Instead, Gallo received only $178.59 to convert certain native files into TIFF and PDF format and another $40 to burn images onto CDs. While the documents could not be “copied” without all of the processing that preceded it, such processing costs will not be shifted through a bill of costs. Id., *8-9 (citing Race Tires Am., supra n. 2, 674 F.3d at 169).

What lessons can we learn?

The Fourth Circuit seems to recognize the harshness of its ruling and provides two helpful clues for future litigants seeking to manage their eDiscovery burdens. The court first observes: “That Gallo will recover only a fraction of its litigation costs under our approach does not establish that our reading of the statute is too grudging in an age of unforeseen innovations in litigation-support technology.” Id., *9. Then, the court leaves open the question of whether the allowable costs of production might include the processing costs had the parties “clearly agreed to the production of ESI on a particular database or in native file format.” Id., *9 n. 20 (citing In re Ricoh Co., Ltd. Patent Litig., 661 F.3d 1361, 1365–66 (Fed. Cir. 2011) (holding that $234,702.43 for the cost of an electronic database which the parties agreed to use for document production would have been allowed, but for the parties’ agreement to share costs)). Next, the court points out that, where discovery costs are excessive, the responding party can move for a protective order and, if that motion is denied (as Gallo’s motion was denied), then the responding party “can appeal that decision” Id., *9; id., *9 n. 21 (noting that Gallo had not appealed the denial of its motion for protective order).

Lesson #1: While it is not entirely clear how the parties’ agreement to utilize a particular format or database alters the conclusion that processing is not “making copies,” the Fourth Circuit seems to suggest that it might. 3  So, any party seeking to shift its eDiscovery costs should consider agreeing with the other side regarding the format or database to be used to handle the parties’ productions.

Lesson #2: While it is not entirely clear whether parties are entitled to file an interlocutory appeal with respect to the denial of a motion for protective order, the Fourth Circuit seems to urge parties to do so. 4  Either the court is encouraging interlocutory appeals before the ESI expenses are incurred, or the court is suggesting that a final judgment (for either party) does not moot the trial court’s refusal to shift pre-trial eDiscovery costs.

 1 Because appellant Gallo’s eDiscovery costs neither involved authentication of public records nor demonstrative exhibits – two potential meanings of exemplification – the Fourth Circuit did not define the meaning of exemplification in this case.  Country Vintner, 2013 WL 1789728, *10.

 2 In reaching that conclusion, the Fourth Circuit aligned itself with the Third Circuit’s approach in Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012).

3  In distinguishing In re Ricoh Co., the Third Circuit explained: “we have acknowledged that the costs of conversion to an agreed-upon production format are taxable as the functional equivalent of ‘making copies.’ It is all the other activity, such as searching, culling and deduplication that are not taxable.” Race Tires Am., 674 F.3d at 171 n.11.

 4 On one hand, discovery orders against a party are not immediately appealable. See, e.g., Nicholas v. Wyndham Int’l, Inc., 373 F.3d 537 (4th Cir. 2004). On the other hand, most discovery orders will be moot by the time a final order is entered. See, e.g., E. H. Reise v. Bd. of Regents of the Univ. of Wisconsin, Sys., 957 F.2d 293, 295-296 (7th Cir. 1992).

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Vapor Intrusion Regulation and Environmental Remediation

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EPA recently issued two draft guidance documents on vapor intrusion and will accept comments on them through May 24, 2013. If finalized in current form, these guidance documents would formalize and enhance EPA’s existing practice of prioritizing vapor intrusion as a central issue in environmental remediation and could result in increases in the expense and effort required from responsible parties to achieve compliance for cleanup of contaminated sites conducted under federal authorities such as CERCLA or RCRA. They could also be highly influential in clean-ups overseen by state regulators.

Lastly, while intended for use in the regulatory context, recommendations in these guidance documents may be used to establish a standard of care in litigation involving vapor intrusion (e.g., RCRA citizen suits or common law toxic tort litigation).

Vapor intrusion is the migration of hazardous vapor from contaminated soil or groundwater into an overlying building.  It is considered potentially harmful to human health, creates risks in real estate transactions and financing due to potentially diminished property values and environmental liability, increases exposure in toxic tort litigation, and, in the federal regulatory context, is considered a pathway of possible exposure that must be evaluated as part of the evaluation and selection of a site remediation plan.

The first of these two guidance documents was prepared by EPA’s Office of Solid Waste and Emergency Response (OSWER) and is a comprehensive set of technical and policy recommendations regarding indoor air contamination arising from subsurface-source vapor intrusion attributable to all classes of volatile, or vapor-forming, chemicals (VI Guidance).[1]  The VI Guidance modifies and expands draft guidance on vapor intrusion issued by the agency in 2002 (2002 Draft VI Guidance), which provided general direction for evaluating the potential for vapor intrusion pathways at cleanup sites but omitted any measures for delineation and mitigation of potential risks.[2]  In a 2009 report, EPA’s Office of the Inspector General (OIG) recommended that EPA update the 2002 Draft VI Guidance to reflect the numerous technical and policy advancements made since that time in both the public and private sectors.

The second guidance document was prepared by EPA’s Office of Underground Storage Tanks (OUST) and is focused on investigations and assessments at petroleum contaminated sites where vapor intrusion by petroleum hydrocarbons may occur (Petroleum VI Guidance).[3]

VI Guidance

The VI Guidance presents a step-by-step vapor intrusion assessment plan, beginning with gathering and evaluating data for an initial conceptual site model, through collecting and evaluating additional data from various sources, and culminating in a risk assessment.  According to EPA, the VI Guidance addresses the recommendations made in the OIG’s 2009 report and takes into consideration more recent guidance developed by states and other technical working groups.  Some of the elements in this document may well trigger an increase in expense in addressing VI risks and lengthen the site evaluation process.

·        Superfund Five-Year Reviews: At Superfund sites that require five-year reviews,[4]EPA will gather data on vapor intrusion pathways and assess the sufficiency of the selected remedy for follow up in the five-year review report.  Therefore, according to the VI Guidance and related Directive 9200.2-84,[5] the five-year review process could result in the re-opening of established Superfund remedies to address vapor intrusion, “even if vapor intrusion was not addressed as part of the original remedial action.”[6]

·        Preemptive Mitigation/Early Action: EPA recommends consideration of engineered methods to reduce vapor in buildings (e.g., by installing a radon-type detection system or vapor barriers), even in the absence of all pertinent lines of evidence necessary to characterize the vapor intrusion pathway.  Any such measure would be an early effort to cut off exposure before completing investigations, but would not address the subsurface vapor source.  The agency’s rationale is that installation of engineered exposure controls in buildings is typically more cost-effective and less disruptive than conventional vapor intrusion investigations and subsurface characterization.  Once preemptive mitigation measures are installed, however, that may conclude only an initial step rather than complete remediation.  In the context of brownfields programs, treating preemptive mitigation now as only an interim solution may affect long term redevelopment plans.

·        Aggregate Noncancer Health Risk: Even when the exposure level for each contaminant at a site is below screening levels and it is assumed that each “acts independently (i.e., there are no synergistic or antagonistic toxicity interactions among the chemicals)”, the VI Guidance nevertheless proposes that a risk manager aggregate the individual noncancer health risks associated with each contaminant exposure to determine whether a response is warranted.  The aggregated risk is reflected in a “noncancer hazard quotient” that would ultimately drive the response.  This approach could be overly precautionary if the aggregated sum overstates the actual risks presented by the individual constituents.  Furthermore, the VI Guidance recommends use of multiple lines of evidence in calculating and evaluating these risks, a process that may prolong response decisions and negatively affect situations where quick resolution of VI issues is paramount (e.g., brownfield redevelopment projects).  On the other hand, evaluation of multiple lines of evidence may be more advantageous to the extent it provides for a more informed view of likely risk.

·        Background Levels: Time-integrated sampling of volatile chemicals (as opposed to short-duration, or “grab” sampling) at multiple locations in and around a site is, in EPA’s view, necessary to distinguish among potential sources of these chemicals (i.e., ambient sources, indoor sources, or vapor intrusion).  In the past, generic values of historic background concentrations have been used to characterize ambient or indoor source concentrations.  However, EPA now recommends against the use of these generic values, even those from peer-reviewed sources, and instead asserts that only site-specific data (e.g., sub-slab, indoor air, and ambient air sampling data) should be used.  This recommendation will likely lead to improved accuracy and better understanding of site conditions, while at the same time increasing the time and cost related to characterization efforts.

Petroleum VI Guidance

The 2009 OIG report expressed concern that EPA’s 2002 Draft VI Guidance did not address petroleum vapor intrusion at UST sites.  The proposed Petroleum VI Guidance seeks to address that concern for UST sites and RCRA-driven activities undertaken by private UST owners and operators.  In addition to the traditional chemicals found in petroleum products (such as benzene), the Petroleum VI Guidance would require consideration of vapor risks associated with gasoline additives (such as MTBE) and chemicals that develop from biodegradation of petroleum in soil and groundwater (such as methane).

As proposed, at least two parts of the Petroleum VI Guidance may, in comparison with past experience, result in increased response costs and delays for responsible parties.[7]  First, the Petroleum VI Guidance rejects the notion that a single sampling event is a sufficient basis to conclude that further vapor intrusion investigation is unnecessary because “periodic monitoring and sampling over more than one annual cycle is generally needed” to address fluctuations in groundwater levels and contaminant plumes over time.  Second, the Petroleum VI Guidance includes a number of recommendations that suggest EPA seeks to reduce reliance on models.  Specifically, when modeling requires the use of literature values due to the unavailability of site-specific data, EPA “recommends that an uncertainty analysis be conducted to provide error bounds on predictions of the computer model,” and that the results of any modeling exercise be verified with field data.

Considerations for Both Guidance Documents

In conclusion, both of these proposed guidance documents signal an increased focus on vapor intrusion within EPA.  As they are amended and finalized, there is a limited opportunity to comment on them to try to encourage a final guidance that is workable and effective for remediation of sites with vapor intrusion issues.  There may be ways to improve the guidance by clarifying where there is site-specific flexibility and where the guidance is overly prescriptive.

Notably, these guidance documents may help define the standard of care in the context of RCRA citizen suits or common law toxic tort litigation.  Clarifying key assumptions in the guidance may buffer some of that impact.

Even though these guidance documents are in draft form and will likely be subject to considerable comment, EPA regions and states can be expected to consult and employ them during what may be a long interval before they are finalized.  To the extent EPA or a state regulatory agency does so and an affected party disagrees with aspects of the guidance at issue, parties should be aware that the draft guidances are non-binding on their face.  The documents state that they do “not impose any requirements or obligations on the [EPA], the states, or the regulated community.”  Accordingly, parties should be free to suggest alternative, technically sound approaches to regulators.  Moreover, because these documents are solely drafts and have not been tested by external expertise that will be provided in public comment, reliance on them in their current state is arguably premature.

Given the potential long term impact on cleanup requirements, interested parties should evaluate the guidance and strongly consider submitting comments to EPA by May 24, 2013.  In light of the complex technical issues involved, interested parties may also wish to request that EPA extend the comment period.

[1] EPA OSWER, “Final Guidance for Assessing and Mitigating the Vapor Intrusion Pathway from Subsurface Sources to Indoor Air” (Apr. 11, 2013)

[2] EPA OSWER, “Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils” (Nov. 29, 2002).  This draft document was never finalized.

[3] EPA OUST, “Guidance for Addressing Petroleum Vapor Intrusion at Leaking Underground Storage Tank Sites” (Apr. 9, 2013).

[4] Section 121 of CERCLA (42 U.S.C. § 9621) requires that remedial actions that result in any hazardous substances, pollutants, or contaminants remaining at the site be re-evaluated every five years to ensure that the remedy is and will continue to be protective of human health and the environment.

[5] “Assessing Protectiveness at Sites for Vapor Intrusion: Supplement to the ‘Comprehensive Five-Year Review Guidance’” (Nov. 14, 2012).

[6] In a related context, EPA officials have already acknowledged that later discovery of vapor intrusion at Superfund sites may trigger parties to litigate over whether site remedies provided for in consent decrees should be revisited under the reopener provisions in those decrees.  SeeInsideEPA, “EPA Official Says Vapor Intrusion May Drive Suits To Reopen Cleanup Pacts” (May 3, 2013), available at http://insideepa.com/201305032433234/EPA-Daily-News/Daily-News/epa-official-says-vapor-intrusion-may-drive-suits-to-reopen-cleanup-pacts/menu-id-95.html?s=mu. 

[7] These issues may also be relevant in scenarios involving vapor intrusion from sources other than those covered by the Petroleum VI Guidance.  However, because these points were emphasized in that guidance document, we highlight them here.

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Supreme Court (Sort Of) Approves “Picking Off” Strategy in Fair Labor Standards Act (FLSA) Collective Action Cases

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If you have ever received a complaint alleging minimum wage or overtime violations from one of your employees, the United States Department of Labor’s Wage and Hour Division, or a similar state agency (in Wisconsin, the Labor Standards Bureau of the Equal Rights Division), you have probably considered the possibility that other employees might raise similar claims.  Depending on the size of your workforce, this single-employee headache could quickly evolve into a class action or collective action migraine.

Under the Fair Labor Standards Act (FLSA), a single employee may file a wage and hour lawsuit on behalf of himself and other “similarly situated” employees.  The FLSA’s collective action mechanism requires potential plaintiffs to opt into the lawsuit, meaning that individuals must choose to participate in the case.  This mechanism differs from a class action lawsuit because individuals covered by a class certified by the court mustopt out of the case.  In other words, in a class action, an individual covered by a certified class must choose to not participate in the case.

Defense counsel have typically attempted to protect employers from prolonged and costly collective action litigation by “picking off” the named plaintiff(s) in lawsuits filed under the FLSA.  This “picking off” strategy refers to Rule 68 of the Federal Rules of Civil Procedure, which allows a defendant to make an offer of judgment to the plaintiff.  An offer of judgment amounts to giving the plaintiff the full relief requested in the complaint and costs accrued by the plaintiff.  A plaintiff’s acceptance of a Rule 68 offer of judgment moots (i.e., a dispute no longer exists) the case as to the plaintiff, thereby depriving the court of jurisdiction.

In the collective action context, however, employers have had mixed results on the issue of whether acceptance of a Rule 68 offer by the named plaintiff(s) also moots the claims of the potential collective group of affected employees.  The question also remained:  what happens when the named plaintiff(s) rejects the Rule 68 offer of judgment?

On Tuesday, April 16, 2013, the United States Supreme Court issued a decision, Genesis Healthcare Corp. v. Symczyk, that attempted to answer this question.  In this case, the employer, Genesis, made a Rule 68 offer of judgment to the plaintiff, Symczyk, while simultaneously answering the complaint and prior to Symczyk moving for conditional certification.  By its terms, the offer automatically expired after ten days.  Symczyk did not accept the offer, and Genesis moved for judgment in its favor, arguing that its offer of judgment mooted Symczyk’s claim and the potential collective action.  Symczyk did not contest Genesis’ argument that the offer fully satisfied her claim.  The district court agreed with Genesis and dismissed the case for lack of subject-matter jurisdiction.

The Court of Appeals for the Third Circuit agreed with the district court that Genesis’ Rule 68 offer mooted Symczyk’s claim, but it disagreed about the effect the offer had on the potential collective action.  The court of appeals held that allowing a defendant to “pick off” named plaintiffs for the purpose of avoiding the certification of a collective action would run contrary to the purpose of the collective action mechanism permitted by the FLSA.

On appeal, the Supreme Court held that a plaintiff “has no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness.”  According to the Supreme Court, a Rule 68 offer of judgment that renders the claims of the named plaintiff(s) moot also eliminates the plaintiff’s interest in the collective action.  More importantly, the Supreme Court held that a collective action under the FLSA, even if “conditionally certified” by a court, does not give the “class” of potential plaintiffs “an independent legal status.”  A “conditional certification” simply results in “the sending of court-approved written notice to employees[.]“  Thus, the Supreme Court has given some legitimacy to the strategy of “picking off” named plaintiffs by offering them full relief through a Rule 68 offer of judgment.

Note, however, that the Supreme Court did not hold that an unaccepted Rule 68 offer renders a claim (the named plaintiff’s or the collective action claim) moot.  Because Symczyk waived these arguments in the lower courts, the Supreme Court simply assumed, without deciding, that the unaccepted Rule 68 offer rendered her claim moot.

While, at first blush, the decision seems like a great win for employers, it has potential limitations, many of which Justice Elena Kagan points out in her dissent, including the following:

  1. Symczyk waived several important arguments throughout the litigation, including the argument that the unaccepted Rule 68 offer in fact did not moot her individual claim.
  2. The Genesis case addresses a scenario in which no other plaintiffs had yet joined the collective action (due in part to the timing of Genesis’ offer to Symczyk and her failure to move for certificaiton).
  3. The Court simply ignored the limitations of a Rule 68 offer of judgment, including that Rule 68 only gives courts authority to enter judgment when the plaintiff accepts the offer and that “[e]vidence of an unaccepted offer is not admissible except in a proceeding to determine costs.”

Despite the limitations of the Genesis decision, employers can take comfort in the Court’s indication of its leanings regarding collective actions.  In addition to the Court’s holding regarding the mootness issue, employers can also point to the Court’s statements calling into question the legitimacy of applying class action rules and precedent to collective actions under the FLSA.

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Center for Medicare and Medicaid Services (CMS) Proposes Increased Payments for Hospices

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On Monday, April 29, 2013, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that updates Medicare payment rules and rates for hospice agencies for fiscal year (FY) 2014.  The proposed rule also clarifies diagnosis coding and modifies quality measures in the hospice quality reporting program.

Major provisions of the proposed rule include:

  • 1.1 percent increase in FY 2014 payments. The increase is the net result of an estimated inpatient hospital market basket increase of 2.5 percent minus 0.7 percent for reductions mandated by the Affordable Care Act (ACA) and a 0.7 percent decrease in payments to hospices due to updated wage data and the continued phase-out of CMS’ wage index budget neutrality adjustment factor for hospices.
  • Hospices are to discontinue using certain non-specific diagnoses or non-principal diagnoses and, instead, should code with the principal diagnosis using the underlying condition that is the main reason for the patient’s care.
  • The ACA mandates that hospices begin reporting quality date in 2013 for the FY 2014 payment determination. Beginning with the FY 2016 payment determination, the rule proposes to eliminate the two current quality measurements and replace them with two other measures. The two measures CMS proposes to eliminate are: (1) the NQF-endorsed measure related to pain management, NQF #0209, and (2) the structural measure on participation in a Quality Assessment and Performance Improvement program.
  • Also for the FY 2016 payment determination, CMS proposes to implement the Hospice Item Set (HIS), which is a standardized patient-level data collection instrument. Hospices will need to complete the HIS upon admission and discharge for all patients starting July 1, 2014. Data collected from the HIS will factor into the payment determination for FY 2016.

Additional information on the proposed rule is available via CMS’s fact sheet.

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District Court Grants Motion to Compel Against Securities & Exchange Commission (SEC), Holding that “Facts” Are Not Work Product In SEC Confidential Witness Interviews

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In a recent Securities & Exchange Commission (“SEC”) investigation, the SEC interviewed three persons who had proffer agreements with the SEC and United States Attorney. In a subsequent SEC enforcement action, a defendant served interrogatories asking the SEC to identify the factual information disclosed in those proffer sessions. The SEC objected, and the defendant moved to compel. The SEC opposed the motion to compel, arguing that defendant sought information protected by the attorney work product doctrine, had not shown substantial need and unavailability, and had not deposed any of the witnesses, despite their identification in Rule 26 disclosures more than a year before. The magistrate judge granted defendant’s motion to compel, and the United States District Court for the Northern District of California confirmed the ruling. SEC v. Sells, No. C 11-4941 CW, 2013 WL 1411247 (N.D. Cal. Apr. 8, 2013).

There had already been an order in the case directing the SEC to answer identical interrogatories about another third-party witness. The SEC had acknowledged it was relying upon that witness’s statements as a basis for the allegations against the same defendant. The court rejected the SEC’s attorney work product objection because the interrogatories sought factual information, and not an attorney’s strategies or mental impressions. The court relied on an earlier decision, In re Convergent Technologies, 122 F.R.D. 555, 558 (N.D. Cal. 1988), in which the court reiterated the well-established principle that “the law does not permit counsel or litigants to use the work product doctrine to hide the facts themselves.” Nor does it shield from discovery the identities of the persons from whom an attorney learned such facts or the existence or non-existence of documents.

An interesting side note about the three witnesses is that their interviews were not recorded, unlike the other fourteen witnesses in this case. Because of this, any inconsistencies, disclosures of motives for their proffers or other potential impeachment evidence were not “otherwise available” to defense counsel. The SEC also advised the court that the three witnesses might testify at trial.

The lesson of this case is not to underestimate the value to defendants in SEC enforcement proceedings of specific, simply stated interrogatories. The SEC was not ordered to turn over its attorneys’ notes. Instead, it was ordered to answer interrogatories. This case also reminds lawyers not to give up, even when your adversary is far more powerful. In the words of the magistrate judge who handled “every possible objection” that the SEC had asserted to avoid answering, “Sunshine is ordinarily the best medicine for a party that is keeping discoverable information hidden in the dark. But where, as here, one party is repeatedly withholding relevant information, stronger medicine may be required.”

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Pregnancy and Disability Discrimination the Focus of EEOC Enforcement Activity

Poyner SpruillSince Congress’ enactment of amendments to the Americans with Disabilities Act (ADA) in 2008, making it easier to establish disability status under that law, the EEOC has directed more of its attention to claims of pregnancy and disability discrimination and accommodation of pregnancy-related limitations. In its 2012 Strategic Enforcement Plan, the Commission identified the investigation and pursuit of this type of claim as a national priority.  This enforcement initiative was recently demonstrated in a lawsuit filed by the EEOC against an employer which allegedly denied accommodations to an employee who suffered from complications arising from her pregnancy. The suit, EEOC v. Engineering Documentation Systems, Inc.,settled for $70,000 before a judgment on the merits was reached. However, the case serves as a reminder to employers that the issue of pregnancy-related disability is now being targeted by the EEOC.

Title VII of the Civil Rights Act of 1964, as amended by the Pregnancy Discrimination Act (PDA), prohibits discrimination against employees or job applicants on the basis of pregnancy, childbirth or related medical conditions. The EEOC takes the position that Title VII and the PDA require employers to treat pregnant employees in the same manner as other employees with temporary medical conditions. For example, according to the EEOC, if an employer provides leaves of absence or light duty to employees with short-term medical conditions which render those employees unable to work, then an employee unable to work due to her pregnancy must also be afforded the same treatment.1   But Title VII is not the only potentially applicable law in this circumstance. The ADA requires employers to provide “reasonable accommodation” to an employee with an actual (or record of) disability. This raises the question whether a pregnant employee has a “disability” within the meaning of the ADA.

Under the ADA, a disability is defined in part as a physical or mental impairment which substantially limits a major life activity. Prior to the amendments to the ADA, temporary medical conditions generally were not found by the courts to constitute disabilities, on the grounds that short-term impairments were not “substantially limiting.” However, the ADA Amendments Act (ADAAA) has led to a more expansive interpretation of the term “disability.” Specifically, the EEOC’s regulations implementing the ADAAA state that an impairment may be substantially limiting of a major life activity, and thus a disability, even if it is of a duration of less than six months. While the EEOC still considers pregnancy itself not to constitute a disability (See EEOC’s “Questions and Answers on the Final Rule Implementing the ADA Amendments Act of 2008”), it recognizes that certain impairments resulting from pregnancy may be disabilities if they substantially limit a major life activity. As stated on the EEOC’s webpage regarding pregnancy discrimination, this could include short term complications of pregnancy such as gestational diabetes or preeclampsia.

With the possibility that more medical conditions and complications arising from pregnancy will now fall within the definition of disability under the ADAAA, employers must be more cognizant of when an obligation to consider and provide reasonable accommodation to employees with a pregnancy-related disability arises. Such accommodations might include leaves of absence, job reassignment, light duty, or job modifications, unless such accommodations would result in an undue hardship to the employer. It is also imperative that employers engage in the “interactive process” with such employees to identify reasonable accommodation. The failure to take such proactive measures can result in liability for an employer, particularly given that the EEOC is now focused on this area of enforcement.

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Expanding Market for Technologies to Clean Wastewater from Hydraulic Fracturing

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Since 2005, U.S. production of natural gas has increased exponentially, from a negligible amount to almost 7.5 trillion cubic feet in 2011. The U.S. is now the largest producer of natural gas in the world.

The new-found supply of this energy source has also had a significant effect on public policy. Domestic energy production, and natural gas in particular, is caught in a battle between proponents of sustainable sources of energy such as wind and solar, the interests of traditional coal-fired plants, national security interests in reducing dependence on foreign energy sources, environmentalists and proponents of natural gas.

The epic increase in the supply of natural gas has come from the effectiveness of hydraulic fracturing. In the hydraulic fracturing process, water mixed with chemicals and sand is injected into a well at ultra-high pressure to shatter and hold open the rock below and release the gas. According to the U.S. Department of Energy, the hydraulic fracturing fluid is composed of approximately 95% water, 4.5% sand and .05% different chemicals. These chemicals can number up to about 65 and include benzyne, glycol-ethers, toluene, ethanol and nonphenols. All of these chemicals have been linked to human health disorders when exposure and concentrations are too high. Because the percentages are by weight, it is estimated that approximately 20 tons of chemicals are added to each million gallons of water. A typical hydraulic fracturing procedure involves 4-7 million gallons of water so about 80-140 tons of chemicals. Each well requires millions of gallons of water (which separately is leading to confrontations over water supply in drought-stricken states). Some of the water comes back up immediately, along with additional groundwater. The rest returns over months or years.

A major issue is how to deal with the wastewater. The amount of water is significant. In most cases, the contaminated water is pumped into disposal wells, but this is not without risk. The wells and pumps can leak, allowing disposal water to contaminate existing aquifers.  In Texas alone, the amount of wastewater increase is significant. According to The New York Times, the state has more than 8,000 active disposal wells. The amount of wastewater being pumped into those wells has increased to approximately 3.5 billion barrels in 2011 from just 46 million barrels in 2005. A recent study dealing with the Marcellus Shale formation, which stretches from New York to Virginia, indicates that wastewater disposal from hydraulic fracturing could soon overwhelm the general wastewater treatment infrastructure of the formation. So cleaning this wastewater is important and represents a significant economic opportunity.

Insurers who write coverage on these environmental risks acknowledge that premiums are favorably impacted by the presence of effective technologies to clean the wastewater.

Water technology is a rapidly growing industry. Global Water Intelligence estimates the global water industry is $483 billion/year and growing by several percentage points annually. Water technology hubs are emerging to encourage and facilitate economic development, notably in Milwaukee, Singapore, Ontario and Israel.

Technologies are already being developed to treat wastewater from hydraulic fracturing. A new desalinization process developed at MIT can scrub the contaminants from the wastewater, uses significantly less energy and is less complicated than other desalinization techniques. The technique is called a carrier gas process in which water is sprayed onto warm air. The water vaporizes, and the water vapor, which contains only pure water, is bubbled through cool water and the vapor then condenses. Researchers at the University of Minnesota have developed a process of creating centimeter-sized silicon beads that have chemical-degrading bacteria inside them. The beads are porous so the chemicals can enter but not porous enough for the bacteria to leave. These represent just two of the developing technologies to treat the wastewater. This alone will become a multi-billion dollar industry in the coming years.

Private equity and venture capitalists should take note. There is a distinct need for this technology and a rapidly increasing, lucrative market. The economic and societal benefits of cheap, plentiful natural gas cannot be denied. Hydraulic fracturing makes it happen. And hydraulic fracturing requires billions of gallons of water annually which need to be treated and/or disposed of.

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Violence Against Women Act Renewed

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Early last month, Congress renewed and extended federal legislation known as the “Violence Against Women Act” or “VAWA.”  The VAWA was originally enacted in 1994, and at that time, its objective was as clear as its name – to prevent and address domestic violence, primarily against women.  The VAWA reformed how the law grapples with domestic violence.  But the VAWA’s enactment has perhaps transformed how we look at domestic violence and the victims who struggle with it at home.

The original legislation that made up the VAWA ensured free access to court protective orders regardless of income level, established the National Domestic Violence Help-Line, and was the legislative source for fiercely contested “rape shield laws” that prohibit evidence relating to a victim’s past sexual history.  The VAWA also required training among civil servants and medical personnel to help encourage victims of domestic violence to identify themselves and reach out for help.  We likely do not notice how the VAWA has kept us mindful of the dangers of violence in the family.  After all, how often does one reflect on anti-stalking laws?  Yet, with any trip to an urgent care, emergency room, or radiologist’s lab a medical provider will ask: “Are you involved in a relationship where you don’t feel safe?”  That’s the VAWA.  And while the VAWA’s name may seem to have everything to have to do with women, the act’s recent reenactment has a much more expansive view – and reach.

Under the original enactment, some Native American tribal members were previously left out in the cold following a 1978 Supreme Court ruling in the case of Oliphant v. Suquamish Tribe, 435 U.S. 191 (1978), which limited a tribe’s jurisdiction over non-Indian abusers.  Native American tribes will now have greater authority to prosecute non-Indian abusers under the reenacted VAWA, based on a special jurisdictional provision to the law. However, a tribe’s jurisdiction to address the victimization of a tribal member is restricted only to those non-Indians with significant ties to the prosecuting tribe, those who reside in the Indian country of the prosecuting tribe, or are employed in the Indian country of the prosecuting tribe, or are either the spouse or intimate partner of a member of the prosecuting tribe.  Although some critics question whether limited jurisdiction over non-Indian defendants will withstand Constitutional muster, many in support of the VAWA’s reenactment are hopeful that the ability of tribes to prosecute non-Indian offenders in some instances will reduce the nearly 40-70% of rape potential prosecutions against non-Indians that are declined by federal prosecutors.

The VAWA reenactment is also aimed at targeting cyber-bullying and other instances of abuse that were not the focus of the VAWA originally.  Protections for men and members of the “LGBT” (Lesbian Gay Bisexual and Transgender) community who are struggling with domestic violence now enjoy greater recognition under the updated law.  These changes to the VAWA send a clear message that domestic violence is not a “women’s issue” – it’s a family one because anyone can be a victim of domestic violence.

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Far From Perfection: Individual Alternative Minimum Tax Is Still Alive

Southern Methodist University, SMU Dedman School of Law

Spring 2013 Law Student Legal Writing Contest Winner

 

Introduction

On January 2, 2013, President Barack Obama signed the American Taxpayer Relief Act of 2012 (“ATRA”).[1] ATRA § 104 provides for annual inflation adjustments for purposes of the alternative minimum tax (“AMT”).[2] The law also makes Bush tax cuts permanent.[3] This paper focuses on the influences of the AMT on the individual tax liability with the proposals on a more rational AMT or a progressive replacement for the AMT. After a historical and academic overview of the AMT in Part I, the paper introduces the reasons of changing the AMT in Part II as failure of its intended purposes and the general tax policies. By elaborating in Part III the evaluation of ATRA and addressing the possible future reforms including a more rational AMT or a repeal of the AMT, the paper concludes that ATRA solution for the AMT is not the end but another start for the future tax reform.

I. Overview Of The AMT

The individual income tax has consisted of two parallel tax systems: a regular tax and an alternative tax.[4] The current version of the alternative tax is the AMT that operates parallel to the regular tax and sets a floor on total tax liability.[5] Taxpayers whose income exceeds the AMT exemption must calculate both regular tax and AMT liabilities and pay the larger amount of the two.[6]

1.          The History Of The AMT

The original minimum tax in 1969 was to guarantee that high-income individuals paid at least a minimal amount of tax.[7] Prior to ATRA, the AMT required annual congressional actions to prevent it from expansion on more taxpayers because of its design flaws.[8] 20 historical legislations on individual minimum taxes preceded ATRA.[9] Those changes before ATRA included the rates, the exemption amounts, and the credits allowed against the tax, but the basic structure had remained unchanged.[10] Over time, the AMT has become more influential on middle-class taxpayers.[11] Before 2000, the AMT was less than 2 percent of individual income tax revenue and 1 percent of total revenue, and affected less than 1 percent of taxpayers, so it played a minor role in the tax system.[12] Since 2000, the AMT is exploding.[13] The number of taxpayers owing the AMT grew from about 20,000 in 1970 to roughly 4 million in 2011.[14]

2.          The Definition And Operation Of The AMT

The Black Law Dictionary defines the AMT as “A tax, often a flat rate, potentially imposed on corporations and higher-income individuals to ensure that those taxpayers do not avoid too much (or all) income-tax liability by legitimately using exclusions, deductions, and credits.”[15] The AMT is the addition to regular income taxes,[16] and its amount equals to the excess of the AMT liability over the regular tax liability after appropriate credits.[17] Taxpayers calculate their taxes under the tentative AMT and the regular tax, and pay the higher of the two.[18] The following table shows the general formula of calculating the tentative AMT.

Taxable Income For Regular Tax Purposes[19]
− Certain Exclusions, Deductions, And Credits Allowed In The Regular Tax[20]
− The AMT Exemption Amount[21]
× The AMT Rate[22]
− The AMT Foreign Tax Credit[23]
= The Tentative AMT

The Tentative AMT Calculation

3.          The Intended Purposes And Policies Of The AMT

Underlying goals of the AMT are requiring high-income taxpayer to pay some tax, deterring the aggressive use of tax shelters, and ensuring progressivity.[24] Being originally motivated by a simplified version of vertical equity,[25] the AMT’s simple mission was making all Americans pay tax regardless of their tax shelters and avoidance efforts.[26] Additionally, the AMT is a second-best backstop for a porous regular income tax system by reducing distortions and avoiding tax sheltering because Legislature cannot address directly some unwarranted tax shelters in the regular income tax system.[27] Moreover, the AMT should increase the tax system progressivity, which means average tax burdens increase with income-size classes in all years and ensure the vertical equity of the tax system.[28]

II. Why To Change

The AMT failed its purposes and had explosive expand to the middle-class taxpayers because it was not indexed for inflation and Bush tax cuts reduced regular income tax without a permanent AMT fix. Moreover, the AMT thwarted generally accepted tax polices such as equity and efficiency bymodifying regular income tax incentives, altering marginal tax rates, increasing complexity, and reducing transparency.

1.          Failure of Intended Purposes Of The AMT

The AMT fails its intended purposes because of its expansion. Before ATRA, two main factors were responsible for the explosive growth in the AMT since 2000: it was not indexed for inflation and Bush tax cuts reduced regular income tax without a permanent AMT fix.[29] Inflation is an important factor of the long-term AMT receipts, but the exemption amounts and the tax rate brackets in AMT were not indexed to automatically adjust and keep pace with inflation as the regular tax before ATRA.[30] Because taxpayers pay the higher of the tentative AMT and the regular tax, the different treatments between the two tax systems would push more taxpayers to the AMT. Additionally, Bush tax cuts reduced regular tax rates without changing the AMT, which would have resulted a dramatic increase in the projected future number of AMT taxpayers.[31] If Legislature had not made the temporary adjustments (“patches”) to the AMT, more returns would be subject to the AMT after Bush tax cuts.[32] However, the patches have only served to mask the underlying problems rather than a permanent solution.[33] ATRA makes Bush tax cuts permanent.[34]

Because of its expansion, the AMT failed its purposes of requiring high-income taxpayer to pay some tax, deterring the aggressive use of tax shelters, and ensuring progressivity for the following ways.[35]

Although Congress originally enacted the AMT to prevent high-income individuals from sheltering all of their income and paying no tax, its expansion gradually moves the types of the AMT taxpayers from higher-income to lower-income by encroaching on the middle class.[36] Because taxpayers would pay higher of the tentative AMT and the regular tax, the top statutory rate for regular income tax higher than the top statutory rate for the AMT would move high-income individuals without substantial sheltering to the regular tax system.[37]

Additionally, the AMT fails to impede some tax shelters. For example, the current AMT cannot stop the tax shelters by reporting capital gains, which could be deferred for years and faced a low statutory rate after recognition.[38] Under the different tax rate treatments between ordinary income and capital gain in the regular tax, an investment that would be a loss before tax when the income including capital gains was less than the expense, but the same investment could be profitable after tax because expenses were overstated for tax purposes and capital gains had lower tax rates.[39] The post-1987 AMT does not have different rate treatment between long-term capital gains and ordinary income as the regular tax, which leads high-income taxpayers report large amounts of capital gains and generally receive the same tax break under the AMT as under the regular income tax.[40]

Furthermore, progressivity of the tax system means average tax burdens increase with income-size classes in all years.[41] The contribution to the AMT from middle-class families was increasing significantly while the contribution to the AMT from high-income families was decreasing, so the AMT becomes less progressive over time,[42] which causes less vertical equity in the tax system.

2.          The AMT Thwarting Generally Accepted Tax Policies

The AMT thwarted generally accepted tax polices such as equity and efficiency bymodifying regular income tax incentives, altering marginal tax rates, increasing complexity, and reducing transparency

A.         Modifying Or Limiting Regular Income Tax Incentives[43]

For the horizontal equity, the AMT should reduce the variance of average effective tax rates among taxpayers with similar incomes.[44] However, the AMT differently affects taxpayers with similar incomes but different family circumstances or different state of residence.[45] The AMT disallows the deduction for state and local taxes, so it affects more taxpayers who live in the places with high state and local taxes.[46] Moreover, the AMT replaces the personal exemptions based on filing status and number of dependents in the regular tax with one single exemption solely based on filing status, so the AMT will not benefit larger families and marriage.[47] Additionally, the AMT has the exemption for married couples less than twice of that for singles[48] and has the same brackets regardless of filing status, so the AMT has more impact on married than unmarried.[49] Furthermore, the AMT requires higher percent of AGI as the threshold (10 percent) to deduct medical expenses than the regular tax (7.5 percent), and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt,[50] which discourage the incentives to get medical treatments and purchase real property.

B.         Altering Marginal Tax Rates

Because Legislature cannot address directly some unwarranted tax shelters in the regular income tax system, the most plausible economic rationale for the AMT is that it is a second-best backstop for a porous regular income tax system by reducing distortions and avoiding tax sheltering.[51] However, because the AMT exempts a large share of income for many middle-class taxpayers and has the phase-out of the AMT exemption,[52] the AMT fails on the efficiency policy by taxing narrower base of income and imposing higher marginal rates than the regular income tax for the most AMT taxpayers.[53] Narrower base and higher marginal tax rates in AMT can decrease after-tax income, discourage work, and reduce economic efficiency.[54]

C.         Increasing Complexity And Reducing Transparency

The AMT can increase the complexity of the tax calculations and reduce the transparency of the tax system because it can affect people’s behavior, alter the distribution of taxes, and complicate the tax planning decisions.[55] Taxpayers need to complete AMT forms in addition to their regular income tax returns,[56] and keep two separate sets of books because of the different deferral preferences between the AMT and the regular income tax.[57] Most people filling out the AMT forms end up owing no additional taxes.[58] Using computer software[59] may lower the complexity of filings, but it will increase the out-of-pocket costs and decrease taxpayer’s intended incentives in the tax code.[60]

III. ATRA Solution: Not The End But Another Start

The increasing number of taxpayers in the AMT placed pressure to permanently restructure of the AMT.[61] In 2013, President Obama signed ATRA, § 104 of which provides for annual inflation adjustments for purposes of the AMT and makes Bush tax cuts permanent.[62] This part lays out the evaluation of ATRA and addresses the possible future reforms including a more rational AMT or the AMT abolishment.

1.          Evaluation Of ATRA Solution

This section assesses ATRA solution in the context of possible legislative options before its enactment, the insufficiency of the current solution, and the potential barriers for the future AMT reform.

A.         Legislative Options Before ATRA

The problems in the AMT placed pressure to permanently restructure of the AMT. Before the enactment of ATRA, the alternative options to repeal the AMT included repealing regular tax, indexing the AMT’s parameters for inflation, and allowing additional exemptions and deductions under the AMT.

(1)  The AMT Or The Regular Income Tax[63]

A debate exists on the elimination of the AMT or the regular income tax. Because ATRA indexes the AMT for inflation and makes Bush tax cuts permanent,[64] the AMT will affect 8 million households by 2020.[65] After the permanent extension of Bush tax cuts by the ATRA, repealing the AMT would reduce revenues by over $2.7 trillion between 2011 and 2022.[66] On the contrary, the advocates of regular tax state that the single AMT system would lead undesirable policy changes from current law.[67] By eliminating the regular tax, the differences between the AMT and the regular tax would alter the current distribution of the income tax, which would be especially detrimental against middle class.[68]

This paper would respectfully join the pro-regular-tax alignment. The statistical indicators of immense scope of the AMT are mostly based on the legislations before ATRA, so it must be subject to change after ATRA. Even assuring that the statistical changes after ATRA are small, it would be against the legislative logic to remove the regular tax and preserve the AMT because the regular tax is the foundation of the AMT calculation.[69] The approach of eliminating the regular tax is analogous to remove the tree trunk (the AMT) from the root (the regular tax) and expect the tree trunk to grow bigger and stronger. Additionally, simply eliminating the regular tax would sacrifice substantial revenues, impose marriage penalties, produce higher marginal tax rates, etc.[70] Admittedly, neither the AMT nor the regular tax is a perfect tax system. However, the regular tax has fewer defects than the AMT.[71] As the discussion in Part II, Section 2A, the AMT rejects the deduction of the state and local taxes; disallows exemptions for dependents; requires higher percent of AGI as the threshold to deduct medical expenses than the regular tax; and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt. These defects do not exist in the regular tax. Moreover, Legislature would consider the cost-benefit to eliminate the regular tax. The cost of eliminating the regular tax would be the lost revenue from the regular tax and the cost of correcting the defects of the AMT. Assuming that the lost revenue from eliminating either the regular tax or the AMT would be close in number, the cost of improving the AMT will probably be higher than improving the regular tax because the regular tax has fewer defects than the AMT.[72]

(2) Rationale Of Congress On Choosing Inflation Index

Before the enactment of ATRA, Legislature could permanently limit the expansion of the AMT’s impact in a number of ways, such as indexing the AMT’s parameters for inflation; allowing additional exemptions and deductions under the AMT; and eliminating the AMT.[73] This part will not discuss the elimination of the regular tax as a legislative option for the reasons in the preceding section (1).

Permanently indexing the AMT’s parameters for inflation was a compelling candidate for AMT reform before ATRA. Even though the patches to the AMT exemptions can have similar effects as the inflation indexing, they create uncertainty for taxpayers and their financial decisions.[74] Additionally, allowing additional exemptions and deductions under the AMT would offset the erosion of the un-indexed AMT exemptions caused by inflation and would provide similar relief as indexing the AMT for inflation.[75] To provide some reliefs for AMT taxpayers, Legislature could allow state and local taxes deductions and dependent exemptions, lower the threshold of medical expense deduction, and loose the rules on interest deductions.Moreover, because the AMT did not fulfill its purposes or policies but became a de facto ATM machine for generating additional tax revenue from middle-class taxpayers,[76] the most comprehensive approach would simply eliminate the individual AMT, which will relief all taxpayers from the complexity and opacity of two parallel tax systems.[77] The following table gives the brief comparisons and contrasts for the three options.

                Consequences

 

 

Legislative Options

 Decreased Number Of AMT Taxpayer In 2010 After Adopting The Optional Reform 2010-2019 Lost Tax Revenue By Adopting The Optional Reform
Option 1: Indexing The AMT’s Parameters For Inflation 22 million[78] $450 billion[79]
Option 2: Allowing Additional Preferences Under The AMT 25 million[80] $530 billion[81]
Option 3: Eliminating The AMT 27 million[82] $620 billion[83]

Legislative Options And Their Consequences Before ATRA

The table above can show that indexing the AMT’s parameters for inflation was the cheapest option before ATRA among the three options. Moreover, either allowing additional preferences under the AMT or eliminating the AMT is more difficult and complex legislation procedures than indexing the AMT for inflation. Allowing additional preferences will have a lot of detailed changes for the current regular tax system. Additionally, the following Section 3 of the paper can show that eliminating the AMT will be a progressive procedure with the AMT indexing as the initial step. Furthermore, indexing the AMT for inflation will be the prerequisite of allowing additional preferences under the AMT because the preferences should be indexed for inflation.[84] So Congress made a right choice to have the AMT indexing for inflation in ATRA.

B.         Insufficiency Of ATRA Solution

The AMT actually affects taxpayers with similar incomes but different family circumstances or different state of residence differently, raising the variance of after-tax income.[85] After ATRA, the AMT still rejects the deduction of the state and local taxes; disallows exemptions for dependents; requires higher percent of AGI as the threshold to deduct medical expenses than the regular tax; and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt. Moreover, ATRA does not eliminate the phase-out of the AMT exemption that leads additional marginal tax rates,[86] so most taxpayers still have higher marginal tax rates under the AMT than under the regular income tax.[87] Additionally, ATRA does not reduce complexity and increase transparency of the AMT. Taxpayers still need to complete AMT forms in addition to their regular income tax returns,[88] and keep two separate sets of books.[89] Furthermore, the AMT after ATRA still fails to impede some shelters, such as the ones involved with capital gains.[90] The future legislations after ATRA should change these defects or abolish the whole AMT.

C.         Barrier To AMT Reform After ATRA

A significant barrier to AMT reform has been the challenge of what to do about the lost revenues.[91] If the AMT reform would have no offsets, federal budget deficits would rise and the cost would be shifted to the future taxpayers.[92] Methods of offsetting the revenue loss from the AMT reform include broadening the base for the regular income tax or raising its rates, increasing revenues from other tax sources, and reducing spending.[93] Regular tax system would have to rise by a similar magnitude to offset the revenue loss, may eliminate various tax preferences, and could raise all or some of rates on capital gains, dividend income, etc.[94] However, if other tax increases or spending reductions would offset the resulting revenue losses, the AMT reform would benefit some taxpayers and disadvantage others.[95]

2.          Possibility Of Creating A More Rational AMT

The more rational AMT should “keep the baby but throw out the bathwater.”[96] If the AMT will remain, a more rational system should allow additional exemptions and deductions as the regular tax[97], and neutralize the potential federal deficit by increasing the AMT tax bracket[98] and eliminating the preferential rates for capital gains in regular tax.[99]

3.          Feasibility Of Repealing The AMT

If Legislature will repeal the AMT, it can be a progressive elimination.[100] The following flowchart illustrates the progressive procedure of the AMT elimination.

à

Indexing The AMT For Inflation

Step 1

(Completed)

à

Allowing Dependent Personal Exemptions

Step 2

à

Repealing The Phase-out And Allowing Same Deductions As Regular Tax

Step 3

à

Deleting Deferral Preferences

Step 4

à

 NO AMT

AMT

The Flowchart On The AMT Progressive Elimination

ATRA has already finished Step 1.[101]  Step 2 can remove almost the entire middle class from the AMT.[102] Step 3 will eliminate the major different tax preferences between the AMT and the regular tax and end the AMT except for high-income taxpayers.[103] Step 4 will significantly increase the number of high-income taxpayers who pay no income tax because deferral preferences have a greater tendency to affect high-income taxpayers.[104]

Two reasonable methods can offset the revenue loss after the AMT progressive elimination. First, after the AMT deletion, Legislature can impose an add-on tax.[105] However, this option is actually back to the origin of the AMT,[106] and will have the possibility to repeat some AMT mistakes in future. Second, changing the regular income tax can reduce some federal deficits.[107] Some AMT provisions, which are preventing investment activities to avoid the regular income tax,[108] should be incorporated into the regular income tax after repealing the AMT.[109] But the legislation of such incorporations may not be easy because the AMT was created to backstop the unwarranted tax shelters that Legislature could not address directly for some reasons in the first place.[110] Additionally, Legislature can raise some or all of the regular income tax rates, including tax rates on capital gains and dividend income,to compensate the lost revenue after the termination of the AMT.[111] Moreover, the AMT elimination can pair with the abolishment of various regular tax preference, such as state and local tax deduction to reduce the federal deficits.[112]

Conclusion

The individual AMT operates parallel to the regular income tax by defining income differently, imposing different tax rates, and allowing different tax preferences. Ideally, the most comprehensive approach should be reforming the income tax to eliminate the AMT. But considering the reality under the huge pressure of potential federal revenue loss, Legislature chose the AMT indexing for inflation in ATRA. As Republican Senator Orrin Hatch of Utah told ABC News, “Far from perfect, this legislation does include a permanent fix to the ever-growing the AMT, giving millions of hard-working, middle-class families certainty that the nightmare of this tax has finally come to an end.”[113] As long as the individual AMT exists, the future tax reform is still foreseeable.

[1]126 Stat 2313 (2013).

[2]Id.

[3]Luke Landes, Fiscal Cliff Bill Passes: American Taxpayer Relief Act of 2012 (H.R. 8), http://www.consumerismcommentary.com/fiscal-cliff-bill-american-taxpayer… (last visited April 1, 2013).

[4]Congressional Budget Office, Economic and Budget Issue Brief: The Individual Alternative Minimum Tax, 1 (2010); Katherine Lim & Jeff Rohaly, The Individual Alternative Minimum Tax: Historical Data and Projections, Urban-Brookings Tax Policy Center, 1, 3 (2009).

[5]Id.

[6]Congressional Budget Office, supra note 4, at 2; I.R.S., supra note 7 (“Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax.”);Burman et al., supra note 7, at 1.

[7]I.R.S. Topic 556 – Alternative Minimum Tax, http://www.irs.gov/taxtopics/tc556.html (last visited April 1, 2013); Lim & Rohaly, supra note 4, at3; Leonard E. Burman et al., The Individual Alternative Minimum Tax (AMT): 12 Facts and Projections, Urban-Brookings Tax Policy Center, 1 (2008).

[8]Lim & Rohaly, supra note 4, at3.

[9]Leonard E. Burman et al., Historical Features of Individual Minimum Taxes, Urban-Brookings Tax Policy Center, 1, 2 (2011).

[10]Greg Leiserson & Jeff Rohaly, What Is Responsible for the Growth of the AMT?, Urban-Brookings Tax Policy Center, 1 (2007).

[11]Burman et al., supra note 9, at 1.

[12]The Joint Committee on Taxation, Present Law and Background Relating to the Individual Alternative Minimum Tax, JCX-10-07 (2007); Lim & Rohaly, supra note 4, at5-7.

[13]Burman et al., supra note 7, at 1.

[14]Aggregate AMT Projections 2011-2022, Urban-Brookings Tax Policy Center (2011).

[15]Black’s Law Dictionary, 1, 1594 (9th ed. 2009) (under the definition of “Tax”).

[16]1 MertensLaw of Fed.Income Tax’n§ 4:39 (“The alternative minimum tax is a tax upon income.”).

[17]Congressional Budget Office, supra note 4, at 2.

[18]Id. at 2; I.R.S., supra note 7;Burman et al., supra note 7, at 1.

[19]Lim & Rohaly, supra note 4, at3.

[20]I.R.S., supra note 7.

[21]I.R.S., supra note 7 (stating that the AMT exemption amount is set by law).

[22]Id. (stating that AMT rate is set by law and the rates in effect for the regular tax are used for capital gains and certain dividends).

[23]I.R.C. § 59; Leonard E. Burman & David Weiner, Suppose They Took the AM Out of the AMT?,Urban-Brookings Tax Policy Center, 1, 6 (2007) (“After determining pre-credit tentative AMT liability above, taxpayers subtract foreign tax credits (FTC) to calculate tentative AMT liability.”).

[24]Lim & Rohaly, supra note 4, at6.

[25]Leonard E. Burman et al., The Expanding Reach of the Individual Alternative Minimum Tax, Urban-Brookings Tax Policy Center, 1, 7 (2005).

[26]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 86.

[27]Burman et al., supra note 25, at 8 (“For example, by taxing interest income from bonds that state and local governments issue to support private activities like shopping centers or stadiums, income that is exempt from the regular income tax, the AMT reduces the subsidy afforded such investments.”).

[28]Tom Petska & Mike Strudler, Income, Taxes, And Tax Progressivity: An Examination Of Recent Trends In The Distribution Of Individual Income And Taxes, Statistics of Income Division, I.R.S., http://www.irs.gov/pub/irs-soi/indincdi.pdf (last visited April 1, 2013).

[29]Lim & Rohaly, supra note 4, at3; Burman et al., supra note 7, at 2; Leiserson & Rohaly, supra note 10, at 1.

[30]Congressional Budget Office, supra note 4, at 1.

[31]Leiserson & Rohaly, supra note 10, at 3; Gabriel Aitsebaomo, The Individual Alternative Minimum Tax and the Intersection of the Bush Tax Cuts: A Proposal for Permanent Reform, 23 Akron Tax J. 109, 134 (2008).

[32]Congressional Budget Office, supra note 4, at 1.

[33]Leiserson & Rohaly, supra note 10, at 3.

[34]Landes, supranote 3.

[35]Burman et al., supra note 25, at 11.

[36]Congressional Budget Office, supra note 4, at 5-7; Lim & Rohaly, supra note 4, at6; Burman et al., supra note 7, at 2.

[37]Lim & Rohaly, supra note 4, at6.

[38]Burman et al., supra note 25, at 9.

[39]Burman et al., supra note 25, at 9 (2005).

[40]Lim & Rohaly, supra note 4, at6, n.10.

[41]Petska & Strudler, supra note 28.

[42]Burman et al., supra note 25, at 7.

[43]Congressional Budget Office, supra note 4, at 7.

[44]Burman et al., supra note 25, at 7.

[45]Id. at 7-8.

[46]Burman et al., supra note 7, at 2.

[47]I.R.C. §§ 55, 56, 151; Burman et al., supra note 7, at 2.

[48]I.R.C. §§ 55(d)(1), 56; Rev. Proc. 2013-15, 2013-5 I.R.B. 444.

[49]Lim & Rohaly, supra note 4, at7.

[50]I.R.C. §§ 55, 56, 163, 213; Congressional Budget Office, supra note 4, at 8.

[51]Burman et al., supra note 25, at 8.

[52]Lim & Rohaly, supra note 4, at8-9.

[53]Lim & Rohaly, supra note 4, at10.

[54]Burman et al., supra note 7, at 2 (“Marginal tax rates affect the incentive to work, save, and comply with the tax system.”); Congressional Budget Office, supra note 4, at 7-8 (“The AMT can subject taxpayers to higher marginal tax rates—which, in turn, influence decisions about how much to work and save, potentially reducing economic efficiency.”).

[55]Congressional Budget Office, supra note 4, at 7.

[56]Id. at 8.

[57]Burman et al., supra note 25, at 11.

[58]Burman et al., supra note 7, at 2; Burman et al., supra note 25, at 11.

[59]See, e.g.,I.R.S., supra note 7 (“If you are filing the Form 1040, you may use the AMT Assistant for Individuals, which is an electronic version of the AMT worksheet available on the IRS website.”).

[60]Congressional Budget Office, supra note 4, at 9.

[61]Congressional Budget Office, supra note 4, at 3.

[62]126 Stat 2313 (2013); Landes, supranote 3.

[63]Burman & Weiner, supra note 23, at Table 2 (listing the regular tax and the AMT provisions for comparison and contrast).

[64]126 Stat 2313 (2013); Landes, supranote 3.

[65]Lim & Rohaly, supra note 4, at6.

[66]Urban-Brookings Tax Policy Center, supra note 14.

[67]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87.

[68]Burman et al., supra note 7, at 2 (“The AMT is encroaching on the middle class.”);2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87 (“Relative to the current system, many middle-income taxpayers would face higher marginal tax rates, while lower- and very high-income taxpayers would face lower marginal tax rates.”).

[69]I.R.S., supra note 7 (“The AMT is the excess of the tentative minimum tax over the regular tax.”); Congressional Budget Office, supra note 4, at 2 (stating that the AMT is the addition to regular income taxes, and its amount equals to the excess of the AMT liability over the regular tax liability after appropriate credits).

[70]Burman & Weiner, supra note 23, at 17.

[71]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87.

[72]Id.

[73]Congressional Budget Office, supra note 4, at 9.

[74]Id. at 10.

[75]Congressional Budget Office, supra note 4, at 10.

[76]Aitsebaomo, supra note 31, at 141.

[77]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 85-87.

[78]Congressional Budget Office, supra note 4, at 10 (“If the exemption amounts in effect for 2009 were made permanent and indexed for inflation after 2009, along with the AMT’s brackets and the threshold at which the exemption phased out, 5 million taxpayers would pay the AMT in 2010—rather than the 27 million projected to pay under current law—and revenues would be about $450 billion lower from 2010 to 2019 than they would be otherwise.”).

[79]Id.

[80]Id. (In January of 2010, The CBO estimates that this option would decrease the number of people affected by the AMT from 27 million to 2 million in 2010).

[81]Id.

[82]Lim & Rohaly, supra note 4, at3 (“Absent another temporary fix or other change in law, the tax cuts and lack of indexation will combine to push more than 27 million taxpayers onto the AMT in 2010.”).

[83]Congressional Budget Office, supra note 4, at 10 (The CBO estimating a revenue cost of more than $620 billion from 2010 to 2019 for the AMT elimination). See also Urban-Brookings Tax Policy Center, supra note 14(showing that the cost of repealing the AMT would be over $2.7 trillion between 2011 and 2022 after the permanent extension of Bush tax cuts by the ATRA).

[84]Id. (“To provide some relief to taxpayers, lawmakers could allow them to use the standard deduction, personal exemptions, and deductions for state and local taxes (as they are used under the regular tax) when computing their tax liability under the AMT. The standard deduction and personal exemptions are both indexed for inflation, and state and local taxes also generally rise with prices.”).

[85]Burman et al., supra note 25, at 7-8.

[86]I.R.C. §§ 55(d)(1), 56; Rev. Proc. 2013-15, 2013-5 I.R.B. 444; 2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87 (“The phase-out of the AMT exemption at higher income levels actually creates two additional marginal tax rates – and a resulting tax rate schedule of 26, 32.5, 35, and 28 percent.”).

[87]Congressional Budget Office, supra note 4, at 8.

[88]Id.

[89]Burman et al., supra note 25, at 11.

[90]Lim & Rohaly, supra note 4, at6, n.10.

[91]Burman et al., supra note 7, at 3 (“Paying for reform or repeal is a key issue”).

[92]Congressional Budget Office, supra note 4, at 1.

[93]Id. at 9.

[94]Id.

[95]Id. at 1.

[96]Burman et al., supra note 25, at 11.

[97]Aitsebaomo, supra note 31, at 139 (“Given that the major pitfall of the AMT is its increasing proliferation into the unintended returns of middle and upper middle class taxpayers, a permanent remedy to this unintended spread should be to exempt taxpayers with AGI of $250,000 or less from the AMT altogether. The implementation of such exemption would help align the AMT closer to its original purpose and policy objective of ensuring that wealthy individuals (not middle and upper middle class taxpayers) would be subject to the AMT.”); Burman et al., supra note 25, at 13.

[98]Burman et al., supra note 25, at 13 (proposing increasing the 28 percent AMT bracket to 33.5 percent to offset the revenue loss because it would only increase taxes for those with incomes above the AMT exemption phase-out).

[99]Burman et al., supra note 25, at 13; Burman & Weiner, supra note 23, at 15 (“If capital gains are taxed at the same 37 percent rate as other income, the option could raise $67 billion that could be applied to deficit reduction.”).

[100]Burman et al., supra note 25, at 11-13.

[101]Id.at 11.

[102]Id. at 12.

[103]Id.

[104]Id. at 12-13.

[105]Leonard E. Burman & Greg Leiserson, A Simple, Progressive Replacement for the AMT, Tax Analysts Viewpoints, 945 (2007) (proposing the 4 percent add-on tax of AGI above certain amount that will be indexed for inflation.).

[106]Burman et al., supra note 9, at 1(illustrating 4 add-on tax related legislations in the early stage of the AMT as 1969 TRA, 1976 TRA, 1978 Revenue Act, and 1982 TEFRA).

[107]Burman et al., supra note 25, at 14.

[108]Id. at 8 (“For example, by taxing interest income from bonds that state and local governments issue to support private activities like shopping centers or stadiums, income that is exempt from the regular income tax, the AMT reduces the subsidy afforded such investments.”).

[109]Congressional Budget Office, supra note 4, at 10.

[110]Burman et al., supra note 25, at 8.

[111]Congressional Budget Office, supra note 4, at 10.

[112]Id.; Burman et al., supra note 25, at 14, n.13 (stating that eliminating the regular income tax deduction for state and local taxes would more than pay for repealing the AMT).

[113]Dan Kadlec, At Long Last, a Permanent Patch for a Dreaded Tax Read, Time Business & Money (Jan. 03, 2013), http://www.consumerismcommentary.com/fiscal-cliff-bill-american-taxpayer-relief/.

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“Innovation Meets Insight:” An Intellectual Property Expert’s Take on the Revised America Invents Act (AIA)

The National Law Review a top volume legal news website

Speaking of the latest developments in the legal field, legislation for the Leahy-Smith American America Invents Act (“AIA” or “Act”) was signed by President Obama and passed in September of 2011 and has gone into full implementation this past March. The Act massively overhauls U.S. patent laws and sets forth the most comprehensive, sweeping changes to the U.S. patent system since 1836.

In an exciting era for intellectual property, David Kappos, one of the world’s leading experts on intellectual property law and a partner at Cravath, Swaine & Moore LLP, recently sat down with me to discuss the revisions to the AIA and their implications. Mr. Kappos ended his term as director of the U.S. Patent and Trademark Office (“USPTO”) this past January, where he acted as advisor to the president on intellectual property policy matters. He will serve as keynote speaker for the upcoming 13th Annual SuperConference, where he will present the new-and-improved AIA to an audience of senior-level legal professionals. In doing so, Mr. Kappos will introduce a revolutionary patent system in which “innovation meets insight.”

However, the AIA almost did not materialize due to its largely stagnated history. Initial calls for changes to the patent system began in the 1980s, but negotiations for the actual legislation did not start until 2001. Mr. Kappos was in private practice at that time and helped with the negotiations. It took nearly five session of Congress for the legislation to finally gain approval.

The ensuing legislation affects many tenants of the patent system. Among the most prominent amendments to the Act is the U.S.’s conversion from a first-to-invent system to a first-to-file system, resulting in the first inventor to file an application with the USPTO for the claimed invention to be granted the patent. In addition, improvements have been made to the post-grant challenge system, resulting in the ability of an inventor to appeal to the USPTO to reconsider any issues related to granting approval of a patent.

According to Mr. Kappos, the AIA espouses a modern, pro-innovation outlook that has “leapfrogged” legislation. The patent system tends to treat innovation as highly valuable and offers incentives. For example, the U.S. now retains an interest-based system for enabling third parties to participate in the patent process.

The Act’s pervasiveness has led to progress and evolution in numerous industries. Mr. Kappos identified the life sciences and pharmaceutical sectors of the business community, which among other fields, have been granted supplemental examination, thus enabling patent owners to request timely additional examination of their inventions by the USPTO for further consideration. The finance and banking industry is expected to progress, due to the covered business method which permits parties to request a post-grant review hearing, providing patent owners an alternative to litigation for challenging a decision related to a patent. For small inventors, a new category has been carved into the Act for 75% off of fees owed to the USPTO associated with obtaining a patent.

Mr. Kappos believes that the legislation will overall bring more clarity to the U.S. innovation system. He characterized the AIA as a “more streamlined and effective way to perfect your innovations.” Any person or business seeking a patent will find a more clear, efficient and cost-effective arrangement in the AIA.

As far as the legal community catching up to the legislation, Mr. Kappos points out that there are numerous changes in the law and recommends attorneys read about the Act and focus on the modifications. The revisions are also great fodder for exchanging ideas and asking questions to other members of the IP field because there are multiple angles to look at.

Overall, Mr. Kappos has said that progress in terms of innovation is amazing and things that were unimaginable five to ten years ago are now possible due to invention and technology. He is optimistic about the future and the ability of technology to change the equation. In his own words,  “Through innovation we — humanity — has the ability to meet and overcome our most critical challenges. And when you talk about innovation, you are talking about invention and insight.  And following that thread, there is only one system of laws that protects invention, incenting it and encouraging creative people to spend their resources on it.  That one system of laws: the patent system.”