Creating failures in the market for tax planning.

(11) Of course, in the real world, the government has far more than these two stylized options. Other than expressly or by implicit acquiescence allowing the method, the government might simply use resources it knows to be insufficient to curtail the method's use. And of course, the government needs to know about the strategy to decide to do anything specifically targeted against it.

(12) David Weisbach makes closely related arguments. See David A. Weisbach, An Economic Analysis of Anti-Tax-Avoidance Doctrines, 4 AM. L. & ECON. REV. 88, 96-109 (2002); Weisbach, supra note 1, at 231-42.

(13) On patents and copyrights generally, see ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL DIMENSIONS OF RIGHTS AND REMEDIES (2005); see also WILLIAM D. NORDHAUS, INVENTION, GROWTH AND WELFARE: A THEORETICAL TREATMENT OF TECHNOLOGICAL CHANGE (1969) (addressing patent law); William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. LEGAL STUD. 325 (1989) (addressing copyright law).

(14) See e.g., Burk & McDonnell, supra note 5, at 986.

(15) One commenter noted, "[t]he fundamental purpose of providing patents, as I understand it, is to promote innovation. While no one can dispute this as a generally desirable goal, it would be hard to identify a subject less in need of further innovation than tax planning." Testimony Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means, 109th Cong. 109-77 (2006) (statement of Ellen Aprill, Associate Dean of Academic Programs, Professor of Law, John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles, California). Whether or not patents generally promote innovation is open to question. See generally BLAIR & COTTER, supra note 13, at 17.

(16) Of course, the assumption that people will keep their ideas to themselves in the absence of patents is not necessarily realistic. The law provides protection short of patents, in the form of trade secrecy laws. See Burk & McDonnell, supra note 5, at 987. Furthermore, markets have a habit of springing up, even in the absence of strong property rights.

(17) There are many reasons why this might be the case. One strong possibility is that the task requires resources beyond what the government has concluded it would be worthwhile to expend and the government has instead decided on a strategy of ex post enforcement against specific, already-developed methods and its arsenal of more general prohibitions.

(18) A non-governmental entity that received such fees could use them to fund its other activities or contribute them to a worthy cause. We thank David Weisbach for suggesting this possibility, as well as suggesting the idea that the entity itself, rather than the government or government-subsidized entity, might suitably carry out the strategy.

(19) In this regard, Burk and McDonnell discuss the possibility that an "anticommons" problem could arise if intellectual property rights needed for tax planning methods were too widely held; it might be impossible to negotiate with all the rights-holders necessary to develop and market the method. See Burk & McDonnell, supra note 5, at 996-99.

(20) See PARKIN, supra note 6.

(21) See George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q. J. ECON. 488 (1970).

(22) A full analysis will also take into consideration the social costs of complying with new rules by taxpayers whose aim is actually to comply.

(23) See KENNETH J. ARROW, THE LIMITS OF ORGANIZATION (1974).

(24) See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW, 62-63 (4th ed. 1992).

(25) See Claire A. Hill, A Comment on Language and Norms in Complex Business Contracting, 77 CHI.-KENT L. REV. 29, 43-51 (2001).

(26) See POSNER, supra note 24, at 89-137.

(27) See Gregg D. Polsky, Can Treasury Overrule the Supreme Court?, 84 B.U.L. REV. 185, 212-18 (2004).

(28) Id. at n.202.

(29) Id. at 229.

(30) See generally Polsky, supra note 27. It could be argued, though, that in this example, the Internal Revenue Service (Service) was simply acknowledging the inevitable--that its costs in attempting to enforce its prohibition exceeded any revenues it was likely to obtain.

(31) MICHAEL GRAETZ & DEBORAH H. SCHENK, FEDERAL INCOME TAXATION, PRINCIPLES AND POLICIES 348 (5th ed. 2005).

(32) Indeed, one of us, Hill, met someone casually on a plane who told her at some length, in a voice speaking at a normal volume, about his company's activities of this type, which he spearheaded; he also told Hill where he worked, demonstrating that he did not think he had much to fear.

(33) 31 C.F.R. pt. 10. (2005). The 2005 amendments to Circular 230 are the ones of note for our purposes; the original Circular 230 was not specifically designed to address tax planning activities.

(34) See generally LEANDRA LEDERMAN & STEPHEN W. MAZZA, TAX CONTROVERSIES: PRACTICE AND PROCEDURE 15-24 (2002).

(35) David Schizer notes, however, that "the [Service] has not sought to impose this sanction yet, even in egregious cases, leaving the bar to wonder whether they can safely ignore this possibility." David M. Schizer, Enlisting the Tax Bar, TAX L. REV. (forthcoming 2007) (manuscript at 47, on file with author).

(36) See, e.g., Claybrook & Assoc., IRS Circular 230 Compliance, http://www.msclaybrook.com/circ230comp.htm (last visited Mar. 18, 2007).

(37) Considerable commentary exists on Circular 230, including law firm memos posted on the internet. See, e.g., Terrence G. Perris, Squire, Sanders & Dempsey, LLP, Beyond the Legend: The Impact of New Circular 230 (Oct. 12, 2005), http://library.findlaw.com/2005/Oct/12/204044.html.

(38) Memorandum from Larry D. Thompson, Deputy Attorney Gen. on Principles of Fed. Prosecution of Bus. Org. (Jan. 20, 2003), available at http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm (hereinafter Thompson Memo). There is also an intervening memo, the "McCallum Memo." See Memorandum from Robert D. McCallum, Jr., Acting Deputy Attorney Gen. on Waiver of Corp. Attorney-Client & Work Product Protection (Oct. 21, 2005), available at http://lawprofessors.typepad.com/whitecollarcrime_blog/files/AttorneyClientWaiverMemo.pdf.

(39) See, e.g., Ashby Jones, Thompson Memo Out, McNulty Memo In (Dec. 12, 2006), http://blogs.wsj.com/law/2006/12/12/thompson-memo-out-mcnulty-memo-in (providing a discussion of the Thompson Memo on the Wall Street Journal law and business blog).

(40) The Memo states:

One factor the prosecutor may weigh in assessing the adequacy of a

corporation's cooperation is the completeness of its disclosure

including, if necessary, a waiver of the attorney-client and work

product protections, both with respect to its internal investigation

and with respect to communication between specific officers, directors

and employees and counsel.... Another factor to be weighed by the

prosecutor is whether the corporation appears to be protecting its

culpable employees and agents. Thus ... a corporation's promise of

support to culpable employees and agents, either thought the advancing

of attorneys fees, through retaining the employees without sanction

for their misconduct, or through providing information to the

employees about the government investigation pursuant to a joint

defense agreement, may be considered by the prosecutor in weighing the

extent and value of a corporation's cooperation.

Thompson Memo, supra note 38, at [section] VI.

(41) United States v. Stein, 435 F. Supp. 2d 330, 362 (S.D.N.Y. 2006).

(42) See generally Irvin B. Nathan & Michael S. Lewis, The Thompson Memo Ruling: Recent Decision May Have Little Effect on Other Cases, 14 ALM BUS. CRIMES BULL. No. 2, Oct. 2006, available at http://www.arnoldporter.com/pubs/files/Irv_NathanandMichael_Lewis.pdf.

(43) Memorandum from Paul J. McNulty, Deputy Attorney Gen. on Principles of Fed. Prosecution of Bus. Org. (Jan. 20, 2003), available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf.

(44) Id. at 8-9.

(45) Id. at 11.

(46) The Sarbanes Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, [section][section] 302, 906 (2002).

(47) Schizer, supra note 35, makes some complementary arguments, especially as to the mechanisms by which Circular 230 will work.

(48) Indeed, the "tax shelter" bar is distinguished from the regular tax bar; the former is arguably subject to a stigma. See Hill, supra note 8, at 1066.

(49) Weisbach, supra note 1, at 220.

(50) Consider, in this regard, the flurry of litigation cited by Kristin E. Hickman, Of Lenity, Chevron, and KPMG, 26 VA. TAX REV. 905 (2007). See generally Symposium on Corporate Tax Shelters, 55 TAX L. REV. 125 (2002).

(51) See Levin, Coleman, Obama Introduce Stop Tax Haven Abuse Act (Feb. 17, 2007), http://www.senate.gov/~levin/newsroom/release.cfm?id=269479.

(52) See, e.g., Patent Reform: Tax Shelter Patents (Feb. 19, 2007), http://www.patentlyo.com/patent/2007/02/patent_reform_t.html (a discussion of the Stop Tax Haven Abuse Act on the Patently-O Patent Law Blog).