Volume 37, Number 2


Bradley T. Borden

Disregarded arrangements, (2) tax partnerships, or (3) tax corporations. Since the enactment of the income tax in 1913, tax law has struggled unsuccessfully to develop an ideal model for classifying business arrangements. The current model’s sole virtue is its simplicity, derived from formalistic, elective attributes. Its greatest shortcoming may be that it disregards the reasons parties form business arrangements and the reasons they use economic items to reduce rent-seeking behavior and agency costs. That disregard often allows business participants to choose their tax classification and minimize their taxes, which erodes the tax base and shifts tax burdens to others but does not alter the parties’ economic relationships. This Article rejects the current model and presents a classification model based on the economic theory of the firm. Economic theory aids classification in three respects. First, it helps explain why parties form business arrangements. Second, it views business arrangements as nexuses of contracts composed of various parties. This view helps identify the economic aspects of business arrangements and the economic rights of business participants, irrespective of legal form. Third, economic theory demonstrates that residual risk (the right to the residual assets of a business) measures the economic interests parties have in business arrangements. In particular, residual risk helps distinguish between arrangements that can trace income from its source to the owner of the source, or from allocations to the beneficiaries of those allocations, and those that cannot. That knowledge clarifies the appropriate tax regime for all arrangements and leads to the residual-risk model for classifying business arrangements.
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Micah J. Burch

For the large number of U.S. arts organizations whose existence depends on private charitable donations, qualification for federal tax exemption under I.R.C. § 501(c)(3) is effectively a requirement for survival. The federal tax rules directly affect the vitality and direction of arts in the United States by determining which organizations qualify for exemption and life-giving tax deductible contributions. These tax rules are arguably the largest single component of U.S. national arts policy, but because they are tucked away in provisions of the federal tax code that do not even use the word “art,” they remain somewhat insulated from the otherwise vigorous public discourse regarding arts funding. § 501(c)(3) generally requires arts organizations to meet the definition of “educational” in order to qualify for tax-exempt status. This is a problem because an exclusive focus on the demonstrably “educational” aspects of art undermines (or at least fails to address) the important democracy enhancing justifications for publicly supporting art in the first place. In particular, the requirement that tax-exempt arts organizations meet the tax law’s definition of educational prevents the type of diversity—and subversiveness—that a successful arts policy should encourage and fosters the type of conservatism that renders direct support for the arts an incomplete policy. Part II of this Article discusses the justifications for public financial support for the arts and the two alternatives for delivering that support—directly (exemplified by the National Endowment for the Arts) and indirectly (as exemplified by the tax subsidy that is the subject of this Article). Part III examines the current interpretation of § 501(c)(3) as it applies to arts organizations and identifies its inadequacies in light of the reasons for publicly supporting art. Part IV recommends explicitly adding arts organizations to the list of those eligible for tax exempt status under § 501(c)(3). An explicit statutory identification of arts organizations as deserving of tax exempt status (by virtue of being artistic rather than educational) would better protect arts funding from changing political winds and free arts organizations to fulfill their role in our democracy—resisting the tyranny of the status quo and providing a counterbalance to headlong scientific and technological advancement. In this way, federal tax law can better do its part in implementing national arts policy.
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Lee Ann W. Lockridge

When is a use in commerce a noncommercial use? This question may sound like the opening for a ridiculous legal riddle, but it is a real conundrum in trademark dilution law. The current federal dilution statute, section 43(c) of the Lanham Act, creates liability based on the “use of a mark or trade name in commerce,” when that use is likely to blur or tarnish a famous mark. At the same time, the statute characterizes certain activities as nonactionable “exclusions,” including “any noncommercial use of a mark.” So the use of a mark in commerce can be a noncommercial use—but how—and why? This Article comprehensively examines the statutory exclusion for “noncommercial use of a mark” within the federal dilution statute. This includes the legislative history of the federal dilution statute, trademark and First Amendment jurisprudence, and court decisions to date interpreting the statute. Based on this research, the Article explains how courts and potential litigants should interpret the exclusion to achieve its purpose as a predictable, efficient defense that excuses a broad range of expressive uses.
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Andrew C. W. Lund

Over the past decade, the doctrine of good faith provided the central front in battles over directors’ fiduciary duties under Delaware law. Good faith played that role accidentally, through the Delaware legislature’s historically arbitrary determination that directors’ violations of good faith cannot be exculpated via charter amendment. Whether the duty of good faith was violated was—and is—often the operative question for determining director liability. In its most recent iteration, a director’s “conscious disregard of duties” will violate the duty of good faith and, consequently, will be nonexculpable. If robustly applied, the conscious disregard standard would threaten to swallow up the kind of duty of care claims that are expressly exculpable under most Delaware firms’ charters. If applied more restrictively, as the Delaware Supreme Court recently did in Ryan v. Lyondell Chemical Co., the conscious disregard standard would cease to be meaningful. Given the uncertainty surrounding the value of these competing considerations, this Article contends that any attempt to calibrate the proper application of conscious disregard was bound to err in one direction or the other. Instead, the optimal solution would have been for (1) courts to ensure the advantages of targeted culpability determinations through a robust version of the conscious disregard standard and (2) the legislature to permit firms to precommit and opt out of that standard. Although the Delaware Supreme Court’s recent decision may have effectively foreclosed this path by reducing the pressure on the legislature to act, the story of “good faith” serves as a reminder that mandatory rules in corporate law should be heavily scrutinized, else they lead to inefficient results, whether contemplated or not.
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