Juris Magazine- May, 1969

Juris

DUQUESNE

UNIVERSIT Y ,

PITTSBURGH ,

PA.

Duquesne Law

School Newsmagazine May, 1969 Vol. 2 No. 4

INVOLVEMENT

Page Two

EDITORIAL-

Juris

Involvement

Duquesne University Law School Newsmagazine 600 Forbes Avenue.

Pittsburgh, Pa. 15219

-1969-

Editoc-·111-Chief JAMES N. F ALCOK A$5oc;late Editor

STEPHEN R. SIGNORE,

Busine$5 MCII!Oftr

Jr,

Feature Editor

JOHN

A. MIKA

Alumni Editor

ROBE RT W. PESSOL.ANO JAMES R. FAIU..EY

T

·HoUGH the class of 1969 has elCJ)erienced the usual academic apprehension,. anguish, disappointment, and triumph, ours has been unusual in that the uncertainties have been intensified because of the general instability that comes with the process of change.

NewJ Editor

GrCIIIhics Arts Editor

W ILLIAM T. LAI'CEVIC

LAURENCE E. OAVIS

Aclwrt.isi 119 Manager

Cirelli CJ!ion Man CHI er

CHRIS G. COPETAS

JAMES R. McDONALD

ASsl$tC81ts To The Edltgr; JOSEPH B. COLLINS, THOMAS SCOTT DONALD CHARLES

Corresponding Editors: MATTHEW VON

In the study of Law we have been exposed to ideas and theories as to the nature and the purpose of the law, some conflicting and some complementary. We have been taught by authors, governmental advisors, active practitioners, and guest lectut·ers- a melting pot of thought and concepts where students from various and contrasting educational backgrounds have exchanged viewpoints on the nature and application of law.

The class of 1969 has experienced, has learned, has become involved.

With thls involvement has come realization; for some, a new cynicism. Our ideals, once simple. unsophisticated, at·e being re-examined in the light of the myriad possibilities to which the law has made us susceptible . In our education, we have been constantly cajoled to consider the questions what is right? what is just? what is moral?, to ponder them in this supposedly rarified academic air. All well and good!

But the realities have intruded, and disillusionment has permeated our 'ivory tower.'

Even in this sheltered micro-society - the University -that is the milieu of the free spirit we have seen failings: ala wschool stiffled by the shortsightedness of the University "Hill;• a grading system that is in dire nee d of change; and students who have not lived up to their obligations to their fellow students.

STAUOII.C\1 <11><1 TI-IOMA.'ii 1-\0FFI\AAH.

staff Members: FRAN!( CARR, HARVEY EGEIL H A R 0 L D CRAMER , ROBERT GOEHRIN G. JOS ePH HOPPER, JOHN .HOVAN, ROBERT LOV ETT, ALBERT MAIER, SAMU EL PANGBURN, TIM STANNY, JOHN SUGHRUE, STANLEY M. STEIN, JAM ES 1.'/EST, CLAUD·E CARSON, . W I l l I A~ S M I T H, STEPHEN GOLDRING, LISLE Z.EHNER.IIIond GERALD M. SIGLEY.

.Advisors: JOHN J. SC IULLO and NIC HOLAS J. DEMAS.

Yet, our education has been a good one, the 'trial' is now ended, and we have muddled through.

The class of 1969 is ready for a different kind of involvement. As attorneys, as professional people, we face new challenges and new responsibilities.

What is our function, what are our duties in our everchanging social order?

We must remain open-minded and not forsake the 'search for truth' that is the essence of all academic endeavor. We will be working within an established legal system, but one that is becoming sensitive to fresh ideas and new concepts. It is now our responsibility to take full advantage of this new sensitivity contribute the best that Is in us toward a more honest, more just design for human activity, This must be the credo of our calling, of our profession. This must be our dedication.

JURIS is a pubUeatton of the Duquesne University School of Law,

Coruspondenee may be addreeaed to J URlS, School of Law, 600 Forb• a Avenae , Pittsburgh, PennaylYanla.• 1"5219.

Copyright

0

Duquesne UnlveruJty, 1969

PFinted at NEWS COMP

1430 Penn Avenuo, Pgh., Pa . 15221

JURIS

May, 1969

Page Tnree

Out#:oin~ Editor-in-Chief

New JURIS Chief

JAMES N. FALCON

ROBERT W. GOEHRING

:.

juris Announces New Editorial Board With this issue JURIS comple~s its second successful year of publication. Under the leadership of editor James Falcon, the magazine has established itself as an integr al part of the law s chool and the University community. It has carried on in its awardwinning tradition of the previous year. The 1968-69 staff of J URIS is to be commended for their excellent work during the past year. They~ along with faculty advisors J ohn Sciullo and Nicholas Demas, have developed a publication of which students, faculty, and alumni can all be proud.

With such a background, it is not without a bit of apprehension that I view the coming year and the job that JURIS has before it. The necessity of continuing the high standards of the past is clear.

However, the challenge of exploring new areas is also apparent. Having served as a valuable forum for the presentation of student opinions on contemporary legal topics, JURIS must maintain this important function. But JURIS must also strive to be a stronger contributor to the exchange of ideas within the law school itself. Theproblemsofa growing law school are many, and it is hoped that in the coming yea:r JURIS may not only supply the law school with new ideas and concepts but also help in their application to pra ctical problems.

The whole law school - students, faculty, and administration - face a !.a rge task in the further development of the school. It is anticipated that JURIS can be a beneficial part of that development.

- - -- -- --

JÂŁdito""In-Cb1e:{<

uJ ~ JURIS

Seated L. to R.: JOHN H. HOVAN, RICHARD K. CHAMPNEY and ANTHONY J. POPECK. Standing L. toR.: STEPHEN I. GOLDRING, HARVEY J. EGER, FRANK L SMISIK and ALBERT F. MAlER, JR.

May, 1969

Page Four

WhatS Wrong With The

By WILLIAM J. SMITH, cpa Second Year Evening Student

CAPITAL gains, as differentiated from ordinary profits, arise from the sale or exchange of an asset which is not part of the owner's stock-in-trade nor one which is regularly offered for sale in the ordinary course of b1:1sioess. Ordinary profits, on the other hand are realized in the sale of goods and services that are part of the seller's stock-in-trade, regularly offered for sale. One of the best explanations of this difference was made by Lawarence H. Selt zer, Professor of •· Economics, Wayne University in his book, The Nature and Treatment of Capital Gains and Losses:

The Nature Of Capital Gains

Ordtnar11 pro/its are commonlv the result of buying goods in one market and se llinu t hem in another. that is, in a different torm, tn different quantities, at a different season, or in a different place. Capital gains or losses, on the other hand, are most com· monlv the result of changes in prices in the same market.

The profit realized by a real estate developer from the purchase, subsequent subdivision and resale of land is ordinary income to him, while the person who sold the land to the developer, if he was holding the land as investment property, or farming it, has a capital gain. It is this capital gain and the treatment it receives in the Federal taxation of income, with which this article is concerned.

The question of taxing capital gains as ordinary profits, at a reduced rate, or not at all, has been debated for quite some time. The British system of taxation, and several others, exempt capital gains from any income tax. (It should be noted that the British tax is schedular in form, i.e., a group of varying tax rates upon different forms of income.)

This has necessitated a constant revision of what constitutes capital gains in these countries sin~e it is a prime target for tax avoidance. The advocates of taxing capital gains as ordinary income are able to assemble a series of impressive arguments.

Capital gains, they reason, like other forms of income, add to one's purchasing power, giving the r eceiver the command of economic resources. If used for consumption they provide the recipient and his family with more luxuries, such as a better home and more expensive food, clothing and superior educational opportunities. Should he choose to save or invest his capital gain, the wealth accrued thereon is indistinguishable from the return on wages, salaries or net profits similarly invested.

Capital gains occur infrequently, making them a direct addition to one's capital, not part of his disposable income, explain some authorities. The very irregularity of iheir nature causes a prudent man to ignore them when determining income available for ordinary consumption, especially when he realizes that losses may well follow such gains.. The analogy of the fruit and the tree is often used with the fruit representing income from a capital investment, the tree . This concept of income is that like fruit, income must be continual. The value added to investments through increases in market prices is likened to the growth of the fruit tree; neither can be separated from the investment, thus the increased value is not taxable income.

Finally, two of the most persuasive reasons for s pecial treatment of capital gains, both of which Will be discussed in greater detail later, are (1) taxation of a gain which accrued over many years as if received all at one time places the ta.."<J)ayer in a higher tax bracket: (2) the tax on gains discourages sales of investments, thus the investor is "locked in.• These are some of the arguments on both sides of the issue, though not necessarily in answer to one another. After fifty-six years of income taxation these points are still valid and deserve consideration when assessing the merits of the capital gains tax.

However, I think it can be safely assumed that these issues were not foremost in the minds of the authors of the sixteenth amendment to the Constitution, the basis of our present income tax.

FOLLOWING the ratification of 16th amendment, the Supreme Court held in Eisner v. Macomber GalDS Tax (252 U.S. 189), that income was "gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through sale or conversion of capital assets.• Thus, the income tax was firmly established and equally so was the inclusion of gains on the sale or exchange of capital assets as taxable income at the applicable normal and surtax rates, This treatment was to prevail for nine years, until 1922.

A Brief History Of The Capital

Special tax treatment for capital gains appeared for the first time in the Revenue Act of 1921. Losses, if from the sale of business property, were deductible from 1913-1915. This was extended to include all losses arising from a profit-motivated transaction in 1916 if they were offset against capital gains. From 1918 to 1923 capital losses wer e permitted as an offset against ordinary income. Capital gains were divided into long-term (over two years) and short-term (less than two years). Since Congress allowed offsetting losses against ordinary income with no limitation, the Treasury Department was absorbing 58 percent of all losses while receiving only 12.5 per cent of the gain. Congress halted this practice in 1924 and the treatment of capital gains remained substantially the same for the next ten years.

The Revenue Act of 1934 brought sweeping changes regarding capital gains and losses. No longer were they taxed separately, but rather, both were included in the computation of net income subject to the regular tax rates. The amount of the gain or loss to be included was determined by the period of time the investment had been held. This step-scale was the result of much criticism of the two year holding period. It provided:

JURIS

May, 1969

Less than 1 year 100 More than 1 but less than 2 years 80 More than 2 but less than 5 years 60 More than 5 but less than 10 years 40 More than 10 years 30 This plan placed a. premium on asset retention of 5 years. It was later modified but never made uniform.

Congress was under constant attack to remove the tax on capital gains but retained it in the 1938 Revenue Act for the following reasons: (1) recipients or such gains were no less able to pay than recipients of other forms of income; (2) most transactions resulting in capital gains were entered into for profit; and (3) capital gains would be a prime targetfor tax avoidance if exempt. The step-scale plan was abandoned and two classes of long-term gains were introduced to the tax law. This period saw the birth of the"alternative tax" which still exists today.

In 1942 the law was changed so that short-term gains and losses (held less than six months) were included in net income at 100 per cent while 50 per cent of the net long-term gatn was so included or taxed at the alternative rate of 50 per cent on 1/2 of the gain. Losses were to be offset against like gains with a provision for deducting $1000 from ordinary income and a carry-over period of 5 years for similarly offsetting the remainder of the loss.

This is basically the system today with the additional requirement that "loss carryovers• retain their identity as either long-term or short-term.

THE authors of the sixteenth amendment specifically provided that all income could be taxed, "from whatever source derived."

We have seen that early court decisions have interpreted this to include capital gains while subsequent legislation modified the rate of taxation. Since that time however, the assets qualifying for capital gains treatment have been substantially increased to the point where they now include items which cannot, by any stretch of the imagination, fit the description of a capital asset given at the beginning of this article. The manner in which these tax favors have been bestowed appears to have been somewhat reckless and without regard for the principles of equity upon which our tax system was built. In light of our previous examination of the tax laws relating to capital gains, it is conceivable that a preference of some sort is due a taxpayer who has realized a gain on the sale of stock purchased as an investment, but why does this benefit extend to inventors, coal and iron ore royalties, and Christmas trees, while gains from the s ale or trademarks and copyrights, all other mineral royalties, and apples result in ordinary income? With thls in mind we will now briefly examine some of these areas whieh have brought the capital gains its current reputation of being a tax-dodger's paradise.

The Cunent Ills Of The Capital Gains Tax

Page Five

The specific exemption given patents under the Inte.r nal Revenue Code is not without support as a matter of public policy. Since the enactment of the Patent Law, the economic and social justifications of the patent monopoly have influenced other legislation concerned with inventors. The granting of capital gains treatment to patent royalties is consistent with the public attitude toward invention but inconsistent with the taxation of r oyalties as ordinary income.

Capital Gains Tax?

Royalties received from copyrights and trademarks are explicitly denied capital gains treatment by the Internal Revenue Code. In a 1952 decision, the Tax Court made a distinction between an inventor's sale of the rights to his work, and the transfer by a playwright of the rights to his work. The extension of capital gains treatment to the inventor and the denial of such exemption to the playwright, hinged upon the ability of the inventor to derive a monetary return Without selling his rights and the supposed dependence of the playwright upon the sale of his r ights to a producer, in order to realize an income from his efforts. Such a sale was said to have been that of "property held ror sale in the ordinary course of business," thus removing the sale from the capital asset category.

Coal and iron ore royalties. Under the pretext of aid to a dying industry, capital gains treatment was extended to coal royalties in 1951. This was done to encour age coal property owners to lease their land to coal producers, and to aid those who had done so, years befo r e, at a fixed royalty rate with no provision for increases. It wasn't long befor e others sought this benefit for r oyalties they were paying or r eceiving.

Only s trenuous objections fr om the Treasury Department, with support from the House Ways and Means Committee, kept iron ore r oyalties from receiving this preferential tax treatment in 1954.

Hard work on the part of lobbyists pays off however; in 1964 ir on ore royalties joined coal royalties in qualifying for capital gains treatment. It is interesting to note that the Committee Reports on the bill cited the preference enjoyed by coal as one of the reasons for granting capital gains treatment to iron ore r oyalties .

On the surface, and indeed, after careful analysis, there doesn't appear to be any justification for extending this privilege to either indus try. The Committee Reports point out the incr eased foreign competition as a reason to aid iron ore and the increased use of other fuels as jus tification for bestowing tax benefits on coal royalties. Assuming both r easons to be valid, more equitable assistance, from the s tandpoint of other taxpayers, could be found in tariff r estrictions and increased feder ally supported research, respectively. The practice oi granting tax -concessions for specific and r estricted economic assistance, once begun, tends to get out of hand.

(Witness the fact that following oil, percentage depletion has been extended to gravel, clams, oysters and even water!) Dan Throop Smith, noted tax advisor and Professor of Finance at Harvard's Graduate School of Business Administration, advocatedoutright repeal of the capital gains treatment of coal royalties in his book, Federal Tax Reform. (The book was published before 1964.) In discussing the merits of granting percentage depletion to coal, LouisE isenstein facetiously sums up the industry's argument this way: "Oil needs wells; wells need steel; and s teel needs coaL• If Congress wer e to accept this reasoning, which is what many think they followed in granting depletion allowances, the oil industry can have capital gains on royalties in addition to what is often called "the pie in the sky• 27-1/2 percent de p 1e ti on.

Continuation of this kind of tax favoritism can hardly be justified.

Timber and Christmas Trees. The first to specifically r eceive the privilege of paying capital gain tax r ates on ordinary income, the timbe r industry is now firmly entrenched. The profit derived from cutting and selling timber is taxed as or dinary income while that portion attributable to gr owth r eceives capital gains treatment. This concession has been justified by the long crop cycle in the timber industry.

Were we to accept this as sufficient grounds, might we not extend the same right to aged whiskey, maybe in propot·tion to the aging period? Taken a s tep fur~er > retail outlets with slow inventory turnover such as jewelery and furs would also qualify.

The intent of Congress originally was to alleviate a situation where some grower s r eceived capital gains by selling the entire traet uncut and other s s uffered the ~ngs of paying taxes at ordinary rates because they felled their own trees. In remedying what was admittedly an unfair situation, Congress must have

We now find ourselves a nation which has the for esight to see the economic and social need for inventions and encourages the same through tax concessions, while on the other hand denies similar treatment to literary, musical and artistic compos itions.• According to Dan Smith, MThe difference in treatment is a puzzlingand somewhat embarrassing one and is not defensible on any principle of equity or national policy." At the same time however, Mr. Smith feels that the present situation is better than granting similar concessions to all royalties or removing this tax umbrella from inventors royalties.

followed this principle of Equity as put by Louis Eisenstein: Equity is the pri !ii l eue of paying as l :ttze as somebod1i else- Now, alltimbermen were paying the equally low rate of ta..,; on income r eceived in the ordinary course of their business! But wait! Somehow, someone had been left out! The Internal Revenue Service, in one of its rulings, specifically prohibited the application of this law to Christmas trees, saying that they were not •timber .• Congress however, solved the proble m when rewriting the Internal Revenue Code in 1954. In so doing, to avoid a direct confrontation with the ruling of the Internal Revenue Service, they clothed the exemption in these profound words: • .•• the ter m " timber"' includes evergreen trees which are more than 6 years old at the time s evered from the roots and are sold for ornamenW purpose."

While they are some economic justifications for the encouragement of forestry and conservation> I think that, again, these goals may be met through measures other than taxation. Timber grower s have problems peculiar to their industry, but then, what industry or business doesn't? If we attempt to solve all such problems With specialized fax favoritis m the decay of our system of taxation is certain.

Patents. The special capital gains treatment accorded the holders of an economic interest in patents is the Congressional solution to a situation created by our courts. Prior to the exemption provided by the 1954 Internal Revenue Code, some inventors received capital gains treatment on the transfer of their invention while others were forced to report such dispositions as ordinary income. Amateur and professional inventors were treated differently, as were "payments of a definite predetermined amount and payments related to use." The dis tinction between an amateur and professional -inventor is open to conjecture as few, if any, concr ete guidelines are a;railable. Those inventors whose patents covered items of obvious worth were accorded capital gains treatment on the basis of the r ecognized value as shown by the purchase. Other inventors, who received royalties based on usage, paid normal tax rates.

JURIS

May, 1969

In his stance that the present treatment has merits Mr. Smith is not without support. Even Congress 1n enacting the 1954 Internal Revenue Code was careful to cite the "good of the people" as a reason for the legislation, by stating that it was designed to "provide an incentive to inventors to contribute to the welfare of the nation."

Is the welfare of the nation more dependent upon inventions than artistic accomplishment? For all practical purposes the answer to this Question is "yes," but when asked anothe r way - Is the welfare of the nation dependent upon inventions to the exclusion of artistic accomplishment, even the enlightened legis lators would hesitate before answering in the affir mative. But isn't this what they have said in the law as it now stands? The Congress apparently feels that without special treatment in addition to the patent monopoly, inventor s Will not invent. This is the same reasoning used by inventors who think the r epeal of the tax on capiW gains will bring forth a floor of investment money and an increase in such tax will freeze all investments. It is indeed fortunate that those of this nation's people who are endowed with the ability to compose, write or similarly create artistic works, do not withhold their talents because of the absence of the tax privileges granted others.

Wer e they to take the attitude of the investors, songs, plays and books would have dis appeared long ago.

If the capital gains tax is to r emain, a redefinition of • property• is s orely needed. There presently is no r eal difference between •titerary property" and the r ights to an invention; the imaginary difference c r eated by Congress is inequitable.

Qualified Stock Options. The place of the stock option in our tax laws is indeed a protected one. It is now possible for selected corporate executives to r etain 75 percent of their income because Congress has once again transformed or dinary income into c apital gains. The law covering stock options is s omewhat intricate and a detailed explanation of it is not neces sary for this article.

- continued on page 12

Page Six

I want to tell ever11 welt./ed and 01Jtimistic American that it is intolerable that so many miltions s/wuld be maim~d in. body and. in spirit when it is 110t necessarv that 1t should be. My standard ot compari son is not how much wotse things used to be? It is how muck better they could be if onlv we were stirred.

MICHAEL HARRINGTON The Other America

Ptor

EACE in Vietnam together with this nation's space achievements symbolize the essence of the 35 million Americans now existing in hope poverty. While peace in Vietnam is long overdue, there have been certain identifiable advances towards this goal during the past year . Before the Nixon administration becomes involved in merely explaining its failures, it retains an opportunity to end this conflict by utilizing its independent position with regard to this issue. As active American involvement in the war diminishes, there will be a corresponding increase in our nation's resources which will be available for use in other areas involving our national interest. The hope for the disadvantaged is that a significant portion of these resources will be directed toward alleviating the poverty which exists in our Society.

Also, the success of our s pace program has signaled a new era for man in space exploration. These historical achievements were accomplished as a result of a sincere commitment on the part of the American people and illustrate the unlimited capacity of man to achieve seemingly impossible goals. The hope for those now existing in poverty is that the conditions in which they live can be eliminated wben this nation dedicates itself to that purpose. :.

This material wealth and human energy can be effectively utilized to advance existing programs designed to aid the poor and to develop alternatives to those programs which have proved inadequate.

Few of the attempts at alleviating the severity of poverty and of providing opportunities for the disadvantaged have failed in as many respects as the present welfare system. As it is presently administered, this system perpetrates dependency and merely creates despair -among those it is intended to aid. In order to offer responsible alternatives, it is first necessary to understand the deficiencies of the present system under which almost 10 million persons receive financial assistance. This can most effectively be accomplished by analyzing the criticisms of the p r e sent system and distinguishing the responsible charges from those which are not supported by fact. It should be clear, however, that the problems of the poor are not solely related to the development of an effective welfare system.

Rather, a comprehensive study must ultimately include an analysis of the interrelated problems of welfare, employment, education, housirig, and the economic development of the ghetto.

The validity of this proposal is illustrated by analyzing the present method used for determining the financial eligibility of applicants for assistance.

The welfare department of each state establishes a minimum standard for health and decency- hereafter referred to as the "state standard". In most of the states, each county then establishes a minimum standard of living for that JYMticular area which is expressed as a percentage of the state standard, In many of the states, however, this percentage as well as the state standard, is established by the state welfare department and is applicable to the entire state. Under this system, if an applicant's total income exceeds an amount reflected by the county or state percentage, he is not entitled to assistance. For example, in Pennsylvania each county establishes a minimum standard of living for that particular area and this figure is a percentage of the state standard as established by the Pennsylvania Department of Public Assistance. In Allegheny County if an applicant for assistance receives a total income which after certain deductions exceeds 90 per cent of the State standard he would not be entitled to receive financial aid. The important point is that assistance is denied even though the applicant's total income after deductions is below the State standard. In addition, the Pennsylvania state standard was last established in 1966. Thus, the inequities of this procedure are multiplied since the County percentage is based on a state standard that fails to take into account the rising inflation in our economy.

BECAUSE the state standards vary according to each particular region, the unfairness of this procedure is often shocking. In Mississippi where the state establishes the percentage as well as the state standard, it is estimated that a family of four requires $201 per month to maintain a minimwn level of subsistence. However, Mississippi actually Variation Breeds Unfairness

IN recent years the welfare system has been the object of Fire intense criticism . Many of the critics offer responsible arguments for change which deserve examination. A basic criticism is that the present categorical system of providing assistance denies financial aid to a large segment of the poor.

As an alternative it is suggested that a welfare system can only effectively aid those living .in poverty if the need is the sole criterion used to determine one's eligibility for assistance.

A System

Uuder

pays a family of four $55 per month or only 27 per cerit of its state standard. The same family would be entitled to $170 in Ohio and $262 per month in Pennsylvania. Similarly, the average national poverty cut-off for a family of four is currently estimated at $3335 annually. Yet, the annual average total. income for a family of four receiving aid under the program Aid for Families with Dependent Children (AFDC) is between $2300 and $2400.

The Committee on Poverty, headed by Richard P. Nathan of the Brookings Institution, recommended to President Nixon that the Federal Government set minimum standards which would be UJliform throughout the nation. If this proposal is adopted, one of the most glaring weaknesses in the present system will be abolished.

In addition to this financial requirement, there are other conditions of eligibility governing dispensation of welfare payments in the present system. The Social Security Act makes Federal assistance available to those states which adopt approved plans for each of the folloWing categories: 1) old age; 2) blindness; 3) permanent and total disability; and 4) AFDC. Also, most states such as Pennsylvania have established another main category called "General Assistance" which is designed to aid those \Vho do not fit into one of the other categories.

There is an independent set of requirements with which an applicant for â&#x20AC;˘General Assistance" must comply in order to receive aid.

Certain of the provisions relating to AFDC have been criticized as not being related to the need of its intended -beneficiaries. The purpose of AFDC is to encourage the care of need)', dependent children as well as to maintain and strengthen family me.

However, in many states, children can receive assistance only if no male is living in their home.

Frequently a father cannot provide his family with as much financial support as they can receive under A FDC. The father, consequently, often deserts his family in order that his wife and children can qualify for public assistance. In addition, this provision encourages illegitimacy because many of the poor forego marriage so that the mother and children can qualify for assistance. Contrary to the purpose of AFDC, this provision weakens the family structure of the poor and penalizes the children for the conduct of others over which they have no control. On the other hand, some states, including Pennsylvania, provide assistance to a family under AFDC even if there is an unemployed father living in the house.

A provision in the Social Security Act provides that in this situation, i! the father refuses to seek or accept employment, the entire grant to his family must be terminated. Thus, in denying aid to children in disregard of their needs, we are in effect saying to them that because their fathers lack the education and corresponding opportunities for employment that they, too, are destined to live their lives within this cycle of poverty.

The Problem~ JURIS

May, 1969

Page Seven

Financial Assistance: Basic Need

WHILE financial assistance is only one of the many necessities of AFDC families, it is nevertheless a basic need. As the financial stability of one's family becomes a reality, the opportunities for the children to achieve higher levels of education and training will increase. Thus, the employment opportunities for these children will multiply as they increase their mental ca~x:tcity and physical abilities.

Consequently, the remuneration from this employment will enable these persons as young adults to support their own frunilies without the need for public assistance. As each of these persons becomes independent of the welfare system, the general public, which is the source of this financial aid, would be affected in two ways. First, as the number of people becoming financially independent increases, the cost of maintaining the welfare system will eventually decrease. Second, the national economy will become more productive as employment and consumer potential increase. One would be foolhardy to suppose that each family presently under A FDC would become financially independent i m m e d i ate 1 y upon a modification of the present provisions applicable to this category. Rather, the success of our present efforts will be determined by the number of persons who emerge from the cycle of dependency over coming generations.

Another provision often criticized provides that a recipient's grant shall be reduced for reasons which disregard the person's financial needs. Specifically, if a recipient' s total income from sources other than welfare, such as social security or employment, increases, the amount of financial assistance to which he is entitled will decrease in varying amounts.

The amount of assistance is reduced even though the _ person' s total income has still not reached a level which would enable him to lead a self-sufficient life.

In Allegheny County, if a father of four earns $200 per month, his welfare grant would be $158, yielding a total income of $ 358. If the father's income from employment increases to $300 per month, the grant is reduced to $111 resulting in a total income of $411. In this situation the to.tal income 'increased only one- half as much as the actual increase in the father's salary. The restrictive effect of this provision is twofold. First, the cycle of dependency is perpetuated since the provision makes it more difficult for the individual to achieve a level of economic self- sufficiency. Second, this provision creates a greater feeling of despair and discouragement among the poor. These people wbo have few employment opportunities because of their limited education go essentially unrewarded for their efforts to improve their financial stability.

Procedures

Create Dependency

EQUALLY as restrictive and d.iscouraging are certain of the procedures and requirements for eligibility to which an applicant or recipient must consent. To

qualify for assistance, an applicant must make himself available for an interview with a caseworker. During this time, the person must answer many per sonal questions which have no relation to his financial needs. For example, the individual must answer questions concer ning the legitimacy of his children and the teasons for a previous divorce or separation.

At this interview the applicant is also confronted with many complicated forms and procedures . If the applicant recently became unemployed, he must verify his last IllY and explain in detail how the money was spent in order to prove that it is totally depleted. Further , applicants who own real property must sign a reimbursement agreement which makes him liable to repay to the state an amount equal to what they receive while on relief. The individual must also authorize a consent judgment to be entered against himseIf if he fails to comply with this repayment provision. This judgment operates as a lien on the recipients real and personal proper ty.

In addition, the person must consent to having his s pouse, children and parents investigated it they do not reside with him. Once on relief, the recipient mus t then consent to a periodic visit in his home by a caseworker who requires that he present and verify information pertaining to his living arrangements. These are only some of theprocedures with which an individual must comply in order to r eceive financial aid. Because many of these procedures merely degrade and confuse an applicant fo r assis tance. At tl1e very least, the effe ct of these procedures is that those on r elief feel completely dependent u{Xln the state for their monthly â&#x20AC;˘gratuity."'

With their spirit broken, the recipients no longer maintain the aspiration for independence which is necessary for their physieal and psychological well-being.

In defense of these provisions, the contention is made that the information acquired thr ough using these forms is necessary in order that the welfare department can effectively administer its social s ervices. Some of the infor mation relating to the applicant's social and economic his tory does aid this social function of tOO welfare department. The effect, however, of attaching these conditions to the distribution of financial assistance only fosters an attitude among r ecipients that reflects total dependence on the state for their personal subsistence.

As a solution to this ~x:trticular problem, it has been suggested that financial assistance and social services be administered through separate departments. The requisites for receiving assistance in each lire a would then be clearly related to the specific type of s uppor t provided. This plan would also enable each ser vice to be more effectively administered.

If public assistance eligibility proVIs1ons and standards were modified whereby financialassistance would be provided to all persons living below the poverty level, the immediate effect would be a fourfold increase in the number of public assistance r ecipients

(H.E.W. Report, April, 1968). In recognition that this situation exists, the former Secretary of Health, Education, and Welfare, Wilbur J . Cohen, ordered all fifty states as of July, 1969, to test a new procedure in selected areas in each state. Under the new procedure, applicants for welfare payments will become eligible on their own statements of need.

Eligibility for assistance will be based solely on the statement concerning the applicant's r esources and personal circumstances. In addition, the present system of detailed investigations will be replaced with spot checks of about ten per cent of those receiving assistance. Since this order does not need Congressional approval, it is binding on the present administration unless steps are taken to change the regulation. It must be emphasized that the order only requires the states to test the new procedure in selected areas. Hopefully, the states will ultimately be ordered to use this new approach on a statewide basis.

Criticisms

MANY of the cr i tic is m s, unfortunately, of the present s y s t e m as we 11 as of the On Fact alte r n at ive social welfare programs are not based on fact.

These arguments serve only to confuse the true issues and consequently impede timely, responsible change. The statement beard most frequently is that welfare recipients are on relief because they are "lazy.â&#x20AC;˘ However, of the almost 10 million people now on relief, 7-1/2 million of the recipients are eligible under the categories for the blind, old-age, disabled, and the children in AFDC. The remaining group of people are composed of the parents of the children in the AFDC categor y and those persons receiving aid under the â&#x20AC;˘General Assistance"' programs established by the various states.

Not Based

- continued on. page 10

DONALD R. CHARLES Third Ye ar Day

of Change J URIS

May, 1969

Page Eight

Winners STEPHEN FERITO

EDWARD BROWN

Bovle Inn of Court - GOURLEY CUP WENNER

Staley Inn

ot Court- GOURLEY

CUP WINNER

Realizing that the primary purpose of a law school is to teach the law, Duquesne's curriculum offers activities that allow its students to develop specialized skills within the legal field.

Trial Moot Court

The Trial Moot Court Winners illustrate the success of these programs.

The trial techniques of the winners demonstrate a poise which only keen competition could have developed. Tbe four winners of the Trial Moot Court are Edward Brown, Stephen Ferito, Robert Kelly and William Lapcevic.

From these four men, two finalists - Stephen Ferito and Edward Brown earned the right to compete against two finalists from University of Pittsburgh's Law School in the Gourley Cup Competition. On April 18, 1969, Stephen Ferito and Edward Brown won that competition and returned the Gourley Cup to Duquesne. In recognition of this fete they are to be congratulated.

ROBERT KELLY Sorg Inn of Court

Appellate Moot Cowt

The Appellate Moot Court winners, demonstrating their oral art of persuasion, also are to be congratulated for their successful participation in the Appellate Moot Court Program. This year's finalists are Eugene Fignar, Lorraine Mullen, Michael Reilly, and Fred C. Trenor.

Phi Alpha Delta On March 8, 1969, Phi Alpha Delta held its Spring Dinner Dance. The highlight of the evening was the presentation of awards in recognition of outstanding achievement. M i c h a e l Aranson received the â&#x20AC;˘scholastic

WILLIAM LAPCEVIC O'Brien Inn of Court

JURIS

May, 1969

Page Nine

Appellate Moot Court Winners:

0

Q... ,

Left to Righ1: L ORRAINE F. MULLEN, EUGENE M. FIGNAR, FRED C. T RENOR and MICHAEL J. REILLY.

Award", presented in recognition of outstanding scholastic achievement. The "Distinguished Member Award" was presented to James Falcon in recognition of his outstanding service to the Law Sc)lool, and Frank Carr received the "Outstanding Member Awardâ&#x20AC;˘ for his outstanding service to the fraternity.

Also, Charles Isaly was the recipient of the ~Preside nt's Award."

Phi Alpha Delta A\Nard V\linners

Law Review

Recently, the Editorial Board of Duquesne's Law Review was selected.

These students have demonstrated their legal and analytical prowess, and now will have the opportunity to co-ordinate these skills and compile them into a review worthy of acclaim. The Editorial Board for next year consists of David Brightbill, James Curtin, David Gilmore, Kathleen Kelly, Stephen Walker, and (Picture Page lO) Donetta Wypski.

JURIS Also Robert Goehring, Editor-inChief of JURIS, r ecently announced his selections for next year' s editorial board. The boar d is composed of Richard Champney, Harvey Eger, Stephen Goldring, John Hovan, Albert Maier, Anthony Popeck, Frank Smizik and Matthew von Staudach.

(Picture Page 3)

C HARLES W. 1SALY President's Award

J. ARANSON Scholastic Award

MICHAEL

JAMES N. FALCON Most Distinguished Member

To the Gourley Cup Winners, the Trial Moot Court Winners, and the Phi Alpha Delta award recipients- Duquesne Law School extends its thanks for a job well done. To the Appellate Moot Court Winners and the Editorial Boards of La\v Review and JURIS, Duquesne Law School offer s its congratulations and wishes for success next year.

JURIS

May, 1969

FRANK CARR Outat..nding Member

Page Ten

Problem of Change -continued from page '1

In relation to this latter group, in 76 per cent of the families receiving aid under AFDC, the mother is the head of the household. The fathers in these cases are absent because of death, divorce, separation, desertion, or unmarried parenthood. In 16 per cent of the AFDC families, the father is incapacitated.

The father has a minimal income job that requires supplementation by assistance in 3 per cent of the families. The unemployed fathers living at home number only 60,000 which involves the remaining 5 per cent of the families in AFDC. There is, iJ\ addition, a provision in the Federal law which states that unemployed fathers living in the home must be actively seeking employment in order to continue receiving welfare. Recognizing that this provision is not strictly enforced, there are only 60,000 fathers in the nation who conceivably could obtain employment.

This figure, however, does not even account for those who are unable to find work because of a limited education and poor work history, deterrents to gainful employment.

Many ask why the mothers on AFDC do not work.

As stated above, the mother is the head of the household in 76 per cent of the families. In addition, tbe median age of the 4 million children receiving aid is 8.6 years. Therefore, it is the sole responsibility of most of the AFDC mothers to care for children who are struggling through the problems of infancy and youth in an environment of poverty. Moreover, if a mother receiving aid for her children should obtain work, in some instances, she loses a dollar of welfare for every dollar she earns. This system provides slight incentive to these individuals who attempt to seek employment as efforts to improve .. the stability of their families go unrewarded. illegiUmacy

ANOTHER comment ft·equently heard is that welfare mothers Amount or have illegitimate children in order Assistance? to increase the total amount of assistance which they receive.

This argument presupposes that the financial increase would be so significant that itwouldbe to the mother's benefit to have another child. Statistics do not support this claim. In Allegheny County a family of four is now eligible to receive a maximum of $262 per month. The maximum for a family of five increases to only $300 J)er month. Also in this county, a family larger than six persons will get only $40 per month more for each additional member. Somewhat more shocking is that the per child benefit in the southern states is often as low as $9 to $10 per month. Hardly an incentive for illegitimacy!

To Increase

In contrast, the poor ot today are the first minority poor in the history of our cotmtry; the first poor whom those in political power do not have to recognize in order to maintain their positions of influence. These people who were left behind by an expanding economy are· those with whom we are now concerned. As a result of automation, there are fewer unskilled jobs available today than there were in the 1930's and 1940's. Also, it is now an essential requirement for the most unskilled of jobs that one have the equivalent of a high school education which most of the poor have not achieved. These factors have created an environment which has destroyed the internal vitality of the "new• poor. These people no longer harbot• the hope of achieving new horizons but rather feed on the failut•es and despair of one another. In many instances the obstacles to achieving a life of decency appear to be insurmountable which might be true unless the American people commit themselves to developing responsible programs to aid the disadvantaged. In order to effectively aid the "new• poor in becoming independent and self-respecting individuals, a program must be adopted which recognizes the inadequacies of applying New Dealstyle social welfare legislation to the economic and political crises of the 1960's.

Any discussion of the welfare system and poverty is often directed to those unique obstacles confronted by the disadvantaged minority groups in our country.

Within the limitations of this analysis, it is sufficient to say that in order to develop responsible programs for the poor. one must necessarily consider the additional barriers faced by the blacks, the Mexican~ Americans, Puerto Ricans, and Indians. In addition, co!isideration must be given to the various problems peculiar to the poor who live in different regions of our country as well as those who live in the rural and urban areas.

WE at·e faced with a problem of deciding which of the available courses of action will best effectuate our desire to eliminate poverty in our nation. One alternative is that the present welfare system should ANew Attitude

be modified in order to correct its many abuses. Many persons offer entirely new programs - tbe most relevant bearing on the various income maintenance schemes: negative income tax, children's allowance, direct cash supplement. Whichever program is selected, the extent that it reflects a sincere commitment to protect the independence of the disadvantaged depends on the development of a new attitude towal'd the poor.

Charles A. Reich, professor of law at Yale University, characterizes this new concept as one of "entitlement." It is simply that when people have insufficient resources to live under conditions of health and decency, society has an obligation to provide assistance and the individual is entitled to this support as a mattet· of right. This feeling of responsibility toward those less fortunate than ourselves is the result of how one views the nature of poverty. Mr. Reich sees poverty as the consequence of large impersonal fot·ces in our complex, industrial society. Automation, lack of jobs, and changing technologies are forces over which the poor have no control. Individuals, then, cannot be blamed for their lack of self-support. Continuing, Mr. Reich states that the poor can more acclU'ately be considered as affirmative contributors to today's society. Since our economy became so organized as to compel such a sacrifice by this large segment of our society, an affluent American has an obligation to provide assistance to the poor. So understood, the financial assistance should not be considered as a gratuity but rathet· as assistance fully deserved to which the recipients have a right.

It is inconceivable that the American people will continue to tolerate the poverty that presently exists in society. Each person must develop a sense of obligation and r e spons ibi li ty towards the disadvantaged. Instead of being content with the status quo, all of those who share in the nation's wealth must project themselves into the problems faced by the poor and become involved with the elimination of these conditions. Aftluent America must finally realize that there is a world which exists outside of their narrow spheres of interest, a world which can be drastically altered if only they were stirred.

Editorial Board: Law Review 1969 . . 1970

Many people who are now part of the affluent sector of the American population began their careers in the depression years or shortly thereafter. It is difficult for some of these persons to understand why the poor in today's society can not "make it"' as they did years ago. There are, however, striking differences between the circumstances of the "oW' and the "new" poor. During the Depression years, misery was a condition oflife for practically everyone.

As a result of their large numbers, the "old poor" represented a powerful force in American politics and were, consequently, the immediate concern of those possessing political power. For most of those who escaped from conditions of poverty success can be attributed to being at the right place at the right time in an expanding economy. Perhaps most importantly, those who lived in the "old" poverty had aspiration. For them the American dream of having an opportunity to seek a new life was very much alive.

L. to R. Sitting: DONETTA WYPISKI, DAVID J. BRIGHTBILL and KATHLEEN A. KELLY. L. toR.: STEPHEN G. WALKER, DAVID L. GILLMORE and JAMES S. CURTIN.

JURIS

May, 1969

Page Eleven

Student Bar Association Selects New Officers

Unfortunately, or perh ap s fortunately, the Student Bar Association does not have a constitution. It is hoped that we wUl have one next year.ln the meantime, however, we have established various committees and it is the profound hope ofthe Student Bar Association that these committees will blossom and bea r fruit.

Student Bar also has adopted a new 'political' weapon called the petition.

Thus far, the proponents of the petition maintain that it is very effective. On the other hand, opponents claim it is very ineffective.

The reasons for both these

opinions are the same; this anomally stems from the fact that, thus far, the results from the various petitions have been virtually zero.

Next year seems full oi promise, but so did this year.

Support the SBA, see your committee chairmen and volunteer your services.

Fervently hoping to see all of you next September.

Only atWPNB can you now get total flexibility • In your

A.C.B.A.

Keogh plan

1 remain, Sincerelv.

L. to R.: RAY RADOKOVICH, Secretary; TOM SCOTT, President; JERRY GROSS, Treasurer and TED WATTS, First Vice President.

Mieslng from t he plcture: JAMES BROWN, Second Vice President,

T OM SCOTT President

Under the guidelines set by the A.C.B.A. and WPNB (Trustee), you are now permitted complete freedom of investment choice for your HR.-10 retirement funds.

This privilege is granted to every lawyer participant, whether an independent practitioner or a member of a finn.

You may choose your own investment advisor, or consult with our Trust Department on all selections available within the limits of the Act. This broad range covers common stocks, preferred stocks, bonds, mutual funds, life insurance (up to 49 % ), and savings aceountsincluding the various long term 5% growth programs offered by WPNB. All transactions (including the purchase of life insurance) may be effected through your own broker, or through your Trustee. In either case, you will at all times retain complete control of your HR-10 investments and their apportionments under this unique plan.

For full details, talk with the Allegheny County Bar Association or w,ith Stephen M. Totton, Trust Officer, WPNB. • • • •

Western Pennsylvania National~ Bank

SAVE ON TAXES BUILD RETIREMENT INCOME INVEST IN LIF E INSURANCE ENLARGE YOUR ESTATE

JURIS

"''WIICI'I"I)II'

May, 1969

Page Twelve

Capital Gains Tax - c ontin.ued from page 5

Basically, a corporate executive is given the privilege of buying the stock of his employer within 5 or 10 years at a price which is set at the time the option is granted, usually, the market value on that day. He pays no tax on receipt of the option nor when he exercises it and buys the stock. To illustrate: ABC Corp.' s stock is selling for $100 a share on the day Mr. Exec is granted a five year option to purchase 500 shares. Six months later, when the price is $125 on the market, Mr. E:xec exercises his option and buys 10 shares for $1000 and pays no tax. If he sells the stock after the required 3 year holding period for $250 a share, his entire profit is taxed at capital gain rates.

A sale before that time would result in ordinary income of $25 per share (difference between the market price on date option was granted and date it was exercis ed) and capiW gain of $125 per share.

While no one will deny that stock options are compensation for services, many do contend that they deserve special treatment under the tax laws. Some ?t these people argue that a •proprietary interest• m the company vrill bring forth greater efforts from the iavoroo executive. His personal wealth will then depend upon his success as an employee in furthering the _company's _b_usiness and more importantly, its pr.o,bts. In add1bon to the proprietary interest so necessary to the company's growth Dan Smith feels "that high income tax rates make it lit~t·ally impossible for even the highest salaried executives to save enough to buy stock which gives them r eally significant holdings in their company.• It doesn't seem to bother Prof. Smith and the other advocates of capital gains treatment for stock options that these same high tax rates also prevent doctors lawyers, accountants, actors and thousands of othe; people who cannot control their receipt of income from saving enough to buy any s tock! Each person in this ;. situation must pay the going rate on a ll of his com~ns~tion even if be worked for three years in earrung. 1t but received it all in one year. (lncome Averagmg might help some of them.) The lawyerts or doctor's extra efforts which bring them larger fee s are their accumulation of a proprietaryinterestwhich is taxed as_ hi.gh as_ 70 percent. One lawyer reportedly tired of thts mequity and left his Wall Street practice for a corporate position and $500, 000 in stock options.

company's stock decreases in value the optioned e~ecutives can simply forget they hav~ options. They nsk nothing but expect to share the rewards of an increase in pri-ce, usually after the price has started up. As used now, most stock options represent an o_pportunity to obtain stock at bargain prices with httle consideration of the proprietary interest supposedly behind them. If the executives wer e required to pay taxes, at the ordinary income rates on the difference between the option price and th~ market value at the time the option was exercised fewer executives would wait until the value had increased 50 to 100 per cent before exercising their options. It may be argued that no reason would -exiSt f~r the option under this plan which is probably true smce thet·e would be no inherent benefit in them.

But isn't this just the point; the only reason they exist now is to give certain individuals pr ivileges not available to anyone else. this point, most of !J\Y discussion has been concerned with specific areas of capital gains taxation. A Ion g with the items mentionoo, many other forms of income are eligible, but unworthy of capital gains treatment. Se:reral years ago, Co~ress took steps to clos~ ~e btggest loophole in capiW g:tins, tha_t of depreClahng property against ordinary income while r eporting the. g~in on its sale at capital gains rates. The deprec1atwn so taken on equipment and to a lesser extent, on real estate must now be "recaptured•, when the property is sold. In his tax reform program, President Kennedy dated to suggest an overhaul of the capital gains tax with the removal of the umbrella from r oyalties, timber, stock options and other similar items, but Congress wouldn't co-operate . (Indeed, the House attempted to lower the rates and create two classes of capital gains with an eventual net loss of 120 million in revenue). While these are some corrections which should be made tt.,~y should be considered in light of an overhaul of the entire capital gains tax structure.

TO

Some

Proposals For Reform

On the baSis of equity it is said, capital gains income is no different from any other and should bear the same tax rates as does ordinary income. Moreover, it is argued that those having income in excess of $1,000,000 per year receive 64 per cent of it in capital gain form while those earning less than$5,000 receive capital gains of 2 per cent of their income.

The benefit of capital gains rate begins at taxable incomes of $18,000 and $36,000 for single and married taxpayers r espectively. On the evidence above removal of capital gains would not harm the "Uttl~ guy" since he r eceives no benefit now, It would however, r eturn additional revenues since a large portion of those $1,000,000 incomes is only taxed at 25 per cent under present law.

This view, however, is not shared by aJl tax experts. In fac t an increased rate on capital gains is the worst thing possible according to Dan Throop Smith: "It is hard to imagine any single change in the tax law which would do as much damage to economic development as the full taxation of capital gains even ii the maximum rate were reduced to 50 per ~ent,• Mr. Smith, and others who share his point of view state that a large amount of investments would" free ze; if ta.'{es on capital gains were increasoo. This is the concept of being "locked in" mentioned in the previous discussion on the nature of capital gains.

Locking-In Under this theory, the prospect of relinguishing 50 per cent of one' s profit to the government, will deter the investor from selling his present holdings and switching to new investments.

This, it is argued, will • starve" those firms in need of investment capital. On the other hand a r eduction in capital gains taxes is expected t~ • unfreeze• millions of dollars in existing investments.

. The ad:ocates of stock options who cite "proprietary mterests as a reason appear to be equally short-sighted in their reasoning here as they were in pointing out the high tax rates on salaries. While it is desirable to ret~n. good management and admittedly, some cor?orate ra1?1ng of executives does take place, the granting of options fails to qualify as a cure for these ills, especially when one looks at the manner in whi_ch they are granted. The employees receiving the opttons are generally top s enior executives vrith years of service to the company. Rarely do options go to those earning less than $25,000 a year. Many of these executives earn salaries in the hundreds of thousands of dollars including bonuses, Their pensions well exceed most wage earner's •earned income • so it can't be argued that they must provide f~r retirement.

The~e are some who will say that these are exceptions rather than the rule but nevertheless corporate executives are legally 'entitled to convert ordinary income into capital gains, a feat which ?thers cannot do. Mr. Smith's solution to the problem IS not repeal of the privilege, but rather a tightening of the la~s ~ require a 10 year holding pel'iod, This I feel~ Will Sl~ply continue an injust practice whicll ~as bttle social or economic justification. In the mterest of le.ss tax favoritism I favor repeal of this law. The shght effect this will have on smaller ?omplnies, trying to conserve cas h and retain talent 1s preferable to the ill-will it now creates betwee~ the haves and the have~nots. By their very nahlre the options do not create a "oneness• with the company stockholders; the stockholders lose if the

There are some writers, and undoubtedly others who don't write about it, who favor complete withdrawal of the capital gains tax. This measure would allow a reduction of the normal rates of taxation to a maximum of 50 per cent without any loss of revenue according to hearings before the House Ways and Means Committee in 1958. The capital gains tax as it now stands is "the subject singly responsible for the largest amount of complexity,• according to Kennedy tax advisor and former Harvard law professor, Stanley S, Surrey. This is due mainly to the fact that their mere existance is cause enough for taxpayer to try and convert ordinary income into capital gains.

This contention has some merit when one considers the • collapsible corporations• and" spin -offs• devisoo for this purpose.

-/an associate ,/ a summer derk

J

a part time clerk

./a research assistant contact: Duquesne Placement Service Dean Wa lter A. Rafalko

JURIS

May, 1969

While Congress almost accepted this hYJX>thesis its enthusiasm is not shared by Professor Waite; w.

Heller, noted economist and Presidential adviSor, who points out that "the sophisticated investor doesn't allow the tax collector to make his market decisions.• When considering the supposed capital starvation, it should be remembered that the millions of shares changing h~ds daily add nothing in the way of capital to any business. Moreover, businesses in neeO of new capital will not be left out in the cold as there is no attempt to tax the investment of capital.

It is my opinion, thereforet that • tacking in" only becomes a factor when the tax rates on capital gains become excessive to the extent that the cost of switching investments exceeds the expected yield of any available substitutes. At the present rates this is not a factor since the economy presently offers a variety of investment forms which vrill easily offset in yield, the capital gains tax paid by most investors.

Invesbnent Rollover. An alternative to complete abrogation of the tax on capiW gains is the deferrment of tax, if the gain and the capital are reinvested This "roll-over• proposal would allow one to conti~ually accumulate wealth while paying no taxes unless a portion of the accumulation were drained off. The gain so removed would be taxable at ordinary income rates.

-continued on page 13

Page Thirtee n

investor and a holding period of one year seems more in line with this. A speculator is normally unconcer ned with dividends; rather, he is buying to obtain a price appreciation over a short period.

Capital Gains Tax

Ben Long

says Duquesne University students hove the chance of a lifetime to create on immed'i/Jte estate ..•

that will provide:

•

cosh or collateral for opportunities or emergencies benefits for parents or other dependents growing funds for retirement

•

through a plan that never fails: guaranteed by a nationwide company in its second century of service

• • •

There is a tailor-made easy way to pay for this valuable estate.

Ask for full information -of course without obligation.

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• MASSACHUSETTS MUTUAL Lite Insurllnce Co mpan¥ SPRINGFIELD, MASSACHUSETTS ORGANIZED 18Sl

This is similar to the treatment now allowed a home-owner who sells his residence and purchases a new one at a cost at least equal to the proceeds from the old one; gain is not recognized until an outright sale of the new home takes place.

While this idea appears workable, several drawbacks do exist. To accord this treatment to the investor would make him more of a tax favored son than he now is.

It would thus be possible for him to accumulate wealth and · never pay taxes by living on proceeds from sales of investments which resulted in losses and reinvesting all gain transactions. No such privilege is accorded the ta.Jqayer who reinvests his savings account interest. If the investor has no losses he will only pay a tax on gains withdrawn, which amounts to a consumption tax, not an income tax.

The other major objection to this revision is the administrative burden it would entail. The types of investments one would be permitted to reinvest in would be open for debate and pressure byevery~oup with a specialized interest. Requiring identical reinvestment would be very restrictive, while allowing a transfer from stocks to certificates·of depasit, although both are Minvestments,• would enhance the investor's already favored position. The Internal Revenue Service and the taxpayers would see no end to the hassles over the cost basis of respective investments. Few taxpayers keep accurate record for 1 or 2 years while this refor m of capital gains would necessitate retention of records for periods, not unconceivably, of 20 years or more.

It is my opinion that this method of treating capital gains has disadvantages which are not acceptable in light of other possibilities.

WHILE they may differ on many aspects of the is sue, few eco nomists or tax experts advocate full taxation of capital gains at ordinary income rates.

The sp ec i a 1 treatment is necessary because •there are no nonpecuniary incentives for investments.• While the taxonordinary income may influence some people its effect is minimal when compared to the possible effects of such a change on capital gains. With any substanFal increase in the tax, the lock-in, as outlined in the previous chapter, would become a major force in investment changes. With a general agreement that true investments deserve some sort of consideration letts look at the factors to be considered.

The problem of bunched income is said to be of considerable importance. As mentioned earlier, this is the receipt of a large amount of income in one year although it is attributable to many years. The progressive nature of our tax structure places a burden on such taxpayers if this receipt places them in another bracket. There is no problem of bunched income if the amount is not large enough to result in a higher tax rate. For those people without large capital gains- the preference lies in the inclusion of 50 per cent of the gain at ordinary rates, not in any alleviation of a bunching problem.

The usual method for solving this type of problem (the 1964 law did it for ordinary income received in large amounts) is some sort of averaging technique.

The gain so pro rated is taxed at ordinary rates, which are slightly lower due to the increased revenue from capital gains. With 26 per cent of the capital gains less than $200 and another 26 per cent less than $1,000 it becomes a question of how many will benefit from proration, since the lower tax brackets are $2,000 apart. Henry C. Wallich, professor of Economics at Yale University, concluded that such averaging reduces the tax very little. As a possible reason he suggests that the degree of inequity is small originally. The use of this averaging form doesn't appear to be justified at present. Should more research reveal that many taxpayers are hurt by the bunching of income, the method would warrant further investigation.

Holding Period. Another aspect of reform is the holding period necessary for capital gains treatment.

Tbe holding period at present is over 6 months for long-term capital gain. Some, including Congress in 1942, feel that this is s ufficient to separate speculators from true investors. How they reason is not easily understood by many well known authorities. Dividends are determined on an annual basis as are the company's profit. These factors should be considered by an

Conclusions???

JURIS

May, 1969

The holding period requirement is used to avoid the bunching of income. If 6 months plus one day is sufficient for long-term capital gain, the bunching is a problem brought on by the ~yer hi.mself and consequently not one which deserved legislative r elief.

The purchase and sale of a stock within one calendar year is not the usual course of an investor. Any holding period is subjective but a mimimum of one year, possibly 2 years seems to correspond with the purpose of the requirement.

Some Recommendations The special favors granted

by Congress should be abolished. If a complete overhaul of capital gains is undesirable these items should be removed by amending the present law. The terms used by the law makers should be clearly defined. Since we are dealing with "property• the definition of property should be uniformly applied, not as is the case where literary rights are not •property.• This is very important if any attempt is ever to be made in removing percentage depletion. As it stands today s uch action would result in each discoverer se~g his field for the value of the underlying oil, thereby receiving capital gains on the sale of the property, while the oil company can then deduct cost depletion on the amount they J;Wd for the land.

A reform necessary simultaneously with capital runs revision concerns estates. It is now possible to escape all income taxes on capital gains by holding the stock and transfering it at death. The total value of appreciated holdings outstanding in 1963 has been estimated at $600 billion, most of which will never be taxed. The basis of the transferee is the market value when he received the stock. Any attempt at capital gains reform will fall short of its.abjectives unless this loophole is plugged. This loss of incentive for holding stocks should result in easier and larger turnovers in investments. The lock-in should cease to be a problem if the investors choice is sell now or later, but JXlY a tax either way.

After considering all th e revisions discussed earlier I feel that the method which is most equitable and reaiistic is a step-scale similar to that intrOduced in 1934 and abandoned in 194.2. Tbe arguments against the other proposals have been given so I will e.xplain why I think this method is better.

The purpose of the capital gains tax is to accord the investor an economic advantage, not present fot: ordinary income, due to risk. The profit incentive should not be restricted by the tax. The investor expects to earn a greater return over a long period of time and will settle for less if he sells before then.

U he approaches his investment from this angle can we not do the same with the tax on his investment gain? The retention of 70 to 80 per cent of a gain held for 10 years will somewhat compensate for the loss of tax free passage after death, while a net yield of 20 per cent at one year is no less than one might expect on an investment. The scale should be evenly divided, to avoid the problem of making one interval a turning point of incentive. While this method gives the investor an advantage it is not at the expense of others as was the tax-free roll over proposal. No purpose would be served by my stating precise intervals since these would require a thorough study of investor habits.

If it is not possible to completely revise the system of taxing capital gains an increased holding period of one year and abolition of the 25 per cent alternative computation would bring the tax rates on ordinary income and capital gains closer together. Capital gains would be taxed at 50 percent of the taxpayers rate as determined by including the total gain in taxable income. The top rate would thus be 35 percent or 1/2 of the 70 percent rate now in effect. The 25 percent rate only benefits a small percentage of the taxpayers and its abolition, in lieu of overall reform, would be desirable.

A conscious effort must be made to restrict the benefits to true capital gains and leave the specialized economic assistance for the agencies best suited to render it. Taxation based on ability to pay has as its premise an honest evaluation of what constitutes such ability. We cannot hide someones ability to pay by calling it something it is not. To try to do so is self- defeating; we must then tax someone else at a rate beyond his ability to pay, leaving us without a clear definition of our premise.

Page Fourteen

The Paris Talks and the Problems of Permanent Peace

HE talks between North Vietnamese, Vietcong, American, and Saigon representatives in Paris have raised hopes that the terrible conflict in Southeast Asia may finally be ended. Whether or not those expectations shall be fulfilled is still uncertain, but the conference has stimulated some general reflections upon the processes of peacemaking in international affairs. In particular, the Paris talks raise anew the persistent question whether it is possible to achieve a lasting settlement of any major international conflict through negotiations initiated and controlled by the combatants.

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If one reviews the history of international conflict in the Twentieth Century, he will find a sparse record of peaceful settlement. As Mr. Walter Lippman observed, the Treaty of Versailles at the conclusion of European hostilities reflected tbe failure of traditional diplomacy to achieve the objectives of its art. The rising pressure of mass public opinion made it impossible for the statesmen then assembled in Paris to approach the drafting of a peace treaty with any large measure of objectivity or spirit of reconcilation. The result was a vindictive document whose punitive imbalance directly contributed to tbe commencement of the Second World War.

The record since 1945 is equally disturbing. At the conclusion of the Second War the victors again proved to be incapable of transforming military victory into a regime of permanent peace. Ideological and strategic differences among the allies prevented a conclusive resolution and left a diVided Germany whose separation still constitutes an obstacle to European renewal. In Korea, the participants have suspended general hostilities, but their inability to resolve the ultimate political issues highlights the limited value of an armistice agreement. Similar observations can be made concerning the Middle East conflict. The absence there of a final peace treaty, the inability of the parties to equitably settle the ¡ basic substance questions, makes periodic resumption of hostilities a virtual certainty.

By CORNELIUS F. MURPHY Professor of Law Duqu es ne Universit y

What is common to all these instances is that in each the belligerents - through the imposition of settlement of the victorious upon the vanquished or through bilateral processes- have attempted, by their own resources, to reach the objective of permanent peace. The intervention of an international authority has been either non-existent or of such restricted dimensions as to be ineffective. At the close of the First World War, there was no international authority in existence; by 1945 the League of Nations was inoperative. Tbe Korean conflict involved a formal commitment of the United Nations, yet the conduct of the war and the negotiations of the Armistice was substantially the work of the United States and a limited number of allies. In the Arab-Israeli conflict the United Nations has been directly involved, yet its efforts, at least in current circumstances, have been mainly confined to the issuance of demands for a cease fire which are often evaded. In the crucial matter of a final resolution, its role as peacemaker has been ineffectual; a failure attributable in large measure to the disputants insistence that they alone possess the necessary competence.

II.

Given this dismal record, it is reasonable to question why nation states insist upon the virtual monopoly of the peacemaking processes which they have proven incapable of administering. This is a complex issue which reflects the convergence of many factors of international relations. Yet the roots of the paradox lie within prevailing theories of sovereignty. States insist on exaggerating their abilities because they conceive the structure of

international society as being composed of self-sufficient. independent sovereign states, each pursuing its own interests to the limits which power and bi~lateral diplomacy Will allow. This vision of the nature of international society has been modified in some respects; it still remains the principal idea when vital interests of the nations are at stake.

As anarchic as this conception of international life may seem, it has gained respectability in modern times through the labors of jurists fascinated by the possibilities of order within the "h o r i z on t a 1" encounters of states. In spite of the decentralized character of the present world community, they perceive jural qualities arising out of the mutual confrontations of nations within the world arena.

These thinkers have proven that stalt:!s create, in their interactions, a balanced equilibrium through processes of mutual deference and restraint. And these reciprocities even extend to issues of force,l Similarly, some legal philosophers consider supre-national authority to be a desirable but not an essential characteristic of world order. According to H.L.A. Hart, the fact that states have accepood horizontal restraints as a measure of their conduct at this stage of history is sufficient justification for characterizing the reciprocities as law. At a later stage of human development more complex forms of social organization may appear, but their absence is not fatal to jural interpretation of contemporary international relations. 2 The difficulties with this form of theorizing is that ultimate decisions to use force is still within the unfettered discretion of the states which make up the world community. Moreover, such reasoning is not sufficiently responsive to the exigencies of the moral conscience which recoils at the perceived inadequacies of horizontalism. The twentieth century record of states attempting, through a spurious self-sufficiency, to achieve an enduring settlement of their conflicts affronts our visions of a good life. Yet no substantial change can be expected until states overcome the alluring illusion of complete and absolute autonomy.

From the point of view of legal and political philosophy, states - and legal scholars- should give renewal attention to the thought of John Austin who insisted that established modes of international ordering did not constitute a legal system. Since international "lawâ&#x20AC;˘ refers to the relations of absolute sovereigns, or "independent societies considered as entire communities'" it could not be called positive law because of the absence of the necessary soverign - subject relation. 3 In the momentous questions of law and peace, his characterization remains true to the mark.

1, See, e.g. FBlk, THE ROLE OF DOMESTIC COURTS IN THB INTERNATIONAL LEGAL ORDER Ch. l, 2. Hort, THE CONCEPT OF LAW Ch. X. 3. Austin, LECTURES ON JURISPRUDEN CE. Lee:. VI, s, 199 (Campbell ed. 1875).

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May, 1969

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What relevance do these reflections bear toward the hard realities of the Paris negotiations? It should initially be insisted that tbe existence of gaps in state-centered efforts toward peace making was not meant to imply that a solution to the Vietnam conflict is impossible. But if history- and a political theory - is any guide, we should be aware of the intrinsic limitations which surround a peace making process kept exclusively in the hands of the combatants. We can only hope that all the participants - including the insurgents- take a deeper look at the nature of world society and the "vertical" dimensions of authority that such a vision implies. Perhaps then a balance can be struck: The harsh processes of mutual confrontation supplemented by the effective presence of some segment of supra-nationalauthority. Working together, they can achieve that enduring peace which all the world so painfully desires.

Page Fifteen

The Student Bar Association congratulates all graduating Seniors and hopes that they will continue to expand their deep involvement in community affairs to insure a better society for all of us.

JURIS recently received for路 mal recognition of its first place standings in the com路 petition of newspapers spon路 sored by the Student Division of the American Bar Association.

1967.68 JURIS editor Bill McLafferty presents this award to Dean Louis L. Monderino.

William Mclafferty Presents Juris Award To Dean Manderino

JURIS

May. 1969

Page Si'lte en

Alumni Record

Duquesne Uni versity Law Alumni Reu.nion Dinner -Thurs day, May 8, 1969, in the Georgian Room of the Hotel Webster Hall. Cocktails at 6:00 p.m., dinner at 7:00 p.m.

The speaker will be Mr. R od er i ck

L '51- The Honorable Joseph R. Ridge. J udge, :ammon Pleas Court, Allegheny County, Originally from the East End of Pittsburgh, Judge Ridge was graduated from Central Catholic Hi gh School.

by James R. Farley L '40-0scar Spenc er , , , is currently serving as patent counsel !or PPG Industr ies. Mr. Spencer became interested in a legal career when he began working for a patent attorney in the Washingron area, upon grad11ation from the University of Maryland in 1932. When later transferred to Pittsburgh he enrolled in Duquesne Law School at night and obtained his J.D. degree in 1940, Two years later Mr. Spencer joined the Patent Dept. of PPG Industries as Asst. Patent Counsel.

Mr. Spencer has been instrumental in recruiting Duquesne graduates inro the Patent Dept, of PPG Industries. The Patent Dept. consists of seventeen attorneys, five of whom are Duquesne graduates. His work at PPG runs the gamut from patent solicitation to patent prosecution. Mr . Spencer believes this area of law to be a lucrative field for the attorney who has the qualifications of an engineering or science background.

Mr . Spencer is married and has thref? children a nd now resides iu Oakmont. One of his sons has followed in his father's footsteps and is also a patent attorney.

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L '59- Stanley J . Re isman • • • One of the most specialized and technical areas of the law roday is that of patent law, In r elation to this subject, JURIS visited Mr. Stanley J. Reisman, a member of the firm of Apple, Beinstein, a nd Reisman.

Mr. Reisman served in the U.S. Navy during World War TI. In 1950 he graduated University with a Bachelor of Science degree in Electrical Engineering.

Since he has a nose for news, an ear for language, an eye for detaU, a touch of the scholar, and a taste for action, Rod MacLeis h is, naturally, a journalis t.

After serving tor three and one- hall' years with the Army during World War II, including 20 months overseas in the Southwest Pacific, he received a disability discharge.

Judge Ridge then attended Duquesne University and in 1947 received his degree in Business Administration. He then taught Business Administration during the day and studied law at night. He received his law degree in 1951.

From 1952 to 1961 he was engaged i n the general practice of law and served concurrently as an Assistant County Solicitor and as solicitor for the boroughs of Baldwin and Carnegie.

Judge Ridge was elected in November of 1961 to a ten year term on the County Court of Allegheny County. Since the r ecent amendment to the Judiciary Ar ticle became effective in J anuary of this year, he now sits on the Civil Tr ial division of the Court of Common Pleas. He commented on the new change saying that it was "an advantage" in that, with the old system and its united jurisdiction, the calendar ol cases would sometimes br eak down, but now, the ~1ew system permits a more gainfulus eofJudge-time.

Judge Ridge presently serv~s on the Board of Governors of the Duquesne Alumni Association. He also has served as past-president and toastmas ter of the Law Alumni Association.

In March of 1967, Judge Ridge was honored by Pope Paul VI by being named a Knight of St. Gregory. He presently serves as Vice-Moderator of the Pittsburgh Diocesan Council.

Judge Ridge, his wife Ann, who also attended Duquesne University, and their 2 childr en reside in the Bethel Park area of Pittsburgh.

A news director of WLA W (now WNAC, Boston) and writer-editor for the ABC radio and television networks after a baptism of print as re-write man for United Press International, Mr. MacLeish joined Group W in 1955 as ne ws director of WBZ, Bo~ton.

Since then he organized, in 1957, Group W's Washington News Bureau, the first non- network radio and television news bureau in the nation's capital, and, in 1959, the European News Bureau, still the only full staffed European news arm of any station group, with headquarters in London and bureaus in Paris and Rome.

In that tour of news duty abroad, he cover ed many major events, among them the European visits by two American Presidents (Eisenhower and Kennedy) and war in Southeast Asia.

Of all the s tor ies he reported, he considers one of the most i mportant and s ignificant that of a 1961 confer ence of theologians in Berne, Switzerland, which considered the newly- advanced proposition that "God Is Dead". He thinks today's biggest and most exciting s tory is that of the s ocial changes sweeping America.

Born January 15, 1926, in Bryn Mawr, Pennsylvania, R )de~·ick Mac Leish is the son of Norman and Leonor e MacLeish. His father is the noted American painter ; his uncle is poet Archibald MacLeish.

Mr . MacLeis h at 42 is a veteran news br oa dcaster and commentator. With Group W since 1955, he organized its Washington News Bureau (1957) and European News Bureau {1959). As a journalist he has covered four of the five continents. Among major events were two wars: the Vietnamese struggle and the Arab-Israeli six-day conflict of 1967, about which he wrote the book, • The Sun Stood Still." ........,......._.......,................., ......u ...u ...... , .. .,.., ....,..,...,.,.... ,......,, ..,.,,.,.....,n"llt"ltUI.....

JURIS, takes great pr ide in acknowledging the outstanding r eputation that Judge Ridge has attained as a member of the bench.

Juris

While wo r king for Wes tinghouse E 1e ct r i c Corp., be attended the evening Division of Duquesne Law School. After graduation from Duquesne he worked in the patent division of Westinghouse until 1963 when he entered private practice. In 1967, he assumed his pr esent position where he is engaged largely in general practice with emphasis on commercial transactions .

Regarding patent law, Mr. Reisman advised that it r equires an extensive technical background in scientific or mathematical fields. He also suggest s that one obtain practical experience in patent law befor e lmdeavoring to take the patent law examination, which is administered by the U.S. Patent Office. In conclusion, he emphasizes the great need for patent attorneys both in private industry and governmental wor k.

M a c L e i s h,

Commentator, Washington News Bureau - Westinghouse Broadcasting Co., Inc.

Duquesne University School of Law 600 Forbes Avenue Pittsburgh, Pennsylvania 15 219

Mr. Reisman, his wife and four children reside in Churchill Boro, where he is currently the Democratic candidate for Mayor.

JURIS ll'ISHES TO EXPRESS ITS GRATITUDE FOR THE COOPERATION RECEIVED FROM ALL THE ALUMNI THROUGHOUT THE YEAR.

Non-Profit Organi:ution

U. S. POSTAGE

PAID Pittsburgh, Pa. Permit No. 390

P OSTAGE REQUIRED FOR THIS MAILING MATTER

JURIS

May, 1969

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