North Carolina Law Review » Issue 4

Remembering Sally Burnett Sharp

nclrev — Thu, 29 Apr 2010 20:25:27 +0000

How to Live with a Tax Code with Which You Disagree: Doctrine, Optimal Tax, Common Sense, and the Debt–Equity Distinction

nclrev — Thu, 01 Apr 2010 20:23:00 +0000

The current financial crisis and recession demonstrate the overwhelming social cost of high leverage. While many factors contributed to the development of the crisis, one factor is frequently overlooked—the tax incentive for excessive debt financing. This Article explains how the debt–equity distinction in the tax code provides corporations with incentives to rely on highly leveraged finance structures. It then asserts that even though there is little justification for the tax code to favor debt over equity investment, this bias is deeply rooted and hard to overcome. Given the political difficulty in eliminating the distinction, policymakers and academics should develop a debt–equity distinction with lower social costs. However, both doctrine and academic literature fail to address this problem because the current legal discourse responds to rules that were developed in the first half of the twentieth century. In those days, the corporate tax was primarily imposed on private and closely held corporations, there was a huge difference between individual and corporate tax rates, financial engineering was limited, and the vast majority of investors and corporations were United States tax residents. None of these conditions apply today, and, as a result, the tax rules distinguishing debt from equity unnecessarily increase the social costs of compliance, and, more importantly, the costs of financial distress. Remarkably, the current rules are ineffective even in preventing tax revenue loss because they fail to recognize the weakest link in terms of tax erosion—interest payments made to foreign investors. These payments may escape United States taxation altogether because they are deductible from the corporate tax.

This Article develops a more practical and easily administrable distinction between debt and equity based on two easy-to-observe and difficult-to-manipulate characteristics—voting power and duration. This new distinction should be used to classify the holdings of domestic investors in public corporations. Further, the analysis of the debt–equity distinction triggers a broader theoretical inquiry over the principles that should guide tax policymakers in line-drawing problems. As a theoretical matter, these problems arise where there is a need to distinguish between two transactions which result in dramatically different tax consequences even though they could be economically very similar.

Restructuring the Debate on Unauthorized Humanitarian Intervention

nclrev — Thu, 01 Apr 2010 20:20:23 +0000

Scholars and practitioners addressing the problem of unauthorized humanitarian intervention often characterize the central difficulty of the issue as arising out of the fact that when the U.N. Security Council fails to authorize states to use military force to stop mass atrocities, the law requires a result—doing nothing—that is illegitimate and morally abhorrent. One scholarly solution to this predicament has been to subordinate considerations of legality to those of legitimacy or morality by arguing that in certain cases in which the Security Council does not authorize an intervention that should take place, the international community should tolerate the unlawful intervention as “excused” or “justified.”

This Article responds to this recent willingness to look beyond the law by illuminating the unaccounted costs of unauthorized humanitarian intervention and by proposing a more rigorous framework for assessing these uses of force. Specifically, this Article advocates a new emphasis on the systemic consequences of unauthorized intervention, focusing on the impact of unauthorized humanitarian intervention on two elements of the international system that preserve the primacy of law over power: first, the principle of sovereign equality of states, and second, the principle that military force should be used only in the common interest. This Article urges that the impact of unauthorized uses of nondefensive force on these principles, and therefore on the vitality of law in the international system, should be an essential consideration in any evaluation of unauthorized humanitarian intervention. By considering the deeper implications of looking the other way when states resort to war to protect human rights, this Article challenges the conventional account of unauthorized humanitarian intervention as raising a choice between protecting human rights and protecting sovereignty, and it contends that the roots and benefits of the prohibition against unauthorized military force should compel policymakers to consider alternatives to military force when responding to grave human rights abuses.

Hirabayashi and the Invasion Evasion

nclrev — Thu, 01 Apr 2010 20:19:37 +0000

This Article presents archival evidence demonstrating that government lawyers made a crucial misrepresentation to the United States Supreme Court in the case of Hirabayashi v. United States, 320 U.S. 81 (1943), the case that upheld the constitutionality of a racial curfew imposed on Japanese Americans in World War II. While the government’s submissions in Hirabayashi maintained that the curfew was a constitutional response to the serious threat of a Japanese invasion of the West Coast, new archival findings make clear that military officials foresaw no Japanese invasion and were planning for no such thing at the time they ordered mass action against Japanese Americans. The archival record also demonstrates that at the time that Justice Department lawyers filed their brief in Hirabayashi emphasizing a threatened invasion, they knew that top military officials had denied the risk of invasion in communications to Congress. The Article seeks to understand how Justice Department lawyers came to make such a misrepresentation and demonstrates that the Hirabayashi decision deserves to be fully and resoundingly repudiated.

You’re Only as “Free to Leave” as You Feel: Police Encounters with Juveniles and the Trouble with Differential Standards for Investigatory Stops under In re I.R.T.

nclrev — Thu, 01 Apr 2010 20:18:42 +0000

Casual encounters with police invoke myriad reactions in different types of people, even among the blameless. While some may welcome the presence of law enforcement as an assurance of their safety and security, others feel an immediate sense of intimidation and trepidation by police questioning. In the context of the Fourth Amendment, however, such visceral responses to police presence can take on constitutional significance. If one is naturally inclined to react anxiously to police, one may feel unreasonably compelled to answer an officer’s questions or consent to requests that would otherwise amount to a search or seizure implicating constitutional protections. In determining when a casual police–citizen encounter on the street escalates to an investigatory stop, courts use an objective test: whether under the circumstances a reasonable person would feel “free to leave.” However, a central question lingers: to what extent should an individual’s subjective reaction to encounters with law enforcement affect Fourth Amendment analysis?

In In re I.R.T., the North Carolina Court of Appeals made a subtle yet significant break with precedent by holding that a juvenile’s age is a relevant factor in determining whether a police encounter amounts to a seizure under the Fourth Amendment. The aim of this Recent Development is to examine the consequences of the court’s modification of the “free to leave” test and to argue that considering a defendant’s age, though appropriate in other legal contexts, is inappropriate in the seizure analysis. As effective law enforcement requires a clear, consistent, and predictable measure of when police conduct or questioning will trigger constitutional protections, the standard for determining when an officer’s actions will constitute a seizure of the person must remain objective if it is to provide practical guidance for police behavior in the field and ultimately deter the abuses of police power against which the Fourth Amendment was adopted to protect. By contrast, differential standards for juvenile stops risks subjectifying the seizure inquiry and results in three unintended consequences: 1) transforming almost any police–juvenile encounter into an investigatory stop because age will inevitably prove determinative in the seizure inquiry; 2) fostering uncertainty in police investigation by forcing law enforcement to guess when their conduct will invoke constitutional protections; and 3) establishing a slippery slope precedent that encourages consideration of other variations including race, gender, and economic status that may just as legitimately affect an individual’s emotional reaction to police questioning, but if incorporated into the seizure analysis would render the “free to leave” test meaningless. As a result, the In re I.R.T. court’s modification of the seizure inquiry to account for age is ripe for reconsideration.

New York’s Unconstitutional Tax on the Internet: Amazon.com v. New York State Department of Taxation & Finance and the Dormant Commerce Clause

nclrev — Thu, 01 Apr 2010 20:17:29 +0000

As the current economic downturn continues to ripple through every sector of the economy, state governments from North Carolina to California are struggling to develop innovative tax policies to boost their plummeting revenues. Traditional methods of taxation are no longer sufficient to satisfy state expenditures—either government spending must change drastically or legislatures must approve new taxes to bolster falling revenues. The recent “Amazon tax” passed by the New York State Assembly is a prime example of the latter. The tax requires out-of-state retailers—such as Amazon.com, Inc. and Overstock.com, Inc.—to collect a use tax from in-state consumers if the retailers have marketing affiliates in the state which produce at least $10,000 in sales. In Quill Corp. v. North Dakota, however, the United States Supreme Court held that, under the Commerce Clause of the U.S. Constitution, a state cannot require an out-of-state retailer to collect and remit a use tax unless the retailer has a “substantial nexus” with the taxing state. The Court invalidated a sales tax imposed by North Dakota on an out-of-state mail-order retailer, which had no offices or employees in the state. By invalidating this tax, the Court reaffirmed the bright-line rule of National Bellas Hess, Inc. v. Department of Revenue of Illinois that “a vendor whose only contacts with the taxing State are by mail or common carrier lacks the ‘substantial nexus’ required by the Commerce Clause;” in other words, some physical presence is required. Attempts by New York and other states to create statutorily this “substantial nexus” between out-of-state Internet retailers and the taxing state through the retailers’ marketing affiliates run afoul of Quill and its bright-line rule.

This Recent Development analyzes the recent New York County Civil Supreme Court decision, Amazon.com v. New York State Department of Taxation & Finance, which upholds the constitutionality of the tax. The focus is on Amazon’s Dormant Commerce Clause argument and the trial court’s application of the Supreme Court’s decision in Quill. This Recent Development argues that the New York trial court failed to apply Quill’s “substantial nexus” test properly and exaggerated the role of Amazon’s associates. As a result, the trial court incorrectly held that the tax on Amazon did not violate the Commerce Clause. When applied correctly, the Quill decision should invalidate New York’s tax on Amazon and similar out-of-state Internet retailers.

No More Free Passes: Yousuf v. Samantar and the Foreign Sovereign Immunities Act

nclrev — Thu, 01 Apr 2010 20:16:56 +0000

Individuals who were the subjects of torture and other atrocities abroad often come to the United States seeking refuge. Since 1991, these victims have also found a way of holding their torturers liable for their actions under the Torture Victim Protection Act of 1991 (“TVPA”). However, victims suing under the TVPA have faced an obstacle in the form of the Foreign Sovereign Immunities Act of 1976 (“FSIA”), a law under which their alleged torturers are claiming immunity from prosecution as “agencies or instrumentalities” of their respective foreign states. This Recent Development considers the Fourth Circuit’s decision in Yousuf v. Samantar, where the court held that the FSIA does not provide immunity protections to individual persons, and as a result, that the defendant, a former Somali Prime Minister and Minister of Defense, was not entitled to immunity from prosecution for his alleged acts of torture. Interpretation of the scope of the FSIA’s protection has resulted in a split among the circuit courts to have considered the issue.

The FSIA gives foreign states and their agencies and instrumentalities immunity in the United States subject to certain exceptions. Ambiguities as to the meaning of the phrase “agencies and instrumentalities” and its further definition in the statute as “any entity which is a separate legal person, corporate or otherwise” have given rise to the different interpretations among the circuits. This Recent Development argues that based on the congressional intent implied by both the language of the statute and its legislative history, the FSIA was not meant to cover individuals, and that the current circuit split should be resolved in the Fourth Circuit’s favor. Further, this Recent Development argues that even assuming that the FSIA applies to individuals, the TVPA on its own was sufficient to bring a cause of action against the defendants. The potential for this narrower holding not only bolsters the argument that the FSIA must not apply to individuals, but also keeps open an important avenue of litigation for torture victims who hope to bring their tormenters to justice. This Recent Development recognizes that the exclusion of individuals from immunity under the FSIA will likely result in an increase in litigation, but concludes that the Fourth Circuit’s holding is preferable and worth the cost, as it gives victims of heinous crimes a way of holding their tormenters accountable while preserving a means of seeking immunity for those who are truly entitled to it.

Statutory Interpretation in Wal-Mart Stores East, Inc. v. Hinton and Why North Carolina Courts Should Apply Anti-Tax Avoidance Judicial Doctrines in Future Cases

nclrev — Thu, 01 Apr 2010 20:15:09 +0000

In its 2009 decision Wal-Mart Stores East, Inc. v. Hinton, the North Carolina Court of Appeals held that the North Carolina Secretary of Revenue had the statutory authority to force combination of Wal-Mart Stores East and its related corporate entities. This action led to Wal-Mart Stores East paying nearly $30 million in back taxes, interest, and penalties resulting from a complex corporate tax avoidance strategy. This Recent Development argues that although the North Carolina Court of Appeals reached the correct result from a public policy standpoint in Wal-Mart Stores East, it did so after conducting an incomplete statutory analysis. Underlying this incomplete analysis was the inability of the state’s tax statutes to respond to new and evolving corporate tax avoidance strategies. In future cases, North Carolina courts should apply anti-tax avoidance judicial doctrines to egregious cases of tax avoidance in which state officials lack clear statutory authority to intervene. Applying these doctrines would help North Carolina achieve important policy benefits, including protecting state revenues, providing for simpler tax law, promoting fairness between individual and corporate taxpayers, and promoting economic efficiency.