4 Hastings Business Law Journal, Issue 2

 
 

Articles

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THE TAX BURDEN AND THE PROPENSITY OF SMALL-BUSINESS ENTREPRENEURS TO FILE FOR BANKRUPTCY
Rafael Efrat, 4 Hastings Bus. L. J. XXX (2008)

Despite the success of many entrepreneurs, a sizable number of small businesses fail every year. Tax problems have been found to be a small but an important contributor to business closure. The extent of the tax problems experienced by small business owners is alarming but not surprising given the disproportionate tax burden small business owners face in operating their businesses. The research undertaken in this study aims to explore the extent to which individual small business owners, who have filed for bankruptcy, attribute their financial distress to tax problems. Further, this study intends to examine the demographics and financial characteristics of small business owners that have pointed to the tax system as the cause of their financial demise. This study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, White, native born, well educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

 
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WHAT YOUR LENDER AND MORTGAGE BROKER DIDN’T TELL YOU: A CALL FOR DISCLOSURE OF LOSS OF THE SECTION 580b ANTI-DEFICIENCY PROTECTION UPON REFINANCING
George W. Kuney, 4 Hastings Bus. L. J. XXX (2008)

California Civil Code of Procedure section 580b protects a California homeowner from a deficiency judgment when the homeowner's purchase money lender forecloses on the house. The protection of section 580b applies only to purchase money mortgages - not to cash out refinance mortgages and probably not to any refinancing mortgage loan under existing law. The California Civil Code requires an initial disclosure of this protection to purchase money mortgage borrowers, but it does not specifically require disclosure of its loss upon refinance. Moreover, lenders that are subject to the Federal Truth in Lending Act or the Homeowners Equity Protection Act are not required to make any such disclosure due to federal preemption. This article suggests that federal law be modified to provide for disclosure of borrower protections like 580b.

 
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FRAUD NOT ON THE MARKET: REBUTTING THE PRESUMPTION OF CLASS WIDE RELIANCE TWENTY YEARS AFTER BASIC INC. v. LEVINSON
Matthew L. Mustokoff, 4 Hastings Bus. L. J. XXX (2008)

This article explores a wave of recent federal court decisions addressing the applicability of the "fraud-on-the-market" presumption of reliance in securities fraud cases at the class certification stage. In the two decades since the US Supreme Court first recognized the fraud-on-the-market doctrine in Basic, Inc. v. Levinson, the district and circuit courts have taken somewhat divergent approaches to the question of classwide reliance. The most recent decisions, however, mark an emerging trend, one which signifies heightened judicial scrutiny - in many cases, going beyond the pleadings and involving extensive fact-finding and expert analysis. Among the decisions discussed are the Second Circuit Court of Appeals' decision in In re IPO Securities Litigation, in which the court refined the test for class certification, holding that district judges must receive ample evidence, including expert testimony as required, to be satisfied that reliance can be presumed by a showing that the security at issue traded in an efficient market; the Fifth Circuit's decision in Regents of Univ. of California v. Credit Suisse First Boston (USA), Inc., holding that so-called "scheme" liability for secondary actors in the securities markets, or "nonspeakers" on whom the market does not presumptively rely for information, is fundamentally incompatible with the fraud-on-themarket doctrine; and the Fifth Circuit's ruling in Oscar Private Equity Investments v. Allegiance Telecom, the first circuit court decision to hold that in addition to reliance, a showing of loss causation is required to trigger the fraud-on-the-market presumption for purposes of certifying a shareholder class.

 

TRADE OR BUSINESS WITHIN THE UNITED STATES AS AN INTERPRETIVE PROBLEM UNDER THE INTERNAL REVENUE CODE: FIVE PROPOSITIONS
Anthony P. Polito, 4 Hastings Bus. L. J. XXX (2008)

Whether a particular set of activities constitute the conduct of a trade or business within the United States is an ongoing interpretive question affecting many foreign taxpayers. It controls what form of U.S. taxation, if any, applies to them. In the domestic context, a trade or business entails profit-oriented non-investment activity that is regular, continuous and considerable. It is tempting, in the transition to the international context, to conclude that the conduct of a trade or business within the U.S. requires that the taxpayer's U.S. activities must be regular, continuous, and considerable, and the standard is often articulated in this quantitative manner. This Article, however, concludes that, as an interpretive matter, this approach is mistaken. Instead the Article disentangles the original inquiry into two distinct inquiries: 1.  Is the foreign taxpayer engaged in a trade or business? 2. Is the conduct of the trade or business "within" the United States? The answer to the former question is quantitative. Once the existence of a trade or business is established, however, no minimum quantum of U.S. activity is necessary to bring a foreign trade or business into the United States. Instead, the necessary condition for an affirmative answer to the second question is qualitative, focusing on the types of U.S. connections rather than their regularity, continuity, or considerableness. In answering these questions, the Article advance a series of five distinct propositions that creates an interpretive reconciliation of the various authorities addressing this question.


Student Notes

DEFINING SUBSTANTIAL ACTIVITY: HELPING TAX-EXEMPT HOSPITALS KEEP THEIR TAX-EXEMPT STATUS
Kevin Leo, 4 Hastings Bus. L. J. XXX (2008)

Joint ventures between tax-exempt hospitals and for-profit organizations have become a common mechanism for hospitals to acquire new sources of revenue and expand their health care services without completely relying on more traditional sources of funding. Joint ventures between tax-exempt organizations and for-profit entities can lead to unfavorable tax consequences for the exempt organization if the venture is not structured in accordance with the rules and regulations provided by the Internal Revenue Service. IRS Revenue Ruling 2004-51 held that an exempt organization would maintain its exempt status as long as it only contributed an insubstantial amount of its assets or activities to the venture. However, the ruling failed to state the point at which the amount of an exempt organization's activities would no longer be considered insubstantial. Thus, tax-exempt hospitals contemplating embarking on an ancillary joint venture cannot always be sure their exempt status will remain unharmed. This note examines the current uncertainty regarding the definition of a substantial amount of an organization's assets or activities and argues that participation in an ancillary joint venture should not be considered substantial unless it markedly restricts the furtherance of an exempt hospital's charitable purposes.

 

THE DISCRETE, THE RELATIONAL, THE SELFISH, AND THE SOCIETAL: ELEMENTS PRESENT IN ALL TRANSACTIONS
Christine Liyanto, 4 Hastings Bus. L. J. XXX (2008)

In the discourse of contract theory, we associate discrete contracts with a goal of self-interest, while associating relational contracts with community-based objectives. This article examines the characteristics of the discrete paradigm, the relational paradigm, and the way in which all transactions reflect the goals associated with both of those models.