$900 Million Typo

Last week, I blogged about an error made by a government lawyer (later characterized by the government as a "typo") that nearly cost the government $200 million. But how would you like to be the lawyer responsible for a screw-up that cost your client $900 million?

It's an old case, but last week's incident reminds me of InverWorld v. Commissioner, a D.C. Circuit case from the 1990s. InverWorld, Ltd., a Cayman Islands corporation, didn't think it owed any U.S. taxes because it didn't think it conducted any trade or business in the U.S. The IRS, apparently believing that InverWorld had enough U.S. contact that it owed U.S. taxes, sent the company a notice that it owed $45 million in withholding taxes (i.e., FICA taxes on InverWorld employee income) and a separate notice that it had also owed several hundred million in corporate income tax.

Lawyers at InverWorld filed a timely petition to contest the assessment of withholding taxes, but said nothing about the notice that the company owed corporate income taxes. The IRS therefore proceeded to assess the company for the corporate income taxes. With interest and penalties thrown in, the amount owed was $900 million. The IRS sent InverWorld a bill.

At this point, the company woke up and said that it was also contesting its corporate income tax bill. But guess what? The time to contest that amount (measured from the original notice) had expired. And the court ruled that the petition contesting the assessment of withholding taxes was insufficient to contest the income taxes. So, the court said to InverWorld, no process for you -- kindly pony up the $900 million that you don't think you owe.

The case had a certain hypothetical quality about it, inasmuch as it seemed highly unlikely that InverWorld was actually going to pay the money in any event -- it was off in the Cayman Islands and I doubt the IRS would be able to get hold of any of the company's assets. So I'm guessing the company just vanished into the Caribbean mist and never actually paid the money.

Still, how would you like to be the lawyer who was responsible for a screw up that led to a $900 million judgment against your client? It pays to be careful.

Economy Still Going Strong

OK, maybe it isn't. But I'll tell you this: my girlfriend and I went to see a movie in Georgetown yesterday (Slumdog Millionaire -- pretty good, although the love interest part is not compelling), and on the way back we stopped into Tretorn to look at some athletic shoes. Someone on M Street had offered us free hot cider and a $25-off coupon, and my girlfriend had been looking for Tretorns anyway. As we were browsing, I observed that the store had a DJ spinning vinyl records. Putting this point together with the cider and the coupon and the fact that I had never noticed this store before (although it's up a flight of stairs, not easy to spot), I decided it must be the grand opening. But no, it turned out that the spinmeister was a regular feature of the store. And it's not as though he did anything else. That was his job.

And then as we walked home, we passed an Adidas store that also had a DJ spinning records. And he didn't seem to have any other work either.

Now, I'm not a corporate mogul. I don't know what packs in the 20-something customers that these stores seemed to be aimed at. But I will say that, in a down economy, these jobs looked pretty expendable. I don't know what they're pulling down, but it has to be something.

The stock market may have hit its lowest level in 11 years, but things haven't reached the point where Tretorn and Adidas have realized that they could put a CD on the stereo and have one of the shoe sellers change it from time to time. So there must be some life in the economy yet. In a real downturn these DJs would be axed. As John Cleese pointed out to the pantomime horses when telling them that one of them would have to go, the management consultants were questioning why the bank employed a pantomime horse at all.

How Neutral Are You?

The Minnesota Senate recount just keeps getting more interesting. After two days of hand counting, with 46% of the votes recounted, Coleman's lead is down to 136 votes.

Now, if one naively assumed that Franken would continue to pick up votes at the same rate for the remainder of the recount, he'll end up losing. Coleman started out ahead by 215, so recounting 46% netted Franken 215-136 = 79 votes. Therefore, one would naively expect the rest of the recount to net him 54/46*79 = about 93 votes, which would still leave him down by 43. (That's out of 2.8 million!)

Of course, the rate of change does not have to be constant, and a lot depends on which counties are left to go. So the above calculation could be misleading.

But what's really interesting are the questions that the recount raises. For a fascinating insight into what the counters have to decide, see here. Courtesy of Minnesota Public Radio, the linked page presents pictures of actual, challenged ballots, with the question that each ballot raises. Take a minute and see if you can decide whether each ballot should count for Coleman, Franken, someone else, or not at all.

Not so easy, is it? I thought most of the challenged ballots had pretty clear answers, but some definitely present close, judgment calls. The Minnesota law requires ballots to be judged by the "intent of the voter" standard. It's not so hard to judge the voter who started to fill in the oval for Coleman, then wrote "NO" next to it and filled in the oval for Franken. That's a Franken vote. The voter who filled in the oval for Franken but had a small dot in the Dean Barkley oval is an even clearer Franken vote. But what about the voter who filled in the oval for Coleman, but also put an "X" through the oval, and didn't fill in anything else? I'm giving that one to Coleman, but it's a closer call. And how about the voter who put an "X" in the Coleman oval and wrote "Bachman" in the write-in line? I would reject that ballot altogether. Perhaps the closest call is the voter who voted for Coleman but also put what appears to be a signature on the ballot. Minnesota law voids a ballot if it is "is marked by distinguishing characteristics in a manner making it evident that the voter intended to identify the ballot." The mark on this ballot is illegible, but it looks so much like a signature to me that I would disqualify it. Tough call, though.

It's got to be a tough job for the recounters. It happens that I've met Mark Ritchie, Minnesota's Secretary of State, and had some discussions with him about election law issues (about a year ago, not related to any of the current recount issues). My impression of him is that he's very committed to honesty and integrity in elections, and although he was elected to office in a partisan election (he's a Democrat), I would trust him to pursue the goal of a 100% honest, fair, neutral recount. But can the same be said of every single person who's actually involved in counting? I have no idea. And even more to the point, even assuming every counter is committed to a fair, honest, neutral recount, is it really humanly possible not to be swayed by some degree of (possibly unconscious) bias in making the close, judgment calls that the ballots actually present? That's a harder question still.

I am also put in mind of something Justice O'Connor said in the oral argument in the infamous case of Bush v. Gore. Discussing the standard for counting the votes, she asked, "Well, why isn't the standard the one that voters are instructed to follow, for goodness sakes?"

The pictured Minnesota ballots show how utterly naive and inappropriate that suggestion was. When you have millions of people, some careless, some in a hurry, some not well educated, some who don't speak English as a native language, some just not so bright, all doing something that they only do once every couple of years, they are going to make some mistakes. It's absurd to imagine otherwise. It's appropriate for the law to preserve the right to vote by taking these mistakes into account and permitting votes to count if the intent of the voter can be reasonably discerned.

And by the way, the other thing that's always struck me about that O'Connor quote is that she really meant to say "for goodness' sake," not "for goodness sakes." I guess she doesn't know how to follow instructions.

Incredible Shrinking Lead

OK, I can't resist: another blog entry about the election.

Norm Coleman's lead over Al Franken is down to 174 votes! That's out of about 2.8 million votes cast -- a difference of about 6/1000 of 1%. It doesn't come much closer than that.

Coleman previously urged Franken to waive the recount and concede, but that was ridiculous. Ted Stevens has graciously conceded in Alaska, but he's down by about 3,700 votes out of 300,000. There's a big difference between being down by 1.2% and being down by 0.006%. The common statutory standard is that a difference of less than half a percent justifies a recount at state expense. 0.006% is a whole lot less than half a percent.

Moreover, if one assumes that Democratic voters are more likely than Republicans to mismark their ballots, in a way that makes it difficult for machines to count, then a recount could make a big difference to Franken. Even a slight edge could overcome a 0.006% difference.

So I think a recount is totally justified. The one thing that seems peculiar to me is one feature of the actual recount process. The part that makes sense is steps 6-10 in the process: each ballot is inspected by a team of humans to determine who the voter really intended to vote for. That's fine -- machines can make mistakes, and a human should look at each ballot and determine which pile it really belongs in.

But then step 11 says that humans will also count up the ballots in each pile. Now that seems like a bad idea. Humans make mistakes too. Humans are better at exercising judgment, but machines are better at doing routine, boring tasks that don't involve judgment, like counting how many ballots there are in a huge pile. Imagine counting a pile of about 1000 ballots. Would you come up with exactly the right number?

I would have the humans sort the ballots into piles by deciding which candidate each ballot votes for, but then I would have machines count up the ballots in each pile. Mistakes are possible either way, but I would trust the humans to make fewer mistakes sorting the ballots into piles and the machines to make fewer mistakes in counting the ballots in each pile.

Of course best of all would be to do an empirical study of which method involves fewer mistakes, rather than consulting one's intuition. But there's no time for that now. People are counting big piles of ballots. Let's hope they come up with the right answer.

Burrowing In

It happens every four years: some political appointees of the outgoing administration "burrow in" to the career civil service. Apparently the outgoing Bush administration has approved 20 such moves, including 6 within the Senior Executive Service (the highest government pay ranks).

Now, this is hardly new and it's not even uniquely partisan; the outgoing Clinton administration approved 47 burrow-ins (including 7 SES moves). But it does particularly stick in one's craw when the outgoing President has a dismal approval rating and is busy making last-minute rules changes that will cement everything that got his party pushed out.

The President is just making life that much more difficult for his successor. He's putting rules in place that will take a year or two to unwind; he's appointing civil servants who will be difficult to push aside or fire. Sure, the practice is as old as the "midnight judges" appointed on the last day of the Adams presidency in 1801. But it's still rotten. And just brace yourself for the last-minute pardons that will likely follow.

Welcome, New Readers

My hits went through the roof yesterday thanks to a link from my colleague Orin Kerr, regular poster on the Volokh Conspiracy. (I didn't put him up to it, I swear!) To all new readers who come from there, welcome.

$200 Million Typo

Typos are always embarrassing, but how would you like to be responsible for a typo that, a court rules, fatally costs your client money? Not fun, particularly if the amount of money involved is $200 million. As you can see here, a U.S. government lawyer had this unhappy experience -- but was rescued at the last minute.

A certain Walter Anderson was convicted, by guilty plea, of income tax evasion. Apparently, Anderson used "a complex scheme involving several foreign corporations" to hide about $450 million in earnings over five years.

Now, let's just pause for one second here. If I earned $450 million over five years, I think I would be happy to pay the $200 million or so I would owe in taxes and live fabulously on the $250 million I'd have left. I don't think giving up the $200 million would bother me that much. But then, perhaps that's why I haven't earned $450 million. Maybe, to earn that much, you have to want every penny of it. Maybe I just don't have the right attitude.

Anyway, Anderson wanted that $200 million so much that he risked going to prison for it, which he is now doing -- for nine years (that's why I still think my attitude works better). But here's the funny part: the plea agreement provided that "the court may order restitution pursuant to 18 U.S.C. § 3572." The obvious purpose here was that the court sentencing Anderson to prison would also have power to order him to pony up the taxes he'd evaded. But there was one little problem: 18 U.S.C. § 3572 isn't the restitution statute. It's the fines statute. The restitution

statute is 18 U.S.C. § 3663.

Oh, that's just "a typo" and not "something that the court should be getting wrapped up about," said the U.S. attorney. Not so fast, said the district court. Under the applicable statute, the court only had power to order restitution "to the extent agreed to by the parties in a plea agreement," and the plea agreement only permitted restitution under a non-applicable statute, so there was no power to order restitution. Sorry, your typo cost the government $200 million.

Actually, the error was not really a "typo"--no one tried to type "3663" and accidentally hit the keys for "3572." It was more like a "wrongo" or even a "stupido"--someone deliberately put in the number of the wrong statute.

In any event, the court of appeals came to the rescue, ruling (correctly, I would say) that (1) the restitution statute requires authority for restitution in a plea agreement, but does not require citation to the restitution statute in the agreement, and (2) the other conduct of the parties made it very clear that they intended the plea agreement to provide restitution authority. So they allowed restitution.

So all's well that ends well, but how would you like to be the attorney who made what might have been a $200 million error?