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Article Excerpt
Conjuring is the only absolutely honest profession: a conjuror
promises to deceive and does. --Karl Germain, lawyer and magician (1)
I. INTRODUCTION
In the last few years, we have seen a number of financial stories discussing corporate America's trickery, many using magic terms such as "sleight of hand," "hocus-pocus," and "trickery." (2) In one news story published in the New York Times, the author writes that "even David Copperfield could learn a trick or two from some of the true masters of illusion: the financial wizards on Wall Street and in corporate America." (3) Numerous books and financial articles have discussed the trickery at corporate giants, such as Enron, WorldCom, and Global Crossing. (4) For example, in one financial story, the author writes that "[t]he true extent of this dodge [tax avoidance] has not been disclosed, except for sleight of hand like this: Using deductions for stock options, the company [Enron] turned a $112-million tax liability into a $278-million refund." (5)
Although financial writers have been using magic terms in describing tax law (and accounting reporting), do such terms and theories really have a place in the law? This Article will show that there is a connection between magic and tax law. (6) A theory in magic known as the Too Perfect Theory, which has been present in magic circles for many years and has recently had a resurgence in popularity, is applicable to tax law.
The Too Perfect Theory has been interpreted to mean that a magic trick may be too perfect, in that not only does it not fool the audience, but the effect itself may lead the audience to discover how the trick is performed. (7) A number of prominent magicians have written about and debated the Too Perfect Theory, with most agreeing with the theory and a small minority disagreeing with it for various reasons. (8) What is interesting about the Too Perfect Theory is that it seems to be applicable to the law, particularly the practice of transactional law, such as tax law. In other words, is it possible for a transaction to be structured in which the results are too perfect under the tax law? Most judges, law academics, lawyers, and law students would immediately respond, "Absolutely not." They would claim that transactional lawyers strive for perfection and anything less may lead to malpractice claims. But, as this Article will show, a transaction may have results that are too perfect under the tax law, and, as a result, the transaction may be subject to recharacterization by the government and the courts. (9)
The first part of this Article will describe in detail the Too Perfect Theory in the area in which it originated: the field of magic or conjuring. (10) The second part of this Article will apply the theory to an area of transactional law in which perfection has always been seen as the goal of the lawyer: tax law. (11) In the field of tax law, any mistake in structuring a transaction can lead to disastrous tax consequences. This is probably most prevalent in the area of international tax law, in which no less an authority than Professor James Eustice has written, "[T]o be wrong here [international tax] is to court tax disasters on a scale rarely encountered on the home front." (12) In this Article, the conventional wisdom of perfection in structuring transactions for tax purposes will be questioned, with examples from both domestic and international tax law. In the final parts of the Article, the Too Perfect Theory will be analyzed in the context of common transactions. (13) An analysis of current practice will reveal that, while almost all tax advisors are intuitively aware of the Too Perfect Theory, many of them have violated it.
It may seem odd for a law professor to be interested in magic. However, the legal profession's fascination with conjuring goes back hundreds of years, and it appears to be more prevalent today than ever, with such noted judges as Alex Kozinski and Stephen Trott of the United States Court of Appeals for the Ninth Circuit being avid magic enthusiasts. (14) Conjurors are also fascinated by the law; for example, one of the best conjurors in the world, England's Guy Hollingworth, has given up the profession of conjuring to pursue a law degree and become a barrister. (15)
When you have excluded the impossible, whatever remains, however improbable, must be the truth. --Sir Arthur Conan Doyle (16)
II. TOO PERFECT THEORY
A. Illustration of the Too Perfect Theory
Before describing in detail the Too Perfect Theory, it is best to demonstrate its application by way of example. A well-known magic trick is the "Cigarette through Quarter." (17) This trick can be purchased in any magic shop, and David Blaine and David Copperfield have performed it on their television specials. (18) The effect is as follows: a magician borrows a quarter and a cigarette from a spectator. The magician puts one end of the cigarette against the center of the quarter and very slowly and deliberately pushes the cigarette through the middle of the quarter (in fact, part of the cigarette can be seen protruding from the rear of the quarter). The magician, if using a lighted cigarette, may even puff on the cigarette at this stage. After clearly demonstrating the cigarette has penetrated through the middle of the quarter, the magician slowly removes the cigarette from the middle of the quarter with no hole visible in the quarter once the cigarette is removed, i.e., the hole in the quarter has "healed." The magician immediately hands the cigarette and quarter to the spectators for their inspection.
Let me emphasize that the spectators actually see the cigarette penetrating the middle of the quarter. (19) Now, it should be fairly easy to figure out the trick. Everyone knows that it is impossible to push a cigarette through the middle of a quarter. (20) So if that is exactly what the magician is doing, then he or she must be using a gimmicked quarter with a hole in it. In fact, that is the case. The center of the gimmicked quarter, about the same circumference as a cigarette, is cut out and separated from the rest of the quarter but is held in place by a spring hinge on the back of the quarter. One side of the quarter looks like a regular quarter, and it is this side (and only this side) that the audience sees. When the cigarette is pressed against the middle of the gimmicked quarter, the center hinges back, allowing the cigarette to penetrate the center of the quarter. When the cigarette is removed, the center of the quarter snaps back into place, leaving no visible hole in the quarter.
The magician switches the gimmicked quarter for the real quarter at the beginning of the trick (when the spectators do not know what to expect) and then switches the quarters back at the end of the trick. (21) The trick is too perfect, and, as a result, it becomes easy for the spectators to figure out the method. In fact, a well-known magician, Jamy Ian Swiss, wrote that after he had performed the Cigarette through Quarter, perfectly in his opinion, the spectator responded, "Neat. Where's that nifty coin with the hole in it?" (22) Swiss very quickly realized that he had violated the Too Perfect Theory. (23)
B. The Origin of the Too Perfect Theory
In 1945, a magician named "Monk" Watson published a small pamphlet on magic entitled The Professional Touch. (24) One chapter in the pamphlet was entitled, "Can a Trick Be Too Perfect?" (25) In this chapter, Watson described a magic show in which he performed a trick commonly known as the "Bill in the Lemon." (26) Generally, in this trick, the performer borrows a dollar bill from a spectator. A corner is torn off the dollar bill and given to the spectator. The performer also shows a lemon, which is given to a second spectator. The performer places the dollar bill in an envelope and then lights the envelope on fire. The second spectator holding the lemon is then given a knife to cut open the lemon and inside is the rolled-up dollar bill. The missing corner of the dollar bill in the lemon matches the torn-off corner of the dollar bill that is being held by the first spectator. The performer does not come within ten feet of the lemon from the time the second spectator is given the lemon.
Watson noted that the trick was "too perfect." (27) The audience would quickly realize that there were two dollar bills and that the one in the lemon was not the same bill that the performer borrowed from the first spectator. The performer must have previously torn off a corner of a dollar bill before inserting the bill in the lemon and then switched this torn corner for the torn corner from the dollar bill borrowed from the first spectator. Therefore, Watson changed the performance of the trick by first burning the envelope containing the borrowed dollar bill and then picking up the lemon, inserting the knife in the lemon, and giving the lemon to the second spectator. (28) The second spectator would then finish cutting open the lemon to reveal the dollar bill. Watson noted that performing the trick in this manner "would give the impression that in some way I [Watson] had put the bill in the lemon," thus giving him credit for great magical skills. (29) Watson is generally credited with coining the term "Too Perfect," but his theory did not make much of an impact in the magic world at the time. (30) However, that would change in about twenty-five years.
Dai Vernon is generally considered to be the greatest close-up magician of the twentieth century. (31) Beginning in the 1930s and continuing until his death, wherever Vernon went quickly became the center of the magic world. For example, Vernon moved from New York to California in 1963 to take up residence at the Magic Castle in Hollywood. (32) Many leading magicians from all over the country traveled to Hollywood to be near him. (33) Late in his career, Vernon was credited with stating that "[a] spectator never or rarely was fooled by what a magician performed for him in the way of tricks." (34) Those magicians who were not fans and supporters of Vernon claimed that the great man had finally lost it. Even avid supporters of Vernon questioned whether he was starting to slip in his mental capacity.
A well-known magician named Rick Johnsson attempted to analyze Vernon's statement from the perspective that maybe Vernon was right. In January 1971, Johnsson published his theory in an article entitled The "Too Perfect" Theory in a magazine designed for close-up magicians. (35) Johnsson wrote that it was his belief, and that he also thought it to be Dai Vernon's belief, that not only do magicians not fool spectators, but magicians must not fool them. (36) Johnsson wrote that "[i]t is by not fooling the spectator that we magicians are most effective." (37) To believe this principle, Johnsson claimed that one must accept two premises: first, a spectator does not attribute supernatural powers to the magician, and second, the unknown is unacceptable to a rational spectator. (38) Johnsson then broke down the second premise into the following three hypotheses: (1) spectators will find or invent an answer for an effect that baffles them; (2) the answer may not be rational or consistent with the available information; and (3) spectators are flexible in changing their answer upon receiving more complete information. (39)
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Looking to the first premise and the first two hypotheses of the second premise, Johnsson wrote that magicians should understand why spectators leave a magical performance by concluding that "it went up his sleeve" or "it's done with mirrors" or some other ridiculous explanation that is completely inconsistent with the facts. (40) Because the spectator does not attribute supernatural powers to the magician (premise one), and the unknown is unacceptable to the spectator (premise two), the spectator will find or invent an answer (hypothesis one to premise two), and the answer may not be rational (hypothesis two to premise two). (41) In certain cases, however, if the effect is too perfect, the spectator will eliminate all solutions except one, and that will be the correct one.
Johnsson recommended that magicians utilize hypothesis three to premise two (spectators are flexible in changing their answers upon receiving more information) by giving the spectator information that will (1) lead the spectator away from the correct solution, (2) be acceptable to the spectator, (3) not detract from the effect, and (4) give the magician credit for great skill. (42) In other words, Johnsson believed that
[i]t behooves magicians to avoid leaving a spectator one accurate path to follow, leading to the modus operandi; or to leave the onlooker paths that take credit away from the magician himself. It's better to direct the spectator to follow a path of the magician's own choosing, leading him to the conclusion that the magician is some clever devil. (43)
In his article, Johnsson laid out the tenets of The Too Perfect Theory: some tricks, by virtue of their perfection, become imperfect. (44) Conversely, some tricks, by virtue of their imperfection, become perfect. (45) In sum, there are two parts to the Too Perfect Theory: the effect and the method. The more miraculous the effect, the more the performer needs to focus on the method of accomplishing the effect so that the spectators are led away from the actual method.
Johnsson gave several examples of tricks in describing his theory. (46) For example, suppose a spectator is given a deck of cards, goes into the next room, shuffles the deck, removes one card from the deck, and places that card in her pocket. She returns to the room where the magician is, and the magician immediately ascertains her chosen card. Johnsson wrote that the spectator will eventually deduce that the deck must have been a trick deck (i.e., all the cards are the same). (47) Whether the spectator's solution is the correct one or not (most likely it is), the spectator will claim credit for herself and the entertainment value will be lost. To prevent such a result, Johnsson suggested using the spectator's own deck and then leaving it with her at the end of the trick. (48) However, he immediately dismissed this solution to the Too Perfect Theory as being too difficult to accomplish. (49)
Johnsson then suggested a number of other possibilities for making the trick less perfect. (50) These include having the spectator stay in the same room as the magician, making the trick not quite as impossible; showing an indifferent card(s) in the deck by flashing the face of the deck at the spectator before the trick begins; handling the deck a bit before disclosing the chosen card; switching the trick deck for a regular deck by placing the trick deck in a pocket and then pulling out a regular deck from the same pocket in anticipation of the spectator wanting to see the deck; or handling the deck a bit, then spelling out the name of the chosen card as the magician removes one card at a time from the top of the deck and finally revealing the selected card as the top card of the remainder of the deck. (51)
Johnsson noted that for years magicians have been performing tricks that are too perfect and getting away with it. (52) Johnsson wrote:
But unless they [the tricks] were done at carefully chosen, psychologically correct times (with an abundant supply of acting ability thrown in for good measure), they could never have fooled anyone. More specifically, in order to be most mystifying, they could only be accomplished after first convincing the spectators by prior miracles; convincing them that you could do the impossible, then moving on rapidly to subsequent miracles of a sounder nature, preventing the spectators from giving the situation much thought. It follows that such effects, for the most part, could not stand alone or could not be used for a one-shot bit, an opening or closing effect. It should be apparent that by applying the "imperfecting" technique, otherwise shaky effects requiring a great deal of skill in placement and performance come close to being completely flexible and can be performed practically whenever the mood moves one. (53)
C. Solutions to the Too Perfect Problem
Since Johnsson's article in 1971, magicians who accept the Too Perfect Theory have generally developed three solutions to a trick that is too perfect. (54) The first is to make the trick less perfect by "reducing the claim" or, as Johnsson would say, imperfecting the trick by weakening the effect. (55) In other words, magicians must reduce the claim or the effect so that the trick does not look too perfect. For example, in the Cigarette through Quarter trick, some magicians will smoke the cigarette while it penetrates the quarter. Reducing the claim would require the magician not to smoke the cigarette and to remove the cigarette quickly from the middle of the quarter. (56) Then the magician may ask the spectator, "What do you think you saw?" (57) The implication is that maybe the cigarette never really penetrated the quarter, but rather was just part of an illusion. In other words, magicians can avoid making the trick look too good. However, a number of magicians have rejected this solution (reducing the claim) to the Too Perfect Theory and argued that they would never want to lessen the impact of a trick. (58)
A second solution to a trick that is too perfect is to raise the proof. (59) In other words, leave the miraculous effect intact but add facts that support the effect. (60) Returning again to the Cigarette through Quarter trick, one way of raising the proof is to have a spectator mark the coin in some unique way to prove that the cigarette is penetrating the spectator's coin. As a result, the use of a gimmicked coin is ruled out in the spectator's mind. In other words, the magician acknowledges that the spectators will figure out the method and therefore tries to eliminate that method from their thinking. (61) This second solution is in many ways an ideal solution because it leaves the miraculous effect intact. The problem with this second solution, however, is the difficulty in accomplishing it. It is extremely difficult to switch a gimmicked coin for a borrowed marked coin and have the spectators believe that the cigarette is penetrating the borrowed marked coin. In fact, Johnsson acknowledges this solution to the Too Perfect Theory (i.e., eliminating all solutions) but concludes, "I'll leave that to you [to decide].... I'll take the easier path [of imperfecting the trick]." (62)
The late Derek Dingle, one of the greatest close-up magicians of all time, devised a brilliant solution to the Cigarette through Quarter trick by raising the proof. (63) He had two gimmicked quarters: one simply had a hole drilled through it (it looked like a bullet had been shot through it) and the second was the standard gimmicked quarter for the trick (with the spring hinge). (64) He then performed the trick for the spectators and asked them if they knew how he did it. (65) He then explained that he switched the borrowed quarter for one with a hole in it and showed the first gimmicked quarter (with the bullet hole) to the spectators. (66) He then brought out a second quarter, which the spectators believed to be the real quarter but in actuality was the second gimmicked quarter (with the spring hinge), and explained how he switched the quarter with the bullet hole for this ostensibly real quarter that he was now holding in his hand. (67)
Dingle then stated, "You know I always thought it would be great if I could do this without using the quarter with the hole in it. If I could really do it with a real quarter with no switching or anything like that, it would make me a real magician." (68) He then slowly pushed the cigarette through the middle of the second gimmicked quarter. Dingle would puff on the cigarette while it penetrated the quarter and would leave the cigarette in the quarter for a short time. (69) When Dingle removed the cigarette, no hole was visible in the quarter because of the spring hinge, and he quickly switched the second gimmicked quarter for the real quarter before handing it back to the spectator. (70)
Dingle's solution attempted to remove from the spectators' minds the possibility that he switched quarters for the second penetration. (71) He acknowledged switching quarters the first time he did the penetration, but the second penetration looked like real magic because the hinged quarter left behind no hole when he removed the cigarette.
A third solution to the Too Perfect Theory is to provide a false solution to the trick. (72) In other words, lead the spectators down the wrong path in determining the solution so that the magician receives credit for great skill or ingenuity. (73) John Cornelius is one of the most creative magicians today. (74) He utilizes two quarters for the Cigarette through Quarter. (75) The first quarter is a regular quarter with a small hole drilled through the middle. The second quarter is the gimmicked quarter (with the spring hinge) and also has a small hole drilled through it. Cornelius shows the gimmicked quarter with the small hole in it (i.e., he does not borrow a quarter from a spectator). He pushes the cigarette through the middle of the quarter. He removes the cigarette from the quarter and then switches quarters, handing the regular quarter with the small hole drilled in it to the spectators for their inspection.
The spectators try to determine how Cornelius pushed a cigarette through a hole clearly smaller than the circumference of the cigarette. The effect of the trick is probably lessened somewhat, but more importantly the spectators are led away from the correct method (switching quarters) to incorrect methods, such as whether the hole expands in some way, whether the cigarette shrinks, or other explanations along those lines. (76)
There are numerous other examples in magic in which the performer should consider the Too Perfect Theory. For example, a very common magic trick is the "Floating Dollar Bill." (77) The magician borrows a dollar bill and places it on the table. The dollar bill floats off the table and then returns to the table. If the magician floats the dollar bill too high off the table and leaves it floating in the air for too long a period of time, the spectators will guess that a very fine thread that cannot be seen is being used, and they will be correct. As a result, a very creative magician named John Kennedy reduces the claim. (78) He only floats the dollar bill a few inches off the table and for only a few seconds. (79) Accordingly, the spectators are not sure exactly what they saw and will either rule out or pass over the possibility of a very fine thread being used. (80)
A final example is the "Torn and Restored Card" trick. (81) The magician has a spectator select a playing card from a deck of cards and then proceeds to tear the selected card into four pieces. The magician then restores the playing card, piece by piece. Putting aside the illogical aspect of the trick (why tear the playing card to begin with if the magician wants a restored playing card at the end?), most spectators will guess correctly that there are two playing cards--one of the two cards is torn into four pieces and these pieces are then switched for the duplicate card. Magician-turned-barrister Guy Hollingworth solves the problem by raising the proof. (82) When the spectator selects the playing card, he has the spectator sign across the face of the card. (83) He then restores the playing card, piece by piece, with the signature in full view...
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