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Abstract:
Ownership is one of the most fundamental concepts in tax law, yet it is remarkably confused. The uncertainty inhibits tax planning, leads to inconsistent responses from the government, and produces unexpected outcomes in the courts. There has been no shortage of scholarly attention to the issue, but most of the commentary has been either exceedingly narrow or focused on far-reaching reforms. As a result, the law of tax ownership lacks conceptual foundation. This Article attempts to remedy the deficiency. It proposes a comprehensive approach to tax ownership and demonstrates that the doctrine may (and should) be significantly clarified without a dramatic overhaul of the existing substantive law. The approach rests on dividing all ownership questions into four categories depending on the context in which the questions arose. Using this analytical framework, the Article allocates various tax ownership authorities to appropriate categories and develops the underlying principles guiding the analysis for each group. Because these principles differ among the categories, the Article suggests that the existence of numerous seemingly inconsistent tax ownership decisions should be understood not as a sign of a confused doctrine, but as an appropriate result reflecting the underlying conceptual differences. By rationalizing and organizing the law of tax ownership, the Article provides a framework for resolving future tax ownership controversies.

Tax ownership

Abstract:
Avoidance and evasion continue to frustrate the government's efforts to collect much needed tax revenues. This article articulates one of the reasons for this lack of success and proposes a new type of penalty that would strengthen tax enforcement while improving efficiency. The economic analysis of deterrence suggests that rational taxpayers choose among various avoidance or evasion strategies that are subject to identical statutory sanctions those that are more difficult for the government to find. I argue that many taxpayers do just that. Because probability of detection varies dramatically among different items on a tax return while nominal penalties do not take likelihood of detection into account, expected penalties for inconspicuous noncompliance are particularly low. Adjusting existing penalties will not solve the problem because what is (and is not) inconspicuous depends on a given tax return and, therefore, is not susceptible to the type of generalization on which the current penalties rely. I propose to complement the existing sanctions with a new penalty equal to a fraction of the legitimate subtraction item (such as a deduction, credit, or loss) reported on the same line of a return that contains the illegitimate one. With this penalty in place, the harder it is for the government to find a given avoidance transaction, the higher is the statutory sanction if the transaction is detected. The proposed penalty adjusts itself. As a result, the differences in expected penalties for many forms of avoidance and, to a lesser extent, evasion are reduced, the inefficient incentive to hide noncompliance is diminished, and the overall deterrence is improved.

Tax, penalties, deterrence

Abstract:
Risk-based rules are the tax system's primary response to aggressive tax planning. They usually grant benefits only to those taxpayers who accept risk of changes in market prices (market risk) or business opportunities (business risk). Attempts to circumvent these rules by hedging, contractual safeguards, and diversification are well-understood. The same cannot be said about a very different type of tax planning. Instead of reducing risk directly, some taxpayers change the nature of risk. They enter into informal, legally unenforceable agreements with contractual counterparties that are designed to eliminate market or business risk entirely. The new uncertainty these tax planners inevitably accept, however, is the risk (counterparty risk) that the counterparties will violate the implicit agreements and betray taxpayers' trust. A deliberate substitution of counterparty risk for market or business risk is what this Article calls relational tax planning. The Article offers an economic analysis of different risks and considers two responses to the relational tax planning problem. The analysis suggests that business risk is superior to both market and counterparty risks. Counterparty risk is the most complex of the three. In addition to risk-bearing losses produced by all risks, it reduces transaction costs of future exchanges between relational tax planners, but only if they manage to overcome bargaining obstacles caused by opportunism and asymmetric information. These insights suggest two very different responses. A sweeping reform will allow - and even encourage - taxpayers to engage in relational tax planning, but will also ensure that counterparty risk they incur is sufficiently high. If only incremental improvements are pursued, courts should increase their scrutiny of relational tax planning involving extensive dyadic business relationships and interactions based on social norms.

tax enforcement, tax evasion, tax avoidance, tax planning, relational contracts

Abstract:
Most human interactions take place in reliance on tacit understandings, customary practices, and other legally unenforceable agreements. A considerable literature studying these informal arrangements (commonly referred to as social norms) has a decidedly positive flavor, arguing that many, if not most, of these norms are welfare-enhancing. This Article looks at the less-appreciated darker side of social norms. It combines the analysis of the modern sophisticated tax planning techniques with the existing empirical studies of commercial relationships to reveal a disturbing connection. By relying on tacit understandings rather than express contractual terms, many taxpayers shift some of their tax liabilities to those whose opportunity to take advantage of social norms is more limited or non-existent. The resulting inefficiency and inequity is the social cost of social norms. Reducing this cost, however, turns out to be a challenging task. The Article introduces a tax-focused classification of social norms and singles out the type of norms that are particularly inefficient. Unfortunately, while reducing the use of these norms (or eliminating them altogether) would be welfare-enhancing, it is unlikely to succeed in practice. Indiscriminately attacking all norms is easier administratively, but socially costly. The Article proposes a compromise between these two courses of action that is more administrable than the first approach and less costly than the second. It also offers a guide that would assist the government in identifying particularly inefficient norms.

tax policy, tax avoidance, social norms, relational contracts, externalities

Abstract:
People pay their taxes for many different reasons. Some choose to game the system, paying only when the cost of noncompliance outweighs its benefits. Others comply out of habit, a sense of duty or reciprocity, a desire to avoid feelings of guilt or shame, and for many other reasons. Our tax enforcement system has ignored this variety of taxpaying motivations for decades. It continues to rely primarily on audits and penalties, at least where information reporting and withholding are impossible. Fines and audits work well for those rationally playing the tax compliance game, but are wasteful or even counterproductive when applied to others. The shortcomings of the current one-size-fits-all approach to tax enforcement are well understood. They also appear to be insurmountable. This Article argues that it is possible to design a more tailored regime. The idea is to separate all taxpayers based on their taxpaying motivations by creating two different enforcement regimes and inducing taxpayers to choose one when they file their annual returns. Once the separation is accomplished, the government can target enforcement by matching enforcement policies to taxpayer types. Those who choose to game the system would be deterred by higher penalties in one regime. All others would be induced to comply by cooperative enforcement measures in the other. If successful, separation and targeted enforcement would improve tax compliance without raising its social cost, or keep the level of compliance unchanged while making tax administration more efficient

tax enforcement, tax compliance, tax shelters, deterrence, social norms, penalty default