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Abstract:
In this time of record federal budget deficits, policymakers are devoting great attention to the tax gap, a measure of tax compliance (or noncompliance). The gap is estimated to be over a third of a trillion dollars, and it has grown rapidly in recent decades. There is no "silver bullet" to improve compliance across the board; a mix of strategies will be needed. This article suggests one such strategy, a new proposal to reduce noncompliance by wealthy individuals and corporations. Many wealthy taxpayers decide whether to take tenuous tax return positions by weighing rewards against risks. Civil tax penalties are crucial to that calculation. Without a viable penalty regime, perceived rewards from noncompliant behavior will often outweigh perceived risks. The deterrent effect of penalties is undercut by the ability of wealthy taxpayers to obtain favorable opinions from their attorneys and accountants blessing even dubious transactions, providing colorable "reasonable cause" defenses to deflect penalties. This article proposes that the reliance defense be means-tested, that is, be made categorically unavailable to corporate and individual taxpayers whose net worths exceed specified levels. This change would transform the conversations between wealthy taxpayers and their advisers. Since "wink and nod" opinions would no longer be valuable, taxpayers would now want their advisers' candid views of the tax merits of proposed transactions, improving compliance. Moreover, means-testing would be fair. This proposal would merely extend to the penalty context the means-testing that the tax law already requires in other contexts. Means-testing recognizes that wealthy taxpayers have options unavailable to others. After means-testing, wealthy taxpayers would still be able to protect themselves by obtaining rulings or second opinions in close cases and by bringing malpractice actions if they wind up paying penalties as a result of poor advice.

Tax compliance

Abstract:
When the Supreme Court handed down its decision in Department of Revenue v. Davis, the Court addressed the so called home state exemption. Resolving a conflict between state courts, a significantly divided Supreme Court held that the negative or dormant Commerce Clause does not prohibit home state exemptions. Davis can be read at any or all of three levels: economic, constitutional, and interpretational.

There will be no dearth of commentary on the economic and constitutional dimensions of Davis. Thus, this article is principally concerned with the interpretational dimension.

In brief, the striking interpretational aspect of Davis is its heavy reliance on the fact that the challenged practice is widespread and of long standing. Advocates should consider Davis when external context arguments plausibly inhere in future tax cases.

Commerce Clause, constitutional interpretation, statutory interpretation, state tax exemptions

Abstract:
The pro-taxpayer canon is one of the oldest interpretational devices in tax litigation. It has been substantially abandoned at the federal level, but retains considerable vigor in cases involving state and local taxes. Although the canon applies only to ambiguous tax statutes and may yield to counter canons or presumptions, the pro-taxpayer canon has impact in enough cases that it should be one of the arrows in the quivers of taxpayers and their representatives.

tax litigation, state taxes, local taxes, statutory interpretation

Abstract:
INTERPRETATION MATTERS COLUMN:
What is a court trying to do when it interprets or applies a statute? This installment of our column looks at two different answers to that question, doing so through the lens of cases involving state and local tax statutes. Both approaches sometimes use the language of "intent," so it becomes important for the state-local tax practitioner to understand, and to accommodate his or her arguments, to the kind of intent that actually controls in the particular jurisdiction.

state and local tax statutes interpretation

Abstract:
Malpractice actions against attorneys have escalated in number and dollar magnitudes in recent decades. Malpractice actions against accountants also have grown in number and size.

Tax malpractice suits have reflected these general trends. Such suits arising out of tax shelters have garnered lots of headlines, but more conventional types of tax transactions have spawned a larger number of cases. Most tax malpractice suits involve federal taxes. However, as Part I below demonstrates, a number of malpractice suits involve only state and local taxes or a mix of state, local, and federal taxes. Regardless of the types of taxes involved, state law typically provides the rules that govern tax malpractice cases.

Thus, malpractice law deserves the attention of state and local tax practitioners, and it will be the subject of this and some future installments of this column.

Abstract:
The IRS should endeavor to treat similarly situated taxpayers similarly. But does this aspiration rise to the level of a judicially enforceable duty? If the IRS takes a position as to Taxpayer B which is correct under the law but is inconsistent with a position the IRS took as to similarly situated Taxpayer A, should the IRS lose as to Taxpayer B simply because of the inconsistency? These questions implicate important themes, such as fairness, the rule of law, separation of powers, administrative exigencies, the role of common law making in a highly positivistic system, and the sustainability of legal regimes.

Abstract:
INTERPRETATION MATTERS COLUMN: In Hyatt v. California Franchise Tax Board, a Nevada jury returned a nearly $400 million tort verdict against the California Franchise Tax Board ("CFTB") on account of its allegedly abusive audit of a taxpayer who claims he relocated from high-tax California to low-tax Nevada. Befitting the case’s fascinating nature and its potential significance, Hyatt has been the subject of considerable commentary. This article will explore aspects of the decision that have not yet been deeply probed. In particular, Hyatt illustrates the use and power of narrative in litigation and in policymaking.

Abstract:
INTERPRETATION MATTERS COLUMN: This issue introduces a new column in State Tax Notes.

I recently wrote an article for State Tax Notes focusing on the constitutional and statutory construction aspects of the United States Supreme Court’s recent decision in the Davis case. This column will extend the inquiry to other aspects of interpretive approaches to the statutes, constitutions, and regulations that frame state and local taxation.

The topic of this first installment of the column, a frequently encountered device or explanation of interpreting legal texts, is “plain meaning.” Cases beyond number have recited that, when the text is clear, there is nothing to construe, and the statute, regulation, or constitutional provision will be applied according to its “plain meaning.” This approach is often reasonable, and the frequency of its assertion may seem soothing. But these waters are not always as placid as they appear. The plain meaning doctrine is sometimes problematic as applied to state and local taxation. It is sometimes overused or abused by the courts.

In this article, we examine this proposition through three perspectives.

Abstract:
INTERPRETATION MATTERS COLUMN: In the interpretation of tax statutes, a venerable principle is that “[t]axation should move in an atmosphere of practical realities rather than amid the intricate and wooden concepts [of legal formalities].” This principle is familiar in federal taxation, and it holds no less sway in state and local taxation. Indeed, the idea that the substance of a transaction usually controls over the form of the transaction is not confined to taxation; it is a principle of American law generally.

The principle commands that the underlying reality of the events usually determine tax consequence; the forms or labels attached to the events by the parties themselves (by contract or otherwise) or even by non-tax law usually are not determinative. This column will explore the “substance versus form” rule from three perspectives: (1) justification for the rule, (2) the reach of the rule and examples of its application in state and local taxation, and (3) use of the rule in favor of taxpayers.

Abstract:
INTERPRETATION MATTERS COLUMN:

Opponents of textualism as an approach to statutory interpretation sometimes deride it as myopic. The textualist, such opponents contend, puts on blinders, narrowing the perhaps vast panorama of possible perspectives on meaning to a narrow slice of the whole.

This article discusses literalism and textualism. In contemporary textualism, context is crucial.

This technique of reading statutes together is often called super text. Super text and the related consistent meaning canon are the subjects of this installment of Interpretation Matters.

statutory interpretation, supertext, consistent meaning

Abstract:
In its rehearing of Textron, the First Circuit will soon have an opportunity to rectify an error and to curb unwise recent expansion of work product protection for tax accrual workpapers.

This article argues that disclosure to the IRS of tax accrual workpapers would not compromise the values on which the work product doctrine is based, but rather would further some of those values. It is to be hoped that the full First Circuit and subsequent courts hearing similar cases will read Rule 26(b)(3) in terms of its purposes and, in so doing, will proceed in the direction the Supreme Court laid out in Arthur Young but from which prior Textron opinions strayed.

Abstract:
Plain meaning is a concept originally developed by the courts as one statutory interpretation approach. An earlier installment of this column looked at that approach generally. This current installment takes up a more specific aspect. According to a recent article by a state appellate judge, nine states now have statutes directing their courts to apply statutes pursuant to the “plain meaning” of their text, if the text is unambiguous. This installment assesses the significance of such statutes for state and local tax controversies.

Abstract:
In a recent article, Professor Alex Raskolnikov proposes creating two regimes for IRS audits and allowing taxpayers to choose between them. I congratulate Professor Raskolnikov on his original contribution to tax compliance discourse. I hope it will stimulate discussion. However, I have concerns about the proposal. Its principal benefits could be achieved through less radical means and would be eclipsed by its disadvantages.

tax compliance, Internal Revenue Service, tax audit

Abstract:
The installment of the column, instead of looking at the end of the legislative process – how courts interpret enacted statutes, this installment looks at the phase at which bills are enacted by or defeated in the legislature. However, the two phases have underlying similarities. As we will see at several places, arguments used in legislative advocacy have counterparts in statutory interpretation advocacy. Proposals to revise state and local tax statutes are always with us, but current budgetary stresses have increased both the number and significance of such proposals.

Abstract:
In Swallows Holding Ltd. v. Commissioner, the Tax Court invalidated a general-authority regulation under section 7805 of the Internal Revenue Code involving return filing by some foreign corporations. A previous article by the author, "Swallows Holding as It Is: The Distortion of National Muffler," maintained that the regulation is consistent with prior case law and should be upheld under the National Muffler standard of deference. This article uses Swallows to explore Chevron and Brand X issues as to interpretive tax regulations generally. It maintains that Chevron typically should apply to challenges to those regulations (and specifically should apply to the challenge to the Swallows regulation) and Brand X should apply when tax regulations revise prior case law rules.

Tax regulations

Abstract:
Tax statutes, like statutes of all kinds, frequently prescribe dates or times by which actions are to be taken. If the actor – either the taxpayer or the state or local revenue authority – fails to act by the specified date or time, the actor sometimes can be rescued by any of several legal and equitable mechanisms. This installment of “Interpretation Matters” addresses one of those mechanisms: the doctrine of equitable tolling.

Abstract:
This installment of Interpretation Matters discusses two related canons of statutory interpretation and illustrates their use in state and local tax controversies.

These canons are relatively weak, but they have had traction in some cases. Accordingly, it behooves the state-local tax practitioner to be able to use the reenactment and inaction canons offensively when they arguably support her client’s cause and to be able to defend against them when they are asserted by an opponent.

canons of statutory interpretations, state and local taxes

Abstract:
There are many exceptions to the juvenile saw that “close counts only in horseshoes and hand grenades.” State and local tax practice may be among these exceptions – depending on possible application of the doctrine of substantial compliance. The tax law often makes the legal validity of one action contingent upon a party having taken certain preliminary steps. Strict compliance – having to take those steps in precisely the right way at precisely the right time – is not always necessary. Courts sometimes hold that substantial compliance – “close enough” – suffices. This installment of “Interpretation Matters” discusses the substantial compliance doctrine from three perspectives.

Abstract:
In addition to its "regular" judges, the United States Tax Court has a number of Special Trial Judges ("STJ"). Both statutes and Tax Court rules define the types of cases STJs may hear and the procedures to be followed in such cases. In a set of related cases, taxpayers alleged that the report of the assigned STJ had been altered by a "regular" judge and that, contrary to Tax Court practice, the STJ's original report should have been made available to the parties. The taxpayers alleged that the failure to release the original report violated both statutes and the Due Process component of the Fifth Amendment. The controversy engaged three federal appellate courts and the Supreme Court, which resolved the cases on narrow grounds, avoiding the interesting statutory and constitutional issues. The clash in the cases involves a recurring theme in tax procedure: the tension between actual or perceived fairness to particular taxpayers or litigants on the one hand versus procedural regularity, i.e., the normal operation of general rules and procedures, on the other hand. This article asserts the importance of the latter value. It supports the process considerations that courts speak through their opinions and that it would be unwise to go behind those opinions to examine judges' thought processes and motivations. The article maintains that courts should be able to craft rules that reflect their needs and safeguard their internal deliberative processes. The article also addresses, and rejects, the statutory, constitutional, and policy arguments made by the taxpayers.

Tax, tax procedure, tax court rules

Abstract:
Recently, in the Baxter case, a federal district court vacated the sentence imposed as a result of a guilty plea in a criminal tax case. The court held that the failure of defense counsel to retain the services of an expert in tax crimes sentencing violated the defendant’s Sixth Amendment right to effective representation. This installment of the Tax Crimes column explores Baxter.

Abstract:
In Swallows Holding Ltd. v. Commissioner, a reviewed opinion in early 2006, the Tax Court invalidated a Treasury Department tax regulation involving return filing by certain foreign corporations. The Tax Court's decision is wrong because it misread the precedents on which it relied and misperceived the roles of Treasury and the courts in filling gaps Congress left in tax statutes. This article maintains that the Tax Court misapplied the standard on which it relied: the National Muffler line of cases on deference to tax rules and regulations. Another of the author's articles, "Swallows as It Might Have Been: Regulations Revising Case Law," maintains that the Tax Court failed to appreciate the teaching of the Supreme Court in the Chevron and Brand X cases. Thus, either on National Muffler grounds or on Chevron and Brand X grounds, the Swallows Holding decision should be reversed. [Subsequent to publication of this article, a panel of the Third Circuit did reverse Swallows Holding.]

Tax Rules and Regulations

Abstract:
Several tax crimes set out in the Code involve failure to pay known or assessed tax liabilities. For generations, there has been controversy about whether and when the taxpayer’s lack of funds from which to make payment precludes conviction for these crimes. The days of the greatest potency of this defense are past. The recent decision of a divided panel of the Ninth Circuit in the Easterday case continues the trend, but the defense should still have life in some situations and some courts.

Abstract:
In April 2002, the Supreme Court decided United States v. Craft. The Court held that the federal tax lien attaches to tenancy-by-the-entireties interests even when state law prevents creditors from proceeding against these interests. This decision overthrows a contrary rule that had been followed in numerous lower court decisions over many decades.

Attachment of the tax lien is important, but it is at the beginning of the collection process, not the end. Thus, Craft raises many follow-up or implementational issues. How well the IRS and the courts address these issues will determine whether Craft's incorporation into the tax system is accomplished relatively smoothly or only with friction and disruption.

This article identifies the principal implementation issues and suggests answers to them. In general, it recommends a "go slowly" approach, with exceptions and applications to particular circumstances. The particular issues covered include protection of non-debtor spouses, transitional considerations, and valuation.

Taxation, federal tax laws

Abstract:
Modern tax statutes serve many purposes beyond simply raising revenue, and the contours of such statutes are shaped by numerous (and sometimes conflicting) economic, social, and political objectives. Legislatures choose a variety of structural mechanisms to advance these policy goals, including exemptions, deductions, and credits. Sometimes these features are drafted with less than meticulous precision. Other times, business practices have evolved since enactment of the provisions. In either event, revenue agencies and courts are frequently required to interpret these provisions.

This installment of “Interpretation Matters” concerns one principle of such interpretation: the canon that exemptions, deductions, and credits are construed strictly against the taxpayer. Part I describes the canon. Part II suggests ways by which taxpayers attempt to counter it.

tax statutes interpretation

Abstract:
One provision of the 1998 IRS Restructuring and Reform Act is new I.R.C. sec. 7491. That section purports to alter the long established rule that the burden of proof in civil tax litigation generally is on the taxpayer. It was enacted with considerable fanfare as a taxpayer-protection measure. However, to minimize the serious effects that a genuine and general burden reversal would occasion, sec. 7491 contains many exceptions and limitations. I argue that these conditions largely swallow the rule, such that the burden of proof will shift in very few actual cases. But ineffective does not mean innocuous. Section 7491 will compound uncertainties in the process of resolving tax controversies, leading to increased litigation and increased costs. Also, by overselling sec. 7491, Congress' actions will exacerbate cynicism and public distrust. Thus, sec. 7491 is a harmful exercise in symbolic legislation.