Playing with 'Monopoly Money': Phony Profits, Fraud Penalties and Equity

Abstract:     
Although most U.S. corporations don't pay Federal income taxes, over the last several years some corporations have been willing to report, and shell out to the Treasury, hundreds of millions of dollars in taxes that they didn't owe. They did so to conceal the fact that they were playing with Monopoly money - fabricating profits as phony as the pastel-colored money used in the classic Parker Brothers board game. Of course, once the game was up, these corporations wanted to raid the Community Chest to get their tax money back. But is it appropriate to refund taxes in such circumstances? This Article traces the history of tax refund suits and concludes that such suits are in essence claims in equity. This means that claimants are subject to well-established equitable defenses like the doctrine of unclean hands and equitable estoppel. This Article argues that given the potentially corrosive effects of tax fraud on the U.S. tax system, the assertion by the Internal Revenue Service of equitable defenses to earnings inflation-related refund claims would provide a more effective penalty regime than the current statutory system. In making this argument, this Article necessarily traverses several areas of law, including corporate fraud, the history and development of equity, the rules versus standards debate, law and economics, risk management, optimal penalty theory and even a bit of tax policy.

Keywords: Federal Income Tax, Corporations, Tax Fraud, Equity, Unclean Hands, Equitable Estoppel, Tax Refund , Earnings Inflation, Refund Claim, Refund Suit, Quasi-Estoppel, Tax Penalties, Fraud Penalties, Corporate Fraud, WorldCom, Qwest, Equitable Defenses, Equitable Remedies

JEL Classifications: K20, K34, K42, G38, H2

Accepted Paper Series