Corporate Shams

New York University Law Review, Vol. 87, 2012

NYU Law and Economics Research Paper No. 12-09

USC Law and Economics Research Paper No. C12-8

USC Legal Studies Research Paper No. 12-12

73 Pages Posted: 5 Apr 2012 Last revised: 12 Nov 2013

See all articles by Joshua D. Blank

Joshua D. Blank

University of California, Irvine School of Law

Nancy C. Staudt

Washington University Law School

Date Written: March 23, 2012

Abstract

Many people — perhaps most — want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and offshore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud.”

In this Article, we focus on government challenges to corporate financial plans — often labeled “corporate shams” — in an effort to understand how and why courts draw the line between legal and fraudulent behavior. The scholars and commentators who have investigated this question nearly all agree: Judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a new, large dataset, and uncover important and heretofore unobserved trends. We find that courts have not produced a confusing morass of outcomes (as some have argued), but instead have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. We then show how both government and corporate attorneys can exploit our empirical results and explore how these results bolster many of the normative views set forth by the scholarly and policymaking communities.

Keywords: sham, corporate tax, corporate tax abuse, Supreme Court, judicial decision making, business purpose

JEL Classification: C12, H20, K00, H23, H24, H25, H26, H29, K34, K14

Suggested Citation

Blank, Joshua D. and Staudt, Nancy Christine, Corporate Shams (March 23, 2012). New York University Law Review, Vol. 87, 2012, NYU Law and Economics Research Paper No. 12-09, USC Law and Economics Research Paper No. C12-8, USC Legal Studies Research Paper No. 12-12, Available at SSRN: https://ssrn.com/abstract=2035057

Joshua D. Blank (Contact Author)

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

HOME PAGE: http://www.law.uci.edu/faculty/full-time/blank/

Nancy Christine Staudt

Washington University Law School ( email )

Campus Box 1120
St. Louis, MO 63130
United States

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