Quantitative Prediction Model of Tax Law's Substantial Authority

49 Pages Posted: 22 Jan 2018 Last revised: 24 Jun 2018

Date Written: January 19, 2018

Abstract

Our earlier Article, Boundaries of the Prediction Model in Tax Law’s Substantial Authority, analyzed the substantial-authority standard, identified factors that taxpayers and their advisors can consider in determining whether substantial authority supports a reporting position, distinguished substantial-authority predictions from other types of predictions, and considered how substantial authority affects advisors’ ethical responsibilities. In short, that Article presented a qualitative analysis of substantial authority. This Article presents a quantitative model of tax law’s substantial authority that introduces the concepts of horizontal substantiality and vertical substantiality. The prediction model places substantial authority and the other reporting standards on a zero-to-one horizontal scale that depicts the likelihood that a position will be upheld. Support for a reporting position satisfies horizontal substantiality if it provides the reporting position the required threshold likelihood of being upheld, which is generally thought to be around 40%. Vertical substantiality, derives from substantial authority’s weight-of-authority method, i.e., the weight of positive authority in relation to contrary authority. The Article shows how to determine a value for vertical substantiality and convert it to a value on the horizontal scale and apply the well-reasoned method to determine whether substantial authority supports a reporting position. The Article presents the substantial-authority prediction model in a simple formula: H=VV 1 R. The Article then illustrates how taxpayers might consider applying the prediction model. That exercise reveals some of the model’s shortcomings, which provide opportunities for additional work in this area, but, more importantly, demonstrates how the model clarifies the concept of substantial authority and some of its various components.

Keywords: Substantial authority, substantial understatement penalty, tax compliance, risk of audit, audit risk, likelihood of matter being raised on audit, vertical substantiality, horizontal substantiality

Suggested Citation

Borden, Bradley T. and Lee, Sang, Quantitative Prediction Model of Tax Law's Substantial Authority (January 19, 2018). Tax Law, 2018 Forthcoming; Brooklyn Law School, Legal Studies Paper No. 547. Available at SSRN: https://ssrn.com/abstract=3105502

Bradley T. Borden (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States

HOME PAGE: http://www.brooklaw.edu

Sang Lee

Ernst & Young LLP ( email )

5 Times Square
New York, NY 10036
United States

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