Using Machine Learning to Evaluate the Existence of a Trade or Business: Olsen

Tax Notes Federal, February 28, 2022, p. 1231

10 Pages Posted: 6 Apr 2022

See all articles by Benjamin Alarie

Benjamin Alarie

University of Toronto - Faculty of Law; Vector Institute for Artificial Intelligence

Christopher Yan

Blue J Legal

Date Written: March 15, 2022

Abstract

The need to determine whether a taxpayer is engaged in a “trade or business” arises frequently. Although the term “trade or business” is used throughout the IRC and the associated regulations in the Code of Federal Regulations, it is not defined explicitly. In some ways this is surprising. Crucially, establishing that there is a trade or business affects whether a taxpayer can deduct business expenses. Moreover, the phrase “trade or business” is relied on for many other taxpayer rights and obligations. Erring about whether a taxpayer is carrying on a trade or business can have wide-ranging financial consequences for deductions, credits, exemptions, disqualifications, and penalties, among other things.

Here we examine how machine learning can be used to assess the strength of the taxpayer’s position in the appeal of the Tax Court’s decision in Olsen. Based on the facts accepted by the Tax Court and the arguments advanced in the appellant’s opening brief, Blue J’s algorithm predicts with greater than 95 percent confidence that the Tenth Circuit will find that the taxpayers were not engaged in a trade or business. We appreciate that a predictive analysis with that high a degree of confidence is unusual for a matter on appeal; we therefore also examine why this may be the case.

Keywords: machine-learning, AI, tax, trade or business

JEL Classification: J00, H2, H00

Suggested Citation

Alarie, Benjamin and Yan, Christopher, Using Machine Learning to Evaluate the Existence of a Trade or Business: Olsen (March 15, 2022). Tax Notes Federal, February 28, 2022, p. 1231, Available at SSRN: https://ssrn.com/abstract=4058646

Benjamin Alarie (Contact Author)

University of Toronto - Faculty of Law ( email )

Jackman Law Building
78 Queen's Park
Toronto, Ontario M5S 2C5
Canada
416-946-8205 (Phone)
416-978-7899 (Fax)

HOME PAGE: http://www.benjaminalarie.com

Vector Institute for Artificial Intelligence ( email )

Christopher Yan

Blue J Legal ( email )

325 FRONT ST W
TORONTO, ON M8Z2C3
Canada

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