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The Problem of Tax Law Uncertainty and the Role of Tax Insurance

Kyle D. Logue

University of Michigan Law School

Virginia Tax Review, Vol. 25, No. 2, Fall 2005

In the broadest sense this is an article about legal or regulatory uncertainty and the role that private and public insurance can play in managing it. More narrowly, the article is about tax law enforcement and the familiar if ill-defined distinctions between tax evasion, tax avoidance, and abusive tax avoidance. Most specifically, the article is about a new type of tax risk insurance policy, sometimes called tax indemnity insurance (or transactional tax risk insurance) that provides coverage against the risk that the IRS will disallow a taxpayer-insured's tax treatment of a particular transaction. The question is whether this type of insurance coverage increases incentives for illegitimate tax avoidance or, alternatively, provides needed certainty to taxpayers, certainty that the IRS is not able or willing to provide. Should tax insurance be banned? Encouraged? Ignored? To what extent should the government, instead of commercial insurance companies, provide such legal-uncertainty insurance directly either by increasing the use of private rulings or by selling the equivalent of tax indemnity insurance policies? On the question of commercially provided tax indemnity insurance, the article concludes that the appropriate regulatory response is probably (a) to allow the policies to be purchased (and perhaps in some situations to subsidize their purchase) but (b) to compel taxpayers who purchase such policies to disclose this fact to the IRS. Such a response allows the use of tax risk insurance as a supplement to private letter rulings while at the same time minimizing the possibility that the insurance will be sold to cover pure detection risk.

Number of Pages in PDF File: 90

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Date posted: August 16, 2005  

Suggested Citation

Logue, Kyle D., The Problem of Tax Law Uncertainty and the Role of Tax Insurance. Virginia Tax Review, Vol. 25, No. 2, Fall 2005. Available at SSRN: https://ssrn.com/abstract=780345

Contact Information

Kyle D. Logue (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)
HOME PAGE: http://kylelogue.net

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