Interpretative Theory and Tax Shelter Regulation

47 Pages Posted: 11 Aug 2006

See all articles by Brian D. Galle

Brian D. Galle

Georgetown University Law Center


This Article responds to an important recent essay in the Columbia Law Review by Marvin Chirelstein and Larry Zelenak. Chirelstein and Zelenak propose a dramatic change in tactics in the way that the government attempts to combat tax shelters - that is, efforts by corporations and high-earning individuals to avoid tax by clever manipulations of the technical terms of the Tax Code. For the past seventy years or so, the IRS has responded to these manipulations by urging courts to read the tax statutes purposively, rather than literally, and thus to deny favorable tax treatment to business transactions entered into with no real business purpose or economic substance. However, as textualism has grown in influence, the IRS's purposivist entreaties have diminished in effectiveness. Chirelstein and Zelenak propose to respond to this problem by doing away with the notion of business purpose and economic substance and instead enacting a pair of bright-line rules that would make rather more difficult some of the most popular shelters. My claim in this Article is that the Chirelstein/Zelenak approach reaches a bit farther than it needs to, but that it contains some very important elements that are worth preserving. In particular, I argue that Chirelstein and Zelenak seem to assume that there is no principled argument we could present to textualist judges to convince them to analyze a transaction for economic substance. I respond by analyzing various strands of textualist theory to demonstrate that, in fact, Congress could likely resolve many textualist objections with a carefully crafted statute. However, I also respond to other commentators who have assumed that there are no constitutional limits on Congress's power to command textualists to apply economic substance analysis. That argument overlooks the constitutional roots of many textualist theories. I thus offer, I believe for the first time, an analysis of whether Congress can constitutionally displace certain textualist interpretative methods by statute. The Article then applies these insights to suggest a fairly radical re-shaping of the meaning of economic substance, although one that draws on earlier work by others. I argue that Congress ought to enact a statute that would prohibit favorable tax treatment of all tax-motivated transactions, except where, as Chirelstein and Zelenak suggest, expressly authorized by Congress or the IRS. This arrangement, I argue, would reduce waste not only in the private sector but also in government, forcing Congress to make plain when it has agreed to treat its lobbyists generously.

Keywords: tax shelters, codification, economic substance doctrine, textualism

Suggested Citation

Galle, Brian D., Interpretative Theory and Tax Shelter Regulation. Virginia Tax Review, Fall 2006, FSU College of Law, Public Law Research Paper No. 212, Available at SSRN:

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

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Washington, DC 20001
United States

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