Of Lenity, Chevron, and Kpmg

Abstract

Tax shelters generally are designed to take advantage of statutory ambiguity in the tax code. In the civil context, depending upon the format of the IRS's interpretation, a finding of ambiguity typically means that the reviewing court should apply one or another doctrine of judicial deference in evaluating the government's interpretation: either the strong, mandatory Chevron deference, the slightly less deferential Skidmore deference standard, or perhaps the tax-specific National Muffler deference. Whichever of these review standards applies, the government has a distinct advantage over the taxpayer in persuading the court to adopt the government's interpretation of the Code. Consequently the judicial deference doctrines are useful in the IRS's effort to maintain the integrity of the tax laws.

In criminal cases, however, the rule of lenity applies to resolve disputes over interpreting ambiguous statutes. This canon of construction requires courts reviewing ambiguous statutes in the context of criminal cases to construe those statutes in the defendant's favor. The Supreme Court has applied the rule of lenity to resolve not only criminal cases but also civil cases where the statute in question could be used as a basis for criminal prosecution. Several scholars have observed that doctrines of judicial deference and the rule of lenity are fundamentally in tension. Although the Supreme Court has not ruled conclusively on the issue, the Court's opinions suggest that the rule of lenity may well trump deference principles in civil cases involving regulatory statutes, like the Internal Revenue Code, that provide for both criminal and civil enforcement mechanisms. This essay explores whether the government is undermining its own civil efforts to protect the integrity of the Code by pursuing tax lawyers and accountants criminally for planning and promoting tax shelters and, thus, opening the door for courts to apply the more taxpayer-friendly rule of lenity instead of the pro-government deference doctrines to resolve even civil tax disputes.

Keywords: Lenity, Chevron, Skidmore, tax shelters, KPMG, National Muffler

JEL Classification: K14, K19, K2, K20, K39, K3, K30, K34, K40, K42