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Monday, June 11, 2007

Tax, Rulemaking, and the Rule of Law

I spent part of my weekend with a group of junior tax scholars.  Two separate topics of discussion together raised an interesting rule of law question that I have been pondering ever since.

The first topic concerned a particular transaction structure that seems to “work” but is not what Congress intended to facilitate when it enacted the relevant statutory provision.  To be a little more precise without going too deeply into tax-speak, Congress created a “loophole” in the tax code that enables taxpayer group A to avoid the corporate income tax.  A member of taxpayer group B has found a way to utilize the same provision to accomplish the same goal.  Unlike most tax shelter activity, this is a real deal, not just a sham transaction ginned up to create phony paper losses.  But Congress clearly was not thinking of taxpayer group B when it enacted the provision in question.  Also, taxpayer group B represents a lot more tax dollars than taxpayer group A.  So Congress will not be pleased that members of taxpayer group B can fit into the loophole and may be moved to change the law.  The interesting aspect of the debate to me was over the following question: If you think that the corporate income tax represents bad policy and that Congress should repeal it, then should you care that this transaction structure and others like it enable significant numbers of corporate taxpayers to substantially reduce their corporate income taxes?

The second topic relates to my own work.  (Shameless self-promotion time.)  I recently wrote an article documenting a study of three years worth of Treasury Department tax regulations in which I concluded that 40% of the regulations studied were susceptible to legal challenge because Treasury failed to adhere to Administrative Procedure Act rulemaking requirements in promulgating them.  Treasury does not necessarily believe that its behavior is inconsistent with the APA, mind you.  But the article documents at length why Treasury’s compliance claims are weak and out of sync with modern administrative law jurisprudence.  Here, the point was raised that maybe the APA rulemaking requirements do not work very well in the tax area.  But if they’re not, should the solution should be for Treasury, the IRS, and/or the tax bar to convince Congress to modify or repeal the APA requirements, rather than turning a blind eye to Treasury’s . . . imprecision?

Does it make a difference that it is a government agency (trying to do good for society) arguably stretching the law rather than a corporate taxpayer (trying to make a profit for itself and its owners)?  Which is worse?  Should the government be held to a higher standard because it's the government or a lower standard because we at least like to think that the government is working for the good of all?

Posted by Kristin Hickman on June 11, 2007 at 01:09 PM in Corporate | Permalink

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