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Friday, June 22, 2007

Text and Intent in Tax Compliance

So two stories today remind me of a paradox in tax code interpretation that I hope to write about one of these days.

The first story is about the Blackstone IPO, which raised $4.13 billion dollars this morning.  I blogged last week about the interesting tax twist on this deal, which can be loosely summarized as Blackstone utilizing a loophole that follows the statute's text but not Congress's intent with that text. 

The second story involves the alternative minimum tax or AMT.  Even most non-tax people these days seem to be aware of the AMT -- the alternative, secondary tax calculation that originally was intended to ensure that a small number of very wealthy people who employed certain tax benefits to avoid liability under the regular income tax laws still pay some amount of income tax.  For several reasons, millions of taxpayers now find themselves within the scope of the AMT, and there have been innumerable op eds, articles, economic studies, and other commentaries published about the AMT problem.  Today's story involves a nurse from New York City who works two jobs plus nights, weekends, and overtime to earn $121,000 to support his elderly parents.  He owns his own home, gives a little to charity, but otherwise his return is pretty straight forward and run-of-the-mill.  We can argue over what qualifies as wealthy, but most people would not consider this guy in that class.  (At least, he's not the sort of millionaire with little or no tax liability the AMT was originally intended to capture.)  Nevertheless, he fell within the scope of the AMT.  While he conceded that the tax code's text subjected him to the AMT, he argued that he should not have to pay the AMT because Congress did not intend for the AMT to hit working class guys like him.  In an opinion that should surprise no one, the Tax Court held that the guy has to pay the AMT.

Many people argue that, in cases like the Blackstone IPO, congressional intent should trump statutory text in applying the tax laws.  But in the case of the nurse, the government's argument is that statutory text trumps congressional intent.  The most obvious way to reconcile these two positions is outcome-oriented revenue maximization rather than a more principled approach to statutory interpretation.  Of course the reality is more nuanced.  Nevertheless, I wonder whether even the apparent inconsistency is enough to undermine faith in the tax system generally.

Hat tip:  Conglomerate and TaxProf Blog

Posted by Kristin Hickman on June 22, 2007 at 01:26 PM | Permalink


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"clear purpose of the corporate tax"

Hmmm...one can easily say that the "purpose" of the corporate tax is to impose a high tax on anything that looks like a corporation. But one just as easily say that the "purpose" of 7704 is to exempt PTPs from that treatment. I don't think that resorts to "purposes" are helpful in this case. It seems pretty clear to me that Congress intends to exempt passive-type income in examining whether an entity qualifies for a PTP -- Congress said so right there in the statute, sec. 7704(d), and I don't see any reason to suggest that the legislature was lying to us.

Posted by: andy | Jun 23, 2007 2:03:35 PM

The difference is that whereas the Code never explicitly says the Blackstone deal is ok and Congress never anticipated the possibility of a Blackstone-like deal, Congress has known for years that the AMT would increasingly apply to upper-middle class taxpayers and has frequently amended the AMT in light of this fact. At this point, the original intent of the AMT is almost irrelevant, it has been reviewed by numerous Congresses and should be seen as just another part of the tax rate structure. In contrast, Blackstone is relying on creative use of multiple highly technical Code sections in order to avoid the clear purpose of the corporate tax.

Posted by: David Gamage | Jun 23, 2007 12:59:20 PM

"congressional intent should trump statutory text in applying the tax laws. "

Alternatively, we can conclude that Congress says what it means and that the statutory text reflects Congress's intent.

"The most obvious way to reconcile these two positions is outcome-oriented revenue maximization rather than a more principled approach to statutory interpretation. Of course the reality is more nuanced."

I'm not sure that it *is* more nuanced than that. Text trumps some pre-fabricated intent when it leads to revenue, and some hidden, unarticulated, unenacted "intent" trumps the text when that intent leads to revenue.

Alternatively, those who are administering the tax code just have no clue how to interpret statutes and think that whatever if the "best" interpretation prevails (what is "best," of course, lies in the eyes of the beholder).

Posted by: andy | Jun 22, 2007 4:09:43 PM

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