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Thursday, August 07, 2008

On Subjectivity, Tax, and other Icky Things

This post started as a comment on Sarah Lawsky's post over at Concurring Opinions, but then it got too long, so now it's here.  A brief recap: Sarah thinks it's interesting that no one really likes oatmeal raisin cookies.  Also, she's written a cool paper about what it means when tax lawyers make statements of probability, such as the statement they must make (under IRS regs.) when providing tax advice that it is, say, more probable than not that a transaction will get favorable tax treatment.   Ok, here's what my comment said:

Hi, Sarah.  First of all, no one loves oatmeal raisin cookies because raisins look like bugs.  Ew. 

I've been thinking about your paper for a while, which for me is the sign of a really outstanding piece of writing.  I'm now fairly (say, 80%...) convinced that you're right in your claim that predicting tax outcomes involves uncertainty, not risk.  (And I went back and re-read Luce and Raifa, just to be sure.)  And your prescriptions based on that seem pretty reasonable.

What I'm wondering now is if the whole project of tying ethical or penalty-free lawyering to statements of probability is misguided.  And this could apply equally to tax penalties or Rule 11 more generally. 

The probability approach suggests that nose-counting can be a sufficient way to meet a standard based on likelihood of success (like the accuracy-related penalties or Rule 11).  That is, a proper method for a tax lawyer to go about her job could be to do a decisional study of every federal appeals judge, then calculate the odds of drawing an appellate panel with a particular group of judges, and so on.  If there are judges with truly outrageous views, and there is a non-trivial chance of drawing a voting majority of them on one's case, then no Rule 11.   

But what if society, or the lawyer herself, recognizes that the position with a non-trivial chance of winning is actually outrageously wrong and unreasonable?  Maybe the outlier judges are all 115 years old, and the equivalent of the mortifying old uncle of the federal bench. 

I think what rules like the accuracy-related penalties and Rule 11 are asking of lawyers is good-faith engagement in contemporarily-accepted, objective, legal analysis.  That is, it asks them to determine not is, but ought.  There's a strong analogy here to Mike Dorf's early work on injunctions and the "probability of success" standard -- probably worth a read.   

Anyway, my view is that the IRS's choice to describe the obligations of lawyers practicing before it in terms of probability is unfortunate and reductive, because it leads to the sort of pure positivism that I mention, and the theoretical black holes that you describe so well.  For instance, one step in that direction, as  I've mentioned, is to chuck the probabilistic regime altogether, and replace it with a standard that prohibits all tax-motivated planning not expressly authorized by Congress.      

Posted by BDG on August 7, 2008 at 09:26 AM in Legal Theory | Permalink


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I don't know anything about the substance, and my post probably should be over at C.O., but dang it, I just have to say: I love oatmeal-raisin cookies. I hope to be standing near an assortment of cookies next to Sarah and BDG some day.

Posted by: Joseph Slater | Aug 8, 2008 10:01:38 AM

Hey Brian--thanks for your comments. I don't think "nose-counting" would work, actually. That sounds like a frequentist approach (how many of the balls in the pot are red?). How we are to know what each judge would do if faced with this particular transaction in the future? And while the rules might be trying to ask for "good-faith engagement in contemporarily-accepted, objective, legal analysis," they're doing a crummy job of it; the law, as reflected both in the Code and the regulations, is (perhaps unfortunately) that a tax position is correct if and only if the taxpayer would ultimately prevail if the tax position were challenged by the IRS. E.g., IRC 6664(d)(3)(A)(ii); Treas. Reg. 1.6662-4(g)(4)(i).

I agree with your concern about the probabilistic scheme in general, though. In particular, there are some administrative and practical problems with using a probability standard, and I think these issues are strong arguments (though perhaps not conclusive) against fault-based penalties, at least when it comes to basing fault on estimations of probability. Kyle Logue has a great discussion of some of them in Optimal Tax Compliance and Penalties When the Law Is Uncertain, 27 Va. Tax Rev. 241 (2007).

Posted by: Sarah Lawsky | Aug 7, 2008 4:47:47 PM

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