Wednesday, June 01, 2005

Tax shelters

According to the May 30 Tax Notes Magazine, Eric Solomon, the acting Treasury Deputy Assistant Secretary for Tax Policy, suggests that Congress, with respect to anti-tax shelter legislation, "take a moment, take a breath, and take a look at what has happened, what is going on, and what the effect is of the legislation and the enforcement initiatives." In other words, no more legislating in the area, please, for now.
Solomon, a truly public-spirited public servant (under both Clinton and Bush, no less) whom I greatly admire, has a point. Congress has a way, when an issue is on the public agenda, of passing a flurry of responses without much overall deliberation or coordination.
The one disagreement I have with Solomon on this concerns the idea of putting the economic substance/business purpose requirement for tax shelters in the Internal Revenue Code, rather than having it just be case law. This is a problematic issue, and both the Treasury and tax practitioners have tended to oppose doing this. One reason I think it is nonetheless a good idea is that several court decisions recently have suggested a lack of understanding or acceptance of the requirement, and indeed I am told that a couple of recent decisions have cited Congress's non-enactment of the statutory rule as indicating that they shouldn't rely on it. (This is bad statutory interpretation, by the way, since non-enactment both need not indicate dislike of the requirement and is not a legislative act.)
Note, moreover, that Justice Scalia's increasingly influential "textual" and anti-purposive approach to statutory interpretation suggests that the Supreme Court might throw out the economic substance line of cases at some point if there is no hook in the Internal Revenue Code indicating that Congress wants it to stay.

26 comments:

Anonymous said...

Regarding economic substance codification: Do you favor a statutory definition of tax shelter, where cases on the bad side of the line are taxed and perhaps penalized? Or do you favor something more general, like a statement in the code that Knetsch, Gregory, etc. are still good law? If the first, then how do you see the definition being formulated? Are you concerned with over-inclusiveness? Note that both approaches would solve the problem of lack of acceptance, but only the first would solve the lack of understanding. I am skeptical of congress’s ability to improve understanding here, which as I understand it is the source of much of the skepticism of ES codification proposals inside and outside of government. If you take a look at the statutory proposals that have been floated, I think it’s pretty clear that the concern is valid. That is, unless over-inclusiveness doesn’t bother you.

Daniel Shaviro said...

I would just tend to say, in the conjunctive test that some circuits have used, that you need business purpose and economic substance, with maybe something in the legislative history about reasonable reading of intent. So more the general.
And the idea is really more to confirm & preserve the legal status quo than to go beyond it, although specific black letter rules in various areas are fine.

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