Monday, September 13, 2004

Noël Cunningham (NYU) & James Repetti (BC) have published Textualism and Tax Shelters in the Virginia Tax Review. Here is part of the abstract:

A substantial debate about the approaches employed by courts to interpret statutes and regulations has developed during the last decade. Some have argued that the search for a statute’s meaning and purpose should focus on the text, itself, and should not include consulting legislative history. In contrast, others have argued that it is difficult to determine the meaning of a statute without consulting legislative history to determine the legislature’s purpose for the statute.

The debate about the appropriate method for interpreting statutes underlies a crisis in the administration of tax law. The recent proliferation of tax shelters has at least in part been facilitated by the ascendancy of textualism….

Although the majority of courts have not adopted textualism, the legal community’s acceptance of textualism as a plausible method of interpretation has dramatically affected the practice of tax law….

Tax shelter promoters have exploited the move towards textualism by designing transactions that comply with the letter of the law, but that generate results clearly never contemplated by Congress or the Treasury….

The anti-abuse regulations caused an unprecedented furor within the tax bar. They have been severely criticized by academics and practitioners alike on a variety of bases, the most damning of which is that Treasury lacked the authority to promulgate the rules and that therefore they are not valid. Indeed, it is fair to say that there is a general consensus that the partnership anti-abuse regulations are an extreme example of administrative overreaching.

We disagree. Although we do not endorse all the policy choices in the anti-abuse regulations, we believe that they are not only valid, but suggest a way in which transactions that are the product of reverse engineering can and should be attacked, both within and without Subchapter K….

In addition to being valid, we also believe that, as a general proposition, it is sound tax policy to use broad standards to administer the tax law. Historically this had been accomplished by the courts through the use of these judicial doctrines. Although the ascendancy of textualism cast doubt on the continuing viability of the doctrines, Treasury eliminated that doubt by promulgating these regulations (if valid), and requiring lawyers and courts to consider the intent of subchapter K. This approach allows the IRS to use broad standards to administer the tax law in place of a collection of narrow rules that must be constantly changed in a hopeless attempt to keep pace with the latest tax gimmick. To assure proper consideration of these doctrines by tax advisors, we recommend that the IRS amend its standards for practice to require advisors opining on the validity of tax shelters to apply the doctrines to the specific facts of the tax shelter in their opinion letter.