Coltec Industries, Inc. v. United States, No. 01-072T (Ct. Fed. Cl. 10/29/04):
In A Matter of Interpretation: Federal Courts and the Law (1997), Justice Scalia presents a compelling argument that the courts must interpret statutes as Congress wrote them, rather than what they “ought to mean.” . . .
The public must be able to rely on clear and understandable rules established by Congress to ascertain their federal tax obligations. If federal tax laws are applied in an unpredictable and arbitrary manner, albeit by federal judges for the “right” reasons in the “right case,” public confidence in the Code and tax enforcement system surely will be further eroded. See John F. Coverdale, Text As Limit: A Plea For A Decent Respect For The Tax Code, 71 Tul. L. Rev. 1501, 1507 (1997) (“A decision rule that prohibits courts from adopting antitextual interpretations reflects the proper role of the legislature and the courts under our democratic constitutional system, it respects the distinctive characteristics of the Code, and it promotes the values of certainty and predictability that are very important when dealing with tax statutes.”). Moreover, as a legal scholar cited by the Government, observed:
The economic substance test is dizzyingly complex. . . . This complexity arises from a number of interrelated factors. First, the test is best seen as a technique of statutory interpretation, which poses open-ended and unanswerable questions. Second, the test must be applied to a near-infinite variety of economic activities and transactions. Third, the present treatment of capital is inconsistent and to some extent incoherent. Taxpayers can exploit this incoherence by structuring transactions that produce tax benefits out of thin air. And conflicting rules make it difficult, sometimes, to determine the “correct” treatment of a particular transaction. Finally, only a few cases have been decided under the economic substance test, leaving open multiple interpretations of the doctrine.
Joseph Bankman, The Economic Substance Doctrine, 74 S. Cal. L. Rev. 5, 29 (2000-01); see Gov’t Post-Trial Memorandum at 38, 40 (citing Bankman). This candid assessment of the deficiencies of “economic substance” doctrine certainly does not suggest a compelling case for the court to jump into to “fill in some of the lacunae and resolve some of the [doctrine’s] ambiguities.” Bankman, 74 S. Cal. L. Rev. at 29. Instead, as Professor Bankman advises, “Congress may have no choice but to engage in substantive law reform. Some shelter activity will take place under even the most utopian tax structure. However, the current tax treatment of capital needlessly multiplies shelter opportunities and provides a fertile breeding ground for shelter development.” Id. at 29-30. The court agrees.
After Professor Bankman’s article was published, Congress debated several proposals to codify the “economic substance” doctrine and declined to do so. See, e.g., CARE Act. S. 476, 108th Cong. section 701 (2003); Jobs and Growth Tax Relief Reconciliation Act, S. 1054, 108th Cong. section 301 (2003); Abusive Tax Shelter Shut Down and Taxpayer Accountability Act, H.R. 1555, 108th Cong. section 101 (2003). In fact, a few days ago Congress passed a major federal tax bill, but again declined to codify the “economic substance doctrine.” See American Jobs Creation Act of 200.4, H.R. 4520, 108th Cong. (2004).
Under our time-tested system of separation of powers, it is Congress, not the court, that should determine how the federal tax laws should be used to promote economic welfare. See, e.g., Gitlitz v. Commissioner, 531 U.S. 206, 220 (2000) (“Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address . . . policy concern[s].”); United States v. Byrum, 408 U.S. 125, 135 (1972) (“When a principle of taxation requires reexamination, Congress is better equipped than a court to define precisely the type of conduct which results in tax consequences. When courts readily undertake such tasks, taxpayers may not rely with assurance on what appear to be established rules[.]”); see also American Trucking Ass’ns v. Smith, 496 U.S. 167, 201 (1989) (Scalia, J., concurring) (reminding the judiciary that their role “is to say what the law is, no to prescribe what it shall be.”). Accordingly, the court has determined that where a taxpayer has satisfied all statutory requirements established by Congress, as Coltec did in this case, the use of the economic substance” doctrine to trump “mere compliance with the Code” would violate the separation of powers.
