Nancy Staudt (USC) presents Corporate Tax Abuse in Court (with Joshua Blank (NYU)) at Loyola-L.A. today as part of its Tax Policy Colloquium Series:
Corporate tax advisors often wish to minimize a corporation’s tax liability without creating the risk that a court will reject the claimed tax treatment as “abusive.” However, courts’ decisions in this area are notoriously difficult to predict. While scholars and practitioners have devoted countless pages to debate over how judges should decide controversies involving corporate tax abuse, this Article is the first to conduct a large-N quantitative study of court decisions in an effort to identify the factors that influence how courts actually decide corporate tax abuse cases.
Our study reviews over 360 U.S. Supreme Court cases involving federal corporate tax issues decided between 1909 and 2011, roughly 140 of which involved allegations of corporate tax abuse. Our principal findings are surprising and counter to the conventional wisdom that judges do not follow predictable patterns when deciding corporate tax abuse cases. We find that the probability of government success increases when the initial controversy arises from the IRS’s denial of the corporation’s refund claim, when the government is the petitioning party and when federal spending on national defense escalates. The probability of government success decreases when the transaction at issue involves a third party and multiple transaction steps—unless alleged simultaneously in the briefs filed in Court, a strategy that increases the government’s chances of winning. Perhaps most surprising, notwithstanding the nearly obsessive attention paid to the business purpose doctrine by practitioners and scholars, the government’s assertion that the transaction at issue lacked a non-tax business purpose has either no statistically significant effect or a negative effect on the outcome of these cases.
Our study raises several important questions, both empirical and normative. These include whether tax lawyers could exploit the findings of this study when planning transactions and litigation, whether the business purpose for a corporation’s transaction should affect the tax treatment of that transaction, and whether the findings of this study are generalizable to the corporate tax abuse decisions in lower federal courts.
Michael Desmond (Bingham McCutcheon, Los Angeles; former Tax Legislative Counsel, Office of Tax Policy, U.S. Treasury Department) is the commenter.
