Joshua D. Blank (UC Irvine) & Ari Glogower (Northwestern), Rethinking Taxpayer Purpose, 53 J. Legis. (forthcoming 2027):

Throughout the U.S. tax law, statutes and regulations feature rules that look to a taxpayer’s purpose—their subjective intent—at the time they undertook transactions or activities. For example, to avoid the “economic substance” anti-abuse rule, taxpayers must show they had a substantial non-tax purpose for a transaction. Similarly, corporations may be subject to additional tax unless they have a business purpose for retaining corporate earnings. Purpose requirements are cases of classification rules in the tax law, which define when a taxpayer will be subject to better or worse tax treatment. The underlying problem with these requirements, however, is they often do not require a taxpayer to change their economic behavior. 

This Article examines the problems with purpose requirements in the tax law and how high-end individual and business taxpayers can often manufacture intent to access more favorable tax treatment. Through several examples, we show how the weaknesses of purpose-based statutes are exacerbated by wealth and income. While tax law scholars and practitioners have emphasized that rules that rely on taxpayer purpose may fail to prevent abusive tax planning, they have not focused on how purpose requirements interact with taxpayers’ means, or economic resources. Many purpose-based standards are necessarily assessed ex ante, at the time of the transaction resulting in the claimed tax benefits, without any subsequent analysis of whether the taxpayer followed through with their intended plans. In other cases, wealthy taxpayers can simply recharacterize their subjective motivations to gain favorable tax treatment.

After highlighting the problems with purpose requirements and their distributional impacts, the Article explores potential reforms. We offer a framework for distinguishing between appropriate uses of purpose-based standards, and inappropriate applications that enable tax avoidance. In some cases, policymakers should eliminate purpose requirements entirely; in others, they should strengthen them by incorporating objective lookbacks of taxpayers’ subsequent behavior; and in others, they should reinforce purpose requirements by eliminating harmful exceptions.