Tax shelters and the Code: navigating between text and intent

Virginia Tax Review, Spring, 2007 by Steven A. Dean, Lawrence M. Solan

This is not to say that we endorse the textualist approach to statutory interpretation in tax cases. We do not. For one thing, as Professor Livingston has pointed out, committee reports are especially important in the enactment of tax legislation. (38) Most members of Congress could not possibly read and analyze the texts of the bills. Instead, they rely heavily on the descriptions of them by the relevant committees. For another, judicially-developed doctrines, such as economic substance (39) and business purpose, (40) may never have been developed at all if courts had not been willing to elevate substance over form. (41) These are important tools in enforcing the intended scope of the tax laws.

Significantly, the Service's strongest tool, deference to the Commissioner, will often not be available to the courts for reasons that Hickman describes. Under the Chevron doctrine, not yet in place when Correll was decided, courts are required to defer to the reasonable interpretation of the administrative agency to which the legislature has delegated the task of enforcement. (42) Both legislative silence and ambiguity may be remedied by administrative action that reasonably comes within statutory authority: "If the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute...." (43) What this means is that when the Service issues a regulation that is entitled to deference, courts will curtail inquiry into legislative intent as long as the Service's interpretation is a "permissible" construction of the Code. In an earlier article, Hickman argues that any equivocation about the applicability of this doctrine to taxation should be resolved in favor of deference. (44) Of course, tax planners can stay ahead of the curve by creating transactions about which regulations have not been issued. The Chevron doctrine, however, surely adds to the government's arsenal.

The problem, Hickman points out, is that deference is most obviously justified when the agency acts through its rulemaking authority, using notice and comment procedures; (45) but the Service most often does not use notice and comment rulemaking. Official Service guidance often comes in the form of either a Notice or a Revenue Ruling. A Notice might offer a preview of forthcoming regulations intended to address an issue (46) or simply announce that certain transactions will be subject to close scrutiny. (47) Revenue Rulings frequently provide the Service's formal view of a given transaction structure. (48) While there is some debate about the type of administrative action to which courts should defer, it would be difficult to justify deference to the Commissioner's position when that position is articulated for the first time in the context of litigation over a tax shelter on which the government had taken no position before its consummation. Thus, the Chevron doctrine is not likely to lead to the effective regulation of tax shelters other than to outlaw shelters prospectively after a number of taxpayers have profited handsomely. At that point, it remains up to the tax attorneys to find new devices for their clients that will work for a short period of time.