Tax shelters and the Code: navigating between text and intent

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

III. LENITY AS A PRINCIPLE IN THE INTERPRETATION OF THE TAX CODE

If the Commissioner is not able to regulate tax shelters out of existence, then the courts must get involved. Hickman's fear is that once they do, they will be tempted to construe the Code narrowly, in keeping with the principle of lenity. If this were to happen, the Commissioner would remain powerless to control the interpretation of the kinds of ambiguities and gaps that become the arbitrage of tax planners who create shelters. In fact, any ambiguity would be mechanically resolved in favor of the taxpayer, making it even more difficult to convince a court to disallow a tax shelter that the legislature would not have intended to permit.

Hickman's fear is not ill-founded. Although lenity is a doctrine traditionally reserved for the interpretation of criminal statutes, (49) the Supreme Court has on several occasions applied lenity in civil cases where the statute in question had both civil and criminal remedies. The notion is that the Court will insist on a single interpretation of the statute, and because there are possible criminal penalties, it is better to interpret the statute narrowly in both criminal and civil contexts. (50)

In one such instance, the statute in question was a tax law, which carried its own criminal consequences. The statute defined "firearm" as including short-barreled rifles, but not long-barreled rifles, (51) and imposed a tax on guns defined as "firearms" under the statute. In United States v. Thompson/Center Arms Co., (52) the Supreme Court decided that a kit that contained a pistol that could be converted to either a long- or short-barreled rifle did not come within the statute and thus was not subject to taxation. Although the case arose in a civil context, the Court noted that failure to register a firearm could be criminally prosecuted under the statute, and therefore felt it appropriate to use lenity to resolve the ambiguity in favor of the taxpayer. (53) Since then, the Court has occasionally applied the rule of lenity in civil cases, especially those involving statutes that have both civil and criminal remedies. (54)

We agree with Hickman that expanding the application of lenity to the Code more generally would be a bad result, but do not think it very likely for several reasons. First, notwithstanding these cases, since the early nineteenth century, lenity as a doctrine has been applied to criminal statutes, not to civil statutes. Chief Justice John Marshall articulated the principle of lenity in United States v. Fisher, (55) decided in 1805. Fisher involved the interpretation of a statute giving priority to the United States over other creditors. Marshall held, "where great inconvenience will result from a particular construction, that construction is to be avoided, unless the meaning of the legislature be plain; in which case it must be obeyed." (56) He later explained in the same decision that the domain of lenity is limited to the criminal context:

  Where rights are infringed, where fundamental principles are
  overthrown, where the general system of the laws is departed from, the
  legislative intention must be expressed with irresistible clearness to
  induce a court of justice to suppose a design to effect such objects.
  But where only a political regulation is made, which is inconvenient,
  if the intention of the legislature be expressed in terms which are
  sufficiently intelligible to leave no doubt in the mind when the words
  are taken in their ordinary sense, it would be going a great way to
  say that a constrained interpretation must be put upon them, to avoid
  an inconvenience which ought to have been contemplated in the
  legislature when the act was passed, and which, in their opinion, was
  probably overbalanced by the particular advantages it was calculated
  to produce. (57)