Tax shelters and the Code: navigating between text and intent

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

Thus, the basic rule of statutory interpretation is enforcing the intention of the legislature, and lenity comes into play only when a statute overthrows what were then seen as natural rights or fundamental principles.

Second, many statutes have both criminal and civil remedies. Among them are the antitrust laws, securities laws, the Copyright Act, and various environmental laws. (58) Only rarely does the Supreme Court use lenity as the basis of a decision in a civil case, however. Much of the time, especially when there is both an administrative agency empowered to engage in civil enforcement and a Department of Justice bureau to which criminal cases are referred, enforcement actually becomes more aggressive over time. For example in United States v. O'Hagan, (59) the Court interpreted the securities laws broadly in a criminal case despite the fact that the issue had been unsettled in both civil and criminal contexts. It does not appear that the application of lenity in civil cases is becoming the norm.

Third, as Hickman notes, tax fraud has a strong mens rea element. In Cheek v. United States, (60) the Supreme Court held that criminal liability for violating the Code requires proof that the taxpayer knew the law and thwarted it. This reduces the pressure on courts to apply lenity across the board. There is no serious likelihood that a broad interpretation of the Code in a civil case will lead to ever-increasing criminal liability, because only those who know their obligations can be successfully prosecuted. We see no evidence that the Court will revoke the Cheek doctrine.

The absence of a mechanical rule of lenity in tax shelter cases does not mean, however, that the government will have an easy time of it. Tax law has its own rule akin to the rule of lenity: "Setting the tone for our statutory analysis is the principle that statutes imposing a tax are construed liberally in favor of the taxpayer." (61) Courts are notoriously inconsistent in applying this doctrine, just as they are inconsistent in applying the rule of lenity. (62) One problem that arises is the determination of when in the interpretive process the principle applies. Should courts resort to favoring the taxpayer relatively early in the process, it will be harder for the government to prevail. If, in contrast, courts do not apply this principle unless they have determined that the statute is ambiguous and fail to glean legislative intent from other inquiry, then the rule will be applied less frequently. Typically, the rule is applied--if at all--in this narrower set of circumstances.

For example, section 4471 of the Code imposes a $3.00 tax per cruise ship passenger, imposed "either at the time of first embarkation or disembarkation in the United States." (63) The question in Royal Caribbean Cruises, Ltd. v. United States, (64) was whether the tax applies when the ship begins and ends its voyage outside of the United States, but makes stops in United States ports as part of the voyage. After looking at various regulations, instances of trade usage, and a few dictionaries, the court found that the terms "embarkation" and disembarkation" are ambiguous. The terms could mean the beginning and end of a voyage, or getting on and off the ship at any time. Consequently, with no strong evidence to resolve the ambiguity, the court gave the taxpayer the benefit of the doubt.