Wednesday, March 21, 2012
Many people—perhaps most—want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and off-shore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third-parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud.”
In this Article, we focus on the government challenges to corporate financial plans—often labeled corporate shams—in an effort to understand how and why courts draw the line between legal and fraudulent behavior. Quite a few scholars and commentators have investigated this question and nearly all agree: judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a large dataset—the first of its kind—and uncover important and heretofore unobserved trends. Indeed, courts have not produced a confusing morass of outcomes as some have argued, but have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. After discussing our empirical results, we show how they can be exploited by both government and corporate attorneys and explore how they bolster many of normative views set forth by the scholarly and policymaking communities.