Tuesday, February 19, 2013
Lawrence Zelenak (Duke), Custom and the Rule of Law in the Administration of the Income Tax, 62 Duke L.J. 855 (2012):
From the early years of the federal income tax to the present, the IRS has engaged in what might be termed “customary deviations” from the dictates of the Internal Revenue Code, always in a taxpayer-favorable direction. A prominent current example is the IRS’s “don’t ask, don’t tell” policy with respect to employee-retained frequent flier miles; in a 2002 announcement (which, as of 2012, is still in force), the IRS indicated that such miles were technically within the scope of the statutory definition of gross income, but that the IRS had no intention of enforcing the law. This Essay describes and evaluates the phenomenon of administratively created customary deviations from the Code. After defining the concept of customary deviations and explaining why such deviations are sometimes attractive to tax administrators, the Essay offers a brief historical survey of customary deviations, paying particular attention to the pre-1984 treatment of a miscellany of fringe benefits of employment, and to a spate of recent announcements that the IRS would not enforce the Code’s anti-loss-trafficking rules in certain contexts. The Essay also explains how the development of customary deviations has depended on the absence of third-party standing in tax litigation, and how the lack of any judicial check on unauthorized giveaways by tax administrators threatens rule-of-law values. It concludes with a proposal for legislation aimed at retaining the practical advantages of customary deviations while assuaging rule-oflaw concerns.