February 19, 2013
Zelenak: Custom and the Rule of Law in the Administration of the Income Tax
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.
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Aren't these deviations merely analogous to prosecutorial discretion? Does prosecutorial discretion threaten the rule of law?
Posted by: Prof Mad | Feb 19, 2013 10:25:33 PM
I have always found this an interesting topic. What is actually happening here is that the tax administrator is not enforcing the law as written by the legislature. In the abstract, one would think this would be a matter of great concern, since (in the case of the IRS and most states) an unelected bureaucracy is unilaterally modifying the statutory law. We generally overlook this kind of administrative discretion, however, because it "benefits" taxpayers. But does it? In the zero-sum world of public revenue, when revenue is not assessed and collected from the intended sources, that revenue must be assessed and collected in greater amounts from other taxpayers, revenue must be obtained through borrowing, or spending must be modified. In other words, the bureaucracy shifts revenue assessment and collection from the legislature's intended sources to sources indirectly selected by the revenue administrator. This would seem to be particularly pernicious when the revenue administrator is not elected by the people.
Posted by: Publius Novus | Feb 21, 2013 10:11:43 AM
The cases cited in the paper seemed to be ones in which the law could not be cost-effectively enforced. In other words, the system is capable of dealing semi-intelligently with stupid laws. That's a benefit to all of us.
Posted by: AMTbuff | Feb 22, 2013 1:33:21 PM