Thursday, September 5, 2013
(DePaul), Safe Harbors in Tax Law:
Safe harbors pervade tax law. This Article begins to fashion an account of why they exist by discussing the functional purposes that safe harbors might serve. Studying the reasons for adopting safe harbors has important practical implications. For instance, analyzing the functions of safe harbors can shed light on the use of other rule-standard hybrids such as rebuttable or irrebuttable presumptions. In addition, this Article provides direction to lawmakers considering the enactment or redesign of a particular safe harbor.
A safe harbor is a provision assuring certain taxpayers that they will receive favorable tax treatment when they comply with the safe harbor’s generally clear requirements. Thus, a safe harbor has rule-like qualities. At the same time, a safe harbor does not necessarily deprive taxpayers of favorable treatment merely because they fail to comply. An underlying standard will determine the treatment of such taxpayers. Thus, a safe harbor has standard-like qualities. Given its rule-like and standard-like features, a safe harbor is a rule-standard hybrid. Thus, in order to analyze the functional purposes served by safe harbors, this Article compares and contrasts safe harbors with standards and rules. First, this Article discusses whether tax law should contain safe harbors as opposed to standards. Briefly, the answer to this first question is that safe harbors provide additional certainty so tax law should contain safe harbors to the extent that certainty is desirable. Next, this Article discusses whether safe harbors have any advantages over rules and suggests three potential advantages. First, safe harbors may be fairer than rules because they are less arbitrary. Second, safe harbors are more forgiving than rules, less likely than rules to trap unwary taxpayers, and, consequently, better suited than rules to serve the goal of fairness. Third, compared to rules or, for that matter, to standards, safe harbors may sometimes be less likely to distort taxpayers’ decision making. Thus, in some cases, a safe harbor, a hybrid of a rule and a standard, can possess the best characteristics of each.