Paul L. Caron

Tuesday, March 22, 2011

Prebble & Huang: The 'Tax Mulligan' Doctrine

John Prebble (Victoria University of Wellington, Faculty of Law) & Chye-Ching Huang (University of Auckland, Business School) have published The Fabricated Unwind Doctrine: The True Meaning of Penn v. Robertson, 7 Hastings Bus. L.J. 117 (2011). Here is part of the Introduction:

Also referred to as the “rescission doctrine,” a tax “do-over,” or a “tax mulligan,” the effect of the unwind doctrine is that if you change your mind about a transaction, you can avoid its income tax consequences by returning to the economic status quo ante, so long as you do so by the end of the tax year. ... Taxpayers routinely rely on the unwind doctrine found in Rev. Rul. 80-581 when they discover that their transactions have unwanted tax consequences. Nowadays, “unwinding” has become a “common if not ubiquitous feature of tax practice.” This article finds that the unwind doctrine has no firm basis in case law. Instead, the unwind doctrine is an IRS fabrication based on the IRS’ misinterpretation of the case Penn v. Robertson [115 F.2d 167 (4th Cir. 1940)].

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Thanks, Tax Guy.You may not have read part VI of our article <>, where we address the question of IRS challenges to taxpayers relying on IRS rulings. We cannot tell from your post whether rulings that are wrong in law stay on the books only because no one challenges them or because, in addition, you take the view that, by Treasury delegation, IRC§7805, empowers the IRS to make rulings that breach the Code, or rulings that breach the Code as interpreted by the courts.

We note that the power (indeed perhaps strictly speaking a duty) is in these terms: "… shall prescribe all needful rules and regulations for the enforcement of this title …" Part VI of the article discusses several cases that decide that the courts will not hold the Commissioner to a ruling that is clearly contrary to the Code

While interesting, your argument does not engage with the major theme of the article. That theme is that although Rev Rul 80-581 and its daughter private letter rulings purport to be correct interpretations of the law they are mistaken. What is your opinion on that question? For the avoidance of doubt, our article is not about IRS powers.

We of course agree with you that taxpayers who benefit from taxpayer friendly rulings do not challenge those rulings before the courts. We had not thought it necessary to make this point to people likely to read our article.

Posted by: John Prebble | Apr 6, 2011 4:54:57 PM

IRC sec. 7805 empowers the Secretary of the Treasury to create the necessary rules and regulations for enforcing the IRC. Some of this rule making authority has been delegated to the IRS.

Rev Rul 80-581 is not the only Rev Rul enacted by the IRS that "has no firm basis in case law." Rev Ruls do not need a firm basis in case law. When the IRS gives taxpayer friendly interpretations to statutes (or cases) that seem to go beyond, or even counter to, the statute (or cases) the Rev Ruls stay on the books because no one challenges them (i.e., no further case law develops).

If mulligans are "wrong" for policy reasons that is one thing, but case law does not enter into it when the IRS give taxpayers largesse.

Posted by: tax guy | Mar 23, 2011 6:55:43 AM