Weekly SSRN Tax Article Review And Roundup: Layser Reviews Tahk's The Tax Separation Of Powers

This week, Michelle Layser (San Diego; Google Scholar) reviews Susannah Camic Tahk (Wisconsin), The Tax Separation of Powers.

The economic development tax incentives that I study rarely appear in Tax Court cases. Instead, they tend to be the subject of legislative activity. Congress amends laws like the low-income housing tax credit and new markets tax credit to adjust program size, extend deadlines, and tweak eligibility requirements. Legislators debate whether incentives like opportunity zones are helpful social and economic policy tools or wasteful giveaways. Every so often, a case will reference an economic development incentive, but it’s unusual. I had no idea that this was part of a larger trend. In a new article, Professor Susannah Camic Tahk argues that the Code sections the Tax Court reviews (the “judicial Code”) and those that receive attention from Congress (the “legislative Code”) have so little overlap that they constitute a substantive divide in the separation of powers. 

Outside of tax law, the concept of separation of powers typically refers to the functions performed by different branches of government, whereby Congress writes laws and courts interpret them. Tahk begins with the observation that this traditional view would “predict[] that the two branches take up different tasks with respect to the same law.” Then she demonstrates that, in the context of tax law, that prediction is wrong. Tahk collected and hand-coded 775 Tax Court opinions published between 2018 and 2020. The sample included “4,036 interpretations of 408 Code provisions.” She also analyzed all of tax provisions amended by Congress between 2015 and 2022. That sample “included 47 tax bills and 1,074 changes to 333 Code provisions.” Her initial research question was simple: does the Tax Court review the same tax provisions as Congress? The answer was clear: it does not.

Tahk writes: “The top five sections of the judicial Code and the legislative Code do not overlap. Neither do the top ten. The top twenty have one Code section in common.” In short, “[t]he Code provisions that most frequently occupy Tax Court and the ones that occupy Congress are relatively distinct from each other.” The Tax Court spends its time on sections that define income, business expenses, and charitable gifts; sections related to investment and business losses; and sections related to charitable organizations, self-employment taxes, personal deductions, and retirement savings. During the study period, “Congress never turned its attention to most of those judicial sections.” Instead, Congress spent its time on industry-specific benefits (like energy incentives or economic development incentives); anti-poverty tax benefits (like the EITC and CTC); sections related to natural or semi-natural disasters; and retirement savings. Meanwhile, “Tax Court rarely deals with any of these topics.”

After describing the empirical findings, the article turns to the question of why the judicial Code and legislative Code differ so significantly. Tahk offers several possible explanations. The first relates to textual differences across Tax Code sections. For example, “[m]aybe any section written as a standard just has to be part of the judicial Code.” Tahk notes that “[s]ome of the judicial Code sections are in fact standards,” such as the definition of income in IRC § 61, or the distinctions between IRC § 162 business expenses and nondeductible personal expenses. However, the rules/standards explanation is imperfect, as “[n]ot all judicial Code sections are standards, and not all standards are judicial.” Another textual explanation—that the judicial Code features laws written with particularly broad or vague language—also fails to explain the difference, as “[n]ot all judicial Code sections are written in sweeping and general terms.”

Tahk then considers whether different political economies may help explain the split. She notes that “[t]he judicial Code involve different players than the legislative Code, and those actors differ in their economic resources and political wherewithal.” Specifically, “the judicial Code largely takes up the issues of individual taxpayers and small businesses with limited political organization,” whereas “the legislative Code focuses narrowly on a particular industry, typically one with vast economic resources and significant political organization.” These differences suggest that “[w]hat becomes part of the legislative Code, as opposed to the judicial Code, depends in part on agenda control,” in which “Congress hears directly from interest groups, whereas Tax Court does not.”

Tahk’s account of tax separation of powers differs from the traditional understanding, in which “the separation of powers is about the separation of functions, not substantive topics.” Tahk’s research demonstrates that, “in the tax context, the branches do split along substantive lines.” The Article concludes with a discussion of the normative implications of this finding. To evaluate whether the tax separation of powers is consistent with theories about how a separation of powers should be structured, Tahk looks to formalist and functional theories, as well as standards “rooted in ideals of equality.” Applying these theories to the tax separation of powers, she concludes that there are “some normative concerns” under each theory, but “no across-the-board policy fix suggests itself.”

Tahk’s study yields fascinating insights into the ways that different branches of government engage with parts of the Tax Code. I was curious to know whether differences in administrative guidance may account for why some laws are litigated less frequently. For example, energy and development incentives often benefit from safe harbors and other bright line rules that come from regulations and other administrative sources. Taxpayers who structure deals that comply with those rules are unlikely to face legal challenge, helping to keep them out of court. This explanation probably wouldn’t explain why other tax provisions, such as the EITC, don’t appear in Tax Court cases—but it may not be necessary to find a single explanation. It is possible that there are multiple explanations, and that the reasons vary by Code section.

This Article is an original contribution to the tax and separation of powers literatures, and it raises several questions that are ripe for future research. In her conclusion, Tahk hints at further work in this area, and I look forward to learning more in the future. I recommend this article to anyone interested in Tax Court activity, tax legislative activity, tax and political economies, or separation of powers.

Here’s the rest of this week’s roundup:

• Karen Alpert (Queensland), John Richardson (Citizenship Solutions) & Laura Snyder (Assoc. Americans Resident Overseas), Don't Blame the Victims: Individuals and the MRT, 182 Tax Notes Fed. 1617 (Feb. 26, 2024).
• Caroline Byrd (Mississippi), The Fraud Triangle and Private Foundations: How Current Regulation Perpetuates Fraud (March 4, 2024).
• Albert Feuer (Law Offices of Albert Feuer), New York Retirement Plans for Public Employees Can Leave Surviving Spouses With Nothing - It's Past Time To Change That, 96 NYSBA J. 23 (Spring 2024).
• Hanna Filipczyk (Bialystok), ADR in Tax Disputes in Poland – the State of Play and Perspectives, 5 Brazilian J. Alternative Dispute Resolution 205 (2023)
• Helen Flannery (Institute for Policy Studies) & Brian Mittendorf (Ohio State), Are Donor-Advised Funds Facilitating Anonymous Giving to Politically Engaged Charities?, Fisher College of Business Working Paper Forthcoming (March 2024).
• Adam Kern (NYU Law), Progressive Taxation for the World, Tax Law Review (forthcoming).
• Adam Kern (NYU Law), Appendices to Progressive Taxation for the World (March 3, 2024).
• Shannon Weeks McCormack (Univ. Washington), America's Failure to Rescue Parents: A Narrative of Inequitable Tax "Reform," UC Law Journal (forthcoming).
• Libin Zhang (Fried Frank), Moore Implications from Forgetting the Foreign Commerce Clause, 182 Tax Notes Federal 1031 (February 5, 2024).