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Paul L. Caron
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Friday, April 19, 2024

Weekly SSRN Tax Article Review And Roundup: Speck Reviews Elkins's Rules, Standards, And The Value Of Certainty In Tax Law

This week, Sloan Speck (Colorado; Google Scholar) reviews David Elkins (Netanya; Google Scholar), Rules, Standards, and the Value of Certainty in Tax Law.

Sloan-speck

In Rules, Standards, and the Value of Certainty in Tax Law, David Elkins brings a fresh and engaging perspective to well-traveled debates about the choice between rules and standards in taxation. Elkins juxtaposes the doctrinal significance of standard-based antiabuse doctrines in U.S. tax law with the IRS’s relatively low audit rates for self-reported tax returns. This wedge, Elkins argues, has a lottery-like effect. The “inherent indeterminacy” of standard-based antiabuse doctrines allows taxpayers to “safely ignore them when taking positions” (18). If those positions are questioned by the IRS, the after-the-fact assertion of antiabuse doctrines effectively applies an alternative body of law to the unlucky (or unfortunate) taxpayers selected for audit, which presents moral, equity, and efficiency concerns. As a result, Elkins concludes that, “in general, standards have no role to play in the tax system, even simply as a complement to a rules-based structure” (id.). Elkins’s thesis challenges a long arc in tax law and scholarship that sees a meaningful—and perhaps essential—role for antiabuse doctrines in tax law.

The broader implications of Elkins’ argument are, I think, that academics and policymakers should treat moral, equity, and efficiency concerns as endogenous to the choice between rules and standards, at least within an enforcement regime that relies on low-frequency audits. As Elkins elaborates, however, these concerns dissipate as government audit and detection rates approach one. Standards’ lottery-like effects disappear, along with any disparities in how law applies across taxpayers. (Elkins further notes that artificial intelligence could be used to increase audit rates, like an amplified version of the IRS’s storied discriminant function.) This universal-audit exception could apply to a subset of taxpayers—Elkins highlights multinational corporations—by tailoring antiabuse doctrines to that population. Moreover, this exception potentially offers an alternative framing of Elkins’s compelling thesis: as government enforcement increases (and the delta decreases between a Kaplow-esque abstraction of fully fleshed-out law and the practical, on-the-ground implementation of that law), standards become crucial as an enforcement mechanism and a means of enhancing equity, encouraging efficiency, and constraining complexity.

The question then becomes whether enforcement can ever reach the lofty heights necessary to unlock the power of standard-based antiabuse doctrines, even for identifiable subsets of taxpayers. The political and pragmatic hurdles to universal auditing preclude large-scale expansion along this front, and even discrete efforts—think: recent initiatives to expand partnership audits—face significant hurdles and opposition from regulated parties. But, for this inquiry, the scope really should extend beyond the formal audit process. Non-audit enforcement mechanisms may force taxpayers to engage meaningfully with antiabuse doctrines in taking tax positions. As long as taxpayers’ positions are not “approved by default” (21; broadly acknowledged as the two sweetest works in the English language), standard-based doctrines retain some teeth under Elkins’s analysis.

One example of non-audit enforcement is third-party information reporting, which figures prominently into many aspects of the U.S. income tax system—and perhaps plays an even larger role in non-income taxes. These third party reporters may prove more amenable to engaging and asserting standard-based antiabuse doctrines without formal prodding by the IRS, since these third parties’ direct tax liability is not affected by any increase in tax due. They simply report events that potentially affect other taxpayers’ income. Even if these third parties do not apply antiabuse doctrines on their own, the IRS may be able to capture a large volume of taxpayer noncompliance by auditing a small number of major issuers of information returns. In this context, information-reporting third parties may weigh the administrative (or relationship) costs of applying standard-based antiabuse doctrines against the monetary (and psychic) risks of audit. I don’t think it’s entirely clear how these dynamics shake out, but they at least allude to a viable role for backstop-type standards in tax law.

Similarly, counterparty pressures may lead to parties applying standard-based antiabuse doctrines when developing return positions—or, when counterparties take incongruous positions, may generate easy audit opportunities. Essentially, if one party to a transaction applies an antiabuse doctrine, then the other party (or parties) may do so as well. These counterparty pressures work best when parties have adverse interests, something that current tax law often exploits. Of course, parties may collude to take the most favorable tax position in the aggregate and divide the proceeds, though frictions and differences in risk appetite may mitigate this type of collusion. The upshot is that standards have some promise in the counterparty context.

Finally, taxpayers’ expert advisors inform how standard-based antiabuse doctrines unfold in advance of formal enforcement measures. Sophisticated advisors do (and are required to) consider these doctrines in rendering advice. Although these advisors frequently lean towards taxpayer-favorable positions, they don’t give their clients a blank check. Firms, for example, may take consistent positions across clients, even when this consistency disfavors one client’s tax outcomes. Similarly, opinion committees or other institutional infrastructure may lead to heightened scrutiny of clients’ preferred positions under standards-based regimes. And advisors have their own authority to consider. Sometimes saying “no” signals acumen and judgment that clients value in future interactions. Again, there’s a lot of texture in how standard-based doctrines fit into the structure of professional advising, and that texture may tip the scales more towards legal standards.

Elkins raises one additional reason to prefer rules to standards that warrants emphasis. Standard-based antiabuse doctrines, from Elkins’s perspective, relieves Congress of “the onus of addressing the problem” of tax abuse. By giving a cohesive veneer to rules’ infirmities, these doctrines provi

Overall, Elkins’s magisterial article is essential reading for those interested in the intersection of tax theory and practice. Academics and policymakers, as well as practitioners, will find Elkins’s arguments provocative and illuminating.

Here’s the rest of this week’s SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2024/04/weekly-ssrn-tax-article-review-and-roundup-speck-reviews-elkinssrules-standards-and-the-value-of-cer.html

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