Social Science Explanations for Disparate Outcomes in Tax Court Abuse of Discretion Cases: A Tax Justice Perspective

Author:Charles A. Borek
Position:Visiting Assistant Professor of Law, University of Baltimore School of Law; J.D.

I. Introduction. II. The Concept of Tax Justice. III. Criteria for Assessing Tax Justice. IV. Evidence of a Deferential Difference. A. The Abuse of Discretion Standard. B. The Abuse of Discretion Standard in Cases Involving Corporate Taxpayers. 1. Code Section 446 Cases. 2. Code Section 482 Cases. 3. Other Tax Court Abuse of Discretion Cases Involving Corporate Taxpayers. C. The Abuse of... (see full summary)


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I Introduction

The subject of taxation is frequently perceived as a primarily technical branch of the law. In the art and science of jurisprudence, tax is thought to be composed of larger doses of the latter than the former. Thus there is less fertile ground for instructive insight into the complex relationships giving rise to valuable discussions of metaphorical concepts such as "justice."

Most would agree that any relevant view of tax policy must be framed within the parameters of basic justice.1 When viewed through the tax lens, however, justice appears to be exclusively related to the substantive structure of the statute, and discourse on tax justice invariably focuses on progressivity and equity with respect to tax legislation.2 The fact that thePage 624 term is richer and more complex seems to have escaped the academy and the bar to a great extent.3 The prominent justice theorists, when they address taxation at all, do so only obliquely and in terms of larger economic issues.4 The emphasis in the tax arena has been on the collective justice of systems rather than on the individualized justice of litigants in a tax forum.

If we are to fully comprehend and evaluate tax justice, we must first grasp the dynamics occurring at the micro-level stage of the adjudicatory process. To achieve such an understanding, scholars have, at various times, used an assortment of social science approaches to gain insight into judicial behavior.5 This should not be surprising, as the study of law hasPage 625 itself evolved into somewhat of an interdisciplinary effort that is as evidenced by the ubiquitous presence of "law and . . ." courses and degree programs in the law school curriculum.6 This trend reveals a growing recognition that the academy has historically divided disciplines into, more or less, arbitrary categories merely for its own convenience. The law, as life itself, is inherently interdisciplinary, and it makes sense to "borrow" approaches from other disciplinary categories to further our understanding of what underlies observed judicial behavior.

This article attempts to explain a particular judicial phenomenon in social science terms, focusing on sociological theory. My point is not to exhaust the variety of social science methodologies that may be used to explain this particular judicial behavior, but rather to demonstrate that because there are a variety of explanations, the behavior itself is ingrainedPage 626 and predictable. By doing so, I posit that there is a fundamental nature to this behavior and that it is not random or accidental.

The embedded nature of the dynamics that work together to produce the results I illustrate below has important implications for the achievement of tax justice. A universal postulate of justice is that of equal treatment in equivalent circumstances. A difference in judicial approach based solely on the social characteristics of the taxpayer is inherently unfair, even if readily explainable by reasons other than intentional, unjustified partiality. If outcomes are rational but unjust, then it behooves us to impose decision mechanisms that overcome whatever it is that promotes the undesirable result.

The particular subjects of my inquiry are Tax Court abuse of discretion cases. By classifying these cases based upon the social and economic categories of the taxpayers involved, a discemable difference is revealed in the degree of deference the court grants to the government's findings. Specifically, institutional (e.g., "corporate") taxpayers regularly enjoy a diminished deferential standard. On the opposite end of the spectrum, individual taxpayers in collection cases are faced with a Tax Court willing to accord great deference to the Internal Revenue Service ("Service"). I propose that this deferential difference is explainable by reference to sociological theory and that neither inadvertence nor intentional bias drives the results observed. Rather, the principles that give rise to these disparate outcomes are of a fundamental nature and implicit in the process itself. As such, any attempt to achieve tax justice by eradicating the fundamental social mechanisms fueling this judicial phenomenon is utterly over-ambitious and doomed to fail. It would be folly to attempt to equalize opportunity by emasculating the inherent superiority of the dominant participant in a given scenario. However, the playing field may be leveled by reformulating the rules of the game to benefit the disadvantaged so as to simulate equality in the process. In the judicial setting, this may be accomplished by modifying the standard of review.

Part II of this Article explores the contours of tax justice. Part III lays the foundation for my recommendations by setting forth the appropriate standards for assessing tax justice in the context of Tax Court adjudication. Part IV sets out the evidence of what I shall refer to as the "deferential difference" by explicating Tax Court applications of the abuse of discretion standard in a variety of settings. Part V contains a detailed explanation of some of the sociological approaches that may be used to demonstrate the expected and institutional nature of this judicial phenomenon. This Part also touches upon thinking found in other social science fields that may be insightful. Part VI contains an illustration of the differing standards of review utilized by the Tax Court in response to varying circumstances. In the conclusion, I offer my suggestion for achieving tax justice by overcoming the deferential difference withPage 627 adjustments to the standard of review in collections cases under Internal Revenue Code ("Code") section 6330.

II The Concept of Tax Justice

Whether analyzing tax justice on the systemic or individual level, a fundamental precept is that of equitable uniformity.7 Differentiation in the application of legal standards is tolerable only when a cogent dissimilarity justifying differential treatment has been articulated. Unjustified distinction is the antithesis of fairness and thus frustrates the ability to achieve justice. It is manifestly obvious, for example, that the standard of proof to which a prosecutor or civil plaintiff is subject should not vary with the social or economic status of the moving party. By its nature, justice is of but one form, not dependent on the identity of the one seeking refuge in her embrace. This is no less true in tax matters than in other areas of the law; Lady Justice is not expected to jettison her blindfold simply because tax is the task at hand.

The universality of these principles may lead to the naive conclusion that the topic of tax justice is easily explicated. To the contrary, a comprehensive theory of tax justice is much too vast an undertaking for a single article-length treatment such as this. My task here is much more modest and requires that we first isolate the particular aspect of the tax justice concept that is the subject of my inquiry. In the fifth book of the Nicomachean Ethics8 Aristotle classified the concept of justice as being either "distributive" or "corrective."9 The former roughly corresponds to the legislative distribution of rights resulting in the sharing of the benefits and burdens of social cooperation, and the latter roughly corresponds with judicial decision making.10 While most of the preceding scholarship has addressed tax justice in the distributive sense, this Article is concerned with tax justice in the Aristotlian corrective sense as it is revealed through the decisions of the United States Tax Court, the primary arbiter of federal tax disputes in this country.11 The concept of justice being pursued herePage 628 deals with the proper administration of laws, with regard to which the aspirational goal is "the constant and perpetual disposition of legal matters or disputes to render every man his due."12

Furthermore, any examination of tax justice in the context of judicial determinations must necessarily be grounded in the actual experiences of the participants in the process. Determining whether justice is being achieved in this setting requires an analysis of the relational dynamics of sentient and rational beings affected by, and affecting, judicial practices.13 Philosophical theory may provide a foundation for our inquiry, but our goal is a systematic analysis of tax justice as it emanates from the courtroom in particular cases.14

This does not imply that meta-theory is without its place nor that we cannot utilize the underlying concepts promoted by the grand theories of economic justice in this endeavor. The eminent theorist John Rawls, forPage 629 example, espoused the "difference principle," which holds that economic differences between "social groups are justified only to the extent that the system that generates those inequalities also does at least as well for the interests of the worst-off group as any alternative system."15 Rawls himself conceived of the difference principle as but a component of a larger inquiry and did not develop...

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