Presumptions of Tax Motivation

Author:Emily Cauble
Position:Professor, DePaul University College of Law
Pages:1995-2051
1995
Presumptions of Tax Motivation
Emily Cauble
ABSTRACT: Rebuttable presumptions are scattered throughout the Internal
Revenue Code and the Treasury Regulations. In many cases, they are
employed in service of determining a taxpayer’s motive or state of mind. They
are not, however, always utilized when motive or state of mind must be
assessed. In some contexts, courts are called upon to examine all relevant facts
and circumstances in order to divine a taxpayer’s state of mind—which facts
are relevant and the weight to be accorded to various facts are not specified
ahead of time except to the extent set forth in judicial precedent. At the other
extreme, in yet another subset of situations in which tax outcome turns on
motive or state of mind, tax law provides that a given fact establishes an
irrebuttable presumption of a given motive. In between the two extremes, tax
law makes use of a variety of tools, including rebuttable presumptions. When
a rebuttable presumption is at work, the proof of a specified fact is deemed to
establish the existence of a given state of mind, unless the party who is
disadvantaged by that state of mind determination presents su fficient
evidence to overcome it.
Despite their prevalence, existing literature contains virtually no discussion
of the use of rebuttable presumptions in tax law generally, or when used for
the purpose of determining motive or state of mind. This Article begins to
address the gap in the existing literature and focuses on rebuttable
presumptions that guide the assessment of motive or state of mind. It analyzes
the purposes that rebuttable presumptions can serve and uses that analysis to
craft recommendations for making better use of them. The recommendations
include supplementing some facts and circumstances tests with rebuttable
presumptions, converting some irrebuttable presumptions into presumptions
that are rebuttable in specific ways, and modifying the design of existing
rebuttable presumptions to increase the odds of the IRS receiving relevant
Professor, DePaul University College of Law. The author would like to thank Bruc e
Boyden, Patricia Bradford, Wendy Netter Epstein, Nadelle Grossman, Nathan Hammons, Andrew
Hayashi, Jeffrey Kahn, Vada Lindsey, Susan Morse, Michael O’Hear, Leigh Osofsky, and the
editors of the Iowa Law Review for their helpful comments on earlier drafts. The author would
also like to thank Ellen Aprill, Leslie Book, Jonathan Choi, Charlotte Crane, David Hasen,
Heather Field, Shu-Yi Oei, Katie Pratt, James Repetti, and Brian Sawers for their helpful
comments at the 22nd Annual Critical Tax Conference hosted by Pepperdine School of Law.
1996 IOWA LAW REVIEW [Vol. 105:1995
information and to provide clearer guidance regarding how the presumptions
can be rebutted.
I. INTRODUCTION ........................................................................... 1997
II.METHODS FOR DETERMINING TAXPAYER MOTIVE OR STATE
OF MIND ...................................................................................... 2000
A.UNADORNED FACTS AND CIRCUMSTANCES TESTS .................... 2001
1.Gift Determination ...................................................... 2001
2.Contribution of Encumbered Property to a
Corporation ................................................................. 2003
B.REBUTTABLE PRESUMPTIONS ................................................. 2006
1.Partnership Disguised Sale Rules ............................... 2008
2.Accumulated Earnings Tax ........................................ 2009
3.Like-Kind Exchanges Between Related Parties ......... 2010
C.SAFE HARBORS ...................................................................... 2013
D.IRREBUTTABLE PRESUMPTIONS (I.E., PER SE RULES) ............... 2015
1.Sale of Built-In Loss Property to a Related
Party.............................................................................. 2016
2.Wash Sale Rules ........................................................... 2018
3.Contributions to Corporations of Built-In
Loss Property ............................................................... 2018
E.DIFFERENCES OF DEGREE NOT KIND ....................................... 2020
III. DESIGN CONSIDERATIONS ........................................................... 2024
A.CAN LAWMAKERS IDENTIFY A USEFUL COMMONLY
RELEVANT FACT? .................................................................. 2028
B.MITIGATING OVERINCLUSION AND UNDERINCLUSION .............. 2031
C.UNCERTAINTY ....................................................................... 2037
D.IS THERE ANY PRINCIPLED BASIS TO GUIDE THE
APPLICATION OF A STANDARD? .............................................. 2039
E.ACCESS TO THE EVIDENCE ...................................................... 2043
F.RISK OF FABRICATION ............................................................ 2044
G.RISK OF GIVING EVIDENCE IMPROPER WEIGHT ........................ 2044
IV.RE-ASSESSING CURRENT DESIGN CHOICES ................................. 2045
A.SUPPLEMENTING FACTS AND CIRCUMSTANCES TESTS
WITH REBUTTABLE PRESUMPTIONS ........................................ 2046
B.MAKING IRREBUTTABLE PRESUMPTIONS REBUTTABLE ............ 2047
C.REFINING EXISTING REBUTTABLE PRESUMPTIONS ................... 2051
V.CONCLUSION .............................................................................. 2051
2020] PRESUMPTIONS OF TAX MOTIVATION 1997
I. INTRODUCTION
Rebuttable presumptions pervade tax law.1 They are used in various
contexts and for various reasons. Often, rebuttable presumptions are
employed in the service of determining a taxpayer’s state of mind, which
frequently affects a transaction’s tax outcome.2 In some circumstances, for
instance, when a taxpayer is guided by an unduly weighty desire to avoid
incurring additional tax liability, the taxpayer will not achieve his or
her desired tax consequences.3 Rebuttable presumptions guide the
determination of whether a transaction was excessively tax-motivated in many
cases.4
Rebuttable presumptions are not always utilized. In some settings, when
courts must divine a taxpayer’s state of mind, they are called upon to examine
all relevant facts and circumstances in order to make that determination
—which facts are relevant and the weight to be accorded to various facts are
not specified ahead of time except to the extent set forth in judicial
precedent.5 However, in a subset of the situations in which motive or state of
mind must be determined, the Internal Revenue Code or the Treasury
Regulations provide that a specified fact will establish a rebuttable
presumption that a taxpayer possesses a particular motive or state of mind.6
In another subset of situations in which tax consequences turn on motive or
state of mind, tax law provides that a given fact will automatically deprive the
taxpayer of a desired tax outcome.7 Stated differently, in these situations, the
presence of a given fact establishes an irrebuttable presumption that a
transaction is overly tax-motivated.
For example, when trying to discern whether a taxpayer engaged in two
steps as part of a given plan, tax law often employs presumptions turning on
timing.8 If the two steps happen within some specified time of each other, the
proximity in time establishes a rebuttable (or irrebuttable) presumption
that the taxpayer planned to take both steps from the outset.9 When a
presumption is rebuttable, the party who is disadvantaged by it is given an
opportunity to overcome the presumption by presenting countervailing
evidence; not so in the case of an irrebuttable presumption.
1. See infra Section II.B.
2. See infra Section II.B.
3. See infra Section II.B.
4. See infra Section II.B.
5. See infra Section II.A.
6. See infra Section II.B.
7. See infra Section II.D.
8. The partnership disguised sale rules discussed in Section II.B.1 provide one example.
9. The partnership disguised sale rules discussed in Section II.B.1 provide an example in
which a presumption based on timing is rebuttable and the wash sale rules discussed in Section
II.D.2 provide an example in which a presumption based on timing is irrebuttable.

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