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.