Corporate Tax Abuse in the Supreme Court

Abstract

Corporate tax advisors wish to minimize a corporation’s tax liability but want to do so without creating the risk that a court will reject the strategy as “abusive.” Courts’ decisions in this area of the law, however, are notoriously difficult to predict. While scholars and practitioners have devoted substantial time and energy debating how judges should decide controversies involving corporate tax abuse, this Article is the first to conduct a large-N quantitative study of court decisions in an effort to identify the factors that influence how courts actually decide corporate tax abuse cases. Our findings are surprising — but very robust — and for this reason we believe they will improve corporate financial planning, generate more efficient litigation strategies, and perhaps, most importantly, help clear the federal docket of cases that can and should be settled out of court. Our study reviews nearly 1,000 U.S. Supreme Court cases decided between 1909 and 2011, roughly 140 of which involve allegations of corporate tax abuse. Our principal findings run counter to the conventional wisdom that judges are erratic and unpredictable when it comes to deciding corporate tax abuse cases. We uncover a number of factors that systematically increase and decrease the probability that the government will win when it challenges a corporate tax strategy in court. The flavor of our findings can be described as follows. The probability of government success when the taxpayer has engaged in accounting irregularities, when the initial controversy arises from the IRS’s denial of a corporate refund claim, when the government is the petitioning party, and when federal spending on national defense escalates. The probability of government success decreases when the transaction at issue involves a third party and multiple transaction steps — unless alleged simultaneously in the briefs filed in Court, a strategy that increases the government’s chances of winning. Perhaps most surprising, notwithstanding the nearly obsessive attention paid to the business purpose doctrine by practitioners, scholars, and policymakers, the government’s assertion that the transaction at issue lacked a non-tax business purpose has either no statistically significant effect or a negative effect on the outcome of these cases. Our study raises several important questions, both empirical and normative. These include whether tax lawyers can exploit the findings of this study when planning transactions and litigation strategies, whether the business purpose for a corporation’s transaction should affect the tax treatment of that transaction, and whether the findings of this study are generalizable to the corporate tax abuse decisions in lower federal courts.