Similarity and Precedent in Tax Authority Judgment

Abstract

Tax professionals often examine past court decisions and administrative rulings in an effort to find precedent for the treatment of a specific transaction. We formulate and test a psychological model that describes how professionals evaluate precedent. We also test predictions made by the model about the influence of certain environmental variables on tax authority judgment. Results indicate that tax professionals' judgments regarding the presence of authority for a tax position are significantly related to judged similarity of precedent. However, contrary to requirements in the Regulations and principles of jurisprudence, only common features (and not distinctive features) impact similarity judgments and subsequent authority judgments. In addition, the direction of comparison and the relative amount of distinctive information known about the precedent and client case are observed to impact judgment. We also find that taxpayer advocacy influences professionals' views of both similarity and authority. These results provide valuable insights into the tax authority judgment process, and contribute theoretical rigor by extending a formal psychological model of similarity judgment to the tax setting.