The tax law, as almost everybody knows, is long-winded. The Internal Revenue Code covers individual, partnership, trust and corporate taxation, the taxation of U.S. taxpayers with international businesses and the taxation of foreign residents with U.S. businesses, the taxation of marriage and divorce, various kinds of special investment vehicles like REMICs (real estate mortgage investment conduits) and RICs (regulated investment companies--i.e., mutual funds). Needless to say, it takes quite a few rules to cover all those different situations, and a few more to cover the various kinds of abusive schemes that taxpayers, and their tax advisers, have cooked up over the years to try to avoid taxes. The result is a complex system of rules that is not always easy to interpret.
Many tax practitioners will say that all a taxpayer is expected to do is comply "literally" with the words of the tax statutes. They tweak structures of transactions to come within or without particular rules and claim to avoid taxes in situations where ordinary taxpayers would expect to pay taxes on a gain realized or income received. They rely on Learned Hand's famous statement in an old tax case to the effect that no one is obliged to pay more in taxes than is due--and they read into that a "pass GO and collect $200" card that legitimizes super-aggressive tax planning to work around the intent of the Congress in enacting particular rules.
A recent article by Burgess Raby and William Raby in Tax Notes, the weekly journal that is read by just about every tax lawyer and tax accountant in the country, discussed one of the schemes developed by creative tax advisers to get around the rules disallowing deductions for potential future liability losses--the contingent liability shelter in the Black & Decker case. See 109 Tax Notes 1037 (Nov. 21, 2005). The trial court held for the taxpayer, who claimed to have complied with the literal terms of the statute even though the transaction undertaken was clearly done to lower taxes. Responding to the Raby piece, a letter writer calling himself (or herself) A Nonymous made an important point about the interpretation of statutes, revealed in the quoted excerpts below.
"The law is not simply the words on the page. The law is what the legsilature intended those words to mean." .....
"Noting that in Black & Decker the IRS contended that 'the substance of what took place cannot possibly be what Congress intended,' the Rabys then observe: 'That is probably true--but should it matter?' The answer is yes, it should and does matter. The legislature makes law. It expresses the law in words, which are imperfect tools for conveying meaning but are the only tools available in practice. When a taxpayer's transaction iws not within the meaning of the relevant words as used by the legislature ... --then those statutory words do not apply to the transaction." .....
[I]f the legislature enacts a tax exemption for vehicles with solar-power[ed] motors, for the purpose of encouraging people to switch from gas-powered vehicles to sloar-powered ones to reduce air pollution, the courts should deny the tax exemption to gas-powered vehicle that have been cleverly designed to include a small solar-power[ed] motor, even if such vehicles are described by the statutory language read literally." 109 Tax Notes 1369 (Dec. 5, 2005).
A Nonymous has it right. Tax laws, like any law, must be interpreted in terms of their purposes--what the legislature intended to accomplish in passing the law. They must also be interpreted as part of a coherent whole. Even though there are gaps and flaws in the way the tax laws fit together over the vast array of transactions and activities to which they apply, interpreters (be they taxpractitioners or judges) should try to make the laws fit coherently. Literalist interpretations are a little like solving a Sudoku puzzle by stopping after filling in the numbers in one square. The square "fits" the rules for Sudokus, but without attempting to conform the remaining squares of the puzzle, the numbers in the square are questionable at best.
But isn't it curious that A Nonymous, who is identified as "a tax lawyer who prefers to remain anonymous," considered making a statement about the importance of purpose to interpretation of statutes something with which he (or she) could not be identified? Has it actually become such a cutthroat world in practice that lawyers who understand the importance of a substantive interpretation have to hide behind anonymity to discuss it?