THE IMPACT OF AGENCY PROCEDURES AND JUDICIAL REVIEW ON TAX REFORM
This paper discusses hurdles that the IRS and Treasury would face following tax reform in their efforts to respond quickly with guidance that courts will uphold. These hurdles include the impact of the Tax Anti-Injunction Act and the Declaratory Relief Act, heightened interest in the course of tax litigation regarding compliance by the IRS and Treasury with the Administrative Procedure Act, and provisions enacted in 1988 and 1996 limiting temporary and retroactive regulations. The paper then outlines several approaches Congress could consider to mitigate possible untoward consequences.
Textualism and Tax Shelters
A substantial debate about the approaches employed by courts to interpret statutes and regulations has developed during the last decade. Some have argued that the search for a statute's meaning and purpose should focus on the text, itself, and should not include consulting legislative history. In contrast, others have argued that it is difficult to determine the meaning of a statute without consulting legislative history to determine the legislature's purpose for the statute. The debate about the appropriate method for interpreting statutes underlies a crisis in the administration of tax law. The recent proliferation of tax shelters has at least in part been facilitated by the ascendancy of textualism. Our conversations with practitioners indicate that tax advisors have become more aggressive in structuring transactions that comply with the form of the tax statutes even though the transactions may be highly questionable in light of the legislation's history or underlying purpose. The result has been a cottage industry where investment banks and accounting firms market tax shelters that triumph in form, but not substance, at the expense of the fisc. Because most tax shelter activity is hidden, it is difficult to ascertain its revenue impact. It is estimated that tax shelters reduced tax revenues by approximately $10 to $24 billion in 1999. In addition, practitioners and government officials worry that the use of shelters is eroding confidence in the tax system. Although the majority of courts have not adopted textualism, the legal community's acceptance of textualism as a plausible method of interpretation has dramatically affected the practice of tax law. Taxpayers often invest in tax shelters based upon the opinion of counsel assessing the probability that the desired tax results from the transaction, if challenged, will be sustained. These opinion letters are essential to attract investors because they protect taxpayers from various penalties that otherwise might be imposed if the Service successfully challenges the transaction. Under the textualist approach, it is much easier for an attorney to write a favorable opinion for transactions that are designed to comply with the letter of the law, but not its spirit, for at least two reasons. First, the attorney is permitted to ignore, or at least downplay, any legislative history that would argue against, or undercut, the desired tax results. Second, under a textualist approach, it is arguable that various well-accepted judicial doctrines, such as the business purpose doctrine, are suspect. At the extreme, a textualist might argue that these doctrines are the product of judicial activism and either should no longer be followed, or at a minimum should not be extended into new areas of the law. Tax shelter promoters have exploited the move towards textualism by designing transactions that comply with the letter of the law, but that generate results clearly never contemplated by Congress or the Treasury. Some promoters believe that the more detailed and complex the underlying law is, the more likely it is that a transaction complying with the letter of the law will be respected. One area in tax law that is particularly detailed and complex is Subchapter K, the partnership tax provisions. Subchapter K also has several special rules not otherwise available in the Internal Revenue Code. It is, therefore, not surprising that Subchapter K has become the vehicle of choice for a wide variety of abusive transactions. Transactions are designed so that a partnership is created or joined just to take advantage of these special rules (reverse engineered transactions). In an attempt to stem the tide, the IRS adopted a general anti-abuse rule for Subchapter K. This rule requires that the provisions of Subchapter K be interpreted consistent with the intent of subchapter K. Oversimplified, the regulations assert that there is an overall legislative intent underlying Subchapter K, and if a partnership is formed or availed of in connection with a transaction to substantially reduce federal taxes in a manner inconsistent with this intent, the transaction may be recast. The regulations make clear that for a transaction to pass muster, doctrines that originated with the judiciary, i.e., the requirements of a business purpose, economic substance, and substance over form, must be taken into account. In addition, the regulations require that the purposivist method of statutory interpretation be used to interpret Subchapter K. The anti-abuse regulations caused an unprecedented furor within the tax bar. They have been severely criticized by academics and practitioners alike on a variety of bases, the most damning of which is that Treasury lacked the authority to promulgate the rules and that therefore they are not valid. Indeed, it is fair to say that there is a general consensus that the partnership anti-abuse regulations are an extreme example of administrative overreaching. We disagree. Although we do not endorse all the policy choices in the anti-abuse regulations, we believe that they are not only valid, but suggest a way in which transactions that are the product of reverse engineering can and should be attacked, both within and without Subchapter K. Initially, it may seem inappropriate for Treasury to instruct the judiciary on how and when the courts should apply judicial doctrines and what tools they should use in interpreting statutes. After all, as every law student knows, [i]t is emphatically the province and duty of the judicial department to say what the law is. Marbury v. Madison, 5 U.S. 137, 177 (1803). Where does Treasury get the authority to instruct a court as to which method of interpretation it should use to interpret a tax statute? On reflection, however, we believe that Treasury acted well within its authority under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) and was simply filling a gap in the statute left by Congress. The judicial doctrines that are implicit in the intent of subchapter K were well-developed when Subchapter K was first enacted in 1954 and continue to be applied in a variety of contexts by the courts. At that time, however, it was not clear exactly how and when these doctrines should be applied in the context of Subchapter K. There is little doubt Congress could have clarified this issue by statute. It could have insisted that these doctrines (or variations thereof) be applied with full force, or it could have forbidden their application altogether. Congress, however, chose not to address this issue, leaving a gap in the statute. Under current administrative law principles, this silence constitutes an implied delegation of authority by Congress to Treasury to fill that gap. In addition to being valid, we also believe that, as a general proposition, it is sound tax policy to use broad standards to administer the tax law. Historically this had been accomplished by the courts through the use of these judicial doctrines. Although the ascendancy of textualism cast doubt on the continuing viability of the doctrines, Treasury eliminated that doubt by promulgating these regulations (if valid), and requiring lawyers and courts to consider the intent of subchapter K. This approach allows the IRS to use broad standards to administer the tax law in place of a collection of narrow rules that must be constantly changed in a hopeless attempt to keep pace with the latest tax gimmick. To assure proper consideration of these doctrines by tax advisors, we recommend that the IRS amend its standards for practice to require advisors opining on the validity of tax shelters to apply the doctrines to the specific facts of the tax shelter in their opinion letter.
Protecting Marine Biodiversity on the Continental Shelf Beyond 200 Nautical Miles
States are expending significant effort to chart the extent of their continental shelves where these extend beyond 200 nautical miles. As more is understood about marine biodiversity on the outer continental shelf, states may wish to regulate the use of biodiversity for the purposes of conservation or for future exploitation. This article identifies potential threats to marine biodiversity on the continental shelf, explores whether conservation is a legitimate purpose for exercising coastal state rights over the outer continental shelf under the Law of the Sea Convention, and considers the various legal rules that coastal states may use to protect marine biodiversity. The article concludes that the continental shelf regime is undesirably vague in some instances but that coastal states have a legal basis for taking action to regulate activities that impact the marine biodiversity of the outer continental shelf.