Progressivity and Taxpayer Purpose

• In Event: Contemporary Legal Issues in Taxation

Abstract

When should a taxpayer’s intent affect their federal tax liabilities? This Article examines the tax rules that account for a taxpayer’s subjective intent through a distributional lens.

Under criminal or corporate law, an individual’s or a firm’s intent can determine culpability for purposes of either civil or criminal sanctions. Many tax rules follow this model, such as the civil penalties for negligent or fraudulent underpayment of tax liabilities.

The tax law also uses taxpayer intent, however, not just to determine culpability for wrongdoing, but also to calculate underlying tax liabilities. These rules most often appear in the setting of business entity taxation, but can also apply to individuals. For example, the accumulated earnings tax penalty depends on a corporation’s purpose for retaining earnings rather than distributing them to shareholders. Similarly, the economic substance doctrine, which disallows the tax benefits from certain tax-motivated transactions, can depend on the taxpayer’s subjective intent when structuring a transaction.

This Article examines these various intent-based standards in the tax law, and argues that they systematically advantage high-end businesses and individual taxpayers for two reasons. Many intent-based standards are necessarily assessed ex ante, without any subsequent analysis of whether the taxpayer followed through with their plans. In other cases, taxpayers can recharacterize their subjective motivations to gain favorable tax treatment.

Finally, the Article proposes reforms to correct for these shortcomings of intent-based standards, through the use of objective criteria as well as ex post examination of whether a taxpayer in fact engaged in their intended activities.

Authors

• Ari Glogower, Northwestern Pritzker School of Law

• Joshua Blank, University of California, Irvine School of Law