The odds are stacked against corporations whose disputes with the Internal Revenue Service go all the way to the Supreme Court, a new study found.
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Titled "Corporate Shams," the study by two tax scholars at U.S. universities found the government prevailed more than six times out of 10 in high court cases where it argued that corporations actively abused the Tax Code.
The 69-page study, parsing more than a century of public data, will be published in the New York University Law Review in December, a spokeswoman for the NYU law school said.
The government won 61 percent of the 137 cases heard by the Supreme Court from 1909 through 2011 that involved allegations by the federal government of abusive tax-motivated transactions by corporations, the study found.
The government fared even better in tax disputes with corporations in which the government alleges a misreading of the Tax Code rather than abuse, winning 68 percent of the time.
Authors Joshua Blank, faculty director of the graduate tax program at NYU law school, and Nancy Staudt, a tax scholar at the University of Southern California Gould School of Law, called their study the first to try to show the number of tax-abuse disputes the government has historically won at the Supreme Court, and why.
"Judicial decision-making in this area of the law is erratic and unpredictable," the study said, adding that the report sought to elucidate "where courts draw the line between legal and fraudulent behavior" involving a Tax Code that has gray areas. The study said its findings "can be exploited by both government and corporate attorneys."
Boosting Odds of Winning
The government's chances of prevailing in cases of alleged abuse increase when there are discrepancies between a corporation's internal books and its returns filed to the IRS, and in instances when a corporation claims it is owed a refund but has not been audited or challenged by the IRS.
The presence of one of two factors appears to give corporations the upper hand: the presence of third parties, such as partnerships, that are directly involved in the economics of the disputed transactions; or complex transactions that contain multiple financial steps.
One exception to this finding, according to the study, is when the government argues that a corporation has both factors—a third party and a multistep transaction. In such cases, the government boosted its odds of winning in the Supreme Court by 50 percent, the study said, compared with when just one of the factors was present.
A surprising finding concerns disputes revolving around an area of focus in many top law firms with leading tax practices: the validity of the business purpose, or economic substance, of a tax transaction. The IRS typically argues that a tax-motivated transaction with no real business purpose other than the generation of lower tax bills and no economic substance is a key hallmark of abusive tax shelters whose deductions are invalid. But the study finds that the government is no more likely to win such cases in the Supreme Court when it uses the economic-substance or business-purpose argument.
The majority of tax cases that go to the Supreme Court are cases that began in federal district courts, U.S. Tax Court or the U.S. Court of Federal Claims, and then went up through a series of appeals.
More than one in three of all corporate tax controversies that reached the Supreme Court over 1909 through 2011 involved allegations by the federal government—meaning the IRS or Justice Department lawyers—of abusive use of the Tax Code.
Of 919 federal taxation disputes heard by the high court over that time, 137 cases of the total 364 cases that concerned corporations involved abusive or highly questionable tax shelters and similar structures. Modern corporate tax laws began around 1909.
(Reporting by Lynnley Browning in Hamden, Connecticut; editing by Howard Goller and M.D. Golan)