The Public Policy Doctrine and Drawing the Line between Permissible and Impermissible Tax-Savings Clauses

55 Pages Posted: 3 Aug 2014 Last revised: 17 Dec 2014

See all articles by Jay A. Soled

Jay A. Soled

Rutgers University

Mitchell M. Gans

Hofstra University - School of Law

Date Written: 2013

Abstract

Over a half-century ago, the Fourth Circuit in Commissioner v. Procter fashioned out of whole cloth what has become known as the public policy doctrine. This doctrine declares void certain tax-savings clauses -- those clauses that taxpayers strategically use to negate the risk of additional taxes, interest, and penalties -- that simultaneously undermine the ability of the Internal Revenue Service (IRS) to enforce the tax laws and thwart the judiciary's ability to render justice.

As taxpayers have tested the boundaries of the public policy doctrine via their continued use of select tax-savings clauses, the public policy doctrine has evolved. In this analysis, we first explore taxpayers' use of such tax-savings clauses. Next, we review the courts' responses to taxpayers' actions and critique these responses. Finally, we lay the groundwork for the institution of important reform measures in this area of the law.

We acknowledge that, in some instances, taxpayers have legitimate reasons to use tax-savings clauses; however, in may instances, reliance upon such clauses poses either a serious public policy threat (whereby the very administration of the tax system is at stake) or a less serious, but nevertheless important, policy concern (whereby taxpayers can readily circumvent their bona fide tax obligations). A line therefore needs to be drawn between permissible and impermissible tax-savings clauses; this line must strike the appropriate balance between taxpayers' quest for certainty and the IRS's mission to secure tax compliance.

Keywords: Tax

JEL Classification: K34

Suggested Citation

Soled, Jay and Gans, Mitchell M., The Public Policy Doctrine and Drawing the Line between Permissible and Impermissible Tax-Savings Clauses (2013). 80 Tennessee Law Review 655 (2013), Hofstra Univ. Legal Studies Research Paper No. 2014-22, Available at SSRN: https://ssrn.com/abstract=2475099

Jay Soled (Contact Author)

Rutgers University ( email )

1 Washington Park
Newark, NJ 07901-1825
United States
(973) 353-1727 (Phone)

Mitchell M. Gans

Hofstra University - School of Law ( email )

121 Hofstra University
Hempstead, NY 11549
United States
(516) 463-5876 (Phone)

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