Abstract: In 2014, a practice where U.S.-based corporations enter complex income shifting transactions to avoid U.S. income tax took center stage in tax avoidance policy. This practice known as corporate inversions is just one attempt of many by corporations to continually find new strategies to avoid tax liabilities while still remaining within the letter of the law. The struggle for tax law is that it must continually adapt to these strategies or it will become outdated and ineffective. Given this challenge, the judiciary has served as a policymaker by providing means beyond the written law for tax enforcement.
In this article, I will use the landmark case Gregory v. Helvering to explain the principles of extralegal tax adjudication central to federal tax enforcement. The term “extralegal” refers to approaches of statutory interpretation where the Court fills a gap in the law by interpreting a statute’s intent or purpose. In reaction to these principles, I will raise concerns about the blurring of the separation of powers between the Court and Congress and reduced certainty in tax avoidance law. I will attempt to clarify the answers to these contentions by examining the development of modern tax avoidance doctrine, highlighting the inconsistent applications of Gregory principles by lower federal courts and the clarification of the separation of powers through Congress’ codification of tax avoidance doctrine. Finally, I argue that it is justified and viable for modern extralegal tax avoidance doctrine to sacrifice some degree of democracy and some certainty in tax law because such extralegal principles help maintain the long-term efficacy of American government while posing little threat to the integrity of democratic government. At the same time, the Supreme Court must be more active in maintaining national uniformity of court doctrine.
Author: Frank Yan is a third-year in the College, majoring in Economics and Political Science.