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First Empirical Study of U.S. Supreme Court Cases Involving Allegations
of Corporate Tax Abuse Developed by USC-NYU Law Team
Professors at USC Gould School of Law and New York University School of Law develop model for prediction
After reviewing nearly 1,000 tax cases decided by the U.S. Supreme Court since 1909, professors with USC Gould School of Law and New York University School of Law have developed a model to predict the chances that the government will win corporate tax abuse cases appearing before the Court.
“Corporate Shams,” by USC Law Professor Nancy Staudt and NYU Law Professor Joshua Blank, is the first major empirical study that looks at how the U.S. Supreme Court decides cases involving allegations of corporate tax abuse. It will be published in the December, 2012, New York University Law Review.
The study could assist corporations, the government and even private practitioners in how best to design transactions, litigate cases and strategize when appearing before the Court, said Staudt.
"Understanding when seemingly legal behavior shades into abusive tax planning is important to both litigators and corporate tax planners,” Staudt said. “This study should offer transparency to an area of the law long viewed as confusing and unpredictable,”
For example, the model predicts that the government had a 62 percent chance of winning a classic corporate tax abuse case, Commissioner v. Court Holding (1945) and indeed, the government prevailed in this case. In a similar case, U.S. V. Cumberland Public Service Co., the authors predicted the government had a 28 percent chance of winning – and the government did lose.
“After reviewing the actual outcomes in all the corporate tax abuse cases decided by the U.S. Supreme Court, we found that our model performs extremely well,” said Blank.
Here are key findings detailed in the study:
* If a transaction involved a third party, instead of just the corporation, the government was 21 percent LESS likely to win.
* If the government argued that the transaction lacked a business purpose - a critical factor that practitioners focus on today - the study found a very small and statistically insignificant effect on the outcome. In other words, it had little or no effect on the Supreme Court.
* If the government argued that the accounting treatment was different than the tax treatment (i.e., corporation reported more income for accounting purposes than tax), the government was 18 percent MORE likely to win.
* If the case in the U.S. Supreme Court started because the corporation asked for a refund and was denied by the IRS, the government was 28 percent MORE likely to win.
* If national defense spending was increasing, government was MORE LIKELY to win the case.
* If the case was decided after U.S. Supreme Court Justice Antonin Scalia was appointed, the government was LESS likely to win the case. His appointment correlated with a decrease in the government's win rate.
What are the implications?
* Private practitioners should consider designing transactions that do not require corporations to ask for refunds (at least when considering effect on Supreme Court outcomes).
* The government should not decide to litigate a case if its strongest argument is the lack of business purpose - at least in the U.S. Supreme Court.
* Corporations should be wary of engaging in transactions that result in different accounting treatment than tax treatment.
To read the full study, go to: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2035057
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