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Taxpayer Deference Can Help Close the Tax Gap

Posted on May 24, 2021
Benjamin M. Willis
Benjamin M. Willis

Benjamin M. Willis (@willisweighsin on Twitter; is a contributing editor with Tax Notes. He formerly worked in the mergers and acquisitions and international tax groups at PwC and at the Treasury Office of Tax Policy, the IRS, and the Senate Finance Committee. Before joining Tax Analysts, he was the corporate tax leader in the national office of BDO USA LLP.

In this article, Willis argues that closing the tax gap would be better achieved if Treasury and the IRS stopped relying on Chevron deference to create overly aggressive revenue-raising laws and appreciate why courts are favoring taxpayer interpretations.

The Biden administration’s recent proposals to close the tax gap between the rich and the poor could backfire, unless they apply the lessons learned during the previous administration. When tax laws are ambiguous, courts often hold in favor of taxpayer interests and give Treasury and the IRS no deference in the majority of cases.1 Until that fact is acknowledged, attempts to shrink the tax gap through overly aggressive interpretations of the law will subject the IRS to more losses in court.

Because Chevron2 deference is now nearly meaningless in tax, the executive agencies will be at a disadvantage if they interpret existing laws to impose or enforce more tax liability on the rich without a clear connection to congressional intent, even with rising public support of tax relief for the poor. Courts often interpret ambiguous revenue-raising laws against their drafter.

The IRS is a collection agency. The IRS also calculates the liability owed. Tax obligations are determined based on regulations written by Treasury and the IRS, who argue that courts should respect their expanding interpretations because their expertise commands deference. But most courts won’t allow Treasury and the IRS to be judge, jury, and executioner by handing over their constitutional obligation to judicially interpret legislation to the executive branch.3

Increased tax reporting requirement proposals will have only relatively small value in closing the tax gap.4 The IRS must be able to compete with the expertise of the megafirms representing the largest taxpayers in the world. Indeed, IRS Commissioner Charles Rettig has previously acknowledged that past hiring freezes have resulted in the agency losing out on an entire generation of tax talent.5 Increased funding alone won’t suffice.

The Tax Cuts and Jobs Act reduced tax rates and birthed vast, novel tax planning to stimulate the economy. The recent change in administration and desire to close the tax gap brings a reminder: Courts won’t allow the executive’s collection agency to expand its ability to tax beyond what is clearly provided for in the law.

To combat abuse and close the tax gap, Treasury and the IRS need to appreciate that Congress encourages behavior and tax planning. Treasury and the IRS should focus on the tools they have been given by Congress to combat abuse instead of attempting to alter and expand the laws.

The Rule of Lenity in Tax

Let’s pretend that most courts give Treasury and the IRS deference to tax as they please when an ambiguity arises. OK, now let’s return to reality: The IRS loses many cases because its interpretations aren’t given deference (and because it often takes heavy-handed positions against well-meaning taxpayers).6

If the government expects to close the tax gap, it must win more cases. Trade and other organizations are already preparing for court battles as proposals are being made to change areas of the law, such as the wealth transfer system.

I once wrote: “As for an agency’s ability to interpret tax provisions expansively, other long-standing traditional judicial canons apply.”7 The rule of lenity strictly construes rules against their drafter. It’s frequently used and infrequently cited. Referring to it is unnecessary because its use as a fundamental canon of construction is universal in the interpretation of ambiguous tax laws.

Professor Andy S. Grewal has argued that “the rule of lenity has no place in the construction of the income tax provisions.”8 Treasury and the IRS agree; I disagree. First, the phrase “rule of lenity” represents a principle of interpretation that is used far more than the phrase is.9 While leniency is better understood in the context of criminal sanctions and fines, the arbitrary use of the phrase “rule of lenity” doesn’t mean its principles aren’t frequently applied. As Chief Justice John Marshall stated, “The power of punishment is vested in the legislative, not in the judicial department.”10 As more antiabuse provisions are imbedded in regulations, the clearer it is that these intent-based rules are designed to penalize by levying more tax than would otherwise be due.11

Second, the following key premise underlying Grewal’s conclusion is flawed: “The rule of lenity makes sense when applied to a statute that compels or prohibits some type of behavior, but income tax provisions do not compel or prohibit anything.”12 Tax provisions do far more than just describe consequences of transactions — they are increasingly designed to influence behavior.

Tax Laws Compel Tax Planning

For over 100 years, Congress has been drafting income tax laws to reward and discourage behavior. Tax benefits for retirement and health plans and so-called sin taxes on smoking and alcohol continue to grow. U.S. tax laws subsidize exports, investments, and homeownership while penalizing intangible and passive earnings under subpart F, for example.

Disincentives like the excise taxes enacted through the Revenue Act of 1932 are still used to prevent offshoring.13 Family and societal incentives underpin the child tax credit. Meanwhile, section 199A was enacted to promote earned income versus passive income. The code is designed to encourage behavior lawmakers would like to see manifested into reality.

Countless courts have held that congressionally authorized tax planning cannot be challenged. As the Supreme Court explained in Gregory v. Helvering, “the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows.”14

Treasury and the IRS shouldn’t be entitled to deference in determining whether Congress intended to reward or punish taxpayers. Bias is inherent in these agencies, which maximize revenue collection to the extent they believe the law permits it. Their failures are reflected in frequent court losses, discussed in more detail below.

The responsibility of courts to interpret the law helps protect the Constitution and the separation of powers. Courts have correctly never relinquished that responsibility by granting agencies complete deference.

While court statements on dwindling agency deference are clear, it also speaks volumes that there are so many decisions in favor of taxpayers in which agency deference wasn’t afforded.15 The government would win more cases if it stopped demanding deference for its aggressive interpretations and started applying the law as written.

Expanding Taxpayer Deference

Under the rule of lenity, any ambiguity within a tax law would be read in a manner most favorable to the taxpayer. Boyd, a recent case that shows the breadth of the rule, is hardly the first to apply it broadly to tax laws.16

In all law, we should rely consistently on canons of construction for proper statutory interpretation. And particularly in tax, we know that statutory labels can mean little. So even if we don’t use the term “rule of lenity” to address potential agency overreach, an interpretation based on strict constructionism is essentially that.

In Boyd, the Ninth Circuit rejected the government’s position that non-willful foreign bank account penalties applied per account. The majority determined that Congress excluded per-account language from the non-willful penalty provision. That exclusion must be presumed intentional since the plain language of the willful penalty included the words per-account.

The expanding role of the rule of lenity in tax and the application of statutory construction principles expressed in Boyd will feature in future legal opinions and analysis.

The Boyd majority clears up any confusion about statutory ambiguity: “Using normal tools of statutory construction, we have no difficulty concluding that the government cannot assess multiple penalties for the non-willful violation here — failing to timely file an FBAR.” The analysis is simple: “The new [2004] penalty provision in section 5321(a)(5)(B)(i) does not expressly authorize (or forbid) multiple non-willful penalties on a per account basis,” while the older “willful-violation provisions, on the other hand, are not silent as to multiple account penalties.”

Although Congress created a regime in 1970 that allowed a per-account penalty for willful violations, another Congress expanded that regime in 2004 for non-willful violations that didn’t specifically authorize a per-account penalty.

In determining whether to take more of a taxpayer’s property than was specifically authorized by Congress, the Boyd court appropriately applied the rule of lenity. It explained that “even if the statute were ambiguous in its treatment of non-willful penalties, we must strictly construe a tax provision which imposes a penalty.”17 As the court wrote, a tax penalty “cannot be assessed unless the words of the provision plainly impose it.”18

Courts aren’t abdicating their responsibilities to the IRS through unwarranted deference based on so-called agency expertise. An agency must earn that deference and overly aggressive attempts to increase tax burdens aren’t helping.

The court in Boyd explained that “while the rule of lenity ordinarily applies only to criminal statutes, see Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1, 16 (2011), our circuit strictly construes tax penalty provisions independent of the rule of lenity.”19 It went on to add that the “Tax Court has held that the rule of lenity applies to tax laws that impose a monetary penalty. Mohamed v. Commissioner, T.C. Memo. 2013-255.” As the Supreme Court explained in Sebelius, taxes and penalties can be one and the same.20

The most recent IRS interpretations impose a monetary penalty or increase taxes for actions it condemns. These expanded extractions of property are exactly what the rule of lenity is designed to protect citizens from. Boyd, which applied that rule based on an off-code provision for a non-willful failure to file a form with Treasury, is one of many decisions to properly apply the rule broadly.

Of course, there is good reason the rule of lenity is rarely referenced even though its principle is found in many cases. It is a rule of last resort applicable when no other canon of construction is available to resolve an ambiguity.21 Similar canons, like construing revenue-raising rules against their drafter, get to the same place for similar reasons.

Historic Taxpayer Deference

Chevron22 deference is diminishing, as is its relevance to expanding tax provisions.23 Many courts agree that interpreting ambiguities in the law shouldn’t be the sole purview of the IRS.

The rule of lenity simply means strict construction against the state. Under it, any ambiguity is read in a manner most favorable to the taxpayer. Criminal use of the rule of lenity is based on the due process notion that “a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.”24 Indeed, the deprivation of property through the imposition of tax should be afforded no less a standard. All citizens are afforded the same protections from a government’s taking of life, liberty, and property.

The Supreme Court seems set on helping to preserve the separation of powers. In Marbury v. Madison, the Court explained “the province and duty of the judicial department to say what the law is.”25 Justice Neil M. Gorsuch reiterated that principle just before being named to the Court: “Transferring the job of saying what the law is from the judiciary to the executive unsurprisingly invites the very sort of due process (fair notice) and equal protection concerns the framers knew would arise if the political branches intruded on judicial functions.”26

It is well settled that seizing property should be permitted only when plainly allowed by the words of a statute — in the case of doubt, a taxing provision is construed in favor of taxpayers.27 Courts frequently apply the rule of lenity in tax without citing it.28 In United Dominion in 2001, the Supreme Court wrote that “at a bare minimum, in cases such as this one, in which the complex statutory and regulatory scheme lends itself to any number of interpretations, we should be inclined to rely on the traditional canon that construes revenue-raising laws against their drafter.”29

As Justice Clarence Thomas explained in his concurring opinion, when “the tax gatherer puts his finger on the citizen, he must also put his finger on the law permitting it.”30 Justice John Paul Stevens provided the lone dissent, and although he said that agency “deference is appropriate,” he acknowledged that “Thomas accurately points to a tradition of cases construing ‘revenue-raising laws’ against their drafter.” The Supreme Court certainly isn’t the only court to strictly construe an ambiguity against the state without citing the rule of lenity.

In The Limited Inc., the Sixth Circuit addressed the section 956(b)(2)(A) phrase “deposit with persons carrying on the banking business.”31 The court explained that it first reviews relevant canons of statutory construction and that “setting the tone for our statutory analysis is the principle that statutes imposing a tax are construed liberally in favor of the taxpayer.” (Emphasis added.) The Sixth Circuit held that certificates of deposit purchased by a fourth-tier foreign subsidiary of The Limited from a first-tier domestic subsidiary weren’t investments in U.S. property under section 956 and were excepted as “deposits with persons carrying on the banking business.”32

Any time the IRS seeks to punish taxpayers by expanding a rule, it is assigning culpability. Whether that culpability is clearly established in the law or merely allows the IRS to continue legislating through ambiguous criteria will affect a court’s decision whether to invalidate the agency’s interpretation.

The most relevant principle the Supreme Court has given for interpreting tax law that Treasury and the IRS needs to appreciate if it seeks to close the tax gap is: “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”33

Expanding Expertise and Taxpayer Collaboration

Enforcement and audit will be only as successful as the expertise underpinning them. IRS personnel will need to be equipped to compete with the sophisticated and aggressive tax planning that has been expanding the tax gap.

Tax is one of the most powerful forms of economic stimulus. Tax breaks have been given in abundance for the general welfare. Congressional motives vary widely and are much more important than the motives of taxpayers.

The very nature of attempts to close the tax gap will dramatically increase litigation. The IRS Independent Appeals Office, created in 2019, reflects a recognition of the need to reduce the unnecessary costs of litigation resulting from a biased IRS.

Treasury and IRS attempts to increase tax revenue through dependence on Chevron deference to support overly aggressive interpretations will continue to waste valuable resources through court losses and diminished public trust. Taxpayers deserve protection from IRS overreach.34 Successfully closing the tax gap will require the IRS to appreciate that taxpayers are rightfully afforded deference to use congressionally intended benefits.


1 William N. Eskridge and Lauren Baer, “The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations From Chevron to Hamdan,” May 15, 2008, available at SSRN (“Our most striking finding is that in the majority of cases — 53.8 percent — the Court does not apply any deference.”).

2 Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

3 Benjamin M. Willis, “TCJA International Regulations: Deference for Expertise and Interest,” Tax Notes Federal, Aug. 3, 2020, p. 863.

4 Lee A. Sheppard, “IRS Trawling Through Small Business Bank Accounts?Tax Notes Federal, May 17, 2021, p. 1003 (“Bank account reporting would be a grotesque invasion of individual taxpayer privacy even if it were not unconstitutional.”). Although it should be noted that some practitioners, such as Monte Jackel, believe that extending the application of Schedule UTP to partnerships may ultimately be fruitful for revenue raising efforts.

5 Don Fort, “The IRS Is Underfunded, but It Needs More Than Cash to Stop Tax Cheats,” The Washington Post, May 6, 2021. See also Rettig 2019 Senate Finance Committee comments.

6 See Kristen A. Parillo, “Tax Court Crunches Numbers on Michael Jackson Estate,” Tax Notes Federal, May 10, 2021 p. 965 (“The Tax Court has concluded that pop icon Michael Jackson’s image and likeliness was worth $4.2 million . . . rejecting the IRS’s position that it was worth $161 million.”).

7 Willis, “Executive Overreach Burdens Taxpayers,” Tax Notes, Jan. 28, 2019, p. 407.

8 Grewal, “Why Lenity Has No Place in the Income Tax Laws,” 81(4) Mo. L. Rev. 1045 (Fall 2016).

9 Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 296 (2012) (The rule of lenity ensures an ambiguity in a rule “defining a crime or imposing a penalty should be resolved in the defendant’s favor.”).

10 United States v. Wiltberger, 18 U.S. 76 (1820).

11 National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) (“Scienter requirements are typical of punitive statutes, because Congress often wishes to punish only those who intentionally break the law.”); see also TAM 8821002 (The IRS has conceded that since “the accumulated earnings tax is a penalty tax, it must be strictly construed and not applied in cases of reasonable doubt. Ivan Allen Co. v. U.S., 422 U.8. 617 (1975).”).

12 Id. (Emphasis added.)

13 Willis, “Does the TCJA Encourage Outbound Transfers to Partnerships?Tax Notes Federal, Aug. 5, 2019, p. 881.

14 Gregory, 293 U.S. 465 (1935).

15 See Intisar A. Rabb, “The Appellate Rule of Lenity,” 131(8) Harv. L. Rev. F. (June 15, 2018) (“A 2006 empirical appraisal of the 1,014 cases in which the Supreme Court invoked Chevron since the decision was handed down in 1984 revealed that deference applied only 8.3 percent of the time.”).

16 United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021).

17 Id. (internal quotations omitted).

18 Id.

19 Id. (emphasis added); see also Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1 (2011) (the rule of lenity “applies primarily to the interpretation of criminal statutes” and favors a lenient interpretation “when, after consulting traditional canons of statutory construction, we are left with an ambiguous statute”).

20 National Federation of Independent Business, 567 U.S. 519.

21 See Shular v. United States, 140 S. Ct. 779 (2020) (“When ‘a reviewing court employs all of the traditional tools of construction, the court will almost always reach a conclusion about the best interpretation,’ thereby resolving any perceived ambiguity. That explains why the rule of lenity rarely comes into play.” (citation omitted)); see also United States v. Thompson/Center Arms Co., 504 U.S. 505 (1992) (applying the rule of lenity to a tax statute in a civil setting because the court could have criminal applications and the rule must be interpreted consistently in all settings).

22 See Chevron, 467 U.S. 837.

23 Congressional Research Service, “Deference and Its Discontents: Will the Supreme Court Overrule Chevron?” LSB10204 (Oct. 11, 2018).

24 See McBoyle v. United States, 283 U.S. 25 (1931).

25 See Marbury v. Madison, 5 U.S. 137 (1803) (holding that the Constitution emphatically declares “the province and duty of the judicial department to say what the law is”).

26 Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016) (“But the fact is Chevron and Brand X permit executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framers’ design.”); see also Perez v. Mortgage Bankers Association, 135 S. Ct. 1199, 1213 (2015); and Elizabeth Slattery, “Why the Supreme Court Shouldn’t Bow to Government Agencies,” Heritage Foundation (Jan. 2, 2018).

27 See Commissioner v. Acker, 361 U.S. 87 (1959); see also Ivan Allen Co. v. United States, 422 U.S. 617 (1975); see Michael Livingston, “Congress, the Courts, and the Code: Legislative History and the Interpretation of Tax Statutes,” 69 Tex. L. Rev. 819 (1991).

28 See Gould v. Gould, 245 U.S. 151 (1917) (stating: “In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen.”); see also Security Bank Minnesota v. Commissioner, 994 F.2d 432 (8th Cir. 1993) (citing Gould and holding “in case of doubt they are construed most strongly against the Government, and in favor of the citizen”).

29 United Dominion Industries Inc. v. United States, 532 U.S. 822 (2001) (holding that a consolidated group’s product liability losses must be determined on a consolidated, single-entity basis).

30 Id. citing Leavell v. Blades, 237 Mo. 695 (1911); see also United States v. Merriam, 263 U.S. 179 (1923) (“If the words are doubtful, the doubt must be resolved against the Government and in favor of the taxpayer.”); and Bowers v. New York & Albany Lighterage Co., 273 U.S. 346 (1927) (“The provision is part of a taxing statute; and such laws are to be interpreted liberally in favor of the taxpayers.”).

31 The Limited Inc. v. Commissioner, 286 F.3d 324 (6th Cir. 2002).

32 Id. The court rejected the IRS’s reliance on the definition of bank in section 581 and Rev. Rul. 70-385, 1970-2 C.B. 156, and said there is no statutory basis for applying the section 581 definition of bank to the section 956(b)(2)(A) exception.

33 Gregory, 293 U.S. 465 (emphasis added).

34 Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007) (“an ambiguity in the meaning of a revenue-raising statute should be resolved in favor of the taxpayer”).


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