Property Rules and Liability Rules in Tax Law

Posted: 7 Oct 2011 Last revised: 16 Sep 2012

See all articles by Andrew Blair-Stanek

Andrew Blair-Stanek

University of Maryland Francis King Carey School of Law

Date Written: October 7, 2011

Abstract

Tax statuses are fundamental to tax law. Examples include the tax-exempt status of a church, the pass-through status of a real estate investment trust, and the qualification of a pension plan. Each status requires meeting multiple criteria, and taxpayers run afoul of such criteria for a nearly infinite range of reasons.

Tax laws can impose two remedies for failing a criterion. First, the tax status can be lost, usually resulting in tax liability vastly exceeding any benefit (either tax or non-tax) received from the relevant infraction. This Article introduces the insight that status-loss protects the tax status with a “property rule.” Second, failing a criterion can create additional tax liability proportionate to the degree of the infraction, while leaving the tax status intact. This remedy protects the tax status with a “liability rule.”

This Article’s insight – that tax statuses may be protected by either property rules or liability rules – allows tax law to benefit from the extensive property/liability-rule scholarship. This Article shows that many of the advantages scholars have identified for liability rules are relevant to tax law. Congress could make greater use of liability rules to reduce tax-compliance costs, encourage economically efficient transactions, and improve bargaining during audits. Counterintuitively, liability rules may often deter improper tax avoidance better than property rules. Building on existing scholarship, this Article also suggests new approaches to tax remedies, such as anti-abuse pliability rules and giving the IRS entitlements plus put-options. Finally, this Article demonstrates that the property/liability-rule scholarship, which has drawn largely from tort, property, and contract paradigms, can draw new insights from tax law.

Keywords: tax, property rules, liability rules, taxation, remedies

Suggested Citation

Blair-Stanek, Andrew, Property Rules and Liability Rules in Tax Law (October 7, 2011). Available at SSRN: https://ssrn.com/abstract=1940439

Andrew Blair-Stanek (Contact Author)

University of Maryland Francis King Carey School of Law ( email )

500 West Baltimore Street
Baltimore, MD 21201-1786
United States

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