The tax law has a lot of rules. But although no statute conjures a more vivid or immediate picture of complex and detailed rules than the Internal Revenue Code, we have spent the last couple of years showing that tax law is not all about rules. In what are now two articles but will soon be four and eventually a book, we have combined our very different scholarly interests, one of us in tax and the other in jurisprudence, to develop our insight that many tax pronouncements that sound like rules are actually “standards.” Our work shows that when a rule-like pronouncement is acknowledged to be setting forth a standard, and is interpreted as a standard, a host of puzzles in the administration of tax law are solved. Apparent inconsistencies in the application of tax doctrine disappear. The murky becomes clear.
We began to develop this idea by focusing on the concept of “income.” The Code itself is singularly unhelpful in defining income because it provides that gross income is “income from whatever source derived.” The task of defining income has therefore fallen to the Supreme Court, which has determined that gross income consists of “undeniable accessions to wealth, clearly realized, over which the taxpayers have complete dominion.” The breadth of that definition has long been a source of consternation for scholars and for the IRS, both of whom have had to answer questions such as whether catching a record breaking baseball results in income to the recipient, and whether the receipt of welfare, or disaster aid, is income.
In our initial work we showed that the analytical confusion over the breadth of the Supreme Court’s definition of income vanishes if that definition is interpreted as a standard rather than a rule.
“Standards” are interpreted in light of the numerous values they reflect; in the income cases the values of administrability and the cultural importance of baseball and care for the needy dictate that catching record winning baseballs or receiving government assistance should not be treated as income and explain why the IRS has not sought to tax lucky fans or unlucky disaster victims.
Extending that insight to other areas of the tax law illuminates them as well. Interpreting the capitalization requirement as a standard which is informed by the value of matching income to the measurable costs of producing it explains why neither a CEO’s salary nor the cost of advertising should be capitalized even though both produce value for periods in excess of one year, while the cost of buying a machine should.
Understanding that some tax pronouncements are better interpreted as standards and distinguishing those from rules requires developing a jurisprudence of values in the tax law, and that is the focus of our current work. We aim to show that in its use of both rules and standards tax is ordinary law, not exceptional or fundamentally different law, as is often thought.