Getting a Poor Return: Courts, Justice, and Taxes

Getting a Poor Return Courts, Justice, and Taxes

Robert M. Howard

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GETTING A POOR RETURN

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GETTING A POOR RETURN Courts, Justice, and Taxes

ROBERT M. HOWARD

State University of New York Press

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Published by

State University of New York Press, Albany © 2009 State University of New York All rights reserved Printed in the United States of America No part of this book may be used or reproduced in any manner whatsoever without written permission. No part of this book may be stored in a retrieval system or transmitted in any form or by any means including electronic, electrostatic, magnetic tape, mechanical, photocopying, recording, or otherwise without the prior permission in writing of the publisher. For information, contact State University of New York Press, Albany, NY www.sunypress.edu Production, Laurie Searl Marketing, Anne M. Valentine Library of Congress Cataloging-in-Publication Data Howard, Robert M., 1956– Getting a poor return : courts, justice, and taxes / Robert M. Howard. p. cm. Includes bibliographical references and index. ISBN 978-1-4384-2889-5 (hardcover : alk. paper) 1. Tax courts—United States. 2. Tax protects and appeals—United States. 3. Tax collection—United States. 4. Justice, Administration of—United States. I. Title. KF6324.H69 2009 343.7304'2—dc22

2009007364 10 9 8 7 6 5 4 3 2 1

PREFACE

To Taryn, Courtney, and Jordan with love

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PREFACE

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List of Figures and Tables Acknowledgments

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One

Tax Policy and the Pursuit of Justice Courts and Justice Taxes and Tax Policy Courts, Fairness, and Taxes Chapter Overview

1 1 4 10 12

Two

Courts and the IRS The Need for Tax Forums Administrative Appeals and Trial Courts: Options and Odds Conclusion

17 18

Three

Tax Litigation and Tax Forum Choice Political Forces and Litigation The Decision to Litigate and Forum Strategy Hypotheses Factors Influencing Litigation and Forum Choice Results Conclusion

29 31 33 39 41 49 51

Four

Tax Decision Making Courts, Law, and Politics Taxpayers, Courts, and Outcomes Hypotheses Results Conclusion

53 54 56 63 67 70

21 27

viii Five

Six

CONTENTS Influences on the IRS and the Audits of Low-Income Taxpayers Bureaucratic Control and the IRS The National Political Coalition, Courts, and Bureaucratic Control Hypotheses Testing Influences Results Conclusion

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Courts, Fairness, and the Creation and Enforcement of National Tax Policy Courts, Fairness, and National Governing Coalitions Changing Tax Policy, Changing the Courts

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75 77 81 82 85 88

89 94

Appendix Methodology and the Use of Panel Data Estimation Problems Models for Chapter Three Models for Chapter Four Models for Chapter Five

97 98 99 100 103

Cases Cited Notes References Index

109 111 115 123

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LIST OF FIGURES AND TABLES

CHAPTER TWO: COURTS AND THE IRS Table 2.1 Comparing Tax Trial Court Options

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CHAPTER THREE: TAX LITIGATION AND TAX FORUM CHOICE Figure 3.1 Total Tax Litigation Filings 1994–2000 Figure 3.2 Change in Ideology of Tax and District Courts 1992–2000 Figure 3.3 Change in the Ratio of Tax Court to District Court Filings 1994–2000 Table 3.1 Model of Judicial Ideology Table 3.2 Descriptive Statistics Filings and Forum Choice 1994–2000 Table 3.3 Determinants of Tax Litigation 1994–2000 Table 3.4 Determinants of Forum Choice 1994–2000

34 36 37 47 48 49 50

CHAPTER FOUR: TAX DECISION MAKING Figure 4.1 President, Senate, and Tax Court Ideology 1983–1998 Table 4.1 Tax Court Judge Experience Table 4.2 Descriptive Statistics U.S. Tax Court and U.S. District Court Table 4.3 Ideology and the Probability of IRS Winning Table 4.4 Structure, Specialization, and Expertise and the Probability of IRS Winning

61 58 68 69 69

CHAPTER FIVE: INFLUENCES ON THE IRS AND THE AUDITS OF LOW-INCOME TAXPAYERS Figure 5.1 Figure 5.2 Figure 5.3 Table 5.1 Table 5.2

Executive-Appointee Target—Veto-Override Point Court-Conscious Executive Appointee Targets Trial Court Ideological Array Judicial Ideological Array and Expected Value Descriptive Statistics—Audit Rates ix

78 79 80 80 84

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Table 5.3 Influences on the Number of High-Income/ Low-Income Audits Table 5.4 Influences on the Number of Individual/ Corporate Audits

86 86

APPENDIX: METHODOLOGY AND THE USE OF PANEL DATA Table A.1 Determinants of Tax Litigation 1994–2000 (Chapter Three) Table A.2 Determinants of Tax Forum Choice 1994–2000 (Chapter Three) Table A.3 Probability of Outcome Favoring IRS (Chapter Four) Table A.4 High-Income/Low-Income Audits (Chapter Five) Table A.5 Individual/Corporate Audits (Chapter Five)

101 102 104 106 107

ACKNOWLEDGMENTS

There are many people to thank and acknowledge who have helped me in my career as well as in the preparation of this manuscript. I would like to thank Byron Nichols of Union College, my college mentor of long ago and just recently retired. A truly great and inspiring teacher dedicated to his students, he awakened in me, and in so many others, a lifelong love of learning and a passion for the mind. He has remained an inspiration and role model throughout the over thirty years of our friendship. I also want to thank Jeff Segal, John Scholz, Rich Timpone, and Paul Teske for all their help before, during, and after graduate school. I particularly want to thank John for providing the initial tax data that allowed me to start my examination of courts and taxes so many years ago. I thank them all for their teaching, inspiration, and repeated kindnesses throughout the years. I want to thank Scott Graves for his patience and help in answering my many questions on methodology and Dave Nixon for allowing me the almost too generous use of his ideas, data, measures, and patience. I thank them both for their continued friendship. I thank the editors and staff at SUNY Press for their warmth and patience throughout the production of this manuscript. I also want to thank Joe Smith, Virginia Hettinger, Harold Spaeth, and Steve Wasby for their comments, ideas, and suggestions for various chapters. I owe my parents, Amy and Bernie Howard, more than I can ever repay. To Courtney and Jordan, I apologize for the warped sense of humor you both appear to have inherited, but no parent could ask for better children. It is wonderful to have such great children with whom I have so much in common. And to Taryn, the love of my life, who knows what the next years have in store, but I hope we both continue fighting over directions.

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TAX POLICY AND THE PURSUIT OF JUSTICE

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TAX POLICY AND THE PURSUIT OF JUSTICE

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes . . . nobody owes any public duty to pay more than the law demands. —Judge Learned Hand Taxes are the price we pay for a civilized society. —Justice Oliver Wendell Holmes

COURTS AND JUSTICE In the aftermath of Hurricane Katrina, congressional Republicans offered a detailed list of cuts in the federal budget to offset the enormous cost of recovery and reconstruction. Among the featured items was a proposal to increase the audits of those claiming the Earned Income Tax Credit, a tax credit designed to provide financial assistance to working low-income individuals. Those claiming the credit in 2005 had a median income of less than $12,000. By separating the truly poor from those who were merely “nonaffluent,” the Republican proposal claimed an estimated savings of $85 billion over ten years. At the same time, the Republican Party continued to urge the complete and total elimination of the Federal Estate Tax, which affects roughly one percent of all taxpayers, and which even the official estimate puts as a revenue loss of $396 billion dollars over a similar ten-year period. Public policy often favors one group over another. It is expected that the dominant or governing political coalition will offer tax policies that favor one group for a variety of reasons—from benefiting political supporters to notions of sound economic policy. The dominant or governing coalition

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can be defined by party or ideology. Generally, if one party controls the elective branches of government, we can define that party and its goals as the dominant or governing coalition. Many times in American history the same party has controlled the presidency and both houses, or at least one house, of Congress. This assumes that each party is bound by certain core ideological assumptions—for example, the nature of federalism and the respective power of the state and federal government, or the extent and size of federal regulatory authority over markets, working conditions, and income. If the policy is improperly applied or enforced, the disfavored group can always assert their rights in court. Audited low-income taxpayers claiming the Earned Income Tax Credit can challenge the assessments by filing a lawsuit against the Internal Revenue Service (IRS). The expectation is that, as Justice Harlan wrote in his dissent in Plessy v. Ferguson,1 “all citizens are equal before the law. The humblest is the peer of the most powerful.” One of those audited working poor seeking equality before the law is Joy Anders, a day-care-center worker from Phoenix, Arizona. In one particular year, Joy earned $5,700, which she used to support herself and her sixteen-year-old son and claimed an Earned Income Tax Credit of $1,500. However, because Joy lived with her mother, whose sole source of income was a pension paying less than $7,200 per year and therefore unearned, the IRS rejected Joy’s claim to the Earned Income Tax Credit. The IRS claimed that although Joy’s mother did not file a tax return, Joy’s son was not a qualifying child because that child also lived with the grandmother and the grandmother’s income was unearned. The IRS immediately assessed an additional tax of $1,500, the amount of the credit, plus interest, and also notified Joy that penalties would accrue if the balance were not paid within ten days. With the pro bono assistance of a local attorney, Joy filed a claim in Tax Court, and penalties and interest accrue as Joy tries to navigate through the arcane meanings of a “qualifying child.” Despite assertions of fairness and equality, evidence suggests that Joy will have difficulty proving her claim. Taxpayers do not do very well challenging assessments and in particular challenged Earned Income Credits rarely survive court scrutiny. Perhaps this should not be surprising. The dominant political coalition sees many earned income claims as fraudulent and Robert Dahl argued many years ago that court rulings rarely conflict with the preferences of the majority political coalition. Modern research largely supports this assertion. Recent scholarship has found, for example, that the majority political coalition uses courts to accomplish goals that it cannot achieve through the legislative process (see, e.g., Whittington 2005). Despite this research, it is still the prevailing belief in this country that a court is the one branch of government that protects the minority against the power of the majority, and that courts exist to ensure “justice as fairness” (Fogel and Hudson 1981).

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This book examines these competing claims and beliefs about the American legal system in the area of tax policy and tax enforcement. Taxes and tax policy are perhaps the dominant domestic public policy issue of the past twenty-five years, taking only a backseat to post 9/11 national security concerns, and there is a complex legal system with competing federal trial courts that taxpayers can access to fight tax assessments. As one respected policy analyst noted, throughout the 1980s there were more frequent and detailed changes to the tax code during this decade than in any other period in U.S. history (Steuerle 1991), and the pace of tax legislation has not diminished with succeeding decades. Both Presidents Clinton and George W. Bush’s initial major domestic policy proposals dealt with taxes. Taxes and tax policy continued as a major focus of campaigns, policy debates, and legislation. The role of courts is critical in ensuring fairness in tax policy and acting as an institutional barrier against the power of government. Taxpayers challenging tax assessments annually file over 30,000 cases. Few tax cases are appealed and even fewer involve low-income taxpayers. Most cases are disposed of at the trial level and there are competing courts that litigants of all income levels use; the two most important are the Federal District Court, the trial court of general jurisdiction within the federal courts system, and the U.S. Tax Court, a specialized trial court created under the Article I legislative power of Congress. These courts are the front line in the guerilla war between taxpayers and the IRS and these are the courts that low-income taxpayers like Joy Anders turn to for relief against the IRS and the power of the political majority. Do these courts protect the rights of the individual, particularly the low-income taxpayer, or do they enforce dominant policy preferences? Do they influence the IRS to change its audit behavior and focus less attention on the lowest income group of taxpayers? Is there a difference in these courts in their decisions and in their relative influence on the IRS? This book attempts to answer these questions. I argue and demonstrate that courts differ little from the national policy makers in their approach to tax policy and tax enforcement and, in fact, the president and Congress can use the courts to support their tax policy goals. Because of this, it is unreasonable to expect low-income taxpayer to fare well in our court system. To argue this premise, I examine the tax litigation process from the initial decision of choosing the tax forum, through an analysis of the decision making process in these competing courts, to an examination of the respective influence and impact of these different tax forums. The book shows that while fairness before the law might be a laudable goal, the appointment process ensures that tax policy and tax enforcement rulings by the courts reflect the dominant political beliefs. Given the longer tenure of the federal judiciary, it is quite possible that even if the national coalition changes in the next few election cycles, which in turn could lead

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to changes in tax policy and tax enforcement, the judiciary will fall short of ensuring the new coalition’s notions of fairness in the tax policy domain.

TAXES AND TAX POLICY Taxes and the courts have always been intimately intertwined, and the statements that begin this book from two famous judges represent the dichotomy of the attitude that law, and, by extension, the judges who interpret and rule on the law, have to taxes. Judge Learned Hand, one of the most renowned of all appellate court judges, summarizes one attitude that the law, and the public, has toward our tax burden: no one likes to pay taxes and all taxpayers have the right to do whatever they legally can to minimize their tax burden. Yet, as Oliver Wendell Holmes notes, taxes are the price we pay for a civilized society. Minimization of one’s tax burden means fewer resources for the government. Without income tax revenue, we would have no army, navy, highways, or airports. We would have no FBI or CIA, or even any disaster management agency. It is unrealistic to think that these potentially divergent judicial attitudes are meaningless when it comes to judicial rulings on taxes and tax policy or that judicial attitudes have not played an important role in the formation and development of tax policy almost since the inception of the income tax. The first income tax laws were enacted in 1861 and 1862 to fund the Civil War.2 These same acts created the IRS.3 The Estate of Abraham Lincoln was even issued a tax refund for an overpayment. After the need for revenue to fund the Civil War diminished, these income tax laws expired. The growth of the progressive movement, the increase in the size of the national government, and the increase in U.S. involvement in international affairs all lay in the future and the current customs duties were sufficient to fund the operations of the federal government. Our story of the interaction of courts, national politics, and taxation really begins in 1894, almost thirty years after the end of the Civil War. Responding to dissatisfaction with high tariff rates and the need to raise revenue, Congress relied on its powers granted by Section 8 of Article I of the U.S. Constitution and passed a federal income tax for the first time since acts passed to fund the Union’s fight against the Confederacy. While almost all in our modern world accept the constitutionality of the income tax, the arguments for and against it echo much of the controversy one hears today about taxation and these arguments have the same ideological and partisan filters. Liberals and Democratic politicians supported the income tax while Republicans and conservatives opposed it. For those in favor of the income tax, it was seen as a crucial element of the progressive agenda, which sought, among other things, fairness and equity in the collection of revenue for the Unites States. Progressive advocates and Democratic

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politicians attacked the tariffs as regressive and hurting the poor and lower classes by increasing the costs of goods. Thus, Democrats viewed the income tax as a progressive measure and a fairer way to raise revenue. Republicans, however, argued that the income tax amounted to a socialist redistribution of income. The income tax would sap initiative and punish the hard work which leads to the accumulation of capital. Unlike many in his party, Democratic President Grover Cleveland personally opposed the imposition of the income tax on individuals (Witte 1985). However, because of the favorable and politically popular tariff relief provisions attached to the legislation, Cleveland reluctantly signed the income tax into law (Whittington 2005; Witte 1985). As part of the tax legislation, banks were required to pay a two percent tax on income in excess of $4,000. One such bank that had to pay an income tax was the Farmers’ Loan Bank located in Massachusetts. In a contrived case, Charles Pollock, a shareholder in the Farmers’ Loan Bank, sued to enjoin the bank from paying the income tax. Eventually, the lawsuit, Pollock v. Farmers’ Loan & Trust Co. (1895), reached the Supreme Court of the United States. After two hearings, Chief Justice Fuller, writing for a scant 5–4 majority, struck down the income tax as an unconstitutional direct tax. Among other reasons, the Court focused on the part of the statute that included rents from real estate as income. Land is subject only to direct taxation, the opinion stated, and you cannot separate income from the land itself. Therefore, the Court held, this provision violated the apportionment provisions of the Constitution. One cannot apportion tax on land because such a tax must be in proportion to the population. Of course these bare and very questionable legal reasons hid the underlying emotions of the case and views of the social desirability of the income tax. Despite Chief Justice Fuller’s admonition in his majority opinion that “we are not concerned with the question whether an income tax be or be not desirable,” Joseph Choate, the lead attorney for the plaintiff, attacked the law as “communistic” and “socialistic” (Hall, Finkelman, and Ely, Jr. 2005, p. 385). Certainly other justices on both sides saw the decision in ideological terms far outside of bare-bones legal reasoning, with some commenting on the emotions and lack of logic in the respective opinions of those with whom they disagreed. Called the “most controversial case of its era” (Hall et al. 2005), one scholar (Whittington 2005) has recently argued that the Pollock case provides a strong example of how the dominant political coalition uses the courts to achieve political goals that it cannot reach through legislation. In this set of circumstances, because of the complications and unpopularity of high tariffs, President Cleveland and the legislators in Congress opposed to the income tax were forced into supporting compromise legislation that enacted an income tax since it was the only political avenue open that

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would lead to a tariff reduction. Unhappy with the bundled income tax part of the legislation, President Cleveland and those legislators opposed to the income tax supported the effort to overturn the tax through the courts as an unconstitutional tax. Thus, an attempt at progressive taxation was stymied by the courts acting in concert with national political interests. The decision met with great criticism and, even though the tariff provisions were upheld, dissatisfaction with tariffs as a primary source of revenue continued. Because of these circumstances, a coalition of newly elected liberal Republicans and progressive Democrats began to seek legislative reenactment of an income tax. Under the guidance of then President William Howard Taft, who was fearful of a constitutional crisis between Congress and the Supreme Court, Congress agreed to a compromise. Congress would propose a constitutional amendment specifically allowing an income tax without direct apportionment based on population and Congress would pass an excise tax on corporate profits but no tax on individual incomes. With the compromise, Congress overwhelmingly passed an amendment to the U.S. Constitution in 1909 permitting an income tax without apportionment with a near unanimous vote in the House and a unanimous vote in the Senate. State ratification was slow, with mostly southern states supporting it and many eastern states reluctant to vote for the amendment. Northern states were far more industrialized, and the economy of the southern states depended greatly on agriculture and farming. Northern states therefore feared that the income tax burden would fall unevenly on the taxpayers of their states and the southern states would pay much less. Eventually, in 1913, the necessary thirty-sixth state ratified the Sixteenth Amendment, providing the constitutional basis for the right of Congress to authorize the collection of a federal income tax.4 The Sixteenth Amendment overturned the 1895 Pollock decision, and this remains one of the few times when a constitutional amendment has overturned a constitutional ruling of the Supreme Court.5 The ratification coincided with major Democratic victories in the 1912 election, including the election of President Woodrow Wilson, the first Democratic president since Grover Cleveland. This new more progressive Congress then enacted income tax legislation in the same year as ratification of the Sixteenth Amendment, upending President Taft’s compromise position. This first income tax was, by any modern standard, extremely modest and of limited reach. The top rate for all taxpayers was six percent for incomes over one-half of a million dollars ($500,000), an enormous figure in 1894 America and the equivalent income in excess of $11 million in today’s dollars. Only about two percent of the labor force filed tax returns during the first two years of the new statute’s existence (Friedman 2002). Even under a revised income tax law enacted in 1916, the first $3,000 ($4,000 for married couples) of income was exempt, an income equivalent today of

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almost $54,000 for single people and over $71,000 for married couples. The upper rate increased to thirteen percent, but only on incomes in excess of $2,000,000 per year; only the very few wealthiest would ever pay this rate, and most paid no tax at all. Even so, this modest income tax led to significant opposition. The most affluent Americans and the business community were the most outspoken in their opposition to the income tax. The wealthy saw the fairly small tax as a stalking horse for far greater income redistribution. The fear was that there would be a call for increased income taxation of wealth and eventually, to paraphrase Joseph Choate, a progressive income tax would lead to socialism. While socialism has never occurred, not all these fears regarding increased rates of taxation were misplaced. Just one year later, to finance World War I, the government dramatically increased income tax rates and also imposed an excess profits tax on business. The maximum rate increased to seventyseven percent, and from almost no influence on federal revenue prior to 1916, individual and corporate tax income accounted for sixteen percent of federal revenue. Between 1917 and 1920, revenue from these income taxes constituted almost sixty percent of all federal revenues. The tariff, once the centerpiece of federal revenue, now saw its importance to the economy and public policy decline in dramatic fashion. The revenue and importance of the income tax dwarfed the money generated by, and the consequence of, tariff collection. With this shift in importance came both significant opposition and tax evasion (or the more preferable term of tax avoidance), along with of course the use of courts to settle taxpayer and government disputes. With the end of World War I and a coming decade of Republican presidents and Republican majorities in Congress, both tax rates and the progressive nature of the income tax declined. Even Democrats led by outgoing President Wilson questioned the need for such high maximum rates and thus the effective top tax rate was reduced to twenty-four percent. Although a push was made by many wealthy businessmen to eliminate the income tax, Secretary of Treasury Andrew Mellon, no fan of disproportionate tax rates, convinced enough Republican officeholders that some degree of progressive taxation was socially responsible and beneficial for political purposes. With the support of a Republican administration, the income tax was now a permanent fixture of American political and economic life. Between the turn of the century and 1925, total internal revenue collections from income tax grew from $207 million to $3.2 billion. By comparison, customs duties climbed only from $185 million to $464 million during the same period (Chommie 1970; Witte 1985). The Bureau of Internal Revenue grew along with its collections. The number of employees increased from 4,000 in 1913, a number that had remained almost constant for more than half a century, to close to 16,000 by 1920.

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However, what the top and bottom rates should be, whether and to what extent the tax should apply to corporations as opposed to individuals, whether and when excess profits should be taxed, whether estates would be taxed, and what constitutes income, among other questions, would remain to be argued about and ruled on over the coming decades. In fact, just nine years after the passage of the Sixteenth Amendment and the subsequent constitutionally permissible income tax legislation, the first book to help taxpayers avoid excess taxation was published. It was entitled Minimizing Taxes, and written by Wall Street lawyer John Sears. Foreshadowing Judge Learned Hand, Sears wrote his book from the point of view of the taxpayer, offering advice on how to minimize taxes legally, which in Sears’s view amounted to the patriotic goal of “exposing evils in the system.”6 To paraphrase Sherlock Holmes, the game was afoot. In the decades that followed, tax policy continued to be a function of “revenue demands and ideology” (Witte 1985, p. 96). Even though the critical election of 1932 brought Franklin D. Roosevelt and solid Democratic majorities power, there was no immediate push for more progressive tax rates. Throughout the Depression, lower maximum income tax rates meant that relatively few individuals paid any income tax, although the 1930s did see the imposition of the Social Security tax, bitterly fought by business, but a regressive tax on individuals. The Supreme Court with a narrow majority7 upheld the Social Security tax. Income tax revenues accounted for about forty percent of all federal revenue. Once again, war came. Just as World War I changed assumptions about the need for government revenue and the appropriate source for such revenue, World War II would also lead to a significant increase in the need for revenue and alter the nature of income taxation. With this need for revenue and full employment led by massive government spending to both finance and support the war effort, tax rates increased and more individuals were subject to the income tax than ever before. A surtax was imposed on the income tax that started at a rate of thirteen percent on the first $2,000 of income and went up to eighty-two percent on incomes over $200,000. In addition, the federal government imposed a guaranteed collection mechanism that had the additional benefit of ensuring a steady stream of tax revenue throughout the year. Income tax withholding was introduced for the first time. More than one-third of Americans now paid some form of income tax and the tax was by far the dominant source of governmental income. By 1945, about 45 million American paid an income tax out of a total population of some 132 million people, and income taxes accounted for over seventy percent of all federal revenues. In the immediate aftermath of the war, income and corporate taxes were roughly equal; however, during the succeeding decades, the individual income tax began to dominate corporate revenue, as more and more earners

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became subject to the income tax. Although some attempts were made to reduce taxation following World War II with a brief Republican takeover in Congress, Truman’s reelection and the revenue needed to fight the Korean War forestalled any significant change in tax rates and the importance of the income tax. President Eisenhower resisted tax reduction throughout his term of office and, with the passage of the Internal Revenue Code (IRC) of 1955, tax rates stabilized. Another change during these years was the increase of individual income tax revenue compared to corporate tax revenue. From the 1920s through World War II, tax collections from corporations and individuals were equal. By 1955, however, individual income taxes provided $31.6 billion of income tax revenue, while corporations provided $18 billion. The disparity between corporate and individual taxes continues to this day (Witte 1985, p. 124). The ensuing decades saw movement back and forth between cutting taxes as a stimulus to the economy and raising them to finance the Vietnam War and new government social and economic programs. Considerable government expansion led to both a much greater need for revenue and collection and tax practices that significantly increased federal revenue. By 1968, the IRS was collecting $78 billion from individuals and $30 billion from corporations. By the mid 1990s, individuals paid almost $600 billion in income taxes and corporations more than $150 billion and the top income tax rate at one point climbed to fifty percent. Of course, expansion of government services and spending and the subsequent expansion of income tax rates and income tax collections led to increases in opposition to such government spending and tax collection rates. By 1980, due to inflation outpacing income gains, many American taxpayers were paying increasing tax rates without any corresponding real increase in income or buying power. A tax revolt was imminent and voters in both Massachusetts and California passed initiatives that capped property taxes. A similar movement was under way to reexamine and lower income tax rates. A rejection of high-income rates became one of the cornerstones of the presidential campaign of the Republican candidate Ronald Reagan. With his election came Republican control of the Senate, and in his subsequent presidency Reagan proposed and Congress adopted a tax package that decreased top rates soon after he took office. This was not the end of his presidency’s altering of tax rates. With bipartisan support, Congress enacted the 1986 Tax Reform Act, which, although revenue neutral, led to a large decline in progressive tax brackets, reducing over fifteen brackets to two. However, once again income taxes and the controversy as to the proper method and rate of collection resulted in additional changes during the ensuing decade. Concern about large federal deficits led both the George

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H. W. Bush and Bill Clinton administrations to once again increase tax rates and tax collections. For example, a third tax bracket was created and top rates climbed again to almost forty percent. George W. Bush ran, in part, in opposition to the imposition of more taxes and promised to reduce government spending and lower maximum tax rates. With his election, some of his initial legislation dealt with taxes. Thus, in the second Bush administration, maximum tax rates again declined and the Estate Tax was significantly reduced with a goal of eventual elimination.

COURTS, FAIRNESS, AND TAXES Millions of tax returns are filed each year and individual income tax collection is by far the single most important source of all federal government revenue. With so much money collected from so many people, significant conflict between individuals and the U.S. taxing authority, the IRS, becomes inevitable. In a typical year, taxpayers file over 100 million individual tax returns. The individual taxpayer initially determines his or her tax liability by calculating income and deductions and then filing a tax return to the appropriate IRS office, along with the amount of tax payment due to the government.8 The taxpayer is expected to comply with the tax laws and honestly report income, exemptions, and deductions. This is our system of self-assessment, one called “quasi voluntary” (Daily, 1992 p. 1/7; Freeland, Lind, and Stevens 1977, p. 971). Increasing rates and growing complexity lead to more incentives for avoidance and evasion and a greater need for planning. Tax cheating, in the form of outright noncompliance, is a severe problem. Many sources, including scholars, the IRS, and journalists, estimated that, in the 1970s and 1980s, noncompliance resulted in an unreported taxable income shortfall between $61 and $80 billion per year (IRS 1979; Kurtz and Pechman 1982). By 1986, Roth, Scholz, and Witte (1989) note that the IRS estimated that individuals failed to report between $70 and $79 billion in income received, and that the figure might in fact be closer to $100 billion. Philip Brand, the IRS’s chief compliance officer, verified the $100 billion figure for the tax year 1994.9 This amount is nearly twenty percent of all reported income. When income is underreported, the IRS collects less tax. The lack of compliance represents a severe loss of revenue for the government. Because of these problems, the IRS will closely examine a certain number of returns in a procedure known as an audit. It is the most powerful policy tool the IRS possesses (Burnham 1989; Roth, Scholz, and Witte 1989; Scholz and Wood 1998; Steuerle 1986). In its simplest form, an audit is a detailed examination of a taxpayer’s income tax return.10 The audit seeks to determine if the taxpayer is actually telling the truth in the claims made on the income tax

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return. The IRS does not accuse the taxpayer of wrongdoing, but instead seeks justification and verification of the listed income and expenditures. Taxpayers seek to avoid paying excess taxes and the IRS seeks to collect all taxes due and thus audits a selected number of returns both to determine individual tax liability and to try to ensure overall compliance. As one scholar of American law noted, “tax avoidance became a national pastime . . . the Internal Revenue Service and the taxpayers became locked in a kind of dance, a rhumba of avoidance and counteravoidance” (Friedman 2002, p. 395). Because of this dance of conflict, the taxpayer and the IRS often fail to resolve the matter to the satisfaction of one or the other, usually the taxpayer. When this course and all appeals fail, the taxpayer can turn to the courts to settle the disputes and courts become a major player, not just in the individual dispute, but in the overall formation and enforcement of U.S. tax policy. Perhaps we can call the courts the dance instructor or the referee of the rules of the dance. The Supreme Court has issued opinions on major tax cases involving more than 200 tax disputes since the beginning of the Warren Court (Epstein et al. 2003), more than any domestic policy domain. The greatest percentage of Supreme Court cases during the Warren Court years involved controversies over the IRC. During the Burger and Rehnquist Courts, IRC controversies accounted for the third and second highest percentage of cases (Epstein et al. 1992, pp. 553–54).11 Tax cases also represent a very large part of the docket of the U.S. Court of Appeals. For example, during the years 1997 to 2004, the Circuit Courts of Appeals handled, on average, more than 220 new tax case appeals per year. This heavy Supreme Court docket of tax cases is remarkable considering the assertion of one scholar that the Supreme Court is reluctant to take such cases because of the justices’ lack of interest and the issue complexity (Perry 1991). Among major cases, the Supreme Court has determined what constitutes income,12 acceptable business and personal deductions,13 and taxable consequences of divorce.14 All of these represent claims by the IRS following post audit assessments; they pitted one party against the IRS, and hence against the government of the United States. Although the taxed parties were concerned with their individual liability, the holdings of the Supreme Court have significantly shaped and determined tax law and tax policy. However, despite these raw numbers and major cases, most matters are disposed of at the trial level, and, unlike other legal areas, the tax domain uses a system of competing courts. These courts allow litigants of all income levels to assert their claims against the IRS. The two most important of these tax trial courts are the U.S. Court, the trial court of general jurisdiction within the federal court system, and the U.S. Tax Court, a specialized trial court created under the Article I legislative power of Congress. These two

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courts, along with the U.S. Court of Federal Claims, are the courts that decide the winners of the battles between the IRS and taxpayers and these are the courts that low-income taxpayers turn to for relief against the IRS and the power of the political majority. Given the particular prominence of taxes and tax policy over the past three decades, where tax litigants choose to sue, how these tax trial courts make decisions, and the impact of these decisions are critically important if one wants to understand the dynamics of not just tax policy, but public policy. Courts need litigants to bring a matter to them before they have a chance to rule on any particular matter and these lawsuits can change public policy by forcing the agency to expend time and resources fighting the litigation and then having to comply with the directives of these courts. The balance between legal avoidance as advocated by Judge Learned Hand and illegal tax evasion, those seeking to avoid what Oliver Wendell Holmes called the “price we pay for a civilized society,” is the point when courts step in and rule either in favor of the taxpayer or in favor of the United States. Taxpayers have a right to pay as little as legally possible, but if the taxpayer does not pay what is truly owed, “the price we pay for a civilized society,” then all the other taxpayers bear this burden and the noncompliant taxpayer becomes the free rider enjoying the benefits, but not the burdens, that federal spending bestows. Most cases that confront the trial courts present few difficult issues or problems. Often a small number of facts are in dispute and the cases involve few, if any, complex legal issues. However, many are not and the courts have to pick a winner and a loser with often devastating consequences to the taxpayer if the courts rule for the government. Often, however, regardless of how the courts rule, these decisions have other consequences. If courts consistently rule in favor of one type of one income level of taxpayer as opposed to another income level, or rule in favor of corporations as opposed to individuals, those decisions become part of the tax policy of the government and influence the ideals and perceptions of justice, fairness, and the notion that all citizens are equal before the courts. How courts decide these matters is the fulcrum on which we attempt to answer these questions. How they decide these cases has much to say about how and why we treat the taxpayer who uses the Earned Income Tax Credit and the taxpayer who employs the services of top accounting and law firms.

CHAPTER OVERVIEW Those looking for debate and analysis of the legal arguments over the constitutionality, interpretation, and meaning of tax law will be disappointed. This is neither a textbook on the fundamentals of income taxation, nor a demonstration on how to survive a tax audit, nor advice on how to prepare

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13

and win a court challenge. How a court should interpret a tax law—and the tax implications of the various interpretations—are properly the subjects of income tax textbooks and the domain of tax professors, tax lawyers, and those who provide income tax advice and assistance. These are obviously important topics for analysis and investigation, but this book is about the politics of courts and taxes, and whether courts deviate from the majority or enforce dominant beliefs in their rulings. After the introduction, the chapters proceed down the path of an audited taxpayer. The chapters use the audit experiences of Joy Anders, along with those of a large multinational corporation, a wealthy taxpayer who invested in a tax shelter, and a middle-class couple whose deductions were challenged as the counterpoints for the examinations and analyses to follow. Chapter two provides an overview of the choices these types of taxpayers have in challenging a post audit assessment by the IRS. This chapter examines the trial options available to taxpayers, which are first internal appeals and then appealing the audit assessment either in the Tax Court, the District Court, or the Court of Claims. While most of the chapter is descriptive, I do provide an examination of the choices as well as the costs and benefits of the particular trial forums. Ideally, the system should work to ensure that all taxpayers, regardless of wealth, have a fair and impartial forum to contest their assessments. However, arguably the least costly option might offer the smallest chance of success, calling into question the fairness of the options and ultimately the effect on compliance. Chapters three, four, and five are the heart of the book and contain the analyses of this dance of courts, the IRS, and these taxpayers. Chapter three analyzes in detail the decisions of each of the potential litigants in choosing first whether to sue and then selecting a forum. To do this, I first describe theories of litigation, including rational actor theories and information asymmetries, and use these theories to examine both the decision to sue the IRS and, once that choice is made, analyze forum choice. Then I gather data from the years 1994 to 2000, which coincides with the Contract for America campaign through the Republican takeover of Congress in 1995 and finishes with the last year of President Clinton’s term of office. The chapter argues that tax policy has been politicized and ideologically divisive since the 1970s, with conservatives generally opposed to greater tax collection and enforcement. Therefore, as the political majority became more conservative over this time period, litigants were encouraged to challenge the assessments and thus one should find a corresponding increase in tax litigation in both the Tax Court and the District Courts. In addition, litigants should also be encouraged to choose the court that offers the greatest chance of a conservative judge because the more conservative the judge, the more likely the support for the taxpayer opposing the IRS. The effect on the specific taxpayers is then examined.

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Chapter four describes the decision making of the two principal courts in which to challenge the IRS, the Tax Court and the U.S. District Courts. This chapter uses data from 1996 and 1997 to systematically examine the differences, if any, in the decision making of these courts. The chapter scrutinizes the specialized Tax Court and its expertise and sees if that leads to differences with the District Court in the use of ideological preferences in the outcomes of the tax cases, specifically focusing on judicial independence and congressional control. The chapter argues that the limited-tenure U.S. Tax Court uses its expertise, and lack of realistic structural or hierarchical constraints, to decide cases more in accordance with the Tax Court judges’ personal policy preferences than do the judges of the U.S. District Courts. The chapter concludes with an assessment of each taxpayer’s probability of success in each court. Chapter five examines the aftermath of these decisions and the influence of courts on tax policy and tax enforcement. Specifically, beyond the immediate impact on the taxpayer, do these aggregate decisions change IRS behavior? Do they lead to greater auditing of Joy Anders and less examination of the large corporation? Do these decisions instead do the reverse and change IRS audits to benefit poorer taxpayers? Several studies have shown that national agency policy can change as the ideology or partisanship of the federal district or federal appellate court changes. Some agencies must contend with different federal courts with overlapping jurisdiction, and calculate responses to these different courts that have different judges, different ideologies, and different agendas while trying to carry out the preferences of the executive and legislative branches of government in a separation of powers system. This chapter applies these theories of influence and impact by examining the tax trial courts and the IRS. Using data from 1994 through 2000, and studying audit ratios of individual and corporate taxpayers, I find that the IRS pays attention to the preferences of the executive and legislative branches of government and the preferences of the Tax Court, but not the District Courts, in determining the ratio of audits of individuals and corporations, with the IRS responding to more conservative courts and more conservative executive and legislative preferences by shifting the audit rate toward auditing more individual taxpayers. The smaller variation in Tax Court ideology lessens the overall impact of the Tax Court. Finally, chapter six offers a summation of the findings of this book and what these findings mean for tax policy, public policy, and the role of courts in a democracy. It is my hope that this book will accomplish two goals. First, it will underscore and demonstrate the importance of tax trial courts in setting and determining the nation’s tax policy. Then I hope to add to the body of literature that shows that courts really represent and make rulings consistent with the preferences of the majority. They are not

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out of control, but they do not really constitute the last best hope for the disenfranchised. In the end, perhaps both the independence and the nondemocratic or antimajoritarian nature of federal courts are overestimated by friends and critics alike.

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TWO

COURTS AND THE IRS

Taxpayers have several choices to consider following a post audit tax assessment. The choices range from administrative appeals, not paying and then suing in the U.S. Tax Court, or paying and suing in either the U.S. District Court or the U.S. Court of Federal Claims. The choice depends on calculations of the cost and benefits of each particular forum and for that analysis each taxpayer has to ask and answer several different questions. For example, does a low-income taxpayer have a realistic chance for success in her dispute with the IRS? For that matter, does this type of taxpayer really have any choice in venue, given financial circumstances? If a taxpayer can afford to pay the assessment, is there still a reason to sue in the Tax Court? What advantages, if any, does the Court of Federal Claims have over the District Court? What alternatives are open to a large multinational corporation to challenge a post audit assessment? Does it make a difference if the assessment is several million dollars or several thousand? Does it make a difference if the challenge is premised on a questioned accounting practice as compared to a challenged deduction? Does it make a difference if one can retain counsel? A poverty-level taxpayer challenging an audit of the Earned Income Tax Credit and a large corporation seeking to defend a questionable accounting practice represent two extremes. Most taxpayers and most audited taxpayers fall between these two types. The IRS often challenges the deductions claimed by a taxpayer or the failure of a taxpayer to report taxable income. From the point of view of most taxpayers, these claimed deductions or omissions of reported income are undoubtedly legitimate methods of avoiding unnecessary tax liability. For example, on the advice of his lawyer and accountant, an affluent taxpayer invests in a tax shelter to reduce his tax liability. However, the IRS challenges the shelter. The investor sought to lower his tax burden, but now faces a post audit assessment of over $100,000. What about a middle-class or upper-middle-class couple who finds 17

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various deductions on their 1040 Schedule A itemization form challenged? Imagine if this couple now owes $25,000 to the government. Do both types of taxpayers sue? If so, what forum choices are available? Why do taxpayers have so many forum choices and do all these choices have anything to do with taxpayer compliance and acceptance of our tax system? There are names one can attach to these taxpayers. Joy Anders is the taxpayer who challenges the denial of her claim to the Earned Income Tax Credit. Wal-Mart, the retail giant, defended its accounting practices in the Tax Court as did tax shelter investors such as James William. Mr. and Mrs. David Forrest filed a claim in the U.S. District Court to uphold disallowed deductions. While all have, at least theoretically, multiple options, each had reasons for the forum choice. The analyses in the following chapters deal with aggregate choice, decision, and impact. However, poor, middle-class, and rich taxpayers, small business and large corporations, and estates and trusts make decisions each and every day and must live with their consequences. The accumulation of these individual preferences leads to the aggregate impacts described in the succeeding chapters. This chapter provides an overview of the choices these taxpayers and others like them have in challenging a post audit assessment by the IRS. Each choice has costs and benefits and, while each particular situation is unique, one can examine some general factors that are taken into account by each type of taxpayer. The chapter considers these choices from the initial administrative appeal through each particular trial court. The conclusion ponders the meaning of these choices in assisting fairness and justice. Ideally, the forum choice system should work to ensure all taxpayers, regardless of wealth, an appropriate forum. Ultimately, a sense of fairness can also lead to greater compliance in a system that depends on voluntary reporting of tax liability. Does the most affordable option offer the smallest chance of success? If so, it calls into question the fairness of the choices and compliance.

THE NEED FOR TAX FORUMS In a typical year, taxpayers file over 100 million individual tax returns under a system of reporting called “quasi voluntary” (Daily, 1992 p. 1/7; Freeland, Lind, and Stevens 1977, p. 971). This reporting system assumes that the vast majority of taxpayers do in fact comply, but the quasi voluntary assessment places a tremendous burden on the taxpayer and sometimes mistakes occur through error and sometimes through deliberate dishonesty. To counter these mistakes, the IRS examines a certain number of returns for error in a process known as an audit. Trained IRS officials conduct the audits out of district offices located throughout the fifty states. The IRS uses numerous procedures and formulas to determine whom to audit and many different types of audits. The most

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19

common type is the correspondence audit. This type of audit usually occurs because of computer matching discrepancies. For example, a taxpayer might fail to include income that the IRS finds on a corresponding 1099 form. Most often, the taxpayer will receive a notice of the adjustment and, unless contested, there is little more for the taxpayer to do then sign the correspondence form and remit the additional tax owed. The IRS can be wrong and the taxpayer can send appropriate documents justifying the initial return. The next type of audit is known as the office audit. This type of audit is usually conducted by less experienced examiners and again involves discrepancies in the tax return. Similar to the correspondence audit, here the taxpayer has to prove, through documentary evidence, reported income and claimed deductions. The field audit is the most extensive audit and is conducted by the most experienced tax examiners. In this procedure, the auditor goes to the office or home of the taxpayer to examine the books and records, although the taxpayer can bring the requested documents to the IRS office. Usually this will result in greater tax liability. The IRS uses many different processes for selecting a return for one of these types of audits. Perhaps the most well known is the statistical analysis known as the DIF scoring system. The DIF or discriminate function system is computed by a comparison of tax returns of the same type or category and specifically singles out returns likely to produce more revenue after the audit (Johnston 1996). The IRS does not reveal the exact formula, but seeks outliers in similar income categories in which the deductions do not match or equal similar returns. For example, a sole proprietor who files a Schedule C return and claims an inordinate number and amount of deductions might fit the DIF profile. One researcher argues that the DIF is unlikely to activate if a taxpayer claims less than forty-four percent of adjusted gross income in Schedule A deductions or no more than fifty-two percent of revenue for a Schedule C filer (Johnston 1996). A supplemental program started in 2002 and known as UI DIF also calculates the probability of unreported income on a tax return (Shafiroff 2004). In addition, the IRS uses system matching systems, special programs that target particular occupations or businesses, evidence of criminal activity and informant tips, tax returns that have had prior trouble, and sometimes random audits. The matching or information reporting program is another computerbased program the IRS uses to select returns for audits based on discrepancies between reported income and deductions and other information that the IRS has received on the taxpayer that suggests irregularities. As suggested above, a taxpayer might not report the income shown on W-2 and 1099 forms submitted to the IRS with the taxpayer’s Social Security number. Other programs that lead to audits are tips from informants, criminal activity, targeted programs, and random auditing. For example, if the police

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GETTING A POOR RETURN

break up a drug ring, the IRS can examine returns of those involved and assess tax liability for the unreported, albeit illegal, income. Certain professionals such as lawyers and professors are often targeted through programs because of the likelihood of their use of tax avoidance. Finally, random audits are also used. Through a program originally known as the Taxpayer Compliance Measurement Program and since replaced with the National Research Plan audits, randomly selected people and business are required to prove every detail on their tax returns. The IRS then uses this information to create its DIF score. If the audit shows a deficiency, then the agency can assess interest and penalties in addition to the deficiency. All enforcement agencies are prone to make errors. The IRS confronts almost countless daily decisions on how to interpret the complexities of tax law and devise rules and procedures to collect taxes. If their decisions are too lenient toward potential tax evaders, the amount of tax collected would fall and reduce the revenue needed to fund the operations of the U.S. government. If the decisions are too stringent, they impose unnecessary burdens on taxpayers. Where to draw this line is a matter of judgment and it is these judgments and the subsequent court treatment that can affect the level of compliance. Drawing this line is not easy, and evidence exists showing that a significant proportion of IRS post audit claims are incorrect. Congressional hearings in 1997 and 1998 focused on several instances of IRS abuse in auditing and collection, although many of the worst alleged abuses were never proven (Johnston 2000). One individual who has studied the IRS for several years, David Burnham (1989), argued that IRS auditors who spend their lives working for the IRS develop a rather peculiar view of the world and hold two particular convictions. The first is that any individual who comes to their attention is guilty. The second is the perception that their duty is to assert and maintain the position of the IRS on all issues. Given these perceptions, perhaps it is not surprising that a 1979 General Accounting Office study found IRS examiners made technical errors in more than one-third of the cases, and that in over sixty percent of the cases, the agents failed to follow agency procedures. Improper auditing does not minimize the problem of tax compliance. In fact, in subsequent hearings, the IRS argued that the rules instituted to curb auditor abuse hampered collection and led to unwarranted dismissals of agents (Johnston 2000). However, when improper auditing, actual or perceived, is combined with the verified lack of tax compliance and then added to partisan and ideological conflict over tax policy, the IRS–audited taxpayer relationship is bound to be hostile and adversarial. The need to audit combined with the potential for abuse and differing policy interpretations inevitably lead to disputes between the agency and individual taxpayers. When confronted with a post-audit assessment, taxpayers can pay, appeal, or sue in response. Many take the last course. The IRC is a litigated

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area. In 1992, for example, taxpayers filed 2,296 cases in the Federal District Courts and 30,345 in Tax Court (MacLachlan 1995 p. 16). A significant percentage of Supreme Court cases during the Warren Court years involved controversies over the IRC. These controversies accounted for high percentages of all cases on the docket during the Burger and Rehnquist years, respectively (Epstein et al. 1992, pp. 553–54). This heavy Supreme Court docket of tax cases is remarkable considering the assertion of one scholar that the Supreme Court is reluctant to take such cases because of the justices’ lack of interest and the issue complexity (Perry 1993). It is also the heaviest litigation load of any federal agency. For example, in comparison, the Securities and Exchange Commission (SEC) reported filing 1,605 administrative complaints and 413 civil suits, for a total of 2,018 actions from July 1, 1999, to June 30, 2000, while the Federal Trade Commission (FTC) reported a total of 107 actions in the U.S. District Court for one quarter of the 2006 fiscal year.1

ADMINISTRATIVE APPEALS AND TRIAL COURTS: OPTIONS AND ODDS Internal Appeal Prior to receiving a formal demand letter, the taxpayer can request an informal conference to resolve the matter with the local IRS office. If no resolution is reached, then the IRS mails the taxpayer a thirty-day notice to pay the tax due. The letter contains the agent’s report and the basis of the proposed adjustments. Following receipt of the letter, the taxpayer has thirty days to protest and request a conference in the district director’s office. If no resolution is reached at this level, then the taxpayer can request an internal appeal through what is known as the appellate division of the IRS. The taxpayer does have the right to skip the district conference and go directly to the appellate conference. Often the IRS encourages this, particularly if the matter is complex. The appellate conference officer has direct authority from the commissioner of Internal Revenue to settle cases. If there is no agreement following this appeal, the taxpayer is given a statutory ninety-day notice of deficiency.2 If the internal appeals process fails to produce a settlement, the next step is litigation. Litigation Options Each taxpayer then has the option of various trial courts—the “S” option, a small claims and lower cost option within the U.S. Tax Court, the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims. There are several structural and institutional differences between

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GETTING A POOR RETURN

these courts. For example, District Court judges are given full judicial independence with lifetime tenure, and their salary is guaranteed while the judge is on the bench.3 In contrast, the Tax Court and Court of Federal Claims judges have fixed terms and lack a salary guarantee. The Court of Federal Claims hears monetary claims against the United States. Congress creates specialized courts, including the Tax Court, for several important reasons—complexity of issues, a need for economic and business-related consistency, similarity of issues, and sheer volume of cases. Each has its particular strengths and weaknesses. Tax Court By far the most common forum to litigate is the Tax Court, a specialized tribunal designed to handle deficiency claims. After the passage of the Sixteenth Amendment, the District Court was the sole venue for challenging tax assessments. However, in 1924, nine years after the passage of the amendment, Congress created the Board of Tax Appeals to handle taxpayer litigation. It was renamed the Tax Court in 1942. Originally an independent part of the executive branch of government, Congress passed legislation in 1969 removing the court from the executive branch and establishing its independence as an Article I constitutional court.4 In 1974, the court moved out of the space it shared with the IRS and received its own building. The Tax Court is an example of a court with limited jurisdiction and limited independence created through the legislative power of Congress under Article I. There are nineteen full-time judges appointed by the president and subject to confirmation by the Senate. Each judge serves for fifteen years, although, as a practical matter, if they so desire, they may be reappointed either to an additional term or allowed to remain on the court to decide cases on senior status. There are also several special judges appointed by the chief judge of the court. The full-time judges enjoy full federal pension and retirement benefits and draw the same salary as District Court judges (see generally Dubroff 1979, part 1). To sue in Tax Court, a taxpayer files a claim in the local district court office, and then the Tax Court randomly assigns the case to one of the judges sitting in Washington, DC. The assigned judge will then try the case in the taxpayer’s local area or in Washington, DC, depending on the request of the taxpayer. No prepayment is required, and all cases are tried without a jury. The losing party can appeal the decisions to the Appellate Circuit in the federal district within which the claim was initially filed. The proceedings are conducted under the federal rules of civil procedure and the federal rules of evidence. The IRS is defended by attorneys who come from the Office of the Chief Counsel of the IRS.

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If the claim is for less than $50,000, the proceeding is a small claims or “S” case. The taxpayer files a claim stating the reasons for protesting the assessment, serves it to the IRS, and is then notified of a trial date. Costs are at a minimum with low filing fees, limited discovery, and often pro se (taxpayer representing him or herself without counsel) litigants. Trial dates are typically within six months of filing, and decisions are rendered within a year. The average trial lasts less than two hours (Daily 1992, pp. 104–5). Procedural and evidentiary rules are simplified, and the rules mandate that the trial judge “ensure substantial justice.” There is no right of appeal, and the decisions have no precedent value. If the matter is more than $50,000, the taxpayer still does not pay the disputed amount, but the backlog to hear such cases is significant. It can take much more than one year for a decision. Each side preserves the right of appeal. Since formal procedural and evidentiary rules are used, effective presentation of the taxpayer’s case almost demands the services of a skilled advocate. The trial can take several days, although presumably since the Tax Court judge is tax specialist and because there is no jury, the parties will spend less time educating the judge about the particular tax issue. The specialized knowledge of the judge also means there is less information asymmetry between the parties and the court in the Tax Court than in a court of general jurisdiction. U.S. Court of Federal Claims The U.S. Court of Federal Claims is another Article I court. This court consists of sixteen judges nominated by the president and confirmed by the Senate for terms of fifteen years. The Court of Federal Claims is authorized to hear money claims against the United States. Approximately one-quarter of the cases before the Court involve tax refund suits. In 1982, the Federal Courts Improvement Act established the U.S. Court of Federal Claims, formerly the U.S. Claims Court, as the successor to the trial division of the Court of Claims, which had been in existence since 1855. The court’s headquarters are in Washington, DC, but cases are heard at other locations convenient to the parties involved. The court has nationwide jurisdiction over a variety of cases, including tax refunds, federal taking of private property for public use, constitutional and statutory rights of military personnel and their dependents, back-pay demands from civil servants claiming unjust dismissal, persons injured by childhood vaccines, and federal government contractors suing for breach of contract. Similar to the procedure for claims filed with the Federal District Court, the taxpayer pays the disputed assessment and sues for a refund. Because these judges are usually not tax specialists, they lack the specific

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subject matter expertise of the Tax Court judges. However, like the Tax Court, there is no jury trial at the Court of Claims. Most often the case will be tried in Washington, DC, and appeals go the U.S. Court of Appeals for the Federal Circuit. The number of tax cases filed varies considerably. From 1998 through 2005, there were several years when the number of lawsuits ranged from seventy-eight to ninety-one. In other years, taxpayers filed over 300 cases in the Court of Federal Claims. U.S. District Court Alternatively, the taxpayer can pay and sue by filing a refund claim in the U.S. District Court. The pay and prestige of the U.S. District Court are presumably greater than that of the Tax Court and Court of Claims. There, a judge’s salary is guaranteed and the tenure is lifetime, dependent only on good behavior. To sue in the District Court, the taxpayer must pay first and then file the claim in the taxpayer’s local district where the case is tried. One judge presides over the case from the onset of the pleadings through trial. The taxpayer can request a jury trial. Decisions of these courts can be appealed to the circuit within which the court is located. In addition to its powers to try civil cases involving tax refunds, the District Court also tries criminal tax cases, and this court has equity power, which allows the District Court to order certain behaviors. The IRS will use the District Court to enforce a subpoena when it seeks information about the taxpayer that is in the possession of a third party such as a bank. The IRS is represented by the U.S. Attorney’s office. The cases are usually important, skillfully argued, and can have precedent value. Thus, although only five percent of all taxpayer suits (Daily 1992, p. 5/12) are initiated in the District Court, its prestige, precedent value, equity, and criminal case power make it an important part of the tax justice system. Comparing the Courts Despite a low chance of success at verdict or decision, taxpayers continue to file cases in federal courts, and since many, if not most, cases settle, simply by contesting the audit, the taxpayer often obtains some tax relief. For example, in almost one-half of the cases filed in the Tax Court, the taxpayer obtained a reduction in taxes (Daily 1992, p. 95). Of the specific options, the “S” option is the quickest and least costly, but presents the most information asymmetries and the taxpayer often lacks expert advice and protection. However, a decision to litigate in the Tax Court entails substantial costs, even if the litigant does not have to pay the contested amount in order to begin proceedings. Pre-trial pleadings and discovery, the trial, and post-trial planning and maneuvering take considerable time and

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money, and a decision by a Tax Court judge is often delayed for more than one year; if the taxpayer loses, interest and penalties can accrue. Expert advice and protection, however, are available, and information asymmetries are lessened. Taxpayers pay first in both the Federal District Court and U.S. Court of Claims. According to some, however, taxpayers have a greater probability of winning in these courts than they do in the Tax Court (see Daily 1992, p. 105). Both options are expensive because of the prepayment requirement and the cost of expertise, representation, communication, and even opportunity because of lost time and money. Given the lack of specialization on the part of the trial judge, there is a greater possibility for information asymmetries and perverse incentives, particularly when the fact finders are jury members in the Federal District Courts. However, swift discovery rules, along with strict time schedules, lead to a shorter decision time than for Tax Court cases.5 For many reasons—complexity, discretion, need for consistency, and similarity of issues—a specialized Tax Court and a low-cost speedy option make sense for a taxpayer. For many other reasons, however, courts of more general trial jurisdiction are preferable. The need for juries, for arbiters who are generalists and thus can look at the broad picture, for some localized control, and a swifter resolution all argue for litigating in a District Court. Table 2.1 (next page) presents a comparison of the benefits and costs associated with each forum choice. Clearly, the available court options allow at least the appearance of fairness for the taxpayer. Having different courts with different costs and different benefits promotes equity and a sense of fairness, and the taxpayer can choose the forum most appropriate to the level of the claim involved. Simple matters can be resolved swiftly and inexpensively. More complex matters get a full hearing with the choice of an expert arbiter or a jury trial. Even if success is low (MacLachlan 1995), the taxpayer at least obtains the appearance of justice. The system design appears fair, and, as Tyler notes, the fairness of the process itself is often more important than the outcome (Tyler 1990)—and of course fairness is the yardstick by which courts are usually evaluated. However, while the appearance of fairness is important, this still begs the question whether the system is actually helpful and fair. This is an important issue because the judicial system should benefit all taxpayers, not just those who have no other option but to litigate in Tax Court because prepayment is required in the other courts. The influence of courts extends beyond the individual matter, and this strengthens the credible commitment of government to the taxpayer. The fact that multinational corporations or wealthy tax shelter investors choose the Tax Court implies that there is more to litigation than just the prepayment requirement. Wealthy

No Right of Appeal Information Assymetries Jurisdictional Limit Lack of Specialized Arbiter Low Chance of Winning Non-level Playing Field Lack of Formal Rules Inhibits Complete Disclosure Lower Court Prestige

Costs

Level Playing Field Right of Appeal Greater Chance of Winning Right of Appeal

Claims Court

Specialized Arbiter Speed Low Communication Opportunity & Time Costs No Expertise Costs Few Information Assymetries Lack of Perverse Incentives

“S” Court

Comparing Tax Trial Court Options

Benefits

Table 2.1

Entails Time, Communication, Communication and Opportunity Costs Expertise Cost Long Wait for a Decision Low Chance of Winning Lower Prestige

Specialized Arbiter Fewer Information Assymetries Fewer Opportunities for Perverse Incentives Right of Appeal Precedential and Policy Value to Decisions

Tax Court

Information Assymetries Negotiation, Strategy, Communication & Opportunity Costs Expertise Cost Greater Opportunity for Perverse Incentives Lack of Specialized Arbiter

Right to Jury Level Playing Field Right of Appeal Precedential and Policy Value to Decisions Greater Chance of Winning Prestigious Court

District Court

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litigants have options and use them. Forum choice means little if you have no realistic selection. A Joy Anders cannot weigh the costs and benefits or the applicable precedent in each court that would allow her to choose an option with a greater chance of success. While the forum choices allow even poor taxpayers to have their “day in court,” they cannot equalize the choices and chances for all taxpayers.

CONCLUSION Although the tax laws are undoubtedly “revenue raisers” (MacLachlan 1995), the choice of forums and the ease and relative effortlessness of filing claims allow almost any aggrieved taxpayer to at least have a fair hearing. Low- and middle-income taxpayers can file claims quickly and have them heard in an informal, inexpensive setting. The appearance of fairness is achieved even if most taxpayers have little actual choice of forum because of the cost of litigation outside the Tax Court. However, the courts serve a broader role of ensuring actual fairness. We have a system of voluntary compliance at least to the extent that the system depends on the individual taxpayers self-reporting. To ensure voluntary observance of tax filing, taxpayers need a credible commitment from the courts that justifies their compliance. That is, we want the IRS to be aggressive in the collection of tax revenue. The good of the entire country depends on the agency’s collecting revenue in as efficient a manner as possible, albeit not at the expense of fairness or injustice to taxpayers. In an ideal world, the IRS aggressively pursues tax cheaters and leaves the honest citizen alone. We know this does not happen. An imbalance toward aggression, toward efficient collection, inevitably means that some honest taxpayers will not be treated in a fair and just manner. Thus, we also want to know that taxpayers will get a fair hearing if they choose to contest the agency action. The appearance of fairness is not enough. If certain forums offer advantages to the litigants over others, then these choices, to be effective, must be open and available to all litigants. In the end, compliance depends on taxpayers believing that they have some sort of stake in the outcome. Why litigants choose to sue and why they would select one particular forum over another are examined in the next chapter.

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THREE

TAX LITIGATION AND TAX FORUM CHOICE

There are the Joy Anders’s of the world and there is Wal-Mart. In between are middle-income taxpayers like David and Barbara Forrest and tax shelter investors such as James William. Joy Anders is seeking to recover the $1,500 the IRS has assessed in its claim of improper use of the Earned Income Tax Credit. Wal-Mart was disputing over $30,000,000 due to challenged accounting practices. David and Barbara Forrest sought to recover $30,000 of deficiencies for denied loss deductions, while James William was charged with investing in an abusive tax shelter. Each has had a dispute with IRS, and each has a choice of a tax trial court; three chose the Tax Court, while one litigated in the District Court. Why did Joy Anders, David and Barbara Forrest, and Wal-Mart select the Tax Court, while James William decided on the District Court? Why would they even bother to litigate? What is the incentive to spend time and money to recover any or all the assessment? Is it possible that Congress can promote the use of one forum over another or even advance litigation against the IRS? Consider taxpayers such as Joy Anders. Congress can encourage the IRS to audit her and similarly situated taxpayers while it can also encourage her to litigate her claim against the IRS. Thus, Congress can push for audits of Joy and other poor taxpayers, deflect the blame onto the IRS,1 and offer hope to the taxpayer for a just solution. Although legislators and scholars often outwardly decry policy making through the courts or the use of litigation to solve social problems, this chapter explores how the political majority can use litigation to move policy or settle issues in a manner consistent with the preferences of the political majority. This can deflect attention away from the deliberate policy choices of the political majority. Instead it allows taxpayers to direct their ire toward a bureaucratic agency, particularly, the IRS. Such litigation, separate and apart from the actual decisions of the judges and their policy preferences, can move an agency like the IRS to 29

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alter policy choices. To show this, the chapter examines the influences behind these choices to litigate and, once that choice is made, what forum to choose. Although this chapter will examine the individual decisions that lead to litigation and forum choice, the emphasis will be on the factors that increase aggregate tax litigation and the reasons behind the decisions of litigants to select one tax forum over another. As observed in chapter two, while every taxpayer who sues the IRS has a theoretical choice of litigation or settlement, given financial circumstances, taxpayers like Joy Anders have few options but to sue and a limited choice of forums. However, wealthier litigants and those with greater resources do have a real choice. The cumulative effects of these choices lead to changes in IRS behavior. To demonstrate the effects of these choices, I examine national policy, court preferences, and litigation patterns in the Tax Court and District Court from 1994 through 2000. Arguably, tax policy has been politicized and ideologically divisive since the late 1970s, with conservatives generally opposed to greater tax collection and enforcement. As noted in chapter one, tax cuts were prominent platform positions of the Republican Party in presidential elections from 1980 onward. Ideological positions on public policy issues in Congress can translate into increasing or decreasing litigation trends. By encouraging or discouraging litigation through the use of standing, a national governing coalition can push policy toward its favored direction. There are many ways that Congress can do this. For example, through expanding or contracting the standing of those who can sue, Congress can enlarge or shrink the potential pool of litigants (Smith 2006) and thereby enlarge or shrink the number of lawsuits. Then, through the appointment and confirmation process, the president and Congress can choose judges more or less sympathetic to the claims of the litigants and push decisions in favor of a particular policy point of view. In several policy domains, courts have a played a prominent and perhaps decisive role in determining public and social policy. In many famous cases, court rulings have significantly changed policy. These range from desegregation through major Supreme Court decisions such as Brown v. Board of Education (1954), the right to privacy through Griswold v. Connecticut (1968), abortion through Roe v. Wade (1973), and even state-level education policy through several state high court decisions (Bosworth 2001). Given the prominent role of courts in setting and determining policy and the particular prominence of taxes and tax policy over the past three decades, why and where tax litigants choose to sue is critically important if one wants to understand the dynamics of not just tax policy, but public policy. Courts need litigants to bring a matter to them before they have a chance to rule on any particular matter and these lawsuits can change public policy by forcing the agency to expend time and resources fighting

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the litigation and then having to comply with the directives of these courts. Without litigants, courts cannot change policy. To show the importance of litigation and litigation choice, this chapter first reviews the divergent literature on litigation and policy and then examines individual and aggregate causes of litigation. These analyses are then applied to the causes of aggregate increases or decreases in tax litigation and the reasons litigants would choose one tax forum over another. From this discussion, testable hypotheses are derived and presented to determine the causes of both tax litigation and tax forum choice. The next section describes the data, methodology, and models. I then explain and interpret the results and in the conclusion offer some suggestions as to the broader meaning of litigation and law forum choice and policy.

POLITICAL FORCES AND LITIGATION Politics matters to litigation because politics is about policy choice and policy change. Litigation can lead to policy change by compelling judges and juries to pick one party over the other. Decisions to litigate—the idea of whether or not to sue and, if that choice is made, where to sue—are not made in a vacuum. These choices depend on larger economic and political circumstances in addition to an individual grievance. Most analyses of litigation and forum choice examine precedent and performance of litigants in each respective court to calculate the likelihood of winning. Little attention has been paid to the dominant national coalition’s ability to encourage litigation or the use of one court over another through legislation and an appointment process that nominates and selects judges more favorable to one policy point of view. If national policy encourages taxpayers to dispute the IRS and if courts preferences are such that they are more likely to rule in favor of the taxpayer against the IRS, then these become additional factors to consider in calculating forum choice and the dominant elected coalition uses this information to encourage the use of one particular forum. The political, social, and economic circumstances influence the choices made by Joy Anders, Wal-Mart, and the Forrest’s. Scholarship has paid considerable attention to litigation and its influence on social and bureaucratic policy (Cortner 1968; Olson 1990; Shipan 2000; Smith 2006; Unah 2003). One area of investigation focused on interest group litigation. Early explanations centered on the theory that disadvantaged groups unable to change policy through the legislative process used litigation to achieve policy goals (Cortner 1968). This political disadvantage theory seemed particularly pertinent for those who examined the National Association for the Advancement of Colored People (NAACP) and the organization’s deliberate strategy to use the courts and the Fourteenth

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Amendment to achieve civil rights goals that a Congress dominated by southern conservative gatekeepers on key congressional committees continually thwarted (Cortner 1968; see also Epstein 1985). While theoretically appealing and enforcing the notion that courts help achieve justice and fairness, later research discounted this “disadvantaged group” theory. Subsequent research showed that interest groups on all sides of the political spectrum resorted to the courts and that even powerful business and other interest groups used the courts to achieve policy objectives (Olson 1990; Unah 2003). Advantaged as well as disadvantaged groups sued to attain policy goals to supplement, enforce, or even just maintain legislative gains. For example, business interests and conservative interest groups as well as traditional liberal and politically disadvantaged groups have used the courts either by participating as parties to the litigation or through filing of amici briefs (Caldeira and Wright 1988; Unah 2003). As Unah (2003, p. 66) noted, pursuing rights in court is not something that is restricted to disadvantaged groups. Scholars have also shown that Congress encourages individual litigation as way to achieve policy goals. Although politicians and certain scholars might decry the use of the courts to achieve social and political goals, political institutions can use the courts to achieve policy goals and regulatory control through encouraging litigation, both by organized interests and by individuals. Congress does so through promoting judicial review and legislation design that allows citizen suits as an additional measure of regulatory control (Shipan 2000; Smith 2006). For example, Congress can encourage citizen suits as a way of obtaining regulatory control over an agency that cannot be achieved through the legislative process. The lawsuits can act as a monitoring device on agency action and save considerable legislative time and cost (Smith 2006). Lawsuits can prevent “bureaucratic drift” away from political control and ensure statutory construction in accordance with congressional preferences (McCubbins, Noll, and Weingast 1989). The dominant coalition is most likely to favor such lawsuits when the court that exercises review is ideologically closer to the elected policy makers (Shipan 2000). Applying this to tax litigation means that the elected coalition through implict legislative signals and the judicial appointment process can encourage the use of tax litigation in an era of tax cutting legislation and antigovernment spending rhetoric. Tax litigation is both a way to control the IRS and another forum for disaffected taxpayers to find tax relief short of legislation. The same logic should apply to forum choice. If one forum offers a greater opportunity to control the IRS, then the coalition should encourage the use of that particular forum. In the following section, I detail these arguments as to why and how litigation and forum choice would be encouraged by Congress.

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THE DECISION TO LITIGATE AND FORUM STRATEGY Rational Actors and the Political and Economic Environment Individuals and groups have goals and decide to go to court to support those goals. As part of this calculation, scholars have theorized and found evidence for the concept that litigants act rationally when deciding to proceed to trial or even appeal a decision to U.S. Supreme Court (Bebchuk 1984; Landes 1971; Posner 1973; Reinganum 1988; Reinganum and Wilde 1986; Songer, Cameron, and Segal 1995). Early formal models showed that the decision to litigate was a simple calculation of costs and benefits (Landes 1971; Posner 1973). Applying these insights to some of the individuals in this book, Joy Anders then proceeds to court because she has nothing to lose. The costs are minimal and the potential benefit is enormous. Later game theoretic models showed that the litigation calculus includes potential economic gain versus the ability to afford court costs, signals from the opposing party, and potential liability (Bebchuk 1984; Reinganum 1988; Reinganum and Wilde 1986). Empirical research extended litigation calculations to appellant decisions. Appeals to the Supreme Court are more likely if the appellant calculates that there is a greater chance of reversal of the adverse appeals court decision (Songer, Cameron, and Segal 1995). If there is a greater likelihood of winning at the appellate level than there is of losing, an individual would be more likely to proceed to trial. While costs, benefits, and signals help determine individual decisions to proceed to trial, those who have examined aggregate decision making find that cumulative litigation rates rise and fall in relation to broader environmental factors. These causes include such factors as the economy, the political environment, and changes in the political and economic environment (Clark 1990; McIntosh 1990; Stookey 1990). Economic growth and political change encourage litigation (McIntosh 1990; Stookey 1990).This means that implict signals from Congress and the executive branch as well as explicit tax legislation should matter. There is a strong ideological dimension attached to tax policy and tax enforcement. If conservatives oppose taxation and rigid enforcement of tax policy, then the more conservative the political coalition, the greater the likelihood of litigation contesting tax assessment. If the political leadership attacks existing tax policy and tax collection, this should increase lawsuits against the IRS. It is a clear signal to challenge tax assessments. Litigation should also increase if Congress enacts legislation that makes it easier to sue or challenge the IRS. Conservatives have adopted an antitax posture over the previous three decades. It has become a conservative position to oppose taxes and, by extension, the IRS. Conservatives believe in lower taxes and less enforcement.

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Arguably, this has occurred because of the antigovernment stance adopted by conservatives and the pro-government posture adopted by liberals during this time period and the corresponding linkage with support for spending, support for government, and political liberalism (McClosky and Zaller 1984). Government spending depends on tax revenue and collection of revenue; therefore, opposition to government spending means opposition to the collection of revenue that supports such spending, while support for government spending means support for the collection of revenue. Trends in polling data seem to bear this out. Following this, one should then expect to see an increase in tax litigation after Republican legislative gains or the introduction of legislation that makes it easier to sue the IRS and as the judiciary becomes more conservative. An examination of data from 1994 through 2000 seems to bear this out. For example, Figure 3.1 shows aggregate tax litigation filings in the U.S. District Courts and the U.S. Tax Courts during this period. We see a gradual increase after the election of Republican majorities in both houses of Congress in 1994 and another gradual increase 1997 following critical hearings about the IRS and subsequent taxpayer bill of rights legislation. A decrease then occurs after the legislation curtailing the ability of the IRS to audit.

35000 35,000 30000 30,000

25,000 25000

Filings

20000 20,000 15000 15,000

10,000 10000 5000 5,000

0

1994

1996

1998

Year

Figure 3.1 Total Tax Litigation Filings 1994–2000

2000

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35

While aggregate political trends are important, they are only one factor in a calculation to litigate. The likelihood of success can depend on other factors. For example, a key consideration in the likelihood of success is existing precedent. Practitioner tax manuals stress the importance of relevant precedent (Berall 1992; Garbis and Schwait 1971; Taylor et al. 1990). Favorable precedent makes litigation more likely, while unfavorable precedent would discourage challenging a post audit assessment. Thus, precedent acts as an influence on whether or not to sue the IRS and forum choice. The Logic of Forum Choice In addition to encouraging litigation, political coalitions have other means to control agency policy. One method is to encourage the use of one forum over another. Though often derided as forum shopping, forum choice is not an isolated procedural issue. In many areas of law, litigants have a choice of venue. Plaintiffs, or their lawyers, often select where they bring a lawsuit. For example, if a party is injured in an accident and the prospective plaintiff and defendant are from different states, the plaintiff can sue in a state court or use diversity jurisdiction to bring the case in federal court. While diversity jurisdiction is a constitutional right, many of these forum choices are predicated on legislation, and a leading example of forum choice is federal tax litigation, as shown in chapter two. All else being equal, if one forum offers a greater chance of success than another, one would expect that taxpayers would choose that particular forum. In tax litigation, defendants have a choice of three forums: the U.S. District Court, the Article III court of general trial jurisdiction in the federal system, and the U.S. Tax Court, a specialized court created by Congress under its Constitutional Article I legislative power. The third is the U.S. Court of Federal Claims. This court’s jurisdiction is limited to taxpayer lawsuits against post audit assessments by the IRS. While there is significant existing research on the reasons for litigation, there is much less research on choices litigants have made once they decided to sue. There has been little investigation of the costs and benefits or the political, economic, and social factors that lead to the choice of one forum or another. Why would Wal-Mart choose to litigate in the Tax Court when the District Court is often viewed as a more favorable forum for the taxpayer? Why does anybody opt for the more costly District Court? This scholarly omission is surprising. Litigants have a choice of forum in several areas. For example, multistate or multinational corporations often have sufficient ties to several states or even several nations that allow these entities a choice of several different forums in which to fight unfavorable laws or defend corporate action from individual litigation. Individual plaintiffs can use diversity jurisdiction to bring state law claims in federal court, and estates

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and bankruptcy petitioners can employ asset location to select a favorable venue for their respective claims. Forum choice is often referred to derisively as “forum shopping.” Forum shopping has the potential to denigrate the ideal of courts standing for fairness and impartiality (Eisenberg and LoPucki 1999). Forum shopping is viewed as perversion of the ideals of justice. It is regarded as the unfair exploitation of jurisdiction or venue rules to affect the outcome of the lawsuit (Juenger 1990, p. 677). Different jurisdictions or venues can treat the same class or type of litigant differently and therefore justice can differ by location. Examining litigation decision making or the reasons for such litigation without examining the forum chosen to bring a court case leaves at best an incomplete picture of much of the litigation process and the potential impact on justice and fairness. Forum choice rarely occurs accidently. In several domains, forum choice is a function of deliberate legislative design (Eisenberg and LoPucki 1999). Federal tax litigation is one such area. For audited taxpayers fighting an IRS post audit, the “choice of forum is perhaps the single most important decision in planning for tax litigation” (Berall 1992, p. 75). There are many practical reasons that Congress created an alternative specialized forum for tax disputes, among them the complexity of the issues and the potential for tax litigation to overwhelm the existing court system. However, encouraging tax litigation forum choice also can serve political purposes. Congress has a much greater ability to change the policy preferences of the shorter-tenured Tax Court than the lifetime-tenured District Court. This can be seen by the an examination of Figure 3.2, which tracks the

0.35

U.S. Tax Court Court Median Median US Tax

0.3

Ideology

0.25 0.2 U.S. District Court Median

US District Court Median

0.15 0.1 0.05 0 1992

1993

1994

1995

1996

1997

1998

1999

2000

Year

Figure 3.2 Change in Ideology of Tax and District Courts 1992–2000

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median ideology of the Tax Court as compared to the median ideology of the District Court from 1992 to 2000. I start with 1992 because this allows me to indicate changes since the election of President Clinton. Figure 3.2 shows that the median ideology of the Tax Court changed more than the median ideology of the District Court during this period. In fact, a simple analysis shows that the ideology on average for the Tax Court changes more than twice as much each year than for the District Court (.008 as compared to .003). While both courts became more liberal during the Clinton years, a logical result of a Democratic president’s power of appointment, the median tax court judge remained more conservative than the median district court judge, except for a few years. Given conservative and Republican disenchantment with taxes and tax collection, it follows that the Republican majority would encourage litigation against the IRS as an additional measure of agency control over tax collection and would encourage taxpayers to use the Tax Court if that court was more conservative than the District Court. Following this logic, just as there was an increase in tax litigation following Republican electoral victories in Congress, one should then also see an increase in litigation in the Tax Court compared to litigation in the District Courts, and again examination of data from 1994 through 2000 seems to bear this out. Figure 3.3 compares aggregate tax litigation filings in the U.S. District Courts and the U.S. Tax Courts during this period.

20 18 16 14

Filing Ratio

12 10 8 6 4 2 0 1994

1995

1996

1997

1998

1999

Year

Figure 3.3 Change in the Ratio of Tax Court to District Court Filings 1994–2000

2000

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What we see is a significant in spike in Tax Court filings compared to District Court filings following the Republican victory in the midterm elections of 1994 and again after the series of hearings on IRS abuse and the introduction of legislation favoring the taxpayer in disputes with the IRS. Just as costs and benefits become part of the calculus of litigation decisions, they should also factor into tax forum choice. Because of the prepayment requirement in the District Court, far more taxpayers choose to file a claim in the Tax Court. If cost were the only concern, then no taxpayer would ever choose the more expensive option of the District Court. However, the probability of winning is part of the calculation, and a taxpayer has to offset the potential cost of litigating versus the likelihood of success. Practitioner manuals make clear that an important factor in both bringing suits, and choice of forum, is precedent (Berall 1992; Garbis and Schwait 1971; Taylor et al. 1990). Precedent acts as an influence on whether to sue the IRS as well as on forum choice. The more favorable the precedent in a particular forum, the more likely taxpayers will sue in that forum. Winning because of favorable precedent in the District Court is a benefit that could outweigh the cost. In addition to precedent, another factor that should matter in the likelihood of prevailing on the merits, and therefore forum choice, is ideology and, in particular, judicial ideology. Ideology matters because, as previously argued, tax policy is an issue charged with significant ideological dimensions (see, e.g., Scholz and Wood 1998, 1999; Stevenson 1997; Wiseman 1997a, 1997b). An earlier study found a significant positive correlation between judicial liberalism and support for the IRS (Howard and Nixon 2002). If the judges on a particular court are more conservative and more opposed to the IRS, a rational tax litigant should consider that a more conservative court will offer the tax litigant a greater probability of winning. As previously noted, Tax Court nominees are appointed by the president and confirmed by the Senate. Although the nominees have considerable prior experience and expertise in tax law, they often have significant political background and experience (Tidrick 2004). In this they are similar to nominees of the other specialized courts (see Unah 1998) and to nominees of more generalized Article III courts. Thus, the more conservative the nominees that are appointed to the Tax Court, the greater the likelihood that litigants will choose the Tax Court over the District Court while the more conservative the appointees to the District Court, the greater the likelihood that the taxpayer will choose the District Court instead of the Tax Court. In addition, the Tax Court judge has a fifteen-year tenure on the Tax Court. This is in contrast to the lifetime tenure of the District Court judge. Because of this, it should be easier to shift the ideology of the Tax Court; as the ideology of the national governing coalition becomes more conservative, then the Tax Court should show a greater shift toward

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conservatism than the life-tenured District Court. This should in turn lead litigants to prefer the Tax Court to the District Court. According to research on aggregate litigation, economic and political factors and changes in the economic and political environment also should affect forum choice. This means that implict signals from the national governing coalition and explicit tax legislation both should matter. Given the ideological dimension attached to tax policy and tax enforcement the more conservative the dominant political coalition, the greater the likelihood of litigation. If the political leadership attacks existing tax policy and tax collection, then this should increase lawsuits against the IRS, and if legislation is enacted that makes it easier to sue or challenge the IRS, this should increase litigation. Since contesting assessments in the Tax Court is a less expensive than contesting them in the District Courts, an increase in tax litigation should lead to a greater increase in Tax Court litigation compared to District Court litigation. In addition, as previously mentioned, the national coalition can change the ideology of the Tax Court much more quickly than the District Court. As the ideology of the national coalition becomes more conservative, this should send a signal to taxpayers to prefer litigation in the Tax Court and avoid the District Court. Economic factors should also influence litigation and forum choice. Wealth allows greater freedom in pursuing more costly alternatives and thus greater wealth should lead to greater use of the more costly District Court. In addition to income, an indication of wealth is the actual post audit assessment of additional taxes and penalties imposed by the IRS. The greater the assessment, the greater the likelihood that the taxpayer has sufficient income to sue in the more expensive District Court and thus higher post audit assessments should lead to an increase in District Court litigation. Conversely, unemployment means fewer resources and less ability to prepay and therefore increased unemployment should lead to greater use of the Tax Court. In the next section, I offer hypotheses to test these assertions.

HYPOTHESES If, as argued, rational taxpayers will seek to maximize benefit and minimize cost, then the greatest determinant for this would be the likelihood of winning. Thus, the more favorable the precedent is to taxpayers, the greater the probability that taxpayers will sue the IRS. Derived from this, an increased probability of winning in one particular forum will move litigants to choose one forum over another. In particular, precedent and ideology will determine forum choice, leading to the first hypotheses: Hypothesis 1: The more favorable the precedent is to the taxpayer, the greater the likelihood litigants will sue the IRS.

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GETTING A POOR RETURN Hypothesis 1a: The more favorable the precedent is to a particular forum, either the Tax Court or the District Court; the greater the likelihood litigants will choose that particular forum.

Given the ideological nature of tax policy and tax enforcement, the more conservative the judiciary, the greater the likelihood that taxpayers will sue the IRS. In addition, taxpayers will choose the judicial forum with more conservative jurists because that will increase the likelihood of prevailing in their claim against the IRS. This leads to the second set of hypotheses: Hypothesis 2: The more conservative the ideology of the judiciary, the greater the likelihood that litigants will sue the IRS. Hypothesis 2a: The more conservative the ideology is in the Tax Court or the District Court, the greater the likelihood that litigants will choose that particular forum. Politics matter in that the national governing coalition sends signals encouraging tax litigation and the use of one forum over another. The more conservative the national coalition, the more taxpayers should want to sue, particularly in the Tax Court, which will more quickly reflect the national political consensus. In addition, Congress can enact specific legislation that promotes taxpayers to sue and promotes the use of the Tax Court over the District Court. This leads to the next hypotheses: Hypothesis 3: As the Congress becomes more conservative, the greater the likelihood that litigants will sue the IRS. Hypothesis 3a: As the Congress becomes more conservative, the greater the likelihood that litigants will sue in the Tax Court. Hypothesis 4: Legislation favoring the taxpayer should lead to an increase in tax litigation. Hypothesis 4a: Legislation favoring the taxpayer should lead to an increase in Tax Court litigation compared to litigation in the District Court. Finally, the economy should determine both tax litigation and tax forum choice, leading to the final hypotheses: Hypothesis 5: Wealthier taxpayers will have a greater likelihood of suing the IRS.

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Hypothesis 5a: Wealthier taxpayers will have a greater likelihood of litigating in the District Court. Hypotheses 6: The greater the post audit assessments imposed by the IRS, the greater likelihood of suing the IRS. Hypotheses 6a: The greater the post audit assessments imposed by the IRS, the greater the likelihood of taxpayers litigating in the District Court. Hypothesis 7: Poorer taxpayers will be less likely to litigate. Hypothesis 7a: Poorer taxpayers will have a greater likelihood of litigating in the Tax Court.

FACTORS INFLUENCING LITIGATION AND FORUM CHOICE Following the approach used by earlier analyses (e.g., Scholz and Wood 1998, 1999), I examine state variation for this study. I created what is known as a panel, or cross-sectional time series, featuring observations of the fifty states over time—specifically, one observation for each state for the years 1994 through 2000 (n = 350).3 The cases were then aggregated by state per year, with the state determined by the domicile of the taxpayer. I used two different dependent variables for the two examinations to test first aggregate litigation and then forum choice. The first simply totals the number of tax lawsuits filed in both the Tax Court and the District Court per state per year. The second dependent variable creates a ratio of the number of lawsuits filed in the Tax Court by dividing that figure by the number of lawsuits filed in the District Courts per state per year. The ratio increases in each state as more lawsuits are filed in the Tax Court and decreases as more lawsuits are filed in the District Court. I used the same factors to test each dependent variable and the following paragraphs detail the process of selecting the factors to examine, based on the arguments of the preceding sections, and how each factor is measured for the analyses. For example, practitioners and scholars alike agree that precedent matters to litigation and forum choice. However, precedent is a difficult concept to measure, particularly when examining aggregate data. It is difficult to point to and then incorporate any one particular case and show that the case influences aggregate decision making and aggregate choice. In addition, there are two types of precedent that need measurement. The first is the concept of horizontal precedent. Horizontal precedent is a case decided by a hierarchically similar court that in theory binds that particular court at that same level to follow that ruling. Thus, a Tax Court ruling on

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a particular item of tax law acts as horizontal precedent on the Tax Court, but would not bind an appellate court. The second is the concept of vertical precedent. Vertical precedent is a case decided by a hierarchically superior court that is binding on lower courts. For example, a Court of Appeals decision for a particular circuit is a vertical precedent binding on all trial courts within that circuit, as well as a horizontal precedent for that particular circuit. Thus, I needed to create both types of precedent applicable to aggregate analyses. For horizontal precedent, my solution was to create a “win percentage” score for each particular tax trial court. Cases were coded so that each individual case was listed as either a win for the IRS or a win for the taxpayer. A ruling for the petitioner counts as a win for the taxpayer, while a win for the commissioner of the Internal Revenue Service counts as a win for the IRS. Often each side wins some issues but loses in some other areas. When this happens in the Tax Court, the cases are decided under Rule 155.4 This is the Tax Court opinion concluding that the decision is neither a complete victory nor a total defeat for either side (Dubroff 1979; Keir, Argue, and Seery 1981). Often a Rule 155 case involves some minor concessions by the IRS. So the issue becomes one of fitting these types of cases into the coding scheme. I decided to follow a pattern established by previous scholars who have looked at taxpayer litigation. Thus, I followed the coding scheme outlined by Daniel Schneider (2001, 2002) in two of his articles concerning tax decisions. I examined the major issue or issues under consideration and coded the case as a win for the petitioner or respondent if the taxpayer won some tax relief in the decision. Minor or subsidiary issues were discounted. Although the U.S. District Court has no Rule 155, I used the same coding rules for the decisions of this court. That is, I looked at the major issue in dispute, and whether the taxpayer won some relief in the decision over that particular issue. For a vertical measure of precedent, I used the ideology of the appropriate Federal Court of Appeals, reasoning that the lower courts, both Tax Court and District Courts, would follow the rulings of the appropriate Court of Appeals. The more conservative the appropriate Court of Appeals, the more likely the lower court would rule in favor of the taxpayer and the more likely the taxpayer would litigate. Admittedly, neither measure is a perfect substitute for precedent. At best, each functions as a proxy—something that approximates the concept I am trying to measure—and each rests on certain assumptions. One is the assumption that aggregate decisions that show trends of taxpayers or the agency winning or losing are related to legal trends. Taxpayers or the IRS win or lose more often because the courts have ruled on a point of law in prior cases and the facts of particular cases are similar to the facts of these prior cases. The logic is intuitive in that court decisions, as shown by win

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percentages, are related to a taxpayer winning or losing a case. The vertical precedent measure rests on the assumptions that lower courts follow the rulings of the higher courts and that the ideology of the higher court captures the trend of the rulings. This second measure of precedent, which relies on ideology, begs the question of how to evaluate and determine political attitudes and beliefs. Ideology, like precedent, is another concept that is difficult to measure. While we all accept that certain political figures (e.g., Ted Kennedy) are liberal, while others are conservative (e.g., Jessie Helms), it is difficult to measure the precise degree that a Ted Kennedy is more liberal than a Jessie Helms. For elected officials, the easiest way to calculate ideology is a voting record. This is the approach of the group known as Americans for Democratic Action (ADA). The ADA publishes scores that measure the percentage of liberal votes on a select number of issues. The ADA then calculates liberalism on a 0 to 100 scale, with 0 being the most conservative and 100 the most liberal. However, that begs the questions as to what is a liberal or conservative issue and what the vote should be to determine the liberal or conservative side. In addition, these measures use a preordained idea of liberalism or conservatism to determine if someone votes the correct way, and then in turn considers these votes to determine liberalism and conservatism. These ideology scores are premised on a small number of votes (McCarty, Poole, and Rosenthal 2006). This also leaves unanswered the question of measuring judicial preferences. Judges do not “vote” on policy issues and therefore one cannot calculate an ideological score based on voting. While some judges might have held prior elective office and one could use those scores, presumably the majority did not and thus have no voting record. Using one measure for elected officials and another for judges would allow the potential problem of having different measures, with different scales meaning different things in defining liberalism and conservatism. To avoid these problems and to test the prevailing elected official and judicial preferences, I first used the Poole and Rosenthal median W-nominate scores of the U.S. Congress from 1994 through 2000 (Poole and Rosenthal 1997). These are static (unchanging) measures based on spatial roll call voting. They are predicated on the entire spectrum of votes and on “who votes for whom and how often” (McCarty, Poole, and Rosenthal, 2006, p. 5). With the Republican takeover of both houses of Congress in the midterm elections of 1994, the Congress became significantly more conservative. Beginning in 1998, this Republican-dominated Congress enacted several measures to provide taxpayer relief. Among these changes was the taxpayer bill of rights, which shifted the burden in contesting audits from the taxpayer to the IRS. To measure the impact of these legislative enactments, I created a dummy (two potential choices) variable for the year 1998

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(i.e., 1 for the year 1998 and 0 for all other years) to represent the impact of the legislation from this pivotal year. I did not include any measure of presidential ideology because Bill Clinton was the president for all the years of this study and therefore no significant measurable change occurred in presidential ideology. That brings us to measuring federal judicial ideology, a complex and difficult task especially when it comes to judges who have no actual voting record and do not espouse overt partisan statements or beliefs. Several methods have been employed in previous studies. A commonly accepted measure of Supreme Court ideology, the Segal-Cover scores (1991), was developed by coding newspaper editorials about each justice at the time of the justice’s nomination. Such a measure is not practical for lower court judges because their nomination is far less salient and often accompanied solely by a news release by the court or the White House at the time of nomination. Thus, judicial politics scholars have developed several other methods for measuring lower court ideology. For example, a judge’s own partisan affiliation5 and the ideology of a judge’s appointing president have often been employed as substitutes of judicial attitudes (Segal and Spaeth 1993). But focusing on judicial partisanship restricts possible ideology indicators to one of two values, assumes partisanship equals ideology, and fails to account for the great variation of judicial attitudes. Scholars have sometimes ignored the ideology of the judge, and inferred his or her ideology from that of the appointing president. Tate and Handberg (1991) proposed an ordinal measure of the ideology of the appointing president: –1 for ideologically conservative presidents, 0 for nonideological presidents, and 1 for ideologically liberal presidents. This measure may be attributed to every judge on the circuits, but the data range is not much better than judicial partisanship. In this measure, there are only three possible values of ideology; it again rests on two assumptions—that presidential ideology equals judicial ideology and that partisanship equals ideology. Segal, Timpone, and Howard (1999) improved on the Tate and Handberg ranking of presidential ideology by surveying presidential scholars and establishing an interval scale for each president since FDR. Scholars were asked to rate presidential liberalism on a 0 to 100 scale and then the scales were combined. The Segal, Timpone, and Howard economic liberalism scores for judges range from 17.6 (for appointees of Reagan, the most conservative president) to 82.5 (for appointees of FDR, the most liberal president).6 Using this approach, the data range for judge ideology is at least theoretically better, but no rankings are available for presidents (and their appointees) prior to FDR, and all judges appointed by the same president receive the same score regardless of individual variation. A number of scholars have suggested combinations of existing measures of ideology. Humphries and Songer (1999) constructed a more differentiated

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measure of judicial ideology based on a logit analysis of judicial voting in economic cases, with a North/South dummy and the Tate and Handberg measure of appointing president’s ideology as predictors (Humphries and Songer 1999). The scores range from 0 (conservative) to 1 (liberal), and can be computed for every appeals judge who has ever served on the modern circuit bench. However, this still leaves little actual variation. In practice, judges are assigned only one of six possible scores. In addition, these measures are based on different scales than the W-nominate scores, so we do not know if a liberal under any of these judicial ideology measures would be the same liberal under the W-nominate scores. Another group of scholars have explicitly used the nominate scores to calculate a measure of judicial ideology for lower court nominees. Michael Giles and colleagues Virginia Hettinger and Todd Pepper (2001, 2002) used the nominate scores of the home state senators or of the nominating president, depending on the political circumstances of the appointment, in calculating the ideology of Appellate Court judges. Political circumstances that preclude using the home state senator’s nominate score and instead substituting the president’s ideology score occur when there was no home state senator of the same party as the president, or when there was an appointment to the D.C. Circuit Court of Appeals, which has no home state senator. This creates more variation in the scores than ordinal measures ranking presidential ideology, but the ideology of any individual judge is never different from the patron senator or the president, and there can be no variation between judges appointed from the same state, or by the same president, even if, as sometimes happens, they are appointed from different political parties.7 In addition, because of the calculation of the nominate scores for the president, which are based on public pronouncements, the president usually has a more extreme liberal or conservative nominate score than most senators. This in turn makes a judge appointed by the president in the absence of senatorial courtesy often have a far more extreme liberal or conservative ideological score than is warranted. To avoid these problems, for this and the next two chapters, a measure of the personal ideology of each federal District Court judge and Tax Court judge is calculated, which, like the Giles, Hettinger, and Pepper score, is strictly comparable to the W-nominate scores but assigns an essentially unique ideology score to each appointed federal judge (Howard 2007; Howard 2008; Howard and Nixon 2003). These scores are constant throughout the judicial career. Many measures of ideology remain constant throughout the career of the judge, executive, or legislator; among these are the widely used SegalCover scores for Supreme Court ideology, W-nominate scores for legislative ideology, and Wright, Erickson, and McIver scores for state-level ideology. Based on these constant measures, it is reasonable to assume that these attitudes generally remain constant throughout a political career and that

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these attitudes will not change if an individual moves from one branch of government to another—for example, from Congress to the judiciary. That is the premise and insight behind this measure of judicial ideology (Howard 2008; Howard and Nixon 2003; Nixon n.d.). In fact, there have been sixty-three federal judges since 1938 who have also served in Congress. These members of Congress have held positions on almost every part of the federal bench, from Supreme Court to the Federal Courts of Appeals to the U.S. District Courts, to the U.S. Tax Court and also other specialized courts. Initial evidence for consistency can be shown from Segal-Cover scores for Supreme Court justices, which again remain constant throughout the career of the justice. Although there are only four Supreme Court justices with prior congressional experience—Minton, Burton, Vinson, and Black—the correlation between their floor voting and Segal-Cover’s ideology measure is extremely strong (Pearson = –.946***). For the thirteen circuit court judges for whom a legislative career exists, the correlation between their floor voting and bench behavior (based on Songer’s Appeals Courts Database) is also very strong (Pearson = –.621***). Nixon (n.d.) assembled ninety-five executive appointees who have also served in Congress since 1938 and demonstrated that their common-space W-nominate scores are predicted well by SOP considerations at the time of their appointment. Nixon, along with Nixon and Howard (2003), extended Nixon’s insight by assembling the collection of the sixty-three federal judicial appointees who have also served in Congress since 1938 (see Howard and Nixon 2003 for additional information) to create a model that predicts common space W-nominate scores for all judicial nominees. The idea behind the measurement is to create a set of variables that predicts the ideology of these sixty-three judges that can be used to ascertain the ideology of all other federal judges. Table 3.1 represents that effort; it is a predictive model that serves as the basis for judicial ideology measures used throughout the book. The model was developed by David Nixon (n.d). Specifically, the ideology of a federal judge is calculated using a combination of the party of the judge, the party of the appointing president, region, unified government, and whether there was a war, and ideology of the home state of the appointee with various weights assigned to each of these categories. Interestingly, what are often thought of as the two primary determinants of judicial ideology—separation of powers constraints and senatorial courtesy—do not make a significant contribution to the model (F2,54 = 2.8, n.s.). Most likely, this is because some of the independent variables, such as judicial and presidential party, serve as proxies for separation of powers constraints while the regional and state ideology variables act as proxies for senatorial courtesy. Unlike many other lower court ideology measures, this formula allows and provides for substantial variation between judges and appears to predict lower court judicial voting quite well. In addi-

47

TAX LITIGATION AND TAX FORUM CHOICE Table 3.1 Model of Judicial Ideology Variables Constant Judge’s own party (–1 Dem., 0 ind., + 1 Rep.) Appointing president’s party (–1 Dem., +1 Rep.) Unified gov’t at time of appointment (0—no, 1—yes)* Wartime appointment (0—no, 1—yes) Southern Democrat (0—no, 1—yes) Northeastern Republican (0—no, 1—yes) Wright/Erikson/McIver State Ideology

Coefficients –.0306 .2371 .0448 .0249 .0694 .1285 –.0151 .3999

R2 = .75. *Positive values for Republican presidents, negative values for Democratic presidents F test against inclusion of SOP Constraint and Senatorial Courtesy: F = ((e*’e* – e’e)/m) / (e’e/(n–k)) m n k restricted full 2.804, n.s. 2 6 9 (e*’e*’) (e’e’) 3 1.0054 .9108

tion, since the scores are scaled in the same issue space and on the same metric as W-nominate scores, this allows for direct comparison across institutions. Bailey and Chang (2002) have demonstrated the pitfalls of failing to employ strictly comparable ideology measures in cross-institutional models of politics. This measure of ideology is used for this chapter and the other chapters, with judicial ideology as an explanatory variable. Precedent, attitudes, and national political factors are not the only aspects that influence litigation and forum choice. Previous studies have shown that the economy will influences litigation and forum choice. To account for the economy, I used several different measures. Included were per capita income, average IRS post audit assessments, and state unemployment. Per capita income and post audit assessments are measures of wealth. The post audit assessment used in this study was limited to the assessment from a single tax year, not an aggregation of prior year assessments. The logic of using a measure of wealth is that the wealthier the state, the more it is likely that the taxpayers in the state, on average, can afford to litigate in the more expensive District Court. Unemployment is a proxy for lack of wealth. Unemployment should be greater in poorer states, and the higher the unemployment, the more likely that taxpayers will litigate since there will be more Earned Income Tax Credit (EITC) audits. Increases in EITC audits should lead the Joy Anders’s of the country to challenge the loss of this credit. This in turn will lead to increased litigation in the Tax Court as opposed to the more expensive District Court since the Tax Court will be the only forum available for poor

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taxpayers. This should increase the Tax Court/District Court ratio. Finally, I added a few other control variables. Beyond politics, ideology, and the economy, certain demographic factors and state characteristics will influence litigation and forum choice. Two such items are state population and the number of audits per state. The greater the population and the greater the number of audits, the greater the likelihood of litigation and litigation in the Tax Court litigation (given the low cost to the taxpayer), all else being equal. Since taxpayers choosing either court can file in the local District Court I did not include a variable of distance from a courthouse. Table 3.2 provides a complete list of the descriptive statistics for the variables with means, standard deviations, minimums, and maximums. Filings vary greatly by state and the numbers also confirm the popularity of the Tax Court as the preferred forum choice, with more than thirty-six times more lawsuits filed in Tax Court than District Court on average per state, although the numbers range from an eighteen-to-one ratio to more than fifty-to-one. The ideology of the Tax Court, the District Court, and the Appellate Court is moderately conservative during this time period, although the District Court shows greater variation, reflecting a much more diverse court. The Courts of Appeals and the Congress are also conservative, although there is significant variation between the circuits. Congress, beginning with the Republican takeover in January 1995, is more conservative than the Tax Court and District Court. The win rates for both the Tax Court and the District Court are the same for the years of this study—seventy-nine percent—although there is greater variation in the District Court win percentage.8

Table 3.2 Descriptive Statistics Filings and Forum Choice 1994–2000 Variable

Mean

St. Dev.

Min

Max

Total Petitions Tax Ct./D. Ct. Ratio Appellate Court Ideology Tax Court Ideology District Court Ideology Congressional Ideology Tax Court Win Pct. D. Ct. Win Pct. Assessments Audits Population Per Capita Income Unemployment Rate

2015 36.69 .12 .10 .09 .41 .79 .79 34.79 23414 5427 24540 4.6

61 10.54 .19 .02 .08 .21 .21 .32 17.54 21098 5927 4186 1.3

101 18.22 –.34 .07 –.08 –.08 0 0 7 4111 502 16392 2.1

3523 51.21 .46 .15 .38 .54 1 1 126.50 195239 34000 41446 9.3

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RESULTS Litigation Rate Analysis The results9 are presented in Table 3.3 and show the change in the probability of litigation occurring from one standard deviation below the mean for each specific factor (or variable) to one standard deviation above the mean. In the case of 1998, the table shows the specific influence of the legislation for the year 1998 (“1”) compared to not showing this influence (“0”). Thus, for continuous independent factors or variables, the probability represents a shift of two standard deviations, while for 1998 the “dummy” factor or variable measures the effect of moving from 0 to 1. An asterisk represents whether the influence of the factor showed statistical probability of occurring by chance at five percent or less. As hypothesized, potential litigants responded to the more conservative Congress, conservative judges, and the legislation in deciding whether to challenge IRS assessments. Politics dominate the process. The shift from Democratic control of Congress to Republican control, which corresponds to the two standard deviation shift in ideological change, almost doubled (ninety-four percent) the probability of litigation. As the Tax Court becomes more conservative using the same two standard deviation shift, litigation increases by almost two-thirds. Two other measures also led to an increase in litigation. The 1998 legislation and the measure of vertical tax court precedent, the win rate, both increased litigation by more than one-third.

Table 3.3 Determinants of Tax Litigation 1994–2000 Variable Lag of Tax Filings Tax Court Ideology District Court Ideology Congressional Ideology Tax Court Win Pct. D. Ct. Win Pct Assessments 1998 Audits Citizen Ideology Population Per Capita Income Unemployment Rate Appellate Court Ideology

Probabilities (percent) 34% 65% –12% 93% 34% .05% –1% 36% 2% 2% 0% –2% 9% 0%

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Except for unemployment, other economic and demographic factors showed little influence on tax litigation. However, unemployment means that many people are out of work and relying on such things as the EITC in their returns. Given that, an increase in unemployment leads to greater litigation. Forum Choice Analysis These results are reported in Table 3.4 and, similar to the litigation analysis, they show the change in the probability of forum choice with a shift from one standard deviation below the mean for each specific factor (or variable) to one standard deviation above the mean. In the case of 1998, the table indicates the specific influence of the legislation for the year 1998 (“1”) compared to not showing this influence (“0”). Thus, for continuous independent factors or variables, the probability represents a shift of two standard deviations, while for 1998 the “dummy” factor or variable measures the effect of moving from 0 to 1. Again, an asterisk represents whether the influence of the factor showed statistical probability of occurring by chance at five percent or less. The results are very similar to the results for litigation. The results show that litigants do act rationally in choosing a forum and that the national coalition is successful in encouraging forum shopping. As the ideology of the Tax Court becomes more conservative, making it more favorable to the taxpayer, more lawsuits are filed in the Tax Court compared to the District Court. Similarly, the conservative Republican takeover of Congress in the 1994 midterm elections led to significantly more Tax Court litigation, as did the legislative enactments of 1998 and 1999. Table 3.4 Determinants of Forum Choice 1994–2000 Variable Lag of Tax Filings Tax Court Ideology District Court Ideology Congressional Ideology Tax Court Win Pct. District Ct. Win Pct. Assessments 1998 Audits Population Per Capita Income Unemployment Rate Appellate Court Ideology

Probabilities (percent) 84% 165% –.002% 44% 4% –.05% –.07% 121% .06% 2% –.04% 2% .04%

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The effect of the ideology of the Tax Court on the ratio of the Tax Court filings to District Court filings is considerable. As one moves a standard deviation below the mean to a standard deviation above it, there is a corresponding increase in Tax Court filings of 165 percent. This means that, in a typical state, as the Tax Court becomes more conservative, the ratio moves from about eighteen Tax Court filings to every District Court filing to more than eighty-three Tax Court filings for every District Court filing. The District Court coefficient, while not statistically distinguishable from zero, was in the expected direction. As the District Court becomes more conservative, taxpayers shift filings to the District Court and away from the Tax Court. Although the impact of a more conservative Congress and the legislation of 1998 and 1999 are not as pronounced as the influence of the ideology of the Tax Court, these variables cause significant shifts in the ratio toward litigants using the Tax Court. As congressional ideology moves in a two standard deviation shift from liberal to conservative, the ratio changes by forty-four percent, or a shift from twenty-eight Tax Court filings for every District Court filing to more than forty-four Tax Court filings compared to District Court filings. The legislation of 1998 and 1999 had similar impacts on Tax Court filings, increasing the ratio by more than one hundred percent. On average, the 1998 and 1999 legislative changes increased the ratio to about seventy-three Tax Court filings for every District Court filing. Unlike the litigation measures, precedent, at least as measured by win percentages, and appellate court ideology of the preceding year did not influence the ratio. The control variables were in the expected direction but, apart from the important lagged variable, were not statistically distinguishable from zero. State poverty or state wealth seems not to matter in forum choice.

CONCLUSION Joy Anders does not have much choice in her decision of where to litigate, and once help was given, if affordable, she has little to lose by suing the IRS, although if she does lose, she will have to pay all accumulated penalties and interest. As the aggregate numbers in this chapter show, the Tax Court was her only alternative. She had neither the means nor the wherewithal to litigate in the District Court. Litigating itself was difficult for Joy Anders, but by suing the IRS she can place her blame on the agency rather than the legislation and congressional backing that created such confusing rules regarding the earned income tax credit and encouraged the IRS to audit EITC claims like hers. Instead of blaming Congress and the political majority for increasing IRS attention to needy individuals such as herself, Joy can blame the

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IRS and receive some relief from sympathetic judges. The analysis in this chapter also provides some insight as to why a multinational corporation would forego the seemingly easier-to-win District Court and instead sue in the Tax Court. Even without calculating precedent, the results suggest that Wal-Mart has a greater likelihood of winning in the Tax Court. Political institutions can use litigation and forum choice to attain policy goals. The likelihood of winning, along with signals from dominant political coalition as to the possibility of winning in a particular forum, lead low-income taxpayers in particular to litigate and to choose the Tax Court over the District Court. Taxes and tax policy have significant ideological dimensions, with conservatives favoring not just fewer taxes but greater constraints on the ability of the primary tax enforcement agency, the IRS, to collect taxes and enforce tax policy. When tax litigants have a choice of forum, it is rational for them to select the more conservative forum because that will be the one most favorable to the taxpayer and least likely to support the IRS. With the shorter tenure of judges on the Tax Court compared to the lifetime tenure of the District Court, it is easier for the governing national coalition to move the ideology of the Tax Court much more quickly than that of the Article III District Court. In addition, the national coalition can implicitly and explicitly signal its preferred choice through appointments and legislation. Critics deride policy making through litigation, and forum choice is often dismissed as “forum shopping.” It is ridiculed because the idea that litigants and their lawyers can play games with our justice system to create favorable outcomes goes against ingrained notions of justice and fairness and that, in the words of Justice Harlan, “all citizens are equal before the law” (dissent in Plessy v. Ferguson 163 U.S. 537, 559–60). The ability to choose a forum means that not all citizens are equal before the law because the law differs from one venue to another. However, at least in tax litigation, Congress has made the explicit decision to allow taxpayers to “game” the system and, certainly in the 1990s, seemed to encourage taxpayers to choose a forum that offers them the greatest likelihood of winning against the IRS. So it appears that litigation and forum shopping are only bad until they help the governing national coalition achieve political and policy goals.

TAX DECISION MAKING

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FOUR

TAX DECISION MAKING

Although individual cost benefit analyses and aggregate political forces push taxpayers to challenge post audit assessments and lead to selection of one tax forum over another, the question remains whether there are actual differences in judicial decision making in these different tax forums. Obvious differences exist in structure and membership. Do these differences lead to different outcomes? Is the theoretically less independent Tax Court biased in favor of the IRS? Is a more conservative court biased in favor of the taxpayer? These are intriguing questions because they call into question the independent nature of the tax judiciary. It is almost a universal given that an independent judiciary is essential to democratic governance (Russell and O’Brien 2001). Montesquieu, for example, noted that the separation of powers between the judicial and executive branches was far more important than any separation between the legislative and the executive associated with presidential democracies. Montesquieu reasoned that the most harm that can be caused by governments is perpetrated by executives; the only check on them is a resolute judiciary in which ordinary citizens ideally can protect their civil rights. Alexander Hamilton echoed these ideas. He suggested that the very purpose of judicial independence was to counterbalance majoritarian will. Hamilton argued that “the complete independence of the courts of justice is peculiarly necessary . . . [because] the courts were designed to be an intermediate body between the people and the legislature, in order, among other things, to keep the latter within the limits assigned to their authority” (Rossiter 1961, p. 457). The independence of the judiciary operated as a “safeguard against the effects of occasional ill humors in the society” (Rossiter 1961, p. 470).The framers recognized this importance by creating an independent judiciary in Article III of the U.S. Constitution, with salary and tenure guarantees. 53

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So, given that many taxpayers, such as Joy Anders, have no real choice where they litigate, do they confront a stacked deck favorable to the IRS with little chance of taxpayer success or is the Tax Court a less costly venue that decides cases in a manner similar to that of the independent Article III court? If in fact the District Court offers a more favorable venue to the taxpayer, then that represents another barrier to the poor and even middle class from obtaining relief from an improper assessment. Does Wal-Mart or James William stand a better or worse chance of winning their case in the Tax Court compared to the District Court? In answer, this chapter compares the decision making of the fixed term Tax Court and the District Courts. Using data from 1996 and 1997, the chapter examines the differences in decision making of these courts, specifically focusing on the meaning and terms of independence in determining outcomes in these two courts.

COURTS, LAW, AND POLITICS The Tax Court is not the only Article I court. Despite the acknowledged value of judicial independence on several occasions, Congress has used its Article I legislative powers to create specialized courts. Judges who serve on Article I courts sit for a fixed, as opposed to a lifetime, term and lack the constitutional protection of a salary guarantee while the judge serves on the bench. For example, the Bankruptcy Court and the U.S. Court of Federal Claims are courts of limited jurisdiction and tenure. As shown in chapter three, Congress can use litigation as a method of policy change and control. Arguably, Congress can exert similar change and control through court creation. By limiting the independence of a court designed to hear tax appeals, Congress should be able to exert greater control over the outcomes of this court than the more independent and much larger court of general trial jurisdiction, the U.S. District Court. Most obviously, a shorter tenure means that judicial replacement occurs at a quicker pace than at a lifetime-tenured federal court. Perhaps it is not surprising that Congress seeks greater control over taxes than other policy issues that reach federal courts because Congress micromanages the IRS to a greater extent than other regulatory agencies (Howard and Nixon 2002). While political science has not ignored this policy domination (see, e.g., Quinn and Shapiro 1991; Scholz and Wood 1998, 1999), relatively little attention has been paid to the specifics of tax decision making by the courts, and whether one group of taxpayers receives different treatment in one type of court as opposed to another. Is there greater control by, or ideological concordance with, the elected branches of government with the decisions of the Tax Court than with the decisions of the District Court?

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Scholars have long acknowledged the importance of ideology in judicial decision making for the U.S. Supreme Court and for lower courts (Hettinger, Martinek, and Lindquist 2004; Segal and Spaeth 2002), to the extent that it is now a scholarly given (Rowland and Carp 1996). The ability of a justice to use ideology is premised on judicial independence, with the guarantee of lifetime tenure and the lack of any realistic constraints (Segal and Spaeth 2002). However, unlike Supreme Court rulings, decisions of lower courts are a function of ideology and additional constraints such as hierarchical precedent and institutional structure. For example, Songer, Cameron, and Segal (1995) show that federal appellate courts responded to conservative decisions of the U.S. Supreme Court with increased conservative decisions, even controlling for appellate ideology. Studies of state supreme courts show how institutional structure and design influence decision making, with elected judges and judges facing retention or reelection less likely to vote their sincere preferences (Brace and Hall 1990; Hall 1992). As noted, specialized courts are another example of courts within the federal hierarchy. Unlike the courts created under the judicial power of Article III, Congress creates Article I courts to deal with certain specific subject areas. Usually these matters involve complex, frequently litigated issues (Baum 1990; Hansen, Johnson, and Unah 1995). While expertise is undoubtedly a consideration in their creation, the failure to guarantee lifetime tenure or salary allows greater legislative and executive control over outcomes in comparison to the outcomes of a more general, lifetimetenured, independent Article III court (see generally McCubbins, Noll, and Weingast 1987). The Tax Court deals with a large docket of post-audit assessment cases. During the mid-1990s, on average more than 25,000 cases were filed per year. These cases often involve technically complex issues calling for significant judicial discretion in meaning and interpretation. Few would argue that the Internal Revenue Code is simple. One former IRS revenue agent and author of tax preparation manuals urged his readers not to use the Internal Revenue Code as a reference source for tax law because of its sheer complexity and lack of accessibility (Wade 1986). For example, the concept of “adequate documentation” of business expenses involves a large amount of discretion beyond the extremes of no documentation or requiring contemporaneous written evidence for every claimed deduction. The evaluation of such claims demands some area expertise in addition to accounting or bookkeeping skills. Complexity, caseload, and limited tenure imply greater expertise in the specialized courts as well as potentially greater control of the agency through the use of this expert judiciary and greater control of the specialized court through a much shorter appointment time frame. It appears to be a trade-off—there is greater expertise, but less independence.

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Scholars have examined specialized courts in other areas of law and policy. Studies of the International Court of Trade and the Patent Court (whose duties are now divided between the Patent and Trademark Office and Court of Appeals for the Federal Circuit) show that these courts behave as theoretically expected. The specialized courts are less deferential to agencies than the nonspecialized federal courts of general jurisdiction (Hansen, Johnson, and Unah 1995; Unah 1997). Because the courts have expertise in these areas of law they do not have to rely on agency interpretation. This expertise extends to their relationship with hierarchically superior courts. One scholar examining the now replaced Court of Customs and Patent Appeals found that this court was significantly less likely than the Federal Circuit Court of Appeals to rely on Supreme Court authority when making decisions (Baum 1995). These findings are consistent with theories of congressional design and bureaucratic control. Creating a specialized court that has the ability to disregard agency expertise could serve political as well as policy goals (see, e.g., McCubbins, Noll, and Weingast 1987, 1989) by controlling the agency when Congress has neither the time nor resources to do so. This presupposes that the specialized court will enforce the policy goals of the democratic branches of government. A specialized Article I court of limited tenure can be aligned with the policy preferences of the legislature and the executive in a much shorter time frame than can the more independent Article III courts. Independent, lifetime-tenured Article III courts should be less subject to control than specialized courts and therefore less likely to control the agency in concordance with congressional and executive preferences.

TAXPAYERS, COURTS, AND OUTCOMES This research on specialized courts and the bureaucratic control literature both suggest that taxpayers have a greater probability of winning at the Tax Court than at the District Court. The District Court judge should show a greater reliance on IRS expertise as well as on relevant courts of appeals decisions. The trade-off for litigating in the District Court and losing the expertise of the Tax Court would be the greater variation in decision making of the District Court due to the lifetime tenure of the independent Article III court. Decisions should show a greater variance from legislative and executive preferences. However, despite the findings of the previous chapter, many others who have examined raw numbers argue that the taxpayer does better in the Article III District Court than in the specialized Article I Tax Court. Some studies show that the taxpayer wins only five percent of the time in Tax Court compared to twenty percent to thirty percent in the District Court, with other studies acknowledging at least a twenty percent differential (Geier

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1991, p. 998). The data used for the years of this study do show a twelve percent differential, with taxpayers winning twenty percent of the time in Tax Court and thirty-two percent of the time in the District Court. This would seem to imply that the less well-off are at a distinct disadvantage. Only those who can afford to prepay their tax liability can afford to litigate in the more favorable District Court. Of course, this begs the question of why there are different rates of success. Some argue that the Tax Court is, contrary to research on other specialized courts and bureaucratic control literature, biased in favor of the IRS and less subject to democratic control than its limited tenure Article I status would suggest (Kroll 1996; but see Maule 1999). One court scholar notes that it is this potential for bias that has led Congress to resist creating other specialized courts (Baum 1990), and another suggests that it is the reason Congress has not made the Tax Court an independent Article III court (Dubroff 1979). While scholarship has failed to develop a coherent theory for why such bias exists, posited reasons include such factors as ideology, institutional design and structure, prior IRS work experience, the type of litigant, attorney representation, and even social and personal characteristics of the presiding judge. The failure to develop a coherent theory stems in large part from a focus on bias as a product of structural constraints and agency dominance rather than a focus on bias due to policy and democratic preference. If there is a bias in favor of the agency at any given time, it is because the elected branches of government want such a bias; if there is a bias in favor of the taxpayer, or class of taxpayer, it is because that is what the elected branches desire. One preliminary way to answer these questions is to examine some descriptive information about Tax Court judges. Tax Court judges, like other federal court nominees, are appointed by the president and confirmed by the Senate. Although the nominees have expertise in tax law and considerable prior experience in the tax field (often with the IRS), the nominees can also have significant political background and experience (Tidrick 2004). In Table 4.1, I list the initial appointment date and the background of all current full-time and senior judges on the Tax Court. Senior judges are retired judges sitting by designation and are denoted by an asterisk next to their names. After the initial appointment date, the next column shows whether the judge worked in some capacity for the IRS at some time prior to the appointment. The third column displays whether the judge had a specialized skill background, either obtaining an LLM in taxation or having an accounting background in addition to a law degree. The fourth column lists whether the judge had private tax experience, which means the judge at some point worked as a tax attorney for a private law firm. The final

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Table 4.1 Tax Court Judge Experience Judge John O. Colvin Mary Ann Cohen Maurice B. Foley Joseph H. Gale Joseph R. Goeke Harry A. Haines James S. Halpern Mark V. Holmes Diane L. Kroupa L. Paige Marvel Stephen J. Swift Michael Thornton Juan F. Vasquez Thomas B. Wells Robert Wherry Renato Beghe* Herbert Chabot* Carolyn Chiechi* How. Dawson* Joel Gerber* Julian I. Jacobs* David Laro* Arthur Nims, III* Robert P. Ruwe* Laur. Whalen* Percent All Percent Regular Percent Senior

Initial Appt. Date

IRS Experience

Specialized Background

Private Experience

Govt. Experience

9/1/88 9/24/92 4/9/95 2/6/96 4/2/03 4/22/03 7/3/90 6/30/03 6/13/03 4/6/98 12/1/00 3/8/98 5/1/95 10/13/86 4/23/03 3/26/91 4/3/78 10/1/92 8/21/62 6/18/84 3/30/84 11/2/92 6/29/79 11/20/87 11/22/87

No No Yes No Yes No Yes No Yes No No No Yes No No No No No Yes Yes Yes No Yes Yes Yes

Yes No Yes No No Yes Yes No No No No Yes Yes Yes Yes No Yes Yes No Yes Yes Yes Yes No Yes

Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes Yes No Yes

Yes No Yes Yes No No No Yes Yes Yes Yes Yes No No No No Yes Yes No No No No No No No

44% 33% 60%

60% 53% 70%

88% 93% 20%

40% 53% 20%

* Senior Judge

column lists governmental experience exclusive of the IRS. For example, the judge might have been a counsel to a congressional tax, finance, or ways and means committee. The bottom three rows list the percentages for each column for all the judges. I then divide the percentages into senior judges and regular judges. Several interesting details emerge. First, and contrary to common perception, on the modern Tax Court only a minority of judges have actual IRS or government experience. Most judges have a private practice background, and most also have a specialized background in taxation. However, when

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one examines the differences between the senior and regular judges, one observes much greater disparity and this examination shows a change in the background of the judges over time. The majority of the senior judges do have IRS experience, but only a small percentage worked in private practice. That is, on average, the older judges have a very different background from the newer judges. The newer judge is unlikely to have worked for the IRS, but instead has both private firm experience and has worked for a congressional committee. This would suggest that the newer judges would not have a bias to the IRS and, if anything, would be more sympathetic to both the taxpayer (because of their private firm background) and to the preferences of Congress (because of their governmental background). The appointment process and background mark Tax Court judges as similar to nominees of the other specialized courts (see Unah 1998). While expertise is important and necessary, the process of appointment is political. Republicans want Republican and conservative judges and Democrats want Democratic and liberal judges. This makes the nomination and confirmation process of advice and consent for Tax Court judges the same as it is for other federal judges (Epstein and Segal 2005). As previously mentioned, an earlier study found a significant positive correlation between judicial liberalism and support for the IRS (Howard and Nixon 2002). Given their lack of independence with the concomitant fewer number of judges and shorter tenure, in the time frame of this study one would expect the Tax Court to decide cases on ideology and personal policy preferences at least as much as the longer-tenured, larger, more independent District Court. This can move beyond just conservative ideology favoring the taxpayer; it can also mean that certain judges are far more likely to favor wealthy taxpayers. This preference would be in accordance with tax policy, which, at least since 1981, seems to favor the wealthy at the expense of the less well-off (Johnston 2003). Given the prominence of antitax and anti-IRS rhetoric from 1981 onward, one would expect ideological and pro wealthy Tax Court IRS rulings to increase, with liberals supporting tax collection efforts and conservatives opposing such efforts, and court rulings in general supporting wealthy litigants. Because there are more judges, and these judges have a longer tenure, the independent Article III District Court should not exhibit the same ideological tendencies in its decisions. The shorter tenure of the Tax Court allows greater control of the court outcomes than the longer time-framed, much larger District Court. The ability of the dominant political coalition to align the judiciary with its policy preferences was observed many years ago by Robert Dahl (1958), who noted that presidents appoint about two justices every four years to the U.S. Supreme Court. Because of this, even with lifetime tenure, the very small, nine-member Supreme Court is “inevitably” part of the dominant political coalition (1958, p. 293).

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Tax Court judges also know the law and do not have to rely on hierarchically superior courts, the agency, or lawyers for interpretation and meaning. This allows Tax Court judges greater freedom in the range of acceptable decision making. This would be in keeping with political objectives of the dominant political coalition through the ability of the court to control IRS behavior. Tax policy is controversial and liberals and conservatives would want to control that policy by controlling court outcomes, which in turn can control the IRS. Arguably, Congress has designed a court with enough freedom and expertise to be independent of the IRS, but also one that can be controlled by the dominant coalition through the quicker time frame appointment process if the ideology is not to the coalition’s political preferences. There are really no obvious institutional constraints restricting the ideological choices of the Tax Court that should lead to a bias in favor of the IRS (Posner 1996, p. 268; see also Easterbrook 1990). Tax Court judges enjoy full pension protection, usually are reappointed or assume senior status, and have the same salary as District Court judges. In practice, Tax Court judges enjoy the same protections as the Article III judges (see Dubroff 1979; Maule 1999) with the exception of special judges, who are appointed by the current chief judge of the Tax Court, and, of course, with the exception of lifetime tenure. While, in the past, many judges came out of the IRS before assuming Tax Court judgeships, that is not the case with the modern court and many have had experience as counsel to various congressional tax and finance committees. Thus, preferences of the Tax Court should align more quickly with the preferences of the Congress and the president. An examination of some data that measure the ideology of the Senate, the Tax Court, and the president supports this argument. Figure 4.1 presents the ideology of the president, the ideological filibuster point of the Senate, and the average ideology of the Tax Court from 1983 to 1998. The senate and presidential scores are the first-dimension “common space” W-nominate scores (Poole 1998), and indicate economic conservatism of the presidents and members of the Senate. This time frame not only corresponds to ideological polarization on tax policy, but also the opposite party control of the presidency and the Senate. Not surprisingly, the mean ideology of the Tax Court lies in between that of the executive and the Senate over this time period, becoming more liberal since the reelection of President Clinton. Given the partisan change at the executive and legislative level, one would expect that appointees of Reagan and Bush would be far more supportive of the taxpayer and appointees of President Clinton more supportive of the IRS. The appointees of the president would be subject to the constraint of Senate confirmation, with the appointee needing to survive any filibuster attempt. The mean result is the slightly conservative line, with more liberal appointees bringing the

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Tax Court 0.8

Ideology Score

0.5

0.2

President -0.1

-0.4

-0.7

Senate

-1

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Figure 4.1 President, Senate, and Tax Court Ideology 1983–1998

average down during the last few years of the Clinton administration as depicted in Figure 4.1. To provide additional evidence of democratic control and concordance with dominant political coalition preferences, I calculated the Pearson correlation between the economic conservatism scores of the Senate filibuster point, the president, and the average for the Tax Court. I also derived average ideological scores for District Court judges using the comparable W-nominate measure detailed in chapter two during this time period and calculated the Pearson correlation between the economic conservatism scores of the Senate filibuster point, the president, and the average for the District Court. For the Tax Court and the president the correlation is .780 and significantly different from zero at the .01 level; for the Tax Court and the Senate filibuster point the correlation is .573 and significantly different from zero at the .05 level. These correlations indicate substantively and statistically positive associations between the higher economic conservatism of the president, the Senate, and the Tax Court. In contrast, the Pearson correlations between the economic conservatism scores of the Senate filibuster point, the president, and the averages for the District Court judges show no such relationship. For the District Court and the president, the correlation is .132, while the correlation for the Senate filibuster point and the District Court is –.094. Neither correlation is significantly different from zero at any meaningful level. The more independent Article III court shows greater independence from the executive and legislative branches than the Article I court.

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Previous examinations of ideological decision making by the Tax Court demonstrate either a weak or nonexistent correlation between ideology and tax decision making (King and Lazarus 2003; Schneider 2002, 2001). These findings, in all likelihood, stem from measurement error. Consistent with previous research, the Schneider studies, along with the King and Lazarus studies, use the partisanship of the appointing judge and the partisanship of the judge, respectively, as their ideology measures. While a judge’s own partisan affiliation and the ideology of a judge’s appointing president have often been employed as useful surrogates of judicial attitudes (Segal and Spaeth 1993), focusing on the partisanship of judges restricts possible ideology indicators that fail to account for the subtlety and diversity of attitudes on the bench, and does not take into account other factors such as the control of the Senate (Maule 1999), region, and home state senator ideology. Previous studies of court tax decisions also have failed to account in any significant way for the influence of facts and issues, besides separating out litigants into three main types—businesses, individuals, and estate and trusts—on the theory that businesses and estates have more complex tax returns than the tax returns of individuals. Specific issues or facts can temper or trigger attitudes (see Segal and Spaeth 1993). Cases involving the meaning of what constitutes income, or what are proper deductions or the valuation of stock, can trigger attitudinal responses in a judge leading to a greater or lower probability of finding for the taxpayer. In addition, both courts deal with salient, ideologically charged matters. For example, a percentage of cases that come before the Tax Court involve tax protestors. These individuals assert that the income tax is unconstitutional and that the IRS has no authority to collect it. Another series of cases involve the assertion of tax frauds. In these cases, individuals or businesses are accused of illegally hiding income or asserting patently false deductions. This calls for the judge to find the line between legitimate tax avoidance and illegal tax evasion. Tax shelters have also come under increased scrutiny. A shelter is a financial arrangement used to reduce the investor’s tax liability, with some designed to lose money for potentially greater tax savings.1 Highly relevant to comparisons of the Tax Court and District Courts is that, although some matters appear in both courts, the two courts at times deal with different issues. For example, District Courts often consider jurisdictional questions. This occurs when litigants have failed to pay their tax assessment and thus the District Court declines to hear the case, forcing taxpayers to have their claim heard by the Tax Court. The District Court also litigates withholding issues. Employers are required to withhold taxes from their employees and submit these taxes on a periodic basis. The District Court hears cases when an employer fails to deposit income tax withheld from employees or tries to avoid withholding taxes by claiming that the

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workers were independent contractors, not employees. In contrast, the Tax Court often deals with innocent spouse issues. This situation occurs when a spouse signed a joint return, but claims lack of knowledge of the contents so as to not be held responsible for penalties and interest. In addition, the court addresses valuation issues, particularly for gifts, estates, and trusts. There are other differences between the courts besides hearing different types of issues. Even though the Tax Court can try a case in the jurisdiction of the taxpayer and the decisions can be appealed to the appropriate regional Federal Court of Appeals, it is a national court, with Tax Court judges assigned to the local area. The District Courts are not monolithic. They meet in very different geographic areas with different rules of procedure and are very culturally diverse. The District Courts are located within each state, and the judges are appointed from that particular state. Previous research has shown that District Court decision making is subject to regional and political effects (Rowland and Carp 1996; see also Giles and Walker 1975). In particular, the District Court should be more influenced by the state political and economic climate.

HYPOTHESES Given the expected prevalence of ideological decision making, as well as the differences in independence and structure, I derive several hypotheses, which I categorize into two subgroups: independence hypotheses and specialization hypotheses. Independence Since tax policy, along with support or opposition to the IRS is ideological, one would expect judges to exhibit ideological bias in their rulings. Tax Court judges are subject to the same nomination and confirmation process as judges of the District Court; therefore, one should see similar ideological rulings for both courts, regardless of their relative independence. Thus, the first hypothesis: Hypothesis 1: The more liberal the judge, the greater the support for the IRS; the more conservative the judge, the greater the support for the taxpayer. However, tax policy and its interpretation are is complex and demanding, and there are many fewer Tax Court judges and their tenure is limited. With shorter tenure, the ideological positioning inherent in tax policy would be more likely to manifest itself in the smaller Tax Court than in the larger District Court where ideological change would take place at a much slower

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pace over a much longer time. In addition, judges of the general jurisdiction courts need to rely more on litigants, lawyers, the IRS, and other courts for the meaning and proper construction of the Internal Revenue Code. This reliance on outside interpretation will restrict the use of ideology in the rulings by the judges of the District Court. The expertise of the Tax Court judges, and their concomitant lack of reliance on lawyers, litigants, the IRS, or other courts, means that the Tax Court judges have greater freedom to use their ideology in their rulings, leading to hypothesis 2: Hypothesis 2: Ideology will have a greater influence in the Tax Court than in the District Court. Of all the issues and facts confronting the judges of both courts, the greatest challenge to the collection of taxes comes from those who question the very notion of the process and the right of the state to collect taxes either through fraud, deception, or abuse. The most flagrant challenges to the tax collection system come from those who commit fraud, create or use abusive tax shelters, or engage in protests against the right of the state to assess and collect revenue. More than anything else, these assertions should lead to significant divergence between liberal and conservative judges, with liberal judges being the most opposed to these assertions and arguments and conservative judges being more supportive. Thus, hypothesis 3: Hypothesis 3: The more liberal the judge, the greater the support for the IRS when the issues concern tax protesters, tax fraud, and tax shelters. Specialization Since prior research has shown that other specialized courts are less likely to follow precedent imposed by hierarchically superior courts than courts of general jurisdiction, there is no reason to expect the Tax Court and District Court to behave differently; hence, hypothesis 4: Hypothesis 4: The regional federal courts of appeals will have a greater influence on the decisions of the District Court than on the decisions of the Tax Court. Given the expertise of the Tax Court compared to the District Court, one should see that attorneys have a greater influence on District Court judges than on Tax Court judges. District Court judges need to rely on the presentation and arguments of legal experts more than Tax Court judges, leading to hypothesis 5:

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Hypothesis 5: Representation by an attorney will have a greater influence on the District Court than on the Tax Court. Tax Court special judges do not have the same pension and reappointment advantages as a regular judge of that court. Because of this, special judges should show greater deference to the agency. Following prior literature, a judge’s prior IRS experience will also influence the decisions of special judges and regular judges. One should expect that special judges would be more likely to decide cases in favor of the IRS. Therefore, all Tax Court judges with IRS experience, special or regular, will be more likely to decide cases in favor of the IRS. Thus, hypotheses 6 and 7: Hypothesis 6: Special judges will be more likely to decide cases in favor of the IRS. Hypothesis 7: Tax Court judges with IRS experience will be more likely to decide cases in favor of the IRS. Prior research on District Courts demonstrates the impact of local conditions on the District Court. Because of this, the District Court decisions should show the influence of state-specific factors. This leads to the following hypotheses: Hypothesis 8: District court judges will be more influenced by statelevel political and economic factors. Finally, given the lack of expertise in the District Court, business and estate and trust litigants should have greater success in the District Court than in the Tax Court. This leads to the final two hypotheses: Hypothesis 9: Tax Court judges and District Court judges will be more likely to decide cases in favor of business or estate and trust litigants than individual litigants. Hypothesis 10: Business and estate and trust litigants will be more successful in the District Court than in the Tax Court. To test the hypotheses, I collected both Tax Court and District Court data, including all decisions of the Tax Court for the year 1996 and for all tax cases from the District Court for the years 1996 and 1997.2 Each case was coded for the names and type of taxpayer, home state of the taxpayer,3 case number, docket number, date of decision, the name of the judge, type of judge, issue being contested, and if counsel was present. Similar to the

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procedure used in other chapters, each case was coded as either a win for the IRS or a win for the taxpayer. For both courts, the docket number was used as the unit of analysis. This coding led to an initial database of 681 decisions for the Tax Court and 207 decisions for the District Court. Most of the other variables came from these cases. Litigant type depended on who opposed the IRS: individual, business, estate or trust, and partnership. For the litigants, a business was any incorporated entity, while an estate and trust was any estate or trust or any individual who challenged a gift tax determination. Each variable was coded as a separate dichotomous variable, with a coding of 1 for the type of litigant, 0 otherwise. The category of partnership was excluded to provide the baseline. Thus, all results of litigation are in comparison to the omitted category of partnership. I followed the same pattern for the issue section, with previously mentioned issue differences for the Tax Court and District Court. Both courts dealt with several of the same issues, including income, deductions, tax shelters, tax protesters, and fraud. I combined the tax protestor/tax fraud into one variable since both represent an assault on the legitimate collection of taxes. Thus, for both courts, tax protestor/fraud, income, deductions, and tax shelters were coded 1 if that was the main issue, 0 otherwise. I followed the same coding rules for the different issues with which each court deals, with 1 for all jurisdictional issues confronted by the District Courts, 0 otherwise, and 1 for all withholding issues, 0 otherwise. For the Tax Court, I coded 1 for a valuation issue, 0 otherwise, and 1 for an innocent spouse, 0 otherwise. To account for the structural differences of the Tax Court, I created a dichotomous variable for each case decided by a special judge (1, 0 otherwise), and a variable to indicate if the judge had IRS experience (1, if so, 0 otherwise). The assumption is that the more constrained special judge will be more likely to rule in favor of the IRS. For both courts, I used a variable to indicate whether an attorney represented the taxpayer (1, if an attorney, 0 otherwise). Other variables were then merged into this dataset. For the state control variables I used the Berry et al. measure of state governmental liberalism and a measure of state per capita income. State-level political and economic measures have been used in prior studies of taxes and political responsiveness (Scholz and Wood 1998, 1999), and the same logic of responsiveness should apply to the District Court. Since they live and work in the state, the judges of the District Courts should be more responsive to the political environment (Giles and Walker 1975). A more liberal state, as measured by Berry et al., should lead to a greater probability of a ruling by the District Court in favor of the IRS. Similarly, a more wealthy state, as measured by per capita income, should have more audits of wealthier individuals, increasing the probability of more judges deciding in favor of

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the IRS. To measure individual judicial ideology, again I used the measure of the personal ideology of each District Court judge and Tax Court judge comparable to Poole’s (1998) common-space W-mominate scores. When a special judge renders a decision and a regular judge approved that decision, I used the latter’s ideology score. This follows Tax Court Rule 182 (c), which states, “The Judge to whom . . . the case is assigned may adopt the Special Trial Judge’s report or may modify it or may reject it in whole or in part” and as the Supreme Court case of Ballard v. Commissioner of Internal Revenue 125 S.Ct. 1270 (2005) makes clear, such reports can be significantly modified. When there was no regular judge, I used the incumbent president as the nominating president for the special judges, because the president appoints the chief judge and chief judge appoints the special judges. If a District Court judge approved a magistrate’s decision, I used the ideology score of the approving District Court judge. In some jurisdictions, a magistrate judge can hear civil tax cases with the consent of the parties, and appeals go directly to the Court of Appeals. In other districts, the cases are assigned to both the magistrate and a District Court judge and appeals go to the District Court judge. Because of this, I coded the District Court judge’s ideology score for decisions of the magistrate judge when both judges are listed. If there was no approving judge, the magistrate’s ideology score was used. The same process applied to the appellate court measure of ideology, with the measure pegged to the median ideology of the relevant appellate court. I then created interaction variables using these ideology scores and the specific issue codings. Each of these was included in the respective analyses, with the exception of the excluded variables serving as baselines. The variables with means and standard deviations are listed in Table 4.2 (next page). Although the range of litigants and issues for each court has many similarities, including mean ideology, with both being slightly conservative, some differences stand out. One is the much greater number of taxpayers who forego counsel in the Tax Court (thirty-six percent) as compared to the District Court (ten percent). Another difference is that more than twice as many tax shelter and tax protester cases are heard in the Tax Court (twenty-one percent) compared to the District Court (ten percent). Finally, the IRS wins twelve percent more often in the Tax Court than in the District Court.

RESULTS The estimated probabilities of an IRS win are reported in two separate tables. The appendix contains the complete results. What emerges from this comparison is confirmation that the shorter-tenured, less independent Tax Court is more ideological in tax rulings than the District Court. The lack of independence through limited tenure and smaller size has allowed the

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Table 4.2 Descriptive Statistics U.S. Tax Court and U.S. District Court Tax Court Mean IRS Win Per Capita Income State Government IRS Experience Special Judge Attorney Business Estate or Trust Individual Income Issue Deduction Issue Tax Shelter Appellate Court Ideology

.80 24,776.75 38.63 .55 .33 .64 .17 .07 .70 .27 .27 .16 .17 .10

St. Dev. .40 2755.22 20.03 .50 .47 .48 .38 .25 .46 .45 .45 .37 .04 .23

District Ct. Mean

St. Dev.

.68 24,776.75 38.63

.47 2755.22 20.03

.90 .25 .10 .62 .22 .19 .07 .17 .10

.30 .43 .30 .49 .41 .40 .26 .04 .26

appointment of more ideological judges, thus resulting in rulings premised on ideology in keeping with dominant coalition political preferences. Independence The ideology and independence probabilities are listed in Table 4.3. As hypothesized, the more liberal the judge, the greater the likelihood of support for the IRS, while the more conservative the judge, the greater the likelihood of support for the taxpayer. Also as hypothesized, the shorter-tenured, less independent Tax Court judges rely on personal policy preferences more than the independent lifetime-tenured District Court judges. The hypothesis that liberal judges would react more negatively and conservatives judges more positively to a tax protestor or tax fraud issue was confirmed. However, contrary to the hypothesis, conservative judges are more likely to decide cases against the taxpayer when there is a tax shelter than are liberal judges. Since these are all continuous variables, the change represents an increase of one standard deviation below the mean to one standard deviation above the mean. Moving from one standard deviation below the mean to one standard deviation above on the ideology score decreases the probability of an IRS win by .16. Given a mean of .10, this means moving from a moderately liberal judge to a very conservative judge. The tax protestor/fraud interaction shows that moving from a moderately liberal judge to a very conservative judge result is almost a sure bet that the IRS will lose the decision (–.88).

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TAX DECISION MAKING Table 4.3 Ideology and the Probability of IRS Winning* Variable Ideology Income * Ideology Deduction * Ideology Valuation * Ideology Tax Shelter * Ideology Fraud/Protester * Ideology Withholding * Ideology

Tax Court –.19 .10 .14 .06 .18 –.88

District Court .04 .007 –.05 –.19 –.43 –.48

*For continuous variables, the probability represents an increase of one standard deviation below the mean to one standard deviation above the mean. For dichotomous variables, it represents a change from 0 to 1.

This appears to indicate that the sentiments about the lack of legitimacy of the tax collection process expressed by the most conservative legislators are shared by the most conservative Tax Court judges, in contrast to the lack of any finding in this area for the more independent District Court judges. Specialization The probabilities for specialization are listed in Table 4.4. The results confirm the expectations derived from prior research that general court judges are

Table 4.4 Structure, Specialization, and Expertise and the Probability of IRS Winning* Variable Appellate Court Per Capita Income Attorney Business Estate or Trust Income Issue Deduction Issue Tax Shelter Fraud/Tax protester Valuation Issue Withholding

Tax Court

District Court

–.004 –.003 –.07 –.13 –.01 –.01 .0001 .05 .19 .02

.14 .14 –.09 –.22 –.31 .001 –.10 .15 .10 .23

*For continuous variables the probability represents an increase of one standard deviation below the mean to one standard deviation above the mean. For dichotomous variables, it represents a change from 0 to 1.

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more likely to rely on precedent than specialized court judges. The District Court, but not the Tax Court, is strongly influenced by the appropriate Federal Court of Appeals. In addition, special judges decide issues differently than regular court judges. However, prior IRS experience does not matter. Curiously, the presence of an attorney appears to help the taxpayer in the more specialized Tax Court, but not in the District Court. This could be an artifact of sample since counsel represented most taxpayers in the District Courts, while more than one-third of the Tax Court litigants appeared pro se. It could also represent the ability of the Tax Court judge to appreciate and understand the arguments of counsel, whereas the more generalized District Court judge relies on the agency. The state-specific variables had no influence on the Tax Court decisions, while the wealth of the state did seem to have some influence on the District Court judge. The District Court judge was more sensitive to the type of litigant, with a District Court judge having a greater likelihood of supporting a business or a trust or estate than a Tax Court judge, although the Tax Court judge had a greater probability of supporting a business litigant than an individual litigant, with the effect smaller than that of the District Court. Finally, the Tax Court judge had little tolerance for the tax fraud/tax protester while this specific issue had no influence on the District Court. Moving from a circuit with a moderate appeals court to a circuit with a much more conservative court leads to a .14 increase in the probability of the District Court judge ruling in favor of the IRS, while a moving from a relatively poor state to a more affluent state leads to the same .14 probability increase in the District Court ruling in favor of the IRS. The type of litigant has a much stronger influence on the District Court than the Tax Court. An estate or trust leads to a –.31 decline in the probability of a decision in favor of the IRS, as compared to –.01 for the Tax Court, while a business litigant leads to a –.22 decline in the probability, compared to a –.13 decline for the Tax Court. Finally, the presence of a tax fraud or tax protester in the Tax Court leads to a .19 increase in the probability of the IRS winning.

CONCLUSION The results presented in this chapter show that decisions can be different for independent courts with lifetime tenure compared to specialized courts with greater expertise, but more limited tenure and independence. The Congress and the president can use the Article I specialized court’s limited tenure and reduced numbers to change the ideology of the court in a much quicker time frame than a more general, independent Article III court. Controlling the ideology of the specialized court can in turn lead to greater control of the agency. Congress and the president can push the agency to produce policy in line with congressional and executive preferences because they have greater

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control over the decision making of the specialized court. Almost fifty years after Dahl (1957) noted that the Supreme Court is inevitably part of the dominant political coalition, Congress and the executive can use Article I courts to keep judicial preferences in agreement with the dominant coalition preferences by aligning the ideology of the specialized court with the ideology of the coalition. This seems to deviate from the ideal that a specialized court is supposed to use its expertise to decide issues without reference to ideology. However, this ideal ignores the practical matter that the collection and distribution of revenue are the single most important and politically charged issue that any government must confront. Who or what should pay and how much, and who or what should receive this revenue and how much, are inescapably political questions charged with ideological overtones (see Johnston 2003). Despite repeated calls for simplification and ease, any system of taxation must have complex laws, rules, and regulations; its interpretation of complicated questions of assessment and collection requires discretion and technical expertise; and any result necessitates opinion and judgment, and such opinion and judgment cannot be divorced from basic views about the collection and allocation of scarce resources. This elaborate system of appeals allows control of the IRS and ultimately tax policy. Almost since the inception of the Tax Board of Appeals, there have been various proposals to consolidate all tax cases in one court and to create a U.S. Tax Court of Appeals to handle all cases from the lower courts (Geier 1991; Posner 1996). While many reasons have been put forward to oppose such proposals, an important consideration has been the fear that such specialized courts would be no more than extensions of the IRS and thus likely to exhibit bias in favor of the agency. However, while the Tax Court might issue more rulings in favor of the IRS than the District Court, the reason might be as much due to congressional design and executive appointment to a more limited independent court, compared to an Article III court, than it is due to bias in favor of an agency.

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FIVE

INFLUENCES ON THE IRS AND THE AUDITS OF LOW-INCOME TAXPAYERS

It was asserted in the beginning of this book that courts rarely conflict with the governing national coalition and instead are often used by the dominant political coalition to accomplish national goals that cannot otherwise be achieved through legislation or executive action. Joy Anders and others in similar situations get audited because the dominant coalition wants to audit those who claim the EITC. If Dahl and others are correct, then court preference and resulting influence should show little difference from national political preferences and resulting influence, and actually enforce the preferences of the majority. As the country’s tax policy moved to favor lower taxes for wealthier individuals, tax enforcement should follow suit. In fact, this has occurred. In 1999, audits of low-income tax payers began to exceed audits of the wealthy (Crenshaw 2002; Tracfed press release 2006), confirming a decade-long trend of increased IRS attention to the tax returns of low-income taxpayers (Johnston 2003; TracIRS 2005). More recent news reports allege that IRS investigations of tax fraud among the poor have resulted in significant delays in obtaining income tax refunds for many innocent low-income taxpayers (Associated Press 2006), and that taxpayers with incomes lower than $25,000 per year are more than six times as likely to be audited as taxpayers earning more than $200,000 per year (Tracfed press release 2006). A Joy Anders getting audited is no accident and is instead the result of deliberate policy choices. Congressional and executive public policy resulted in the increase in audits of low-income taxpayers. However, although we often see public policy and policy change as the result of legislative and executive action, courts have long been acknowledged as policy players (McCann 1994; Moe 1985; Segal and Spaeth 2002). Most, but not all, of these examinations concern social policy, although 73

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there has been emerging research on the impact of courts on bureaucratic and agency policy (Howard and Nixon 2002, 2003; Moe 1985; Ringquist and Emmert 1999). This chapter specifically examines claims about the role of courts and how they impact and influence tax policy and tax enforcement. Court protection of the poor is especially relevant due to these recent tax policy and tax enforcement trends that have shown increased concentration on the tax filings of the poorest taxpayers. Some members of Congress have expressed concern over this development, implying that the agency is pursuing its own agenda (Crenshaw 2002). A policy that targets low-income taxpayers says much about national mores and a commitment to equity and fairness beyond the mere collection of revenue. The role of courts is potentially critical in ensuring fairness and protecting the poor from the power of government. However, if Dahl and others are correct, then courts would push enforcement in the same direction as Congress. In other words, Joy Anders and those in her income and tax bracket have little reason to expect courts to ensure fairness. In asserting court and policy maker alignment, Dahl was writing about the U.S. Supreme Court. However, in examining tax policy and tax enforcement, focusing on the Supreme Court or even the Federal Court of Appeals causes one to miss the larger picture of courts, tax policy, and tax compliance. Very few tax cases are appealed and higher courts review even fewer cases involving low-income taxpayers. Most tax cases are disposed of at the trial level by the District Court and the Tax Court. These courts, not appellate courts, interact the most with the IRS and taxpayers and these are the courts that low-income taxpayers turn to for relief against the IRS. Do these courts protect the rights of the individual, particularly the lowincome taxpayer, or do they enforce dominant policy preferences? Do they influence the IRS to change its audit behavior and focus less attention on the lowest income group? Is there a difference in these courts in their relative influence? Little attention has been paid to these different trial courts and their role in influencing tax policy. Perhaps this lack of attention is due to the scholarly debate over the impact of courts on social and economic policy (see, e.g., McCann 1994; Rosenberg 1991) or perhaps it is because tax laws and tax policy are so complex that it is difficult to parse out the influence of any one particular court on the IRS. I analyze this by examining the separate influences of the national political coalition, the Tax Court, and the District Courts on the number of state-level audits of the lowest income class of taxpayers from 1982 through 2000. Understanding the enforcement of national policy is as important as understanding its creation. Given these two courts and their institutional differences, an examination of the IRS response to these courts provides a unique opportunity to demonstrate how an enforcement agency approaches

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potentially competing claims of different courts with different structure, outlook, and independence while attempting to carry out the policy preferences of the executive and legislative branches. This chapter offers insight into courts and whether their commitment to equality differs from the national political commitment. In the following section, I review the literature on bureaucratic control and control of the IRS. After that I present the argument of how courts within a national political framework can influence and control bureaucratic behavior, and why that control will augment the preferences of the dominant national coalition. I then offer two primary testable hypotheses and progress to explain the construction of the dataset, development of the model, and the methodology before presenting the results. In the last section, I discuss the meaning of the findings and suggestions for the future.

BUREAUCRATIC CONTROL AND THE IRS Bureaucratic literature often emphasizes that agencies with enforcement responsibility have an incentive to focus on legally sound but politically inconsequential cases to augment their perceived successes (Katzmann 1980). For example, police and prosecutors may believe that compiling arrest and prosecution records are more important than societal values such as fairness or the administration of justice because arrests and successful guilty pleas lead to greater prestige and larger budgets. Many argue that the IRS often exceeds other agencies in its disdain for broad political and social values. Shapiro (1988) observes that the IRS goal of maximum tax yield could subvert a broad tax policy aim of equity and fairness. Long (1980) and others (Burnham 1989; Crouch 1996; Strassels 1979) concur that the IRS has its own idiosyncratic goals independent of justice and fairness and that a particular concern is maximizing revenue, while MacDonald (1994) alleges that the IRS rewards regions and districts that collect the most in revenue with larger budgets. Congressional hearings in the late 1990s buttressed many of these assertions when witnesses testified about capricious and arbitrary agent behavior during both audit and post audit activity. In short, the claim is that the IRS values allocative efficiency—how much money it can collect for the lowest cost—regardless of the social harm or the damage to political and policy goals of the governing coalition. Yearly, state and regional audit variation supports these claims. A citizen of the Middle Atlantic region has a twenty percent greater probability of getting audited than a citizen of the Midwest. Almost three percent of corporate returns were audited in 1993, but the number dropped to less than one percent by 2004. About one percent of individual federal returns were audited in 1994, but the number increased to more than one and one

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half percent in 1995 and 1996 before falling to a low of less than one-half of one percent in 2000 (TracIRS 2005). Corporate tax income represented more than twenty percent of all tax dollars in 1995, but less than fourteen percent by 2001, and, as previously noted, the number of audited low-income returns has increased. One explanation for the variation is the decentralized administrative structure of the IRS (Burnham 1989; Scholz and Wood 1998). Due to a series of scandals in the 1950s, the IRS decentralized its organization and for most of the post–World War II period it operated out of sixty districts within state boundaries in a larger set of seven national regions. Some of this administrative structure has changed and currently the IRS audits out of thirty-three districts encompassing the fifty states in four national regions. Each region is under the control of a regional director. Thus, each region or state operates outside of centralized political control, with regional directors free to pursue their own preferred audit policy. Auditing low-income taxpayers who cannot afford skilled counsel or perhaps lack education to successfully fight an audit might mean that few agency resources need be expended to recoup tax dollars from faulty tax returns. Because of this, the cost of low-income audits might be relatively inexpensive and the IRS could demonstrate a successful record before Congress. Competing courts provide another reason for this lack of control. The IRS is subject to the jurisdiction of three very different federal trial courts, the U.S. District Court, the court of general trial jurisdiction in the federal system, the U.S. Tax Court, and the U.S. Court of Federal Claims.1 These competing courts might allow the agency to “play” one court off the other and ignore the consequences of any one particular court ruling. Despite these theorized reasons and the evidence of audit variation, scholars have demonstrated the political and appellate court control of the IRS. In one study, Scholz and Wood (1998) use several state and federal political control variables to examine the impact of partisanship and political variation to show that changes in presidential administrations and congressional committee membership led to changes in IRS audit rates. President Reagan’s election, for example, led to an increase in individual audits and a decrease in corporate audits. Howard and Nixon (2002, 2003) observe IRS responsiveness to appellate courts and illustrate that regional variation in audit policy is explained in part by ideological differences in these regional federal appellate courts. However, preceding any action of appellate courts, litigants first challenge the IRS in a trial court and few of the trial court decisions will ever be appealed. For example, in 2001, a total of 149 tax cases with the United States as a defendant were filed in the U.S. Federal Court of Appeals and there were only two tax decisions by the U.S. Supreme Court during the same year (Epstein et al. 2003).

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These low numbers compare to the over 29,000 filings in the District Courts and Tax Courts in the 2000 calendar year, and over 700 total decisions rendered by both courts during that same period. Trial courts remain the principal courts for taxpayers to interact with the federal system and one would expect that these competing federal tax trial courts will induce regional and yearly variation in agency policy because the agency must continually interact and deal with these competing courts to a much greater extent than they interact with any appellate level court.

THE NATIONAL POLITICAL COALITION, COURTS, AND BUREAUCRATIC CONTROL Courts and the National Political Coalition within a Separation of Powers Framework The argument of the power of these competing courts to influence agency policy within the national political coalition is premised on a separation of powers (SOP) model. Admittedly, this is not the only theory of influence on agency policy. Another theory showing how agencies respond to competing principals is that of “common agency” (Dixit 1995; Dixit et al. 1997). Specifically, it is a theory of a “multilateral relationship in which several principals simultaneously try to influence the actions of an agent” (Dixit et al. 1997). For our purposes, this formulation better describes the process herein of multiprincipals with common goals acting sequentially. The IRS regional directors are appointed by the IRS commissioner, an appointee of the president subject to confirmation by the Senate. I assume that the regional directors will carry out the policy preferences of the president because the president has the power to fire and replace a wayward director. The regional directors should use their ability to shift audits between states and districts to most effectively carry out the president’s policy, subject to the constraint of the legislative branch. As Figure 5.1 (next page) shows, the SOP model suggests that a “core” of legislative and executive branch preferences constrain agency policy choices (Hammond and Knott 1996; Hammond and Miller 1987). The figure implies that in a liberal-conservative dimension, agencies may propose any policy within a “legislative-executive core” because that policy will not be overturned through statutory means (Hammond and Knott 1996). If the president, P, is relatively extreme, one boundary of the legislative-executive core is defined by the median House member, Hm, or the median senator, Sm, whoever is furthest from the president. The crucial veto-override legislator in the House, Hvo, or Senate, Svo, whoever is closer to the president, defines the other boundary of the core. Boundaries defined by this core represent the preferences of the dominant national coalition.

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GETTING A POOR RETURN Legislative-Executive Core Liberal

Conservative

P

Hvo

Svo

Hm

Sm

Executive Appointee Target P = President Hvo = 290th Most Liberal House Member (key veto-override representative) Svo = 67th Most Liberal Senator (key veto-override senator) Hm = Median Representative Sm = Median Senator Figure 5.1 Executive-Appointee Target—Veto-Override Point

An agency, or regional director, that establishes a policy outside the core will be overturned through a statutory revision at some point within the core. If the SOP model is accurate, executive agencies will establish policies at the boundary of the legislative-executive core closest to the president, shifting as it shifts (Shipan 1998). Based on this “core” dynamic, each regional director ought to establish policy at the exact same point. However, there is still a need to control for nonpolitical factors such as regional wealth disparities, or even regional or local political factors. For example, IRS policy can directly impact a state’s economy and local politicians would ignore the effect of IRS audits at their peril. Therefore, other political actors, such as governors, may play a role in the calculations of regional directors. Courts and the Legal Set within the Separation of Powers Framework Courts should also induce variation in agency policy through a “legal set” that may or may not overlap with the legislative-executive core. If the legal

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set does not overlap with the core, then judicial review presents an additional constraint on agency choice. A regional director may not establish a policy at the boundary of the core because the director risks a court-ordered policy anywhere within the legal set. Instead, the regional director should establish a policy at the boundary of the legal set closest to the president, if it lies within the core. Such a policy will survive any legislative efforts to overturn it, and will also pass judicial review. It represents the best policy the president can obtain. For a regional director of the IRS, there are two primary trial court legal sets as demonstrated in Figure 5.2. Here TC represents the ideal policy of the Tax Court, and DC represents the ideal policy of any particular federal district court. Of course, how does the agency determine the policy preferences or legal set for a trail court? Several court scholars examining appellate court decision making have established the median justice as pivotal in calculating court preferences (Hausegger and Haynie 2003; Martin, Quinn, and Epstein 2004). The median justice is crucial on multimember appellate courts where every justice has a vote, with a majority decision determining the outcome. There are fewer comparable analyses of agency policy and the legal set established by trial courts (but see Smith 2006). It is difficult to reconcile the logic of the median justice for a trial court, which is composed of an identifiable fixed number of justices, with each judge having an equal probability of assignment and each making a separate decision. Setting policy to the median judge could leave the agency in a very disadvantageous position if a judge very distant from the median is selected to try the case. To arrive at a solution, the random assignment of judges may be thought of as a calculation of probabilities and expected values. For example, consider Figure 5.3’s (next page) illustration of a small trial court of five judges, J1–5, whose ideological preferences are arrayed on a liberal-conservative scale, with random assignment of each judge to a case.

Liberal

Conservative P

Hvo

Svo

Hm

Sm DC TC Legal Sets

Figure 5.2 Court-Conscious Executive Appointee Targets

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Liberal

Conservative J1 J2

J3

J4

J5

Figure 5.3 Trial Court Ideological Array There are five distinct assignments among this hypothetical collection of five court members. If each possible judge has an equal probability of assignment (1/5 in this example), then a specific judge may choose to overturn an agency policy even if the agency establishes that policy within the broad bounds of a potential court median. For example, if a regional director establishes a policy at J3, but draws a J4, or J5 judge, the IRS policy is vulnerable to judicial reversal. A rational IRS director ought to set policy based on a calculation of the probability of the assignment of each judge and, therefore, the expected value among all possible assignments. This ought to minimize the risk of loss and maximize the potential for victory for the IRS. One way to think about this is that each judge has an expected ideological value, which is derived from the judge’s position on the ideological array multiplied by the probability of their selection. Thus, assume that the ideologies for the five judges in Figure 5.3 are on a 0 to 1 scale, with 1 being the most liberal and 0 being the most conservative. Further assume that J1 has an ideology score of .1, J2 has an ideology score of .2, J3 a score of .3, J4 a score of .7, and J5 a score of .8. Since the probability of any judge being assigned a case is 1/5 or .2, the expected ideological value of each judge is the ideology score multiplied by .2. These figures are presented in Table 5.1. In this table, the expected ideological values range from .02 to .16. If one assumes J3 to be the median judge, and the IRS places its policy at that position, as already noted, drawing J4 or J5 would put the IRS at a serious disadvantage. To avoid this, and to minimize loss and maximize

Table 5.1 Judicial Ideological Array and Expected Value Judge J1 J2 J3 J4 J5

Ideology

Expected Value

.1 .2 .3 .7 .8

.02 .04 .06 .14 .16

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gain, the IRS should add up all the calculated expected values that would give the agency the optimum policy position for the maximum expected outcome, which is in all cases such as this the equivalent of the average of the ideology scores, or .42. Thus, the best possible strategy for the IRS in dealing with a randomly assigned finite number of trial court judges is to place policy at the average of the ideological values for all the justices on the court (Smith 2006). However, this still begs the question of comparative response to the different courts with different mean ideological legal sets. While the District Court is an Article III court with lifetime tenure and judicial independence compared to the Article I Tax Court, many have argued that, in practice, these other constraints are “largely theoretical” (Posner 1996, p. 268; see also Easterbrook 1990). Tax Court judges enjoy full pension protection, usually are reappointed or assume senior status, and have the same salary as District Court judges. Thus, in practice, Tax Court judges enjoy the same protections as the Article III judges (Dubroff 1979; Maule 1999) with the exception of explicitly protected lifetime tenure. The Tax Court is, in contrast to the regionally specific District Courts, a national court. Tax Court rulings have national jurisdiction. Although the Tax Court under the case of Golson v. Commissioner (1970) voluntarily follows the rulings of the appropriate circuit, given the national scope of its rulings, and its acknowledged expertise in tax matters, the IRS must change policy at least regionally, and sometimes nationally, in response to Tax Court decisions. The jurisdiction of the District Court judge extends only to the geographic limits of the specific district. District Court decisions are not national, or even regional, but district specific, or at best state specific if the district covers the entire state. This district-wide jurisdiction is considerably smaller than the regional or national jurisdiction of the Tax Court. Given the broad scope of the rulings, it is realistic to posit that the IRS, subject to competing jurisdictions, will pay closer attention, and be more likely to respond to, rulings of the national court than the district and state-specific federal court.

HYPOTHESES No enforcement tool used by the IRS produces more attention than the audit, and the degree to which audits focus on various groups of taxpayers based on their earnings is politically relevant to competing concerns along a liberal-conservative continuum. One would expect more liberal executives and legislatures and more liberal courts to want the IRS to audit fewer low-income individuals, while one would expect more conservative political actors to favor greater attention to the audits of the poor, particularly

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if it shifts attention away from the wealthy. In addition, the Tax Court is a national court with national jurisdiction. In comparison, the District Courts only have jurisdiction over their respective districts. Thus, the primary hypotheses are as follows: Hypothesis 1: As both the courts and the executive-legislative coalition move in a conservative direction, the IRS will audit more low-income individuals. The national political coalition and the courts should both move IRS audit policy in the same direction. Hypothesis 2: Because the Tax Court is a national court with national jurisdiction and because the differences in the independence of the District Court is more theoretical than actual, the IRS will respond more to the national Tax Court than the state-specific District Court.

TESTING INFLUENCES Data on the IRS, including low-income and high-income audit rates, audit rates, and percentage of returns changed after audit, come from a database compiled by TRAC IRS, a Syracuse University-based center that compiles data on various federal agencies. Following the earlier approaches in audit variation (Scholz and Wood 1998, 1999), I examine state variation for this study because IRS districts and regions have changed over this period and state-level analysis provides greater stability. I used the years 1994 to 2000. I derive the dependent variable by dividing the audits per state per year of the highest income class (> $100,000) by the total number of audits per state per year of the lowest income class of taxpayers (< $25,000). This ratio increases when the IRS shifts audit attention away from low-income taxpayers toward high-income taxpayers. The measure correlates with modern political and economic liberalism and conservatism. If courts and the national political coalition become more conservative, one should see an increase in the audits of low-income taxpayers. Conversely, if the courts protect minority interests, there should be a divergence of court and national coalition influence, regardless of court ideology. As prior research has shown, audits are affected by more than just court or national political considerations. Echoing Shapiro, one should find that if the IRS values allocative efficiency, then state demographic and political factors should impact collection. States with high per capita income are more likely to have a greater number of middle-class and wealthy taxpayers to audit, lessening the need to audit the poor. Conversely, states with high urbanization might make it more efficient to audit the poor because taxpayers live much closer together and therefore one tax or revenue agent can audit many more individuals in one specific area than one who audits

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in areas of greater population dispersion. States with high unemployment should also affect low-income audits, although not in the direction one would expect. That is, ordinarily one would expect greater unemployment to lead to fewer audits of the poor—why audit someone who is unemployed? However, during the 1990s, Congress enacted, and the president signed, various legislative measures that restructured the IRS and made changes to various tax and trade provisions. Although the legislation was primarily designed to provide taxpayer relief, the measures also made some changes to qualifying for the earned income tax credit (EITC). Unlike most other tax credits, if the EITC credit exceeds tax liability, the taxpayer receives the difference in cash from the IRS. The tax law changes called for stepped-up IRS monitoring of returns claiming this low-income credit. An increase in unemployment then should lead to an increase in those qualifying for the EITC, which should in turn lead to an increase in auditing returns of the lowest income classes. Because of this, I added the control variables of per capita income (in thousands of dollars), unemployment rate, population, urbanization (percentage of population living in urban areas); as a final gauge of allocative efficiency, I use a variable that measures the percentage of low-income returns changed after audit. The greater the percentage of low-income returns changed after audit, the more likely the IRS will continue to increase audits of low-income taxpayers because it is cost effective to audit this type of return. To measure the impact of local government, as previously discussed, I added a measure of state government liberalism developed by Berry et al. (1998). To test the national coalition, I use the point in the W-nominate scale of the pivotal separation of powers veto-override member in the Congress (see Krehbiel 1998). W-nominate scores are positive for conservatives, negative for liberals, and have been tested and shown to be static (Poole 1998). Judicial ideology was again measured through the comparable nominate scores based on the political and geographical circumstances surrounding the appointment of each judge. I also used time-point dummy variables for each year, omitting the last year as the baseline. One reason for the use of these variables was methodological and that is explained in the appendix. The use of dummy variables for fixed effects models is often atheoretic—that is, they are employed strictly as a control mechanism. However, in this case, the use of time-point dummies makes sense for this particular model. Many of the years studied had particular political importance. For example, 1994 represented the Republican takeover of Congress and 1995 their first year of power. The year 1996 was the presidential election and 1997 and 1998 saw significant tax reform efforts, including seeking stepped-up audit enforcement of those claiming the EITC. The year 1998 was also a midterm election, which saw a slight Democratic gain in the House of Representatives, while 1999

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was the first full year following passage of the increased audit attention to EITC recipients. While the focus of this book is on the varying treatments of different income classes, as an additional test of the dominant ideology and court treatment, I also analyzed the differences in tax enforcement of individuals as compared to corporations. The degree to which audits focus on individual and corporate taxpayers is politically relevant to competing concerns along a liberal-conservative continuum and this analysis would provide additional evidence of court treatment conforming to the preferences of the dominant national coalition. The hypotheses posited for the movement of low-income audits should be the same for the movement of individual and corporate audits. Using the same data and independent variables, I derive this second dependent variable by dividing the audits per state per year of the individual taxpayers by the audits per state per year of corporate taxpayers. This ratio decreases when the IRS shifts audit attention away from individual taxpayers, toward corporate taxpayers, and increases when the IRS audits more individuals and fewer corporations. The explanation is in the appendix. With the judicial ideology measures included, Table 5.2 provides a complete list of the descriptive statistics for the variables with means and standard deviations for the data used in this chapter. On average, the IRS audits low-income taxpayers more than two and half times as much as highincome taxpayers per state per year, but there is significant variation, with the ratio increasing as much as over nine to one, and in some states more high-income taxpayers are audited. The Tax Court for the years of this study is, on average, slightly more conservative than the District Court, but the District Court exhibits greater variation. The core shows a slight conservative orientation, although there is a significant range over this time, given the shift in control of Congress from 1995 onward. Table 5.2 Descriptive Statistics—Audit Rates Variable Individual/Corp. Audit Rate High/Low-income Audit Urbanization Percent Unemployment Rate Density Population Percent Change after Audit Core Tax Court Ideology District Court Ideology

Mean 11.07 4.22 67.41 5.99 174.94 5,427 90.42 .06 .13 .12

Std. Dev. 6.85 2.18 16.99 2.24 238.38 5,927 3.95 .31 .03 .16

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RESULTS The results presented in Table 5.3 and Table 5.4 (next page) show the impact of the coefficient as the variable moves from one-half a standard deviation below the mean to one-half a standard deviation above the mean. The appendix contains the complete tables with coefficients and standard errors. These results provide strong evidence to confirm the primary hypotheses. The courts and national coalition as represented by the core measure impact IRS audit behavior, and court preferences closely track the preferences of the national political coalition. In a more conservative political climate, both the courts and the political branches push the IRS to increase audits of the lowest income level. Institutional ideology is a powerful explanation for the increased attention to low-income tax returns. Tax Court ideology, District Court ideology, and the national core coalition are substantively important. The IRS alters the ratio of low-income to high-income audits in response to the policy preferences of the Tax Court, the District Court, and the national coalition. As the ideology of the average Tax Court judge, average District Court judge, and the national political coalition moves in a conservative direction, more low-income taxpayers are audited. The Tax Court is a major and important actor in influencing agency policy. A standard deviation shift in its average ideology leads to twenty-five percent more low-income audits. Also as hypothesized, the Tax Court coefficient was substantively much greater than the District Court coefficient. While the influence of the District Court is less than that of the Tax Court, the IRS still fashions its audit policy in relation to the District Court average ideology. A standard deviation shift from a more liberal District Court to a more conservative District Court results in sixteen percent more audits of the lowest income class in relation to the highest. As the executive and legislative preferences grow more conservative, there is a shift toward low-income audits that parallels the influence of the courts. The IRS regional directors audit low-income taxpayers in accordance with the wishes of the executive branch of government, subject to the constraint of the pivotal veto-override member of Congress. The standard deviation move from a more liberal to a more conservative national governing coalition shifts audits to the lowest income class by twenty-three percent. Although the coefficient is smaller than that of the Tax Court, this shift is nearly equal to the corresponding shift of the Tax Court because the ideology of elected officials changes much more rapidly than judges appointed for life or appointed for fifteen years with the probability of reappointment.

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Table 5.3 Influences on the Number of High–Income/Low–Income Audits* Variable State Gov. Ideology Per Capita Income Population Density Urbanization Unemployment Population Tax Court Ideology District Court Ideology Core Pct Change after Audit 1994 1995 1996 1997 1998 1999

Impact .11 –.30 –.23 –.06 –.02 –.10 .25 .16 .23 .21 .02 .09 .26 .03 .56 .18

*Impact represents a one standard deviation change in the independent variable, moving from one-half standard deviation below the mean to one-half standard deviation above the mean.

Table 5.4 Influences on the Number of Individual/Corporate Audits* Variable State Gov. Ideology Per Capita Income Population Density Urbanization Unemployment Population Tax Court Ideology District Court Ideology Core Pct Change after Audit 1994 1995 1996 1997 1998 1999

Impact –.03 –.30 –.05 .03 –.03 .01 .15 .11 .23 –.02 1.25 .94 2.70 1.22 1.11 .71

*Impact represents a one standard deviation change in the independent variable, moving from one-half standard deviation below the mean to one-half standard deviation above, or a change of 0 to 1 for a dichotomous variable.

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Efficiency does matter. The percentage change in audits, a measure of how successful the low-income audit was in collecting additional tax due, does lead to a twenty-one percent shift in the ratio of low-income audits. The greater wealth of the state, as measured by per capita income, leads to a corresponding shift of thirty percent away from low-income taxpayers and toward high-income taxpayers. Urbanization leads to a six percent shift from low-income audits; however, urbanization is correlated with per capita income and greater urbanization might just be an additional measure of the wealth of the state. The time-point dummies all were substantively and statistically significant, albeit with differences in impact. The election cycle years of 1996 and 1998 showed dramatic influence on the audit rate. The year 1996 resulted in a shift toward greater audits of low-income taxpayers by twenty-six percent. The year 1998, which was also the year of tax reform and the agreed on increase of audits of EITC recipients, saw a fifty-six percent shift from high-income taxpayers toward low-income taxpayers. The second dependent variable shows similar influences, but with important differences. The IRS altered the individual/corporate audit ratio in response to the policy preferences of the average judge of the Tax Court. As the ideology of the average Tax Court judge moves in a conservative direction, a greater percentage of individual taxpayers are audited. As the average ideology moves in a liberal direction, the IRS targets more corporate returns for audit. A one standard deviation shift in the average ideology of the Tax Court leads to more than fifteen percent individual audits compared to corporate audits. Of course, over the time period of this study the Tax Court ideology ranged only eight percent in this sample, compared, by contrast, to over forty-seven percent variation for the District Court, limiting the impact of the shifts in the audit ratio caused by shifts in the Tax Court ideology. Also as hypothesized, the impact of the Tax Court was greater than that of the District Court, which showed an eleven percent change toward more individual audits as the District Court became more conservative. Political circumstances, in comparison to judicial ideology, appear to be very important to the corporate individual audit rate, far more so than for the variation in individual audits. Here the standard deviation shift in the core leads to almost twenty-five percent more audits of individuals. A more liberal political coalition emphasizes corporate auditing more than individual auditing. Undoubtedly, this is confirmation of Scholz and Wood’s (1998) findings of audit changes due to the changes in presidential administrations. These findings are buttressed by the results of the individual years, which represent substantial political change; most of the years show significant substantive impact.

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CONCLUSION Low-income and individual audits increase because of political and judicial considerations confronted by the IRS. In addition to the governing national coalition, the Tax Court, a national specialized court specifically designed to deal with audited taxpayers and resolve their disputes with the IRS, is a major player in setting and determining agency policy. To a lesser extent, the District Court also influences tax policy. The Tax Court and District Court establish clear “legal sets.” Changes in judicial ideology change the audit behavior of the IRS. A study encompassing even more years would show greater variation in Tax Court ideology and therefore greater change due to its shifting ideology. Contrary to assertions by political leaders that the IRS is different from other agencies, that it is an agency “out of control,” there is substantial political and judicial influence on the IRS. This book demonstrates that all three branches of government work to control the agency, and the increasing conservatism of the Tax Court, District Court, and the governing national political coalition has led to an increase in the number of low-income and individual audits. Increased attention to the returns of low-income taxpayers is the result of deliberate policy choices by the political branches of government and judicial preferences. In the past two decades, there has perhaps been no domestic public policy that has so dominated American politics as taxes, and the interrelated questions of who should pay and how much. There is no reason that a judiciary nominated and confirmed through a political process should not have policy preferences or that the IRS should not follow these preferences in addition to following the preferences of other political actors. Robert Dahl (1957) noted many years ago that the Supreme Court is rarely out of political alignment with majoritarian elected institutions because of the appointment power of the president. More recently, Whittington (2005) observed that an emerging literature argues that Supreme Court doctrine fits within the broader political regime (see, e.g., Gillman 2002; Pickerill and Clayton 2004), and “structural characteristics of the political systems such as the United States encourage cooperation between judges and political leaders to obtain common objectives” (Whittington 2005, p. 584). This appears to be true for IRS enforcement policy and its relationship to the preferences of lower federal courts, including specialized courts. Future research should examine the influence of other trial courts and other specialized courts on other agencies and other public policy domains to see if the courts differ from the national political coalition in both the size and direction of their influence. It appears that the protection of minority rights and the commitment to equality depend on the membership of the court, and not solely on its assumed institutional role.

THE CREATION AND ENFORCEMENT OF NATIONAL TAX POLICY 89

SIX

COURTS, FAIRNESS AND THE CREATION AND ENFORCEMENT OF NATIONAL TAX POLICY

COURTS, FAIRNESS, AND NATIONAL GOVERNING COALITIONS Through the preceding pages of facts, illustrations, data, analyses, and arguments, I have tried to demonstrate the importance of tax trial courts in setting and determining the nation’s tax policy and tax enforcement in two ways. First, I have attempted to show that Tax Courts play an important part in setting and determining tax and tax enforcement policy. Who has to pay and how much and whose tax return will be audited and why are not choices solely made by elected officials and their delegated agents. Courts as well as Congress and the president have an important and influential role in these decisions. Second, I have endeavored to prove that the influence of the courts is not independent of the broader directives and policy preferences of the dominant political coalition. While courts may exist to ensure fairness and allow tax litigants their “day in court,” the preferences of the judges on these courts show little difference from the preferences of the majority coalition. The result is that the rulings favor the taxpayer that the coalition favors. That is, the directional influence that courts have on this process differs little from the choices preferred by elected officials and their agents. In our federal system, the judges are nominated by the president and confirmed by the Senate. While there are many individual judges remaining on the bench who have been appointed by presidents now out of power and approved by a Congress very different from the one that sits during the later trials and subsequent judicial decisions, over time the dominant coalition can change the judiciary to resemble the ideology, values, and preferences of this political 89

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coalition. This is particularly so in those courts where judges sit for a fixed term and thus do not enjoy lifetime tenure. This does not mean that every individual judge or even the majority of decisions of a specific court will always coincide with the preferences of the political majority. One personal opinion might not always represent the interests of, or issue rulings consistent with, the preferences of the majority. However, one ruling or even several rulings that are contrary to dominant policy preference do not mean that the courts always protect the minority against the wishes of the dominant majority. The aggregate picture reveals that, on average and over time, court decisions mirror the preferences of the majority coalition. When the dominant majority favors less tax enforcement, court rulings will usually be less favorable to the tax enforcement authority, the IRS. When the dominant majority favors less enforcement of wealthy taxpayers, the IRS follows suit and court rulings reinforce and buttress this trend. Courts are often criticized as activist, where the term is used in a pejorative sense to mean that the court rulings oppose the preferences of the democratic majority. Thus, courts are condemned as antimajoritarian and, by implication, undemocratic. It is true that rulings can be antimajoritarian. While often normatively decried as undemocratic, this can be a positive element of a democratic system. Antimajoritarianism allows courts to be the “last best hope” of the disenfranchised. However, most often courts mirror and uphold majority preferences. Each of the taxpayers portrayed here represents some of the various types of U.S. taxpayers. One is rich, another is poor. One is a middleincome couple seeking to uphold deductions, while another is a wealthy individual attempting to uphold a challenged tax shelter. One taxpayer is a large corporation, while the rest are individuals. Each taxpayer alleged some inequity in enforcement of tax policy and chose to seek redress in the U.S. court system. Each taxpayer made a choice to sue and then selected a particular forum. The tax policies themselves were deliberate choices. The audits they contested were themselves the product of choices made by agents of the IRS. The accumulation of these individual choices led to the analyses of this book. Political science defines itself by positing theories of causation, then developing testable hypotheses, and finally gathering information to learn about political reality. We examine larger trends and try to determine what constitutes average behavior or median positions of all the actors involved in political process. We step back to examine the larger picture. In considering this broad view, we sometimes forget that each data point of some trend represents someone who has gained or lost, suffered harm or been rewarded. It is not unlike when law students realize that each case they read in a textbook might represent an important principle of law, but also

THE CREATION AND ENFORCEMENT OF NATIONAL TAX POLICY 91 represents someone who has gained or lost something of value. A criminal defendant might go to jail or be freed because of a court ruling. A plaintiff might receive compensation resulting from a severe injury or fail to obtain much needed relief because of the negative outcome of a particular case. The same is true of tax litigation. While they are not life or death issues, the outcomes of particular cases can have enormous consequences for individual litigants as well as teach us something about the larger trends in tax policy and tax enforcement. Given the number of noncompliant taxpayers, no one can seriously doubt the need for taxpayer audits. The government, and, by extension, we the people, need the revenue collected from the income tax. However, whether one is cheating or actually in compliance, whether one owes additional tax payments or not, it is unquestionable that undergoing an audit and then contesting the audit means a nontrivial level of anguish for the taxpayer, as well as a significant investment of time and often money. Each individual case is unique and some will win big, while others will lose. A business entity the size of Wal-Mart will recover from an adverse ruling regarding its accounting practice. The denial of the practice might result in a loss for one quarter of a fiscal year. Perhaps James William will suffer a significant economic loss with a denial of a tax shelter, but he might have enough assets to weather a short-term loss. However, in certain cases, the loss can be devastating. Joy Anders and the Forrest’s would likely have to deal with crippling economic losses. Few middle-income couples can pay an additional $25,000 plus potential penalties and interest and almost no lowincome individual can withstand the denial of 1,500 worth of tax credits, which might represent twenty-five percent of yearly income. The court decisions in these latter two cases have enormous impact on these taxpayers beyond any aggregate story of audit shifts, forum choice, and chances of winning in a tax trial court. It is not wrong to focus on the aggregate numbers to gain greater insight into causation and trends. These greater trends ultimately move public policy and create societal change—and social science wants to know why change has occurred. However, understanding what causes changes in tax policy and tax enforcement does not mean individual taxpayers do not deal with the consequences of these changes. It means a Joy Anders gets audited and might confront an adverse court decision while a high-income individual might not. It means a James William once audited might find a court more favorably inclined to uphold a tax shelter than a use of the unearned income tax credit. It means a corporation using a questionable accounting practice might find that it does not confront an audit the following year, or, if it does, it is likely that its tax position will be upheld by the tax trial court. Consider the main findings of chapters two, three, four, and five.

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Chapter Two In chapter two, I argued that the tax laws are meant to be “revenue raisers.” Interpretation and burden of proof have usually been on the taxpayer. Because of the purpose of these tax laws is to raise revenue and because of this burden of proof, taxpayers lose far more often than they win in the Tax Court, the Court of Federal Claims, and the District Court. The law favors the government. That being said, even if the taxpayer loses, the choice of forum and the ease and relative effortlessness of filing claims allow almost any aggrieved taxpayer to at least have his or her “day in court.” Less affluent taxpayers can file claims in a short period of time and have them heard in an informal and relatively inexpensive setting. Of course the term “forum choice” is misused in this instance because of the prepayment option. That is, both the Court of Claims and the District Court require prepayment and only a few taxpayers can afford to prepay their tax obligation and subsequently sue for a tax refund. Therefore, most taxpayers, including Joy Anders and the Forrest’s, have no choice but to sue in Tax Court. However, the courts have a broader role than acting as a forum to settle tax disputes—they must ensure actual fairness. We have a system of voluntary compliance at least to the extent that the system depends on individual taxpayers self-reporting. To ensure voluntary observance of tax filing, taxpayers need a credible commitment from the courts that justifies their compliance. That is, we want the IRS to be aggressive in the collection of tax revenue. The good of the entire country depends on the agency’s collecting revenue in as efficient a manner as possible, but not at the expense of fairness or injustice to taxpayers. In an ideal world, the IRS aggressively pursues the tax cheaters and leaves the honest citizen alone. We know this does not happen. An imbalance toward aggression, toward efficient collection, inevitably means some honest taxpayers will not be treated in a fair and just manner. Some tax shelters are legitimate, but many are not. Thus, we also want to know that taxpayers get a fair hearing if they choose to contest the agency action. The appearance of fairness is not enough. If certain forums offer advantages to the litigants over other forums, then these choices, to be effective, must be open and available to all litigants. In the end, compliance depends on taxpayers believing that they have some sort of stake in the outcome. Chapter Three Here I found evidence that political institutions use litigation and forum choice to attain policy goals. Litigants calculate the likelihood of winning their tax suit. If they are likely to win, they proceed with the litigation. However, there is more to the calculation than individual costs and potential

THE CREATION AND ENFORCEMENT OF NATIONAL TAX POLICY 93 benefits. Litigants also receive signals from the dominant political coalition. A more conservative coalition will encourage taxpayers to challenge IRS post audits claims because the dominant coalition sees litigation as additional measure of agency control and policy change. In addition, political signals can also lead taxpayers to favor one forum over another. It is rational for the litigants to choose the more conservative forum because that will be the one most favorable to the taxpayer and least likely to support the IRS. It is easier for the governing national coalition to change the ideology of the Tax Court much more quickly than the ideology of the District Court. Thus, litigation and forum choice are political acts as much as they are rational calculations on the costs and benefits of challenging an audit. Forum shopping is usually derided because it appears that litigants and their lawyers play games with our justice system to create favorable outcomes. However, at least in tax litigation, Congress has made the explicit decision to allow taxpayers to use forum choice and, at least in the 1990s, seems to encourage taxpayers to choose a forum that offers them the greatest likelihood of winning against the IRS. So it appears that litigation and forum shopping are only bad until they help the governing national coalition achieve political and policy goals. Chapter Four In the chapter that examines court decision making, I showed how the Congress and the president can use the Article I specialized court’s limited tenure and reduced numbers to change the ideology of the court much more quickly than the independent Article III court of general trial jurisdiction. Just as the coalition can use litigation to control agency policy, it also uses the ideology of the specialized court as a method of agency control. Congress and the president can push the agency to produce policy in line with congressional and executive preferences because they have greater control over the decision making of the specialized court. Of course this finding differs from the ideal of a specialized court using its expertise to decide issues without reference to ideology and free from agency influence. However, the ideal ignores the practical matter that the collection and distribution of revenue are politically charged issues. Who or what should pay and how much, and who or what should receive this revenue and how much, are inescapably political questions with ideological overtones Despite repeated calls for simplification and ease, any system of taxation must have complex laws, rules, and regulations. The interpretation of complicated questions of assessment and collection requires discretion and technical expertise, and any result requires opinion and judgment; such opinion and judgment cannot be divorced from basic views about the

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collection and allocation of scarce resources. This elaborate system of appeals allows control of the IRS and ultimately tax policy. There have been numerous calls for, and studies of, proposals to consolidate all tax cases in one court and to create a U.S. Tax Court of Appeals. While many reasons have been put forward to oppose such proposals, an important consideration has been the fear that such specialized courts would be no more than extensions of the IRS and thus likely to exhibit bias in favor of the agency. However, while the Tax Court might issue more rulings in favor of the IRS than the District Court, the reason might be as much due to congressional design and executive appointment to a more limited independent court, as compared to an Article III court, than it is to bias in favor of an agency. Chapter Five In this chapter, I found that there is substantial political and judicial influence on the IRS. All the branches of government work to control the agency, and the increasing conservatism of the Tax Court, District Court, and the governing national political coalition is the reason for the increase in the number of low-income audits. Increased attention to the returns of lowincome taxpayers is the result of deliberate policy choices by the political branches of government and judicial preferences. There is no reason that a judiciary nominated and confirmed through a political process should not have policy preferences, or that the IRS should not follow these preferences in addition to following the preferences of other political actors. Whittington (2005) observed that Supreme Court doctrine fits within the broader political regime and “structural characteristics of the political systems such as the United States encourage cooperation between judges and political leaders to obtain common objectives” (Whittington 2005, p. 584). This appears to be true for IRS enforcement policy and its relationship to the preferences of lower federal courts, including specialized courts.

CHANGING TAX POLICY, CHANGING THE COURTS Clearly, federal trial court rulings, as well as appellate court decisions, reflect dominant political preferences. Judges are nominated by the president and confirmed by the Senate. Many judges are loyal party workers who diligently work for the local, state, and national party to secure a nomination to the federal bench. Even if the judge is not a committed and loyal Republican or Democrat, he or she has a patron either in the nominating senator, approving governor or representative, or some other high-ranking party official. In short, the nominating and confirmation route is a political process. Political

THE CREATION AND ENFORCEMENT OF NATIONAL TAX POLICY 95 leaders with policy preferences nominate and appoint judges who, for the most part, share those preferences and are committed to seeing them enacted. There is no reason to believe that the judiciary will have markedly different political beliefs than the dominant political majority. Having said this, there are some caveats to this now not so startling idea of the alignment of judicial and majoritarian preferences. First, policy and politics do not always determine outcomes, particularly for trial court judges. Law, facts, precedent, and legislative intent all are important in case outcomes. Trial courts, even federal trial courts, do not have the institutional features of the U.S. Supreme Court that allows that court to have virtually unlimited freedom in case outcomes. Lower courts must adhere to precedent from both the Supreme Court and the appropriate Court of Appeals, have little docket control, and presumably seek appointment to higher courts. At the trial level, facts can often lead to only one outcome, and particularly so in tax matters where the taxpayer has the burden of proof and most often fails to reach it. All of these features will temper the ideological direction of their rulings. In short, law does matter. Second, as Dahl and others have noted, there are times when judicial preferences significantly differ from the majority of the elected officials. Prominent among those times were the 1930s with the election of Franklin Roosevelt and his New Deal coalition. The court, as Dahl showed, struck down much of the New Deal legislation, at least until the “switch in time that saved nine” in the mid 1930s and the ability of Roosevelt to replace many of these more conservative justices with his own appointees. Another scholar has argued that we are likely to see these misalignments between elected and judicial preference following critical realigning elections such as 1800 and 1828 as well as 1932 (Funston 1975; but see Beck and Funston 1976 and Canon and Ulmer 1976 disputing Funston’s findings). Dahl argued that a “dead hand” of the previous coalition could reach out through the judiciary and stymie the achievement of the goals of the new electoral majority. While empirical evidence supporting Dahl’s specific claims has been somewhat lacking, clearly the longer tenure of the unelected judiciary means that it takes more time to change the median or average preferences of the federal judiciary. Even the Article 1 Tax Court judges sit for a term of fifteen years—almost twice that of a reelected president, more than twice the term of a senator, and more than seven times as long as the term of a member of the House of Representatives. Thus, a federal judge sits on the bench for a long time, potentially much longer than the coalition that first nominated and confirmed him or her to the judiciary. This means that long after majority preferences change and a new coalition comes to power, the judiciary will have many judges whose preferences do not match those of the now dominant coalition. Although public policy might favor changes in tax rates and tax enforcement,

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it might take much longer for the judiciary to adopt and adhere to those preferences. While the “dead hand” of the past will eventually change, and change more quickly in the shorter tenure Tax Court than in the District Courts, individual rulings will be inconsistent with majority preferences, at least for the first few years after electoral change. Thus, although a new Congress and a new president might favor fewer examinations of individuals claiming the Earned Income Tax Credit, a Joy Anders might still confront an unfriendly judiciary partial to enforcement against low-income tax payers. Conversely, although a new administration might favor greater enforcement against tax shelters, James Williams might still find judges more sympathetic to the use of such shelters than would be suggested by the current political climate. This will change over time and the longer the coalition stays in power, the greater the concordance between judicial preferences and elected preferences. Even when judicial preference and electoral preference differ, this does not mean that courts are out of control. However, nor does it mean that the courts really represent the last best hope for the disenfranchised. The courts follow the preferences of the majority, but since courts are made up of judges appointed over time, not all judges will always support the dominant preferences.

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APPENDIX

METHODOLOGY AND THE USE OF PANEL DATA

One can read and understand this book with a minimal appreciation of quantitative methodology and data analysis. Basic concepts of central tendencies and probability are sufficient to appreciate and follow the statistical findings. This appendix is for those with a greater knowledge of statistical methodology and analysis. It offers the complete tables, including coefficients and standard errors, for those who want to understand more about how the results were achieved. Of course, the presentation of the complete results also allows those with methodological training to criticize or disagree with the various methodologies chosen. I think the findings are quite robust, but I welcome any exchange with those seeking greater information. The data and methodological analyses employed in this study do present several interesting issues and potential hazards. For example, there are potential problems with the Gauss-Markov assumptions of multicollinearity, heteroskedasticity, and auto/serial correlation. This appendix is a brief discussion of those issues and how I dealt with the associated problems. Data used for most of the study are longitudinal panel data. That data was gathered from fifty states and I then proceeded to analyze the information over a period of years. It is a combination of data gathered from both a cross section (states) and over a period of time, or a time series (years). Such data are very useful. They allow the examination of issues and questions that cross-sectional or time series data alone do not. Their usage also increases the degrees of freedom in any given analysis. Such data, however, also have the potential to exhibit all the problems associated with crosssectional and time series data in addition to problems that are unique to panel data. The exact number of years depended on the specific analysis. Some of the data was much more difficult and time consuming to collect. For example, collecting and coding each and every judicial decision on lawsuits 97

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brought by taxpayers are labor intensive and thus the data for chapter four was limited to two years. In addition, the use of these types of data and the subsequent presence of these problems make the use of regression or Ordinary Least Squares (OLS) problematic. OLS is optimal if one assumes first that the error processes have the same variance (homoskedasticity), and that the errors from any given time point and any given unit are unrelated to the errors for any other time point or unit point (no serial/auto correlation). Beck and Katz (1995, p. 636) call these errors uncomplicated or “spherical.” Those assumptions are difficult to make with data examining states over time. It is difficult, if not impossible, to assume homoskedasticity and no auto/serial correlation. States, for example, are of unequal size. A large state will have a different influence than a small state, meaning there is probably heteroskedasticity. In addition, it is reasonable both to assume that what happens in any one state influences what happens in another and what happens in one year influences what happens in another. That is, there is undoubtedly auto/serial correlation. Because of this, OLS estimation will not make the most efficient use of the data. This means that the standard errors will be incorrect. Before discussing alternatives to OLS, I want to detail the problems with the data and estimation and the tests and methods available to deal with these problems.

ESTIMATION PROBLEMS Heteroskedasticity Heteroskedasticity is unequal variance of the error term (Downs and Rocke 1979). This is a violation of a Gauss-Markov regression assumption, which means that the use of ordinary least squares can lead to inefficient estimates (Gujarati 1995, pp. 365–66). Each estimate has a greater probability of being “off target” (Berry and Feldman 1985, p. 77). The t and F tests of significance are likely to give inaccurate results. In this sample, states are obviously of unequal size within each panel. Before using any particular method to test for heteroskedasticity, I transformed the data in an attempt to reduce, if not eliminate, the heteroskedasticity caused by the unequal size of states—for example, by using a percentage or a logarithmic transformation whenever possible. Given the transformation, I then tested for heteroskedasticity. There are no hard and fast rules for detecting heteroskedasticity, only some rules of thumb. I performed basic tests on all equations in the model, including graphing the estimated squared residuals (ui2) against the estimated Yi, and against several of the explanatory variables. I also performed White’s general heteroskedasticity test on the equations. This involves running an auxiliary

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regression of the estimated squared residuals against the original X variables, interactions of the variables, and polynomials of the variables. Then I obtained an R2 from the regressions. The chi square values obtained were all below the critical chi square value at the .05 level of significance. Auto/Serial Correlation Time series and panel data, by contrast, are data arranged in chronological order (Gujarati 1995). Analyses of time series and panel data involve examining changes in variables over time. In using such data, care must be taken to avoid the problem of auto/serial correlation. The difficulty with observations of the same variable through time is that the observations are correlated to some extent with each other. The error terms are thus correlated (or auto correlated), meaning there is a definite pattern, which violates a Gauss-Markov regression assumption. Closely related to autocorrelation is serial correlation. Many now treat the terms synonymously (Gujarati 1995, p. 410). There are several methods both to detect and correct autocorrelation/serial correlation. The most often used is the Durbin-Watson statistic (Greene, p. 591). The test is inaccurate in this instance since this a pooled sample of years. Stimson suggests using a pooled Durbin-Watson to test for such correlation. There are also different methods to correct for autocorrelation. One accepted method is to use a lagged dependent variable (Beck and Katz 1996; Scholz and Wood 1998), and that method was used here. Since each chapter used slightly different models, the next sections review the methods chosen for each model in each chapter.

MODELS FOR CHAPTER THREE Because one of the dependent variables is a count and the other is a ratio, I used different methods for to test the hypotheses. The dependent variable, litigation rate, simply counts the number of tax litigation filings by year. It is a discrete outcome conforming roughly to a Poisson distribution. However, data are produced by fifty separate states, each with a range of qualities likely to produce heterogeneous variation in event production greater than the conditional population mean. The negative binomial model modifies the Poisson regression model by introducing an additional stochastic term to the conditional mean, typically assumed to have a gamma distribution, to reflect individual heterogeneity often observed in cross-sectional data (Cameron and Trivedi 1998, pp. 100–101). The distribution itself is similar to Poisson. Because the negative binomial model reduces to Poisson when ␣ = 0, a test of this hypothesis was conducted to assess whether the data are better described by a Poisson or negative binomial distribution, and the

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results of this test show that the data are overdispersed as expected from the crosssection of American states over this extended period. Because some of the variation in the data is national and thus constant per state per year I cluster the data on the states and use robust standard errors. Finally, I use a lagged dependent variable in the model to control for error autocorrelation. I test the hypotheses based on the following equation: Y (Litigation Rate Lag) = _ + `1 (Litigation Rate) + `2 (1998) + `3 (1999) + `4 (Per Capita Income) + `5 (Audits) + `6 (Unemployment) + `7 (Assessments) + `8 (Tax Court Ideology) + `9 District Court Ideology) + `10 (Tax Court IRS Win Pct.) + `11 (District Court IRS Win Pct.) + `12 (Congressional Ideology) + ¡. The full results are reported in Table A.1. For the second analyses of this chapter, the dependent variable is a ratio, which reduces the risk of heteroskedasticity due to variation in state size and other methodological problems associated with studies over time such as nonstationarity. For the test of the “a” hypotheses, I use a regression analysis with panel corrected standard errors and I test the hypotheses using this panel design based on the following equation: Y (Tax Court/District Court Ratio Lag) = _ + `1 (Tax Court/District Court Ratio) + `2 (1998) + `3 (1999) + `4 (Per Capita Income) + `5 (Audits) + `6 (Unemployment) + `7 (Assessments) + `8 (Tax Court Ideology) + `9 District Court Ideology) + `10 (Tax Court IRS Win Pct.) + `11 (District Court IRS Win Pct) + `12 (Congressional Ideology) + ¡. The full results are reported in Table A.2 (page 102).

MODELS FOR CHAPTER FOUR The dependent variable for this chapter takes on two values: a value of “0” when the tax payer wins, and “1” when the IRS wins. I estimate the model using probit analysis in STATA 8, clustering the data on the judge for both the Tax Court and District Court analyses.1 Positive coefficients indicate a greater likelihood of an IRS win. After dropping decisions due to lack of obtainable data for all the independent variables, there were 631 decisions for the Tax Court analysis and 185 decisions for the District Court analysis. Thus, I model the likelihood that the IRS will win the case. I rely on a probit estimation procedure and report robust standard errors, clustered on judges, to control for the potential influence of any outlying observations

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Table A.1 Determinants of Tax Litigation 1994–2000 (Chapter Three) Variable Lagged DV Tax Court Ideology District Court Ideology Congressional Ideology Tax Court Win Pct. District Court Win Pct. Assessments 1998 Audits Citizen Ideology Population Per Capita Income Unemployment Rate Appellate Court Ideology Constant Wald Chi Square N = 300

Coefficient .00002*** (.0000018) 12.60*** (.59) –.08 (.09) 1.56** (.19) .09** (.03) .01 (.03) –.0003 (.0007) .30*** (.02) .0000006 (.0000005) .0006 (.0005) .000000082 (.000000056) .000003 (000002) .03*** (.006) .00002 (.002) 7.37*** (.15) 3922.92***

* = p < .05 (two tailed). ** = p < .01 (two tailed). *** = p < .001 (two tailed).

(Western 1995). I use a time-point dummy to control for the effect of any particular year. Positive coefficients indicate a greater likelihood of an IRS win. Since the IRS wins most often, other scholars have used Rare Events logistic regression to model this data (King and Lazarus 2003; see King and Zeng 2001a, 2001b), on the theory that conventional dichotomous regressions

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Table A.2 Determinants of Tax Forum Choice 1994–2000 (Chapter Three) Variable Lagged DV Tax Court Ideology District Court Ideology Congressional Ideology Tax Court Win Pct. District Court Win Pct. Assessments 1998 1999 Audits Population Per Capita Income Unemployment Rate Appellate Court Ideology Constant Wald Chi Square N = 300

Coefficient .86*** (.08) 1664.63*** (131.65) –.23 (1.2) 37.85*** (14.67) .22 (.28) –.45 (.28) –.02 (.17) 40.49*** (2.72) 42.49*** (2.36) .0000094 (.000015) .000000082 (.000000056) –.0000017 (000016) .04 (.14) .12 (.48) –179.36*** (15.99) 2269.46***

* = p < .05 (two tailed). ** = p < .01 (two tailed). *** = p < .001 (two tailed).

techniques will produce biased coefficients since the observance of a “1” is particularly rare. However in the datasets used here, while the IRS wins most often, the taxpayer still won twenty percent of the time in the Tax Court, and thirty-two percent in the District Court. While the IRS wins much more, it is hard to argue that a taxpayer win is a rare event, thus

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ordinary probit is appropriate.2 After dropping decisions due to magistrate decisions, or lack of obtainable data for all the independent variables, there were 631 decisions for the Tax Court analysis and 185 decisions for the District Court analysis. The model has the following functional forms:3 U.S. Tax Court: Y(IRS Win) = _ + `1x1(Per Capita Income) + `2x2(State Government) + `3x3(IRS Experience) + `4x4(Special Judge) + `5x5(Attorney) + `6x6(Business) + `7x7(Estate or Trust) + `8x8(Income Issue) + `9x9(Deduction Issue) + `10x10(Tax Shelter) + `11x11(Fraud/Tax Protestor) + `12x12(Valuation Issue) + `13x13(Appellate Court Ideology) + `14x14(Ideology) + `15x15(Income*Ideology) + `16x16(Deduction*Ide ology) + `17x17(Valuation*Ideology) + `18x18(Tax Shelter*Ideology) + `19x19(Fraud/Tax Protestor*Ideology) + ¡1. U.S. District Court:4 Y(IRS Win) = _ + `1x1(Per Capita Income) + `2x12(State Government) + `3x3(Attorney) + `4x4(Business) + `5x5(Estate or Trust) + `6x6(Income Issue) + `7x7(Deduction Issue) + `8x8(Tax Shelter) + `9x9(Fraud/Tax Protestor) + `10x10(Issue) + `11x11(Appellate Court Ideology) + `12x12(Ideology) + `13x13(Income*Ideology) + `14x14(D eduction*Ideology) + `15x15(Withholding *Ideology) + `16x16(Tax Shelter*Ideology) + `17x17(Fraud/Tax Protestor*Ideology) + ¡1. The coefficients are reported in Table A.3 (next page).

MODELS FOR CHAPTER FIVE The analysis is similar to that used in chapter three. Since the model is a panel of fifty states over seven years, I used a fixed effects OLS regression with panel corrected standard errors to test the model. Specifically, I used time-point dummy variables for each year, omitting the last year as the baseline. Although the use of dummy variables for fixed effects models is often atheoretic, use of time-point dummies makes sense for this particular model. Many of the years used in this model had particular political importance. For example, 1994 represented the Republican takeover of Congress, and 1995 their first year of power. The year 1996 was the presidential election and 1997 and 1998 saw significant tax reform efforts, including seeking stepped-up audit enforcement of those claiming the EITC. The year 1998 was also a midterm election year that saw a slight Democratic gain in the House of Representatives, while 1999 was the first full year following

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Table A.3 Probability of Outcome Favoring IRS (Chapter Four) Variable

Tax Court

District Court

Per Capita Income

–.000006 (.00003) .004 (.005) .022 (.137) .464* (.192) –.334* (.139) –.534** (.183) –.056 (.275) –.042 (.200) .0005 (.184) .243 (.253) 5.11** (1.78) –.075 (.269)

.00007+ (.00004) .004 (.006)

State Government IRS Experience Special Judge Attorney Business Estate or Trust Income Issue Deduction Issue Tax Shelter Fraud/Tax protester Valuation Issue Withholding Issue Appellate Court Ideology Income * Ideology Deduction * Ideology Valuation * Ideology

–.325 (2.112) –1.13* (.522) .991 .761 1.33* .623 .706 (.921)

Withholding * Ideology Tax Shelter * Ideology Fraud/Protester * Ideology Constant

2.05* (.928) –14.06** 4.61 1.06 .917

N Chi sq Pseudo R2 + = p < .01 (two tailed) * = p < .05 (two tailed) *** = p < .001 (two tailed)

–.295 (.511) –.607** (.243) –.819** (.327) .004 (.273) –.283 (.303) .497 (.576) .325 (.509) .797* (.358) 5.18* (2.42) .358 (.647) .037 (.986) –.147 (1.09) –3.78*** (1.15) –1.26 (2.03) –4.35* (2.11) –1.77 (1.27)

= 638 N = 185 = 342.43*** Chi sq = 45.78*** = .12 Pseudo R2 = .14 ** = p < .01 (two tailed)

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passage of the increased audit attention to EITC recipients. Several of the variables control for the specific effect of the states. In addition, I ran both models with fixed effects, controlling first for states by creating fifty dummy variables and leaving out the last state as the baseline and then with seven year dummies. In neither model did the key ideology variables change in the level of significance or substantially change in impact. Since states are of different sizes, the use of a ratio as the dependent variable reduces the risk of heteroskedasticity due to variation in state size, and the use of a ratio also reduces the risk of other methodological problems associated with studies over time such as nonstationarity (Scholz and Wood 1998). Both a q norm and a Jacque-Bera test showed that the dependent variables were skewed, so I logged the dependent variables to achieve a normal distribution. With the log of the dependent variable, and the timepoint dummies, the models then become the following: Y (Log of the Income Audit Ratio) = _ + `1 (Tax Court Ideology) + `2 (State Specific District Court Ideology) +`3 (District Court Ideological Variation) + `4 (Local Government) + `5 (Per Capita Income) + `6 (Unemployment) + `7 (Urbanization) + `8 (Population Density) + `9 (Population) + Time-point dummies + ¡. Y (Log of the Corporate Individual Audit Ratio) = _ + `1 (Tax Court Median Ideology) + `2 (State Specific District Court Median Ideology) +`3 (District Court Ideological Variation) + `4 (Local Government) + `5 (Per Capita Income) + `6 (Unemployment) + `7 (Urbanization) + `8 (Population Density) + `9 (Population) + Time-point dummies + ¡. The coefficients for the low-income high-income ratio results are reported in Table A.4 (next page) and the individual corporate ratio results in Table A.5 (page 107).

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Table A.4 High-Income/Low-Income Audits (Chapter Five) Variable State Gov. Ideology Per Capita Income Population Density Urbanization Unemployment Population Tax Court Ideology District Court Ideology Core Pct. Change after Audit 1994 1995 1996 1997 1998 1999 Constant N = 350 R2 = .52 Chi Square = 1081.26*** * = p < .05 (two tailed) ** = p < .01 (two tailed) *** = p < .001 (two tailed)

Coefficient .005*** (.001) –.00005*** (.000005) –.0002 (.00012) –.004*** (.0001) –.009 (.02) 6.11E-09 (4.92E-09) 8.23*** (1.03) 1.00*** (.09) .73*** (.10) .03** (.01) .16*** (.04) .46*** (.02) .64*** (.03) .35*** (.05) 1.14*** (.04) .61*** (.03) 6.45*** (.90)

METHODOLOGY AND THE USE OF PANEL DATA Table A.5 Individual/Corporate Audits (Chapter Five) Variable

Coefficient

State Gov Ideology

–.022* (.009) –.00004 (.00009) –.002 (.002) .006 (.005) –.40 (.21) –4.23E-09 –3.01E-08) 365.79** (151.11) 6.79*** (1.76) 19.92* (8.72) –.25** (.10) 14.92*** (4.45) 10.89*** (3.89) 20.98*** (3.14) 14.50*** (3.06) 11.08* (5.54) 7.25 (4.72) –28.46 (22.32)

Per Capita Income Population Density Urbanization Unemployment Population Tax Court Ideology District Court Ideology Core Pct. Change after Audit 1994 1995 1996 1997 1998 1999 Constant N = 350 R Squared = .53 Chi Square = 121.31*** * = p < .05 (two tailed) ** = p < .01 (two tailed) *** = p < .001 (two tailed)

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CASES CITED

Brown v. Board of Education I 347 U.S. 483 (1954) Ballard v. Commissioner of Internal Revenue 125 S.Ct. 1270 (2005) Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955) Golson v. Commissioner 54 T.C. 742 (1970) Griswold v. State of Connecticut 381 US 479 (1968) Oregon v. Mitchell 400 U.S. 112 (1970) Plessy v. Ferguson 163 U.S. 537 (1896) Pollock v. Farmers’ Loan & Trust Co. 157 U.S. 429 (1895) Roe v. Wade 410 US 113 (1973) Steward Machine Co. v. Davis 301 U.S. 548 (1937) United States v. Davis 370 U.S. 65 (1962) Welch v. Helvering 290 U.S. 111 (1933)

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NOTES

CHAPTER ONE: TAX POLICY AND THE PURSUIT OF JUSTICE 1. Plessy v. Ferguson (163 U.S. 537, 559–560, 1896). 2. The first act was passed July 6, 1861, although no income tax revenue was collected under this act. The second and more important act was passed July 1, 1862. By this time, Congress knew the Civil War was going to last more than ninety days, creating a need for revenue. 3. The office of Commissioner of Internal Revenue as part of the Bureau of Internal Revenue (Chommie 1970) was created to collect the income tax. Although successful in financing the Civil War, the income tax act expired in 1872. The Bureau of Internal Revenue remained, with almost 4,000 employees to administer and collect such other taxes as existed. That figure was to remain constant for the next fifty years. 4. The amendment states that: “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” 5. Constitutional amendments have overturned four Supreme Court rulings. The last was the Twenty-sixth Amendment, ratified in 1971, that allowed eighteen year olds the right to vote, overturning the Supreme Court decision of Oregon v. Mitchell 400 U.S. 112 (1970). 6. Sears wrote: “It is intended that Part I shall be frank and devoid of that mock patriotism which preaches from the taxing power’s vantage point and secretly takes advantage of any loophole in the law. No tricks are advocated or alluded to in this book, except to illustrate the fundamental differences between avoidance and evasion” preface, p. iii. 7. Steward Machine Co. v. Davis 301 U.S. 548 (1937) 8. IRC §§6012 (a), 6072 (a), 6151 (a). 9. Quoted by Joy Mann, “We All End Up Paying for Deadbeats,” Washington Post, January 6, 1995, p. E3. As evidence of the lack of compliance, Brand noted that when the law was changed to require the listing of Social Security numbers for dependents, “Seven million dependents disappeared in the United States.” 10. Chapter two contains much greater detail on audit processes and procedures. 11. Specifically, the numbers are Warren—122, Burger—77, and Rehnquist— 28. 12. Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955).

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NOTES 13. Welch v. Helvering 290 U.S. 111 (1933). 14. United States v. Davis 370 U.S. 65 (1962).

CHAPTER TWO: COURTS AND THE IRS 1. Office of General Counsel, Federal Trade Commission, “Quarterly Federal Court Litigation Status Report,” June 30, 2006. 2. IRC § 6213 (a). 3. According to Rule 80, a federal judge who serves for fifteen years before reaching the age of eighty can retire at full salary and thus at this point the salary is guaranteed for life. 4. Congress has the power to create courts under the Constitution. The Tax Court is a constitutional court by Congress under Article I as opposed to Article III. Article III, Section 1 of the U.S. Constitution states: “The judicial Power of the United States shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.” These judges have lifetime tenure and salary protection. By contrast, Article I legislative courts have fixed terms and lack the salary guarantee (Ducat 1996). 5. Criminal tax cases in the Federal District Court are prosecuted in a much shorter time frame. A criminal defendant has a constitutional right to a speedy trial before a jury.

CHAPTER THREE: TAX LITIGATION AND TAX FORUM CHOICE 1. For example, the late Paul Coverdall, Republican senator from Georgia, noted the high incidence of audits on southerners, particularly poor southerners, lamenting that “the emphasis on attacking the poor is unconscionable” (Pace 1998). 2. I exclude the U.S. Court of Federal Claims, a third alternative, from this analysis, since fewer cases were litigated in that court (see Daily 1992) during the years of this study. 3. This represents over 4,000 decisions for the Tax Court and over 700 decisions for the District Court. 4. Rules of Practice and Procedure, United States Tax Court, 2003. Title XV, Rule 155, p. 96. 5. The party of each judge to have served on one of the modern circuits is available in the Appellate Biographical Database (Zuk, Barrow, and Gryski 1997). 6. Segal, Timpone, and Howard also constructed a social liberalism score (see Segal, Timpone, and Howard 1999). 7. In New York, for example, when Senator Alphonse D’Amato and Senator Daniel Patrick Moynihan were colleagues, the junior Republican Senator D’Amato allowed the senior Democratic Senator Moynihan one nomination in four when Reagan and Bush held office. During Clinton’s term, Moynihan followed the same custom in reverse. 8. There has been an ongoing debate about whether the Tax Court has a pro IRS bias because several Tax Court judges have IRS experience and because earlier

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studies argued that taxpayers appear to do better in the District Courts than they do in the Tax Court. However, the examination of the judges on the court did not seem to support this. See chapter four for more information. 9. The appendix provides complete tables and details on the datasets and methodology used for chapters two, three, and four.

CHAPTER FOUR: TAX DECISION MAKING 1. One journalist studying the tax system stated that the Ronald Reagan appointee, Judge Cohen (chief justice during the examined time), had a “well established reputation as a real softie for . . . tax dodgers who appeared before her” (Johnston 2003). 2. Data for the U.S. Tax Court and the U.S. District Courts were compiled through Westlaw (www.westlaw.com) with the keyword “tax” and the appropriate year added to the search. 3. For the District Court, it was the state of the appropriate district. For the Tax Court, in almost all cases, the opinion cited the state of the taxpayer. When that did not occur, the original docket filing was examined to determine the state where the case was filed.

CHAPTER FIVE: INFLUENCES ON THE IRS AND THE AUDITS OF LOW-INCOME TAXPAYERS 1. As in chapter three, the Court of Claims is omitted from this analysis.

APPENDIX: METHODOLOGY AND THE USE OF PANEL DATA 1. I use event history analysis with probabilities because I am interested in the likelihood or probability of a decision occurring as opposed to the timing or duration of time before an event occurs. The latter can be determined through a Cox proportional hazards duration model (Box-Steffensmeier and Jones 2004). Simply put, I wanted to know the probability of an event occurring, not when it would occur. However, I also tested the model using a Cox duration model. The model performed similarly to the event history analysis, with most coefficients in the same direction, with similar, but slightly smaller, chi squares. Given that I was looking for probabilities, not timing, and given that the event history model provides a better fit than the Cox model, I present the results of the event history model. 2. The analyses are premised on the assumption that the rulings between judges are independent, but not the rulings by each particular judge. I did run both analyses using Rare Events logit and found no change in statistical significance from the probit analysis. Results from the Relogit are available on request. I also ran both models with the logged deficiency amount as an independent variable. While for many cases the information is readily available, for many partnership matters it is not, since the income/loss is reported on the individual return, and the District Courts often failed to be precise in stating the amount being contested. When I included the deficiency, the key independent variables showed little change. Given

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the loss of degrees of freedom with little increase in explanatory power, I omitted this variable from the analyses presented here. 3. There is a potential for bias in a study comparing decisions in the Tax Court and the District Courts in that there is a possibility that there are distinctly different types of litigants in each court, with the District Court wealthier on average, and therefore that this wealth causes some systematic differences in treatment. Controlling for type of litigant and attorney should systematically control for wealthier people, who would be more likely to be represented by an attorney, and would have more complex claims. 4. I ran an analysis, not reported here, that controlled for assessment, a direct measure of wealth, and this measure did not alter the results. All of these variables control for systematic bias in the type of litigants and therefore systematic bias in treatment. I added a dummy variable for 1996 to account for any time-specific effects for the district court (Beck, Katz, and Tucker 1998). For ease of comparison, the results omit this control variable.

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INDEX

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INDEX

Anders, Joy, 2, 3, 13, 14, 18, 27, 29, 30, 31, 33, 47, 51, 54, 73, 74, 91, 92, 96 Argue, Douglas, W., 42 Bailey, Michael, 47 Ballard v. Commissioner of Internal Revenue, 47 Barrow, Deborah J., 112 n.5 Baum, Lawrence, 55, 56, 57 Bebchuk, Lucian, 33 Beck, Nathaniel, 98, 99, 114 Beck, Paul Allen, 95 Beghe, Renato, 58 Berall, Frank S., 35, 36, 38 Berry, William D., 66, 83, 98 Bosworth, Matthew H., 30 Box-Steffensmeier, Janet M., 113 n.1 Brace, Paul, 55 Brown v. Board of Education, 30 Burnham, David, 10, 20, 75, 76 Bush, George H.W., 10, 60, 112 n.7 Bush, George W., 3, 10 Caldeira, Gregory A., 32 Cameron, A. Colin, 99 Cameron, Charles M., 33, 55 Canon, Bradley, 95 Carp, Robert A., 55, 63 Chabot, Herbert, 58 Chang, Kelly H., 47 Chiechi, Carolyn, 58 Chommie, John C., 7, 111 n.3 Clark, David S., 33 Clayton, Cornell W., 88 Cleveland, Grover, 5, 6

Clinton, William, 3, 10, 37, 44, 60, 112 n.7 Cohen, Mary Ann, 58 Colvin, John O., 58 Commissioner v. Glenshaw Glass Co., 111 n.12 Cortner, Richard C., 31, 32 Crenshaw, Albert B., 73, 74 Crouch, Holmes F., 75

Dahl, Robert A., 2, 59, 71, 73, 74, 88, 95 Daily, Frederick, W., 10, 18, 23, 24, 25, 112 n.2 Dawson, How., 58 Dixit, Avinash, K., 77 Downs, George W., 98 Dubroff, Harold, 22, 42, 57, 60, 81 Ducat, Craig, 112 n.4 Easterbrook, Frank H., 60, 81 Eisenberg, Theodore, 36 Eisenhower, Dwight, 9 Ely, Jr., James W., 5 Emmert, Craig, F., 74 Epstein, Lee, 11, 21, 32, 59, 76, 79 Feldman, Stanley, 98 Finkelman, Paul, 5 Fogel, David, 2 Foley, Maurice, B., 58 Fording, Richard C., 66, 83 Forrest, David and Barbara, 18, 29, 31, 91, 92 Freeland, James J., 10, 18

123

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INDEX

Friedman, Lawrence M., 7, 11 Funston, Richard, 95 Gale, Joseph H., 58 Garbis, Marvin J., 35, 38 Geier, Deborah A., 56, 71 Gerber, Joel, 58 Giles, Michael W., 45, 63, 66 Gillman, Howard, 88 Goeke, Joseph R., 58 Golson v. Commissioner, 81 Griswold v. Connecticut, 30 Green, William H., 99 Grossman, Gene M., 77 Gryski, Gerard S., 112 n.5 Gujarati, Damodar N., 98, 99 Handberg, Roger, 44, 45 Haines, Harry A., 58 Hall, Kermit L., 5 Hall, Melinda Gann, 55 Halpern, James S., 58 Hamilton, Alexander, 53 Hammond, William, H., 77 Hand, Learned, 1, 4, 8, 12 Hansen, Wendy L., 55, 56 Hanson, Russell L., 66, 83 Harlan, John Marshall, 2, 52 Hausseger, Lori, 79 Haynie, Stacia, 79 Helpman, Elhanan, 77 Hettinger, Virginia A., 45, 55 Holmes, Mark V., 58 Holmes, Oliver Wendell, 1, 4, 12 Howard, Robert M., 38, 44, 45, 46, 54, 59, 74, 76, 112 n.6 Hudson, Joe, 2 Humphries, Martha Anne, 44, 45 Internal Revenue Service, 2, 10, 11, 12, 13, 14, 17, 18, 21, 22, 23, 24, 27, 29, 30, 33, 34, 35, 36, 37, 38, 39, 42, 43, 47, 49, 51, 52, 53, 56, 57, 58, 59, 60, 62, 63, 66, 67, 68, 69, 70, 71, 73,

3, 4, 9, 19, 20, 31, 32, 40, 41, 54, 55, 64, 65, 74, 75,

76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 87, 88, 90, 92, 93, 94, 100, 101, 102, 103, 104, 112 n.8 Jacobs, Julian, I., 58 Jones, Bradford S., 113 Johnson, Renee, J., 55, 56 Johnston, David Cay, 19, 20, 59, 71, 73, 113 n.1 Juenger, Friedrich K., 36 Katz, Jonathan, 98, 99, 114 Katzmann, Robert A., 75 Keir, Lloyd, 42 King, Chad M., 62, 101 King, Gary, 101 Knot, Jack H., 77 Krehbiel, Keith, 83 Kroll, Glenn, 57 Kroupa, Diane L., 58 Kurtz, J., 10 Landes, William M., 33 Laro, David, 58 Lazarus, Ellen, 62, 101 Lind, Stephen A., 10, 18 Lindquist, Stephanie A., 55 Long, Susan, 75 LoPucki, Lynn M., 36 MacDonald, Elizabeth, 75 MacLachlan, Claudia, 21, 25, 27 Mann, Joy, 111 n.9 Martin, Andrew, 79 Martinek, Wendy L., 55 Marvel, L. Paige, 58 Maule, James Edward, 57, 60, 62, 81 McCann, Michael, 73, 74 McCarthy, Nolan, 43 McClosky, Herbert, 34 McCubbins, Matthew, 32, 55, 56 McIntosh, Wayne V., 33 Miller, Gary J., 77 Moe, Terry, 73, 74 Nims III, Arthur, 58

INDEX Nixon, David C., 38, 45, 46, 54, 59, 74, 76 Noll, Roger G., 32, 55, 56 O‘Brien, David M., 53 Olson, Susan, 31, 32 Oregon v. Mitchell, 111 n.5 Pace, David, 112 n.1 Pechman, J.A., 10 Peppers, Todd C., 45 Perry, H.W., 11, 21 Pickerill, J. Mitchell, 88 Plessy v. Ferguson, 2, 52, 111 n.1 Pollock v. Farmers‘ Loan & Trust Co., 5, 6 Poole, Keith T., 43, 60, 83 Posner, Richard A., 33, 60, 71, 81 Quinn, Dennis P., 54 Quinn, Kevin M., 79 Reagan, Ronald, 9, 44, 60, 76, 112 n.7, 113 n.1 Reinganum, Jennifer F., 33 Ringquist, Evan J., 74 Rocke, David M., 98 Roe v. Wade, 30 Roosevelt, Franklin D., 8, 44, 95 Rosenberg, Gerald N., 74 Rosenthal, Howard, 43 Rossiter, Clinton, 53 Roth, Jeffrey A., 10 Rowland, C. K., 55, 63 Russell, Peter H., 53 Ruwe, Robert P., 58 Schneider, Daniel M., 42, 62 Scholz, John T., 10, 38, 41, 54, 66, 76, 82, 87, 99, 105 Schwait, Allen L., 35, 38 Sears, John H., 8, 111 n.6 Seery, Brian J., 35, 38, 42 Segal, Jeffrey A., 33, 44, 45, 46, 55, 59, 62, 73, 112 n.6 Shafiroff, Ira L., 19

Shapiro, Martin M., 75, 82 Shapiro, Robert Y., 54 Shipan, Charles R., 31, 32, 78 Simonson, Karen J., 35, 38 Smith, Joseph L., 30, 31, 79, 81 Songer, Donald R., 33, 44, 45, 46, 55 Spaeth, Harold J., 55 Steuerle, Eugene, 3, 10 Stevens, Richard B., 10, 18 Stevenson, Richard W., 38 Steward Machine v. Davis, 111 n.7 Stookey, John A., 33 Strassels, Paul N., 75 Swift, Stephen J., 58 Taft, William, 6 Tate, C. Neil, 44, 45 Taylor, Marshall, 35, 38 Thornton, Michael, 58 Tidrick, Donald, 38, 57 Timpone, Richard C., 44, 112 n.6 Tucker, Richard, 114 Trivedi, Pravin K., 99 Tyler, Tom R., 25 Ulmer, Sidney, 95 Unah, Isaac, 31, 32, 38, 55, 56, 59 United States v. Davis, 112 n.14 Vasquez, Juan F., 58 Wade, Jr., Jack Warren, 55 Walker, William G., 63, 66 Warren Court, 11, 21 Warren, Earl, 111 n.11 Weingast, Barry, 32, 55, 56 Welch v. Helvering, 112 n.13 Wells, Thomas B., 58 Western, Bruce, 101 Whalen, Laur., 58 Wherry, Robert, 58 Whittington, Keith E., 2, 5, 88, 94 Wilde, Louis L., 33 William, James, 18, 29, 54, 91, 96 Winter, Marc J., 35, 38

125

126

INDEX

Wiseman, Paul, 38 Witte, Ann Dryden, 10 Witte, John, 5, 7, 8, 9 Wood, B. Dan, 10, 38, 41, 54, 66, 76, 82, 87, 99, 105

Wright, John R., 32 Zaller, John, 34 Zeng, Langche, 101 Zuk, Gary, 112 n.5

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POLITICAL SCIENCE / PUBLIC POLICY

SUNY P R E S S