Document Type

Article

Publication Date

12-1983

Abstract

A good deal has been written over the past forty-odd years about the tax benefit rule. Over this period the federal courts have decided many cases in which its application has been at issue, and the law journals have published a small but steady stream of commentary on the rule and its manifestations. Last term, in Hillsboro National Bank v. Commissioner, the Supreme Court issued an opinion that focused squarely, and at some length, on the tax benefit rule. Despite this attention, relatively little has been done to examine the conceptual foundations of the tax benefit rule and to try, in the light of that examination, to give a coherent account of the principle behind the rule. This essay attempts to begin to fill that void.

The phrase "tax benefit rule" has been widely used to refer to the requirement that a taxpayer who recovers an amount that he deducted in an earlier year include the recovery in his income for the current year unless he received no tax benefit from the deduction. In Hillsboro, the Supreme Court rejected this "recovery" formulation and described the rule instead as "ordinarily apply[ing] to require the inclusion of income when events occur that are fundamentally inconsistent with an earlier deduction." In a lengthy separate opinion and partial dissent, Justice Stevens sharply criticized the Court's "reformulation" as "an extremely significant enlargement of the tax collector's powers." Although Justice Stevens' concern is understandable and although the majority opinion is objectionable on a number of grounds, I shall argue that the majority's account of the tax benefit rule is close to being consistent with the only principled justification that can be offered for the rule.

My aim in this essay is to explore the foundations of the tax benefit notion. My strategy is simple, but it is probably best to state it explicitly at the outset. I begin with a straightforward and uncontroversial example of the application of the "inclusionary aspect" of the tax benefit rule. Using it as a paradigm, I try to discern why the law deems it appropriate to increase a taxpayer's taxable income. Next I examine the account of the tax benefit rule given by the Supreme Court in Hillsboro to see if it is consistent with the paradigm. I conclude that the results in Hillsboro are consistent, but that the rationale offered by the Court does not fully explain the principle. Along the way I suggest an analysis of the tax benefit principle that attempts to capture the notion exemplified by the paradigm. Throughout, my premise is a variant of the supposition that always underlies conceptual analysis: namely, that the features which characterize a principle in its simplest forms will also characterize it in more complex circumstances. My hope is that as extraneous factors are stripped away, we can more instructively begin to come to grips with the core concept underlying the tax benefit rule.

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