Sham on You: Too Good to Be True

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Mitchell L. Engler


Of course, many taxpayers manipulate their affairs to minimize their taxes. The new December 2017 limits on state tax deductions evidence, however, the more endemic nature of the sham problem. Some state government officials have joined the loophole quest on behalf of their citizens. For instance, some states have proposed new state tax credits for “voluntary” contributions to state charities. Treasury Secretary Mnuchin aptly challenged this “ridiculous” attempt to “dress up” non-deductible tax payments as deductible charitable contributions. Despite Mnuchin’s convincing rebuke, state officials carry on with their ongoing avoidance efforts.

In addition, similar avoidance schemes permeate many other legal areas such as property law, contract law, family law, and copyright law. While some courts strike down the sham attempts, other courts are less vigilant. Occasionally, some courts even endorse the workaround to achieve a desired goal.

How should the legal system respond to all these legal gymnastics? First, lawmakers should avoid even sanctioned indirect workarounds. Even though intended as a narrowly circumscribed allowance, these endorsed maneuvers foster disrespect for legal requirements and create an air of legitimacy for other unintended manipulations. Instead, lawmakers should endeavor to achieve their desired ends more directly, without resort to these problematic formalisms.

Unsanctioned schemes present a more intricate challenge. After analyzing the reasons behind the current judicial inertia, this Article crafts a new sham defense system sensitive to the root causes. A precise, but limited, sham definition provides the first line of a defense against the most egregious cases. Next, a balanced summary judgment approach further reinforces the new sham definition. Finally, legislative recommendations for vulnerable provisions complete the necessary protection.

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