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Magic Chips

Alas, Proctor and Gamble has lost its fight before Britain's highest court. The product may be fun, and the chips may look exactly alike (well, as alike as technology and manufacture can make them look) but the justices have ruled. Pringles are potato chips (Notice, no "e" at the end, Dan Quayle). Even P&G's own website agrees that the major ingredient in Pringles is "dried potatoes."

P&G wanted its "savory snack" to qualify as something other than a potato chip, so that it would be exempt from the VAT (value added tax), and thus sell for less than comparable products, "crisps," in British parlance. But the Supreme Court of Judicature ruled that legal sleight of hand was not necessary to spell out how Pringles might be different from "crisps." Just because Pringles weren't completely potato didn't mean they weren't any potato at all. Indeed, they're 42 percent potato. That was enough spudosity for the Court. One could discern "potato-ness" in a Pringles with that much potato hanging on. Other P&G arguments didn't hold water either (possibly inflating potato volume). Because Pringles were made of a mix of potato and grains didn't mean they weren't potato. The Court noted that if that were true, then "a marmalade made using both oranges and grapefruit would be made of neither — a nonsense conclusion.” Two thoughts come to mind here. 1) These are the folks who spawned Edward Lear and Lewis Carroll. 2) The Brits do like their marmalades.

To be fair, this case is really about deference to the agency. "Although Mr Christopher Vajda QC for HMRC opened the appeal by attacking the judgment of Warren J rather than concentrating upon the decision of the Tribunal (which of course he contended was correct) in the end counsel were agreed that what really mattered was whether the decision of the Tribunal was wrong in law. For it is the Tribunal which is the primary fact finder. It is also the primary maker of a value judgment based on those primary facts. Unless it has made a legal error in that in so doing (e.g. reached a perverse finding or failed to make a relevant finding) or has misconstrued the statutory test it is not for an appeal court to interfere. This has been said in other contexts e.g Osmani v Camden LBC [2007] EWCA Civ 1281 at [34] ("the main focus of attention on a second appeal such as this should be on the decision of the Council rather than that of the County Court Judge on appeal" per Auld LJ and Waltham Forest LBC v Maloba [2007] EWCA Civ 1281 at [19] per Toulson LJ). The same applies for the same reasons to appeals from this Tribunal."

What P&G had to show was that the agency had so erred and how, persuading the appellate court to reverse the finding. What was at stake was about one hundred million pounds in tax receipts, a not inconsiderable stack of chips. The Court's discussion of the nature of a Pringles is to show why the Tribunal's is not error (not a perverse finding,  making an irrelevant finding, not miscontruing the statutory test).

The Court notes that the case here is "not one calling for or justifying over-elaborate, almost mind-numbing legal analysis. It is a short practical question calling for a short practical answer. The Tribunal did just that." It goes on to say, "no doubt because of the submissions which were made to it by the parties, the treatment of the issue which was before it, was far more elaborate than was necessary. I do urge Tribunals, when considering issues of this sort, not to be misled by authorities which are no more than authorities of fact into elevating issues of fact into questions of principle when it is not appropriate to do so on an inquiry such as this. The Tribunal had to answer one question and one question only: was each of these products properly described as biscuits or not? If it had confined itself to that issue which is, and has to be, one of fact and degree, then the problems which subsequently arose would have been avoided."

The Court even discusses where to draw the rule with regard to the "42 percent" problem, quoting the U.S. Justice Oliver Wendell Holmes, Jr. "'When he has discovered that a difference is difference of degree, that distinguished extremes have between them a penumbra in which one gradually shades into the other, a tyro thinks to puzzle you by asking you where you are going to draw the line and an advocate of more experience will show the arbitrariness of the line proposed by putting cases very near it on one side or the other, Law and Science in Law Collected Legal Papers 1921, pp.232-233,'Putting the point another way: you do not have to know where the precise line is to decide whether something is one side or the other....Here the potato flour content is over 40 per cent; it is the largest single ingredient by about 9 percentage points; and it is nearly three times larger than the other flours in the ingredients taken together. We have to give a yes or no answer to the question 'are Regular Pringles [partly] made from the potato, from potato flour or from potato starch' and we are bound to say yes. There are other ingredients but it is made from potato flour in the sense that one cannot say that it is not made from potato flour, and the proportion of potato flour is significant being over 40 per cent. The fact that it is also made from other things does not affect this. I cannot begin to see anything wrong with that, still less that that was not a conclusion which any reasonable Tribunal could reach. There is more than enough potato content for it to be a reasonable view that it is made from the potato."

An interesting case from a legal snack food point of view, but not, I think, wholly unexpected. And thus does the chip crumble. Snap!

Read more here in an op-ed from Adam Cohen and here from Improbable Research. The case is Procter & Gamble UK v Revenue and Customs Commissioners, Court of Appeal, Civil Division, [2009] All ER (D) 177 (May); [2009] EWCA Civ 407, decided 20 May 2009.

Julian Dibbell, NPR, Tax Law and Virtual Gaming

Julian Dibbell on tax law, virtual gaming, and the very real costs of both. His piece appeared in the  January/February 2006 issue of Legal Affairs. Here's a link to Mr. Dibbell's website.

Magic For Tax Day

In honor of the Ides of April (Tax Day), here are some mentions of Tax Law Magic.

Christopher H. Hanna, who as Adam Gopnik notes is both a law professor and a magician, has published From Gregory to Enron:  The Too Perfect Theory and Tax Law, 24 Virginia Tax Review 737 (2005). Here's a link to a prior Law and Magic Blog post. Professor Hanna also published The Magic in the Tax Legislative Process at 59 Southern Methodist University Law Review 649-688 (2006). 

Indiana University law professor Leandra Lederman writes about real taxes, virtual worlds and magic circles here.

Attorney Lisa Davis discusses those "magic words" you need to include if you want your organization to be recognized as a legitimate 501(c)(3) corporation. 

What tax courts and Article III courts have never recognized as magic words are those phrases or notions that encompass the idea that the Sixteenth Amendment is somehow unconstitutional, or that one can willy-nilly refuse to pay one's federal income taxes on some wild theory or other, or refuse to file one's returns. This area is a minefield and one must tread carefully. That's what recently got actor Wesley Snipes into trouble. Although a jury acquitted him of tax fraud, it convicted him of failing to file his tax returns.

Why do tax resisters claim we don't have to pay federal taxes? One popular argument is that Ohio, one of the states that ratified the 16th Amendment, wasn't actually a state of the United States in 1911. For more "tax protestor" claims that courts have found invalid, see this great page by George Washington Law School's Jonathan Siegel.

The Uses of Tax Law Magic Words

In this post, Jessica Slavin of Marquette Law School discusses whether "inure" should really be a "magic word" for tax law purposes, as she considers the arguments of linguistics expert Roger Shuy. He, in turn, discusses his adventures with the Montana Department of Revenue.

In the post he first describes the ordinary use of the word “inure,” giving an example from a Newsweek article, “Shoppers seem inured to the relentless Christmas spirit.”  Then he goes on to describe another use of “inure” that he found in a legal document, and attempted, unsuccessfully, to get the lawyers to change to something plainer, like “financially benefit.”

Actually, I'm not certain whether he's referring just to the word "inure," or to the phrase "inured to," but never mind. Here's the meaning the MDR uses in letters to Montana taxpayers. "No part of the net income of a Montana tax-exempt organization can inure to the benefit of any private stockholder or individual."

Now, that meaning isn't incorrect--in fact, it has a specific legal meaning, but as Dr. Shuy points out, it can be confusing to citizens who are used to another meaning. (Let's leave aside the issue of whether some of them actually understand the first meaning at all). According to the Oxford English Dictionary, the transitive verb "inure" means "To bring (a person, etc.) by use, habit, or continual exercise to a certain condition or state of mind, to the endurance of a certain condition, to the following of a certain kind of life, etc.; to accustom, habituate," and the intransitive form means "To come into operation; to operate; to be operative; to take or have effect." The OED adds that it's chiefly used in legal English and often spelled "enure."

Confusing, isn't it? In one context the word has one meaning, and in another, zap! Let me argue, as the Devil's advocate, just for the moment, that this isn't the MDR's problem. If a word can mean different things in different contexts, then so be it (sounds kind of witchly, doesn't it?) But as Dr. Shuy and Professor Slavin point out, if one's point is to be clear, one might be better off using more words, such as "financially benefit" to communicate the same point, even if "inure to" means the same thing. After all, taxpayers, even corporate taxpayers, aren't lawyers, and they aren't linguistic experts. As Professor Slavin concludes in her post, "Were those tax lawyers right?  Is “inure” a magical word in this context?  I want to say, no, of course not–if it means the same as “financially benefit,” then it can be changed.  But my expertise is in brief-writing and in immigration law, not in tax law.  Maybe it really does matter in that context.  Still, I wish it didn’t."

As one commentator on Professor Slavin's post points out, if used as a transitive verb "inure" means one thing and as an intransitive it means something else. He's absolutely right; he's pointing out that the Department of Revenue isn't wrong and can use the term correctly in this fashion. In fact, that's the Department's point. The question that Dr. Shuy and Professor Slavin bring up, however, isn't whether the Montana Department of Revenue is using the word incorrectly. It's whether the MDR could have used another word or phrase to explain itself more clearly. As Dr. Shuy notes in his original post, attorneys use "magic words" for specific reasons: to make things happen in law, and they insisted on "inure" because it made "something" happen that, presumably, "financially benefit" as a phrase would not.

I challenged the use of inure in this letter, but the lawyers in the tax department strongly objected. I argued that these tax letters are replacing a word with one meaning that lay people know with a word that has another meaning known only to lawyers (probably) and accountants (possibly). But the lawyers informed me that inure is one of those magical words that is absolutely necessary for legal reasons.

He gives another, slightly different, example of words that confuse the public because they mean something in one context and something different in another.

I didn’t win this battle. The lawyers prevailed as they usually do and inure remains in the letters. But [I] [sic] am reminded of how confusing it can be to have one word with two or more fairly different meanings, like sanction, for example, which is used to mean both “to agree” and “to criticize or condemn.”

I ask the following as someone who is not a tax attorney , but is very interested in rhetoric. (I took one, count it, one tax course in law school). Are the letters sent to Montana corporate taxpayers supposed to be legal documents, or explanations of the law? That might make a difference. Does it make a difference that these letters go to corporations rather than to individuals? Can we presume that corporations have lawyers on staff (or on retainer) to explain the legal meaning of "inure?" That it means nothing about relentless Christmas spirit and one's reaction to it? Should we so presume? Interesting issue.

David Ben

A review of a performance by tax lawyer turned magician David Ben from the blog Riscario Insider.

Uses of "Magic Words" in Tax Law

Christopher Hanna, Southern Methodist University School of Law, has published "The Magic in the Tax Legislative Process," in volume 59 of the Southern Methodist Law Review (2006). Here's the abstract.

In enacting the tax laws, Congress and others involved in the legislative process have been accused by many, including individual members of Congress, congressional aides, and the press, of employing gimmicks and sleight of hand as part of the tax legislative process. Some of these so-called gimmicks include the use of non-code provisions to benefit certain taxpayers, the use of the alternative minimum tax to scale back tax benefits (and lower revenue costs), and also the use of delayed effective dates and transition rules to lower revenue costs.

Magicians use the term gimmick quite often. In fact, the term “gimmick” comes from the magic arena. But magicians also use the term “fake,” and almost all magical devices utilized by magicians can be classified as either gimmicks, which are generally secret devices, or fakes, which are generally visible yet not understood devices. Magicians utilize gimmicks and fakes to accomplish a single purpose: to deceive and thereby entertain the audience. In the world of magic, no negative (or positive) connotations are associated with the terms gimmicks and fakes - they are merely categorizations of magical props.

It appears that much (but not all) of the so-called trickery and sleight of hand employed by those in the tax legislative process can also be classified into two broad categories very similar to the magical categorizations of gimmicks and fakes. The first category involves changes to the tax laws that are hidden from general view. More specifically, these changes are not part of the Internal Revenue Code even though they are tax provisions. Rather, the changes are part of the non-code tax laws, or in some cases, part of the legislative history. The second category involves changes to the tax laws that are not hidden from general view. In other words, they are not hidden changes but rather changes that are in plain view. In actuality, however, these open tax changes may not be well-understood by taxpayers and tax advisors. Congress's use of what magicians would categorize as gimmicks and fakes obviously differs from those of a magician. Congress is not entertaining an audience. Rather, its use of gimmicks and fakes may be designed to benefit a limited class of taxpayers or to lower revenue costs. In this article, no negative (or positive) connotations are intended by categorizing various tax legislative provisions as gimmicks or fakes.

Download the entire article from SSRN here.