Toward quantifying legal reasoning : a case study of judicial decisions when the existence of a partnership is in question for Federal income tax purposes

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It has been suggested that the most basic and perhaps the most difficult problem in the taxation of partnerships and partners is the determination whether a particular business, financial or other economic arrangement, constitutes a partnership for income tax purposes. The problem of classifying a business arrangement as a partnership for income tax purposes is caused by the statutory definition of a partnership which appears in the Internal Revenue Code. Specifically section 761(a) provides that: " . . . the term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate." This inclusive language has caused uncertainty and taxpayer anguish since its enactment in 1932. The United States Supreme Court, when attempting to classify a business relationship of two or more people, has held that the true intention of the parties is controlling for income tax purposes. To rule on the "intention" of the parties, the courts have had to analyze the facts and circumstances of each case. In effect the Court's test for intent is an unspecified combination of specified circumstances in which factors are isolated and weighed by the Court without apparent fixed standards. One of the premises of this study was that useful information concerning the requisite facts and circumstances necessary for the existence of a tax partnership could be obtained through combining a legal analysis of litigated cases with an empirical analysis of the same cases. Through the legal analysis of judicial decisions the objective factors relied on by the Tax Court in rendering decisions were identified. This legal research provided the-necessary information to construct a comprehensive coding scheme utilized in the empirical analysis which followed. The legal research also provided the perspective needed in order to meaningfully interpret the empirical results. The objective of this study was to provide a quantitative model consisting of facts and circumstances requisite for the existence of a tax partnership as perceived by the judiciary. .The focus of the study was on post 1949 cases litigated in the Tax Court. These limitations were imposed to insure as much internal consistency as possible within the cases. Lexis was utilized to identify 98 tax partnership existence cases. Thirty-nine of these cases were eliminated because they were not relevant to the study. The remaining cases were classified into two groups: group 1 consisting of cases in which a tax partnership was held to exist and group 2 consisted of those in which no tax partnership was formed. The variables collected from the cases were based on a comprehensive coding scheme developed from the legal analysis. After the application of statistical data reduction techniques, 22 variables were available for analysis. The statistical tools used to analyze the data included a factor analysis and stepwise linear discriminant analysis. The empirical findings show that it is possible to discriminate tax partnerships from other financial and economic arrangements based on the variables identified through the legal analysis. A test was devised to evaluate the effects of time on the models developed in this study. It was concluded that time is a relevant variable in modeling the judicial decision making process and should be addressed in future research efforts in this area. The results also support the proposition that combining individual variables so they represent some underlying pattern may mitigate the effect that time has on the classification/predictive capability of models.

Partnership--Taxation--United States, Income tax--Law and legislation--United States, Taxation--United States--Law and legislation