Concepts, categories, and compliance in the regulatory state

Minnesota Law Review

Volumn 94, Issue 4, 2010, Pages 1151-1201

  Hickman, Kristin E ^a   Hill, Claire A ^a  

^a UNIVERSITY OF MINNESOTA LAW SCHOOL   (United States)

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EID: 77957366206     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (359)

1. Joseph Isenbergh, Musings on Form and Substance in Taxation, 49 U. CHI. L. REV. 859, 865 (1982).
2. This view of the relationship between congressional statutes and agency implementation thereof was in vogue about one hundred years ago but has long since been dismissed by scholars as unrealistic.
3. See, e.g., Elena Kagan, Presidential Administration, 114 HARV. L. REV. 2245, 2253 (2001)
4. (describing the transmission belt theory of the administrative state and subsequent scholarly rejection of that theory); Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1669, 1675 (1975)
5. (same). The conception of the courts as faithful agents of Congress interpreting statutes to effectuate congressional purposes, also historically based, retains at least some currency. See John F. Manning, Textualism and the Equity of the Statute, 101 COLUM. L. REV. 1, 11-22 (2001)
6. (documenting the conception of judges charged with interpreting legislation as faithful agents of Congress).
7. See, e.g., WILLIAM N. ESKRIDGE, JR., DYNAMIC STATUTORY INTERPRETATION 48 (1994)
8. (describing statutory enactments as "often general, abstract, and theoretical"); see also MORRIS P. FIORINA, CONGRESS: KEYSTONE OF THE WASHINGTON ESTABLISHMENT 39-47 (2d ed. 1989)
9. (contending that Congress has an incentive to adopt legislative programs and expand the federal bureaucracy to increase opportunities to help constituents resolve bureaucratic problems and thereby gain support for their own reelection efforts); Daniel B. Rodriguez, Statutory Interpretation and Political Advantage, 12 INT'L REV. L. & ECON. 217, 218-20 (1992)
10. (listing several reasons why statutes "contain vexing gaps, gray areas, and opaque language", including achieving legislative compromise, satisfying interest groups with competing interests, and accommodating changing preferences, as well as drafting difficulties and errors); Cass R. Sunstein, Incompletely Theorized Agreements, 108 HARV. L. REV. 1733, 1741 (1995)
11. (observing that legislators may reach agreement regarding "the meaning, authority, and soundness of a governing legal provision in the face of disagreements about much else").
12. See, e.g., Stewart, supra note 2, at 1676-77 (noting that statutes which delegate broad discretionary powers to agencies run counter to the "transmission belt" theory of administrative law).
13. See Steven Kelman, Enforcement of Occupational Safety and Health Regulations, in ENFORCING REGULATION 97, 103
14. (Keith Hawkins & John M. Thomas eds., 1984) ("Perhaps the most unfortunate results come when legal requirements actually interfere with compliance because they make regulations so hard to understand.").
15. See discussion infra note 21 (noting that even efforts to comply maximally with regulatory requirements may lead to interpretive disagreements and litigation between regulators and regulated parties).
16. See, e.g., Rodriguez, supra note 3, at 218 (observing that, even where statutory requirements are not particularly ambiguous, lawyers will still "manufacture" ambiguity in attempting to persuade courts to interpret statutes in their clients' interests).
17. Of course, concepts such as efficacy and legitimacy are complex and nuanced, and the literature discussing them as regards the law is voluminous. See generally, e.g., JAMES O. FREEDMAN, CRISIS AND LEGITIMACY: THE ADMINISTRATIVE PROCESS AND AMERICAN GOVERNMENT 125-33, 259-66 (1978);
18. JOHN H. SCHAAR, LEGITIMACY IN THE MODERN STATE 15-44 (1981);
19. TOM R. TYLER, WHY PEOPLE OBEY THE LAW 19-39 (2006);
20. MAX WEBER, ECONOMY AND SOCIETY 212-99 (Guenther Roth & Claus Wittich eds., Ephraim Fischoff et al. trans., Univ. of Cal. Press 1978) (1922);
21. Richard H. Fallon, Jr., Legitimacy and the Constitution, 118 HARV. L. REV. 1787, 1794-95 (2005).
22. For the purposes of this Article, intuitive and rather crude concepts suffice.
23. The distinction between regulatory laws and other laws is difficult to pinpoint precisely. Henry Friendly described regulatory law as encompassing: the entire range of action by government with respect to the citizen or by the citizen with respect to the government, except for those matters dealt with by the criminal law and those left to private civil litigation where the government's only participation is in furnishing an impartial tribunal with the power of enforcement.
24. Henry J. Friendly, New Trends in Administrative Law, 6 MD. B. J., Apr. 1974, at 9, 9.
25. Focusing more specifically on compliance, as we do here, Cento Veljanovski observes that nonregulatory criminal offenses are "positive act[s]" and "discrete event[s]" that "redistribute and destroy wealth", while regulatory offenses tend to be "byproducts of the pursuit of some otherwise socially beneficial activity" that involve a "failure to act" and "a continuing state of affairs" and that "occur within an organization where the responsibilities for compliance are often diffused." Cento G. Veljanovski, The Economics of Regulatory Enforcement, in ENFORCING REGULATION, supra note 5, at 171, 179.
26. One can readily imagine scenarios that are clearly regulatory yet do not quite satisfy either of these conceptions. There may also be laws that seem to fall within these broad descriptions but that one nevertheless resists labeling as regulatory when comparing them, for example, to the laws governing classic regulated industries like utilities and railroads. Nevertheless, together these definitions reflect common intuitions about the scope and nature of regulatory law, and we regard them as both close enough and consistent with the features of regulatory law that we consider particularly salient for purposes of this Article.
27. See generally Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L. J. 557 (1992).
28. See ERICH KIRCHLER, THE ECONOMIC PSYCHOLOGY OF TAX BEHAVIOUR 67 (2007)
29. ("If a taxpayer believes that non-compliance is widespread and a socially accepted behaviour, then this taxpayer is more likely not to comply.");
30. TYLER, supra note 8, at 22-27 (linking compliance with perceptions of legitimacy and observing that "in democratic societies the legal system cannot function if it can influence people only by manipulating rewards and costs");
31. Claire A. Hill, What Cognitive Psychologists Should Find Interesting About Tax, 17 PSYCHONOMICS BULL. & REV. (forthcoming Apr. 2010) (discussing the psychology literature on noncompliance in tax).
32. We make no normative claim that it is always bad to "harm" a regulatory regime. We acknowledge the argument that government ought to be challenged, and that the regulatory envelope should be pushed, as a needed counterweight to the government's power. The phenomenon we discuss in this Article concerns potential threats to regulatory regimes that go beyond such arguably healthy challenges.
33. Compare, e.g., Paul Caron, Tax Myopia, or Mamas Don't Let Your Babies Grow Up To Be Tax Lawyers, 13 VA. TAX REV. 517, 531 (1994)
34. (documenting and rejecting justifications for tax exceptionalism), Karla W. Simon, Constitutional Implications of the Tax Legislative Process, 10 AM. J. TAX POL'Y 235, 237-44 (1992)
35. (observing substantial differences between tax and other areas of regulatory law yet rejecting tax exceptionalism), and Lawrence Zelenak, Thinking About Nonliteral Interpretations of the Internal Revenue Code, 64 N. C. L. REV. 623, 630 (1986)
36. (rejecting "treating interpretation of the [Internal Revenue] Code as a subject distinct from the interpretation of any other statute"), with DANIEL SHAVIRO, WHEN RULES CHANGE 86-87 (2000)
37. (contending that the tax legislative process is unusually dominated by interest groups and reflects other unique pathologies that justify special interventions), Bradford L. Ferguson, Frederic W. Hickman & Donald C. Lubick, Reexamining the Nature and Role of Tax Legislative History in Light of the Changing Realities of the Process, 67 TAXES 804, 823 (1989) (contending that the uniqueness of the tax legislative process means that tax legislative history "should be considered as having virtual parity with the statute itself")
38. and Mary L. Heen, Plain Meaning, the Tax Code, and Doctrinal Incoherence, 48 HASTINGS L. J. 771, 814-19 (1997)
39. (suggesting that the Internal Revenue Code is unique in its complexity, its constantly changing nature, and its insulation from the influence of special interest groups).
40. See generally Kristin E. Hickman, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference, 90 MINN. L. REV. 1537 (2006).
41. See, e.g., Timothy F. Malloy, Regulation, Compliance, and the Firm, 76 TEMP. L. REV. 451, 453-55 (2003)
42. (recognizing "two visions" of regulated parties within the compliance literature);
43. see also Robert L. Glicksman & Dietrich H. Earnhart, Depiction of the Regulator-Regulated Entity Relationship in the Chemical Industry: Deterrence-Based vs. Cooperative Enforcement, 31 WM. & MARY ENVTL. L. & POL'Y REV. 603, 611-44 (2007) (describing both models and studying them empirically).
44. See, e.g., Malloy, supra note 15, at 453 (describing the firm under the deterrence model as "a rational profit-maximizer, obeying the law only when it is in the firm's best economic interest to do so");
45. see also John C. Coffee, Jr., "No Soul to Damn: No Body to Kick": An Unscandalized Inquiry into the Problem of Corporate Punishment, 79 MICH. L. REV. 386, 389-407 (1981) (analyzing deterrence methods by reference to relative costs and benefits).
46. See, e.g., TYLER, supra note 8, at 3-4 (contending that people are naturally inclined to comply with laws they perceive as legitimate);
47. see also Allison F. Gardner, Beyond Compliance: Regulatory Incentives to Implement Environmental Management Systems, 11 N. Y. U. ENVTL. L. J. 662, 664-67 (2003)
48. (discussing one such cooperative program for accomplishing statutory goals and enforcing regulatory requirements);
49. Christine Parker, Compliance Professionalism and Regulatory Community: The Australian Trade Practices Regime, 26 J. L. & SOC'Y 215, 216 (1999)
50. (observing that "self-regulatory and compliance-oriented models of corporate regulation have been adopted in areas as varied as occupational health and safety, equal employment opportunity, environmental regulation, consumer dispute resolution, securities regulation, and antitrust").
51. See, e.g., IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION 158-62 (1992)
52. (contending that regulation should incorporate both deterrenceoriented and cooperative methods in response to varying regulated party motives and circumstances); Malloy, supra note 15, at 456 (suggesting that the deterrence and cooperative models are not mutually exclusive).
53. See Claire A. Hill, The Law and Economics of Identity, 32 QUEEN'S L. J. 389, 406-21 (2007)
54. (discussing identity payoffs for particular identities such as law-abidingness and civic mindedness).
55. Robert Kagan and John Scholz similarly divide firms that fail to comply with regulatory requirements into three subgroups: amoral calculators who conclude that the benefits of disobedience outweigh the risk and cost of getting caught, political citizens who generally want to comply with the law but disobey out of principled disagreement with what they see as arbitrary or unreasonable legal requirements, and incompetent organizations that simply fail to adequately educate and supervise employees. See Robert A. Kagan & John T. Scholz, The "Criminology of the Corporation" and Regulatory Enforcement Strategies, in ENFORCING REGULATION, supra note 5, at 67, 67-68.
56. See, e.g., David A. Weisbach, Ten Truths About Tax Shelters, 55 TAX L. REV. 215, 221-23 (2002)
57. (broadly criticizing tax planning). We do not contend normatively that maximal compliance is desirable. In any event, what counts as maximal compliance may be difficult to characterize. One possible definition could equate maximal compliance with what the regulating agency would want, but this formulation unduly elevates the agency's desires, which may not be coextensive with some principled views of what the regime is and should be doing. In some instances, a regulated party may truly believe that it is acting in accordance with statutory requirements, and that the relevant agency's alternative interpretation of the statute is mistaken, only to have a court side with the agency.
58. See id. at 224 (recognizing that, even in a system with no planning, litigation between the regulator and regulated parties will nevertheless occur). All this being said, for expository ease, we will generally treat maximal compliance as being what a regulator, or perhaps an idealized regulator, would want.
59. See, e.g., Neil Gunningham, Robert A. Kagan & Dorothy Thornton, Social License and Environmental Protection: Why Businesses Go Beyond Compliance, 29 LAW & SOC. INQUIRY 307 (2004)
60. [hereinafter Gunningham et al., Social License and Environmental Protection] (examining reasons for overcompliance with legal requirements); see also Dorothy Thornton, Robert A. Kagan & Neil Gunningham, When Social Norms and Pressures Are Not Enough: Environmental Performance in the Trucking Industry, 43 LAW & SOC'Y REV. 405, 406 (2009)
61. (noting that "many regulated firms routinely go 'beyond compliance,' taking nonlegally required actions that advance regulatory goals", for example by building in margins of error in complying with regulatory requirements); discussion infra Part I. B (discussing potential alignments in the interests of regulators and regulated parties).
62. See KIRCHLER, supra note 11, at 67 (making a similar point).
63. See, e.g., id., at 21-27 (documenting studies showing that most taxpayers do not evade the tax laws outright); Dave Rifkin, A Primer on the "Tax Gap" and Methodologies for Reducing It, 27 QUINNIPIAC L. REV. 375, 377, 406-07 (2009) (observing that nonfiling of tax returns represents a mere eight percent of federal tax code noncompliance and characterizing aggressive IRS pursuit of tax protesters instead as a "battle over public perception" undertaken primarily for its deterrent effect).
64. See KIRCHLER, supra note 11, at 70 (concluding that, "if a taxpayer believes that tax compliance in her or his country is perceived as a virtue and the majority of people comply and condemn evasion, than [sic] she or he is more likely to comply"); Hill, supra note 11 (discussing same).
65. Other scholars, particularly in the tax context, have distinguished regulated parties who take positions the legality of which is unclear from those whose actions are clearly illegal. See, e.g., KIRCHLER, supra note 11, at 21 (recognizing degrees of compliance and observing that "non-compliance does not necessarily imply the violation of law");
66. Michelle Hanlon & Joel Slemrod, What Does Tax Aggressiveness Signal? Evidence from Stock Price Reactions to News About Tax Shelter Involvement, 93 J. PUB. ECON. 126, 126-27 (2009) (distinguishing "tax aggressiveness" from noncompliance);
67. Rifkin, supra note 24, at 378-79 (attributing some portion of "noncompliance" with the federal income tax laws to taxpayers who utilize legal, though perhaps unintended, loopholes or adopt legal tax positions and strategies);
68. Michael Wenzel, The Impact of Outcome Orientation and Justice Concerns on Tax Compliance: The Role of Taxpayers' Identity, 87 J. APPLIED PSYCHOL. 529, 630 (2002) (distinguishing clearly illegal acts of tax evasion from "borderline cases" involving certain tax minimization strategies).
69. Throughout this Article, we talk about facial compliance, or compliance with the letter or fact of the law, that violates the law's purpose or spirit. Although we discuss at some length the existence and role of statutory purpose in regulatory regimes, see infra Part II. B, we also recognize that this concept is impossible to define rigorously. Nevertheless, the great weight of common sense and intuition, as well as the frequent references to the purpose or spirit of the law in the scholarly literature, suggest that the concept has enough content to be useful and used. Consider in this regard the following contracts example: An employment agency has a provision in its agreement with a firm to the effect that if the firm hires anyone whose name the employment agency provides, the firm owes the agency a commission. The employment agency then gives the firm a telephone directory for the city in which they are both located. Even if other facts prove less susceptible to arguments over the contract's purpose or spirit, we maintain that it would be hard not to characterize that particular action as spirit-violative.
70. The economic substance doctrine, a common law anti-abuse standard that the courts often apply to invalidate transactions for federal income tax purposes, includes as one of its elements "whether the transaction has any practical economic effects other than the creation of income tax losses." ACM P'ship v. Comm'r, 157 F.3d 231, 248 (3d Cir. 1998)
71. (quoting Jacobson v. Comm'r, 915 F.2d 832, 837 (2d Cir. 1990));
72. Joseph Bankman, The Economic Substance Doctrine, 74 S. CAL. L. REV. 5, 9-10 (2000) (recognizing the need for nontax economic consequences as an element of the economic substance doctrine).
73. Consistent with the literature on regulatory compliance generally, in speaking of the cost of compliance, we mean amounts expended by a regulated party to satisfy regulatory requirements in addition to amounts paid to professionals to explain legal requirements and develop compliance strategies. See, e.g., C. Steven Bradford, Does Size Matter? An Economic Analysis of Small Business Exemptions from Regulation, 8 J. SMALL & EMERGING BUS. L. 1, 7-11 (2004)
74. (describing different types of regulatory compliance costs as part of study); Toni Makkai & John Braithwaite, The Limits of the Economic Analysis of Regulation: An Empirical Case and a Case for Empiricism, 15 LAW & POL'Y 271, 271-73 (1993)
75. (defining compliance costs in these terms for purposes of study).
76. We have already recognized some maximal compliers may in good faith adopt interpretations that they truly believe comply with legal requirements but that regulators and courts later judge noncompliant. Cf. Weisbach, supra note 21, at 224. By contrast, our description of minimal compliers here encompasses those who hew quite closely to existing legal pronouncements. Certainly these two groups overlap. One may distinguish them, however, by assuming that the former are unaware that they are operating in the gray area of the law while the latter are more cognizant of the uncertainty of their position.
77. The recent case of Nelson v. Comm'r, 130 T. C. 70 (2008)
78. aff'd, 568 F.3d;662 (8th Cir. 2009)
79. offers an interesting example from the tax context. Farmers who ordinarily reported their income from sugar beet production over two tax years consistent with statutory requirements lost their sugar beet crop to unusually wet weather, collected insurance proceeds in Year 1, and interpreted ambiguous statutory language as allowing them to defer 100% of the insurance proceeds to Year 2.
80. See id. at 71-73. Reviewing courts concurred with the IRS that the taxpayers should have recognized the insurance proceeds in Year 1, but agreed with the taxpayers that the statute was ambiguous and that they should not be otherwise penalized for taking an alternative position in good faith on their tax return.
81. See Nelson, 568 F.3d at 665-66;
82. see also Nelson, 130 T. C. at 78-79.
83. Although the Nelson example concerns tax law compliance, examples of this phenomenon are legion throughout the regulatory sphere. One particularly colorful example involved an importer of coffee that had a shipment of beans damaged by water during a hurricane and sought to salvage as many beans as possible by drying the beans, skimming off those that had molded, and rebagging the remainder for sale abroad if not in the United States; more than four years of litigation ensued over Federal Food, Drug, and Cosmetic Act requirements and the importer's compliance therewith. See United States v. 484 Bags, More or Less, 297 F. Supp. 672, 673 (E. D. La. 1969)
84. vacated, United States v. 484 Bags, More or Less, 423 F.2d 839 (5th Cir. 1970);
85. Carl Borchsenius Co. v. Gardner, 282 F. Supp. 396, 400-05 (E. D. La. 1968).
86. In this Article, we define maximal compliance as striving for the greatest possible adherence to regulatory requirements. See discussion supra note 21.
87. Of course, not complying at all involves the least effort and may be riskiest. Maximal compliance at least necessitates ascertaining what the law requires. As noted, however, neither total noncompliance nor maximal compliance is the focus of this Article. See supra text accompanying note 26.
88. See, e.g., Gunningham et al., Social License and Environmental Protection, supra note 22, at 326-27 (documenting impact of reputational concerns on corporate compliance attitudes).
89. See Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 680-707 (1984)
90. (offering arguments concerning the rationale for mandatory, standardized disclosures).
91. See generally Dennis D. Hirsch, Project XL and the Special Case: The EPA's Untold Success Story, 26 COLUM. J. ENVTL. L. 219, 222-34 (2001)
92. (describing Project XL and offering examples of XL projects).
93. See Orly Lobel, Interlocking Regulatory and Industrial Relations: The Governance of Workplace Safety, 57 ADMIN. L. REV. 1071, 1105-08 (2005) (describing the Voluntary Protection Program and other OSHA programs).
94. Compare Claire Hill & Brett McDonnell, Executive Compensation and the Optimal Penumbra of Delaware Corporate Law, 4 VA. L. & BUS. REV. 333, 360-64 (2009)
95. (discussing how corporate law firms give their clients cautious advice that encourages maximal compliance)
96. with Richard Lavoie, Deputizing the Gunslingers: Co-opting the Tax Bar into Dissuading Corporate Tax Shelters, 21 VA. TAX REV. 43, 46 (2001)
97. ("[Tax] attorneys often find such savings through the exploitation of obscure gaps in the statutory scheme, exploitations which are completely at odds with sound tax policy or the intent of the drafters."), and infra notes 54-56 and accompanying text. Of course, this is not to say that all lawyers within a given field have the same level of caution; indeed, we would expect that firms might sort by reputation, where one firm of lawyers in a particular field is known to be more cautious and another is known to be more aggressive. Still, we think that it is fair to characterize the general ethos in some fields of law as more cautious than that of other fields.
98. An interesting issue arises as to the interests of law firms versus perhaps different interests of their clients. Some law firms have clients on both sides of an issue-for instance, hostile acquirers and companies defending against hostile acquirers, or bankruptcy debtors and bankruptcy creditors. To what extent might a law firm in that position be foreclosed from making arguments or taking positions in their clients' interests? To what extent might a law firm's behavior be affected by its role, status and history in the reputational community of its peer law firms? These questions are largely beyond the scope of this Article. That being said, James Freund offers a fascinating illustration of a dynamic among lawyers who are repeat players in the transactional world, in the form of a playlet of acquisition negotiations involving the characters of Sol Sagacity and Perry Prudent, respectively seller's and purchaser's outside counsel, who know one another from representing opposing clients in other deals. One interchange is as follows: Sagacity: Come on, Perry.... You know you'd ask for the same thing if you were in my shoes. In fact-I just remembered-you did ask for it in that Lorax-Grinch deal where you represented the seller! Prudent: That's right, Sol-and you handed me the same ungracious little speech I just gave you. I've been lying in wait all these years.
99. JAMES C. FREUND, ANATOMY OF A MERGER 514 (1975).
100. See, e.g., Errol Meidinger, Regulatory Culture: A Theoretical Outline, 9 LAW & POL'Y 355, 363-72 (1987)
101. (identifying and analyzing the cultural dynamics of regulatory communities); Parker, supra note 17, at 227-33 (considering the implications of regulatory community dynamics in the context of the Australian trade practices regime);
102. see also Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, 144 U. PA. L. REV. 1765, 1807-14 (1996) (Pubitemid 126408765)
103. (recognizing similar phenomena in the context of commercial and other market transactions); Claire A. Hill, Bargaining in the Shadow of the Lawsuit: A Social Norms Theory of Incomplete Contracts, 34 DEL. J. CORP. L. 191, 211-13 (2009) (arguing that contracting parties known to exploit loopholes will find transacting more difficult and expensive because of the wariness of potential partners).
104. See, e.g., Gary L. Rodgers, The Commissioner "Does Not Acquiesce", 59 NEB. L. REV. 1001, 1024-25 (1980)
105. (recognizing that budgetary pressures mean that the IRS is under pressure to interpret ambiguous statutes to maximize tax collections).
106. See, e.g., INDOPCO, Inc. v. Comm'r, 503 U. S. 79, 84 (1992)
107. ("[T]his Court has noted the familiar rule that an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer." (footnote omitted)); Comm'r v. Glenshaw Glass Co., 348 U. S. 426, 430 (1955)
108. (counseling "liberal construction" to the "broad phraseology" in the Internal Revenue Code's definition of gross income); Steve R. Johnson, The Canon That Tax Penalties Should Be Strictly Construed, 3 NEV. L. J. 495, 495-96 (2003)
109. (summarizing judicial canons applicable in the tax context).
110. See, e.g., Philip A. Curry, Claire Hill & Francesco Parisi, Creating Failures in the Market for Tax Planning, 26 VA. TAX REV. 943, 944 (2007)
111. (arguing that the government might leave open some known tax loopholes to discourage taxpayers from wasting resources in aggressively seeking more obscure or unknown tax loopholes).
112. The tax community recognizes some Internal Revenue Code provisions and Treasury regulations as taxpayer friendly, meaning that Congress or Treasury has adopted rules that are not revenue-maximizing for public policy, administrability, or other similar reasons. See, e.g., 26 U. S. C. § 1341 (2006) (describing circumstances in which taxpayers take either a deduction or a credit, depending upon which yields the lower tax liability);
113. Treas. Reg. § 1.263 (a)-4 (2008) (providing regulations for capitalization of intangible assets that include exceptions for de minimis expenditures).
114. See, e.g., Lavoie, supra note 38, at 60 ("When the [Internal Revenue] Service interprets a tax rule in a manner that maximizes short-term tax collections... without consideration of the economic realities of the transaction, it does a disservice to the tax system.... [This] encourage[s] aggressive tax planning.").
115. Isenbergh, supra note 1, at 866.
116. See 26 U. S. C. § 7623 (2006)
117. (authorizing awards to whistleblowers who provide specific information leading to tax collections); Dennis J. Ventry, Jr., Whistleblowers and Qui Tam for Tax, 61 TAX LAW. 357, 362-68 (2008)
118. (examining the IRS's whistleblower program, which was substantially strengthened by the 2006 amendments to § 7623 of the Internal Revenue Code).
119. See Hanlon & Slemrod, supra note 26, at 127 ("[O]n average, a company's stock price declines when there is news about its involvement in tax shelters, but the reaction is much smaller than for other accounting missteps."); see also Mihir A. Desai & Dhammika Dharmapala, Corporate Tax Avoidance and Firm Value, 91 REV. ECON. & STAT. 537, 545-46 (2009).
120. See Hanlon & Slemrod, supra note 26, at 137 ("[F]or certain kinds of firms, we expect that the release of involvement in a tax shelter will cause the stock price to increase.").
121. Notably, Hanlon and Slemrod deal mostly with reactions to "tax shelters", not generic minimal compliance. Although there is no universally accepted definition of a tax shelter, the term carries an especially negative connotation. As Hanlon and Slemrod acknowledge, even while disapproving of tax shelter activity, shareholders might want their firms to pay as little tax as possible without getting caught or getting assessed penalties.
122. Id. at 127;
123. see also Joshua D. Blank, What's Wrong with Shaming Corporate Tax Abuse, 62 TAX L. REV. 539, 559-60 (2009)
124. (arguing that corporate taxpayers are less likely than individual taxpayers to suffer reputational harm from tax shelter involvement).
125. The brouhaha surrounding corporate expatriations for tax purposes represents just one example. See, e.g., Michael S. Kirsch, The Congressional Response to Corporate Expatriations: The Tension Between Symbols and Substance in the Taxation of Multinational Corporations, 24 VA. TAX REV. 475, 496-507 (2005)
126. (documenting and analyzing media and congressional reactions to decisions by U. S.-based corporations to change their tax residence to tax haven countries); David R. Francis, Tax Revenues Vanish as Firms Move from US to Bermuda, CHRISTIAN SCI. MONITOR, May 22, 2002, http://www.csmonitor.com/2002/ 0522/p01s01-uspo.html (same).
127. See supra note 39 and accompanying text.
128. That being said, one can envision a norm within a reputational community that taking highly technical and legalistic positions even to parties outside the community is unacceptable. For instance, it might be seen as a signal that a party is willing and inclined to behave badly vis-à-vis members of the community. Considering when and why there would be a norm approving or disapproving technical arguments to a third party is beyond the scope of this Article.
129. See, e.g., 2 KENNETH CULP DAVIS, ADMINISTRATIVE LAW TREATISE § 8:12 (2d ed. 1979)
130. ("[The IRS's] basic attitude is that because consistency is impossible, an effort to be consistent is unnecessary; therefore it need not consider precedents, and it may depart from precedents without explaining why."); Steve R. Johnson, An IRS Duty of Consistency: The Failure of Common Law Making and a Proposed Legislative Solution, 77 TENN. L. REV. (forthcoming 2010) (manuscript at 9-12), available at http://papers.ssrn.com/sol3/papers.cfm? abstract-id=1471641 (documenting the IRS's pattern of taking inconsistent positions).
131. Jeffrey N. Gordon, What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections, 69 U. CHI. L. REV. 1233, 1238 (2002);
132. see also Claire A. Hill, Tax Lawyers Are People Too, 26 VA. TAX REV. 1065, 1067-68 (2007)
133. (describing a continuum of tax lawyer behavior, where one end is the " (Almost?) Over the Edge Envelope Pushing" tax lawyer who has a perhaps extreme form of the tax lawyer ethos Jeffrey Gordon describes).
134. Gordon, supra note 54, at 1238.
135. See Jay A. Soled, Tax Shelter Malpractice Cases and Their Implications for Tax Compliance, 58 AM. U. L. REV. 267, 295-96, 306-07 (2008).
136. See discussion infra Part II. B (considering statutory and regulatory use of ordinary and technical terms).
137. See 15 U. S. C. § 78m (d) (1) (2006);
138. SEC Rule 13d-1, 17 C. F. R. § 240.13d-1 (2009).
139. See 15 U. S. C. § 78m (d) (3) (providing, in connection with information reporting that, "[w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a 'person' for the purposes of this subsection");
140. C. F. R. § 240.13d-5 (b) (1) (elaborating: "When two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of sections 13 (d) and (g) of the Act, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such persons.").
141. See 26 U. S. C. § 165 (a) (2006)
142. (allowing a deduction for losses realized).
143. See id. § 267 (a) (1), (b) (2) - (3) (disallowing deductibility of losses from related-party sales and defining relevant related-party relationships).
144. See id. § 1502 (requiring consolidated returns for affiliated groups);
145. id. § 1504 (defining affiliated group by reference to stock ownership);
146. see also S. REP. NO. 617, at 9 (1918) ("[A] law which contains no requirement for consolidation puts an almost irresistible premium on a segregation or a separate incorporation of activities which would normally be carried as branches of one concern. Increasing evidence has come to light demonstrating that the possibilities of evading taxation in these and allied ways are becoming familiar to the taxpayers of the country.").
147. See, e.g., I. R. S. Priv. Ltr. Rul. 9714002 (Dec. 6, 1996) ("There are situations in which taxpayers try to achieve affiliation status, and there are situations in which taxpayers try to avoid affiliation status.").
148. See LAWRENCE M. AXELROD & MARK A. KOZIK, CONSOLIDATED TAX RETURNS § 4:10 (4th ed. Supp. 2008)
149. (discussing judicial reliance on the business purpose doctrine to counter manipulation of the affiliated group definition).
150. See 26 U. S. C. § 1504 (a) (5) (F);
151. I. R. S. Priv. Ltr. Rul. 9714002 (Dec. 6, 1996) ("The principal theme of section 1504 (a) (5) (F) is anti-abuse. Generally, any guidance should operate as a one-way street to be used by the Service to deal with manipulative practices intended to either establish or break affiliation. ").
152. See discussion supra note 9 and accompanying text.
153. See supra Part I. A.
154. Several factors contribute to the inevitability of statutory ambiguity, especially in the regulatory context. When dealing with technical subjects and complicated programmatic schemes, even the most adept legislators cannot anticipate every circumstance that may fall at the margins of statutory terms and commands. Also, even if members of Congress are largely united in their assessment that a particular problem warrants a legislative solution, they may be sharply divided regarding the programmatic details for accomplishing that goal; hence, legislators may deliberately leave statutory language ambiguous in their effort to get legislation passed in the first instance, anticipating that agencies or courts will resolve whatever issues may arise as a consequence.
155. See, e.g., ESKRIDGE, supra note 3, at 20 (noting with respect to the "hard cases" of statutory interpretation, "[i]f an issue is unanticipated by the majority coalition, its agents are unlikely to say anything about the issue, for obvious reasons. If the issue is controversial, the agents are likely to suppress discussion in order to preserve cohesion within the coalition. In fact, the two phenomena are often interrelated: an issue becomes conveniently unanticipated because it would be controversial to talk about it openly");
156. Frank H. Easterbrook, Statutes' Domains, 50 U. CHI. L. REV. 533, 540 (1983)
157. ("Almost all statutes are compromises, and the cornerstone of many a compromise is the decision, usually unexpressed, to leave certain issues unresolved."); Sunstein, supra note 3, at 1741 (recognizing that lawmakers may reach agreement at one level of abstraction even while disagreeing at another level).
158. 42 U. S. C. § 7401 (b) (2006);
159. Sierra Club v. Larson, 2 F.3d 462, 464 (1st Cir. 1993) (stating that Congress enacted the Clean Air Act "to control and mitigate air pollution in the United States").
160. 29 U. S. C. § 651 (b) (2006).
161. 15 U. S. C. § 78b (2006).
162. 16 U. S. C. §§ 824-824a (2006).
163. See, e.g., Securities Exchange Act of 1934, 15 U. S. C. § 78b;
164. Occupational Safety and Health Act, 29 U. S. C. § 651;
165. Clean Air Act, 42 U. S. C. § 7401.
166. The Clean Air Act (CAA) clearly identifies "air pollution" as its target, not least by repeating that phrase multiple times in its opening findings and declaration of purpose. See 42 U. S. C. § 7401 (a) - (b);
167. see also id. § 7470 (articulating separately the purposes of part of the CAA dedicated to prevention of significant deterioration of air quality, which purposes in turn emphasize "air pollution", "air quality", and "clean air resources"). The CAA's declaration of purpose specifies also three programmatic elements for controlling air pollution: "a national research and development program", "technical and financial assistance to State and local governments", and "the development and operation of regional air pollution prevention and control programs."
168. Id. § 7401 (b) (2) - (4).
169. OSHA's declaration of purpose specifies as its objective "to assure... safe and healthful working conditions" for "every working man and woman" and "to preserve our human resources", both in general and in identifying thirteen separate avenues for achieving that objective. 29 U. S. C. § 651 (b).
170. 16 U. S. C. § 824a (providing for the regulation of electricity generation, transmission, and sale via regional districts).
171. Id. § 824a-1 (authorizing exemptions from state laws, rules, and regulations based on certain findings).
172. For example, 26 U. S. C. § 61 (2006)
173. defines income broadly. After that, Subtitle A, Chapter 1, Subchapter B, Part II of the Internal Revenue Code contains twenty separate provisions addressing items specifically included in gross income, and Subtitle A, Chapter 1, Subchapter B, Part III of the Internal Revenue Code contains forty-one separate provisions addressing items specifically excluded from gross income for federal income tax purposes. Subtitle A, Chapter 1, Subchapter B, Part VI of the Internal Revenue Code then offers another forty separate provisions providing itemized deductions for individual and corporate taxpayers. These are only a small number of the many, many tax provisions that contribute to determining taxable income.
174. See 26 U. S. C. § 163.
175. See id. § 170.
176. See id. § 162;
177. Treas. Reg. § 1.162-10 (a) (2006).
178. See 26 U. S. C. § 106.
179. See, e.g., 26 U. S. C. § 162 (a) (2) (allowing a deduction for travel expenses, but only if they are not "lavish or extravagant under the circumstances");
180. id. § 162 (m) (disallowing a deduction for wages in excess of one million dollars paid to certain corporate executives).
181. See Reuven S. Avi-Yonah, The Three Goals of Taxation, 60 TAX L. REV. 1, 3 (2006).
182. For example, former General Counsel to the Treasury and tax expert Randolph Paul observed in 1938 that "[i]n 25 years of development federal taxation has had little direction on the legal side. There has been no chart or compass. Growth has been ex necessitate.... There is pressing need today for more careful thinking in terms of our federal tax system as a unit." Jasper L. Cummings, Jr. & Alan J. J. Swirski, Interview: Randolph Paul, A. B. A. SEC. OF TAX'N NEWS Q., Winter 2009, at 4, 5
183. (quoting RANDOLPH E. PAUL, SELECTED STUDIES IN FEDERAL TAXATION, SECOND SERIES v-vi (1938)).
184. Various commenters with whom we have discussed this project have suggested campaign finance, certain aspects of patent law, and antitrust as potential candidates for comparison on this score. As noted, we hope to consider some or all of these regulatory regimes in future work.
185. Depending upon one's perspective, this may be a feature rather than a bug.
186. See, e.g., ESKRIDGE, supra note 3, at 26-27;
187. Frank H. Easterbrook, The Supreme Court, 1983 Term-Foreword: The Court and the Economic System, 98 HARV. L. REV. 4, 46 (1984);
188. Cass R. Sunstein, Interpreting Statutes in the Regulatory State, 103 HARV. L. REV. 405, 427 (1989);
189. see also LEO KATZ, ILL GOTTEN GAINS: EVASION, BLACKMAIL, FRAUD, AND KINDRED PUZZLES OF THE LAW 13-14 (1996).
190. Not everyone accepts the indeterminacy of statutory purposes. Consider the following argument: Whether words be the skin of the idea, in the simile of Mr. Justice Holmes, or chameleons which take their color from their surroundings, in the figure occasionally used by Continental jurists, the skin, we must remember, is already half filled; the chameleon's natural gray shines through the red or green which it has assumed from its surroundings. Although we are convinced that hanging a murderer has no deterrent effect whatever, or has even a slight stimulating effect, we can scarcely recast the obvious immediate purpose of a statute which makes murder capital.
191. Max Radin, Statutory Interpretation, 43 HARV. L. REV. 863, 878-79 (1930).
192. See Michael Livingston, Practical Reason, "Purposivism", and the Interpretation of Tax Statutes, 51 TAX L. REV. 677, 708-09 (1996)
193. (discussing purpose as "a useful fiction"); John F. Manning, What Divides Textualists from Purposivists?, 106 COLUM. L. REV. 70, 79-85 (2006)
194. (recognizing the importance of statutory purpose in establishing context for textual analysis).
195. See, e.g., Zuni Pub. Sch. Dist. No. 89 v. Dep't of Educ., 127 S. Ct. 1534, 1541-43 (2007)
196. (disregarding a literal reading of statutory text in light of legislative history and statutory purpose); Dolan v. U. S. Postal Serv. 546 U. S. 481, 486 (2006)
197. ("Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute....").
198. There is voluminous writing on the law's use of ordinary versus technical terms. See, e.g., BRIAN BIX, LAW, LANGUAGE AND LEGAL DETERMINACY 178-93 (1993)
199. (discussing the role of language in the law);
200. Mary Jane Morrison, Excursions Into the Nature of Legal Language, 37 CLEV. ST. L. REV. 271, 287-90 (1989)
201. (discussing particularly the distinction between technical and ordinary understandings of terms used by lawyers); Frederick Schauer, A Critical Guide to Vehicles in the Park, 83 N. Y. U. L. REV. 1109, 1123-24 (2008) (recognizing that ordinary terms may hold special meanings in the legal context).
202. See, e.g., MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY 408 (11th ed. 2003).
203. See, e.g., WILLIAM A. KLEIN ET AL., BUSINESS ASSOCIATIONS: AGENCY, PARTNERSHIPS AND CORPORATIONS 42-48 (7th ed. 2009)
204. (presenting cases discussing whether a person was an employee or an independent contractor for purposes of determining liability of a third party who would be the "employer").
205. 29 U. S. C. § 203 (e) (2) (A) - (B) (2006).
206. Id. § 652 (5) - (6).
207. 26 U. S. C. § 3401 (c) (2006).
208. The tax code further defines "employee" differently for purposes of other types of withholding, explicitly including life insurance salesmen and home workers for Federal Insurance Contributions Act (FICA) withholding purposes
209. see id. § 3121 (d) (3) (B) - (C), but specifically excluding them for Federal Unemployment Tax Act (FUTA) withholding purposes
210. see id. § 3306 (i).
211. 29 U. S. C. § 152 (3) (defining "employee" for the purposes of the National Labor Relations Act (NLRA)).
212. Id. § 1002 (6) (defining "employee" for the purposes of ERISA).
213. 26 U. S. C. § 3401 (c) (defining "employee" for the purposes of federal income tax withholding).
214. See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U. S. 318, 323 (1992)
215. (finding ERISA's definition of employee to be "completely circular" and therefore turning to the common law to define the term); Cmty. for Creative Non-Violence v. Reid, 490 U. S. 730, 739 (1989)
216. (referencing common law principles in the absence of a statutory definition to interpret "employee" for purposes of the Copyright Act of 1976). But see NLRB. v. Town & Country Elec., Inc., 516 U. S. 85, 93-94 (1995)
217. (suggesting that giving "considerable deference" to an administering agency's definition of "employee" might be more appropriate than relying upon common law).
218. See, e.g., Rev. Rul. 87-41, 1987-1 C. B. 296, 298-301 (purporting to apply common law standards for identifying employees for FICA and FUTA withholding tax purposes but listing twenty particular factors for consideration in making that assessment).
219. See Darden, 503 U. S. at 326 (recognizing that the FLSA's definition of "employee" may be broader than the common law definition);
220. FedEx Home Delivery v. NLRB, 563 F.3d 492, 496 (D. C. Cir. 2009)
221. (applying a ten-factor common law agency test to evaluate whether a worker is an employee for the purposes of the NLRA); Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008)
222. (employing a five-factor test to determine whether a worker qualifies as an employee for the purposes of the FLSA).
223. U. S. COMM'N ON THE FUTURE OF WORKER-MGMT. RELATIONS, THE DUNLOP COMMISSION ON THE FUTURE OF WORKER-MANAGEMENT RELATIONS-FINAL REPORT 64 (1994).
224. See 30 U. S. C. § 902 (d) (2006).
225. See id. § 802 (g) - (h).
226. Compare Dir., Office of Workers' Comp. Programs, U. S. Dep't of Labor v. Consolidation Coal Co., 884 F.2d 926, 935 (6th Cir. 1989)
227. (repairmen eligible for benefits), with Dir., Office of Workers' Comp. Programs, U. S. Dep't of Labor v. Ziegler Coal Co., 853 F.2d 529, 537 (7th Cir. 1988) (repairmen not eligible for benefits).
228. See Sec'y of Labor v. Nat'l Cement Co. of Cal., 573 F.3d 788, 794-96 (D. C. Cir. 2009)
229. (recognizing the Secretary of Labor's interpretation of 30 U. S. C. § 802 (h) (1) (B) to cover roads but not vehicles as reasonable).
230. See, e.g., E. Inv. Corp. v. United States, 49 F.3d 651, 653-55 (10th Cir. 1995) (assessing the applicability of the different tax definitions of "employee" to a group of sales representatives);
231. see also United States. v. MacKenzie, 777 F.2d 811, 814 (2d Cir. 1985)
232. ("[I]n drawing the line between who is an employee and who is an independent contractor there will be some doubtful cases....").
233. See 15 U. S. C. § 77b (a) (1) (2006)
234. ("The term 'security' means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a 'security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.").
235. 42 U. S. C. § 7411 (7) (2006) (defining "technological system of continuous emission reduction" for the purpose of establishing standards of performance for new stationary sources of air pollutants under the Clean Air Act).
236. 21 U. S. C. § 321 (ll) - (mm) (2) (2006)
237. (building on definitions of other terms to define "semi-critical reprocessed single-use device" as a "device that is intended for one use, or on a single patient during a single procedure... that has previously been used on a patient and has been subjected to additional processing and manufacturing for the purpose of an additional single use on a patient" and "that is intended to contact intact mucous membranes and not penetrate normally sterile areas of the body").
238. Isenbergh, supra note 1, at 879. Isenbergh notes in particular, in discussing the well-known tax case of Gregory v. Helvering, 293 U. S. 465 (1935):
239. At the outset, Gregory raises the question whether the notion of a "reorganization" in the 1928 Act is simply a creature of the statute or whether it imports something from life-life in this case being the world of business in which "reorganizations" occur. Within the terms of the statute, the taxpayer had a winning case because she had done everything the statute required. If, however, we view the statute not as an exhaustive definition of reorganizations but as incorporating something from the world of business, the government had a strong case. Certainly, what happened in Gregory did not much look like the sort of adjustment of a business that the notion of a "reorganization" would bring to mind if derived from the business world and not solely from the statute.
240. Id. at 867-68. Isenbergh additionally observes that the statute "purported to define reorganizations", as contrasted "with the Revenue Act of 1921, which purported only to enumerate certain transactions included within the term 'reorganization. '"
241. Id. at 868.
242. Arthur B. Markman & Brian H. Ross, Category Use and Category Learning, 129 PSYCHOL. BULL. 592, 592-93 (2003).
243. The psychology and philosophy literatures develop theories about categories at considerable length; while the theories differ among themselves and articulate and develop many nuances, most of those differences and nuances are not relevant to our account.
244. See generally LAWRENCE W. BARSALOU, COGNITIVE PSYCHOLOGY: AN OVERVIEW FOR COGNITIVE SCIENTISTS 15-51 (1992);
245. CONCEPTS (Eric Margolis & Stephen Laurence eds., 1999)
246. DOUGLAS L. MEDIN, BRIAN H. ROSS & ARTHUR B. MARKMAN, COGNITIVE PSYCHOLOGY 317-50 (2005);
247. see also GREGORY L. MURPHY, THE BIG BOOK OF CONCEPTS (2002).
248. See Federal Food, Drug, and Cosmetics Act, 21 U. S. C. §§ 321 (g) - (h), 393 (b) - (d) (2) (empowering the FDA to ensure that drugs and devices are "safe and effective" and defining "drug" and "device");
249. see also, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120 (2000) (reviewing FDA determinations that nicotine is a drug and cigarettes and smokeless tobacco are drug delivery devices under the FDCA).
250. See 26 U. S. C. §§ 1 (a) - (d), 11 (a) (2006) (imposing tax on "taxable income" of individuals and corporations);
251. id. § 63 (a) (defining "taxable income" by reference to other defined terms and provisions within Title 26, Chapter 1, Subchapter A of the U. S. Code). As observed, much of the Internal Revenue Code is dedicated to defining taxable income. See supra note 78 and accompanying text.
252. BARSALOU, supra note 113, at 29 ("According to the classical view of categories in philosophy and linguistics, rules underlie categorization. Although rules can take a variety of forms, the ideal rule specifies properties that are individually necessary and jointly sufficient for category membership. ").
253. See id. at 30.
254. See, e.g., id. at 28;
255. MURPHY, supra note 113, at 28;
256. Arthur B. Markman & Dedre Gentner, Thinking, 52 ANN. REV. PSYCHOL. 223, 235-41 (2001).
257. The philosophy literature also has a great deal to say about this issue. See, e.g., Hilary Putnam, The Meaning of "Meaning", in READINGS IN LANGUAGE AND MIND 157 (Heimir Geirsson & Michael Losonsky eds., 1996).
258. MURPHY, supra note 113, at 62;
259. see also Lawrence W. Barsalou, Deriving Categories To Achieve Goals, in 27 THE PSYCHOLOGY OF LEARNING AND MOTIVATION: ADVANCES IN RESEARCH AND THEORY 1, 1 (Gordon H. Bower ed., 1991) (originating the term "goal-derived categories").
260. See generally Kaplow, supra note 10;
261. see also Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of "Principles-Based Systems" in Corporate Law, Securities Regulation, and Accounting, 60 VAND. L. REV. 1411, 1417-35 (2007).
262. We note too, that many categories seemingly specified by necessary and sufficient conditions are in fact subject to override to treat nonmembers as members, and to treat members as nonmembers.
263. See Kaplow, supra note 10, at 577-79 (observing that standards become more rule-like over time);
264. see also Cass R. Sunstein, Problems with Rules, 83 CAL. L. REV. 953, 964-65 (1995) (recognizing that rules and standards are not entirely distinguishable).
265. See, e.g., STEVEN L. WINTER, A CLEARING IN THE FOREST: LAW, LIFE, AND MIND (2001);
266. see also BARSALOU, supra note 113, at 29-30;
267. Putnam, supra note 118.
268. We shall shortly turn to a discussion of the famous "vehicle" example. See infra notes 146-49 and accompanying text.
269. Sometimes the law will specify conditions that are necessary but may not be sufficient. For example, if young children accomplished all of the steps necessary to establish a limited liability company, the law still may not recognize the company's creation under the general rules governing capacity to contract.
270. See MARVIN A. CHIRELSTEIN, CONCEPTS AND CASE ANALYSIS IN THE LAW OF CONTRACTS 74 (5th ed. 2006).
271. In other instances, a judge or other decisionmaker may interpret a category expansively so that the conditions that specify the category are not even necessary: X does not meet the conditions of membership in the category but is nevertheless treated as though it were a member because X is saliently similar to what is in the category. See infra note 126 and accompanying text (discussing the example of de facto merger doctrine). In rigorous parlance, there will rarely if ever be a pure case of necessary and sufficient conditions, or for that matter a pure case of conditions that are either necessary or sufficient. When we use the terms, we mean necessary and/or sufficient, or nearly so.
272. See, e.g., 26 U. S. C. § 368 (2006) (defining " reorganization");
273. see also BORIS I. BITTKER & JAMES S. EUSTICE, FEDERAL INCOME TAXATION OF CORPORATIONS AND SHAREHOLDERS ¶ 12.03 (6th ed. 1999) ("It remains true, therefore, that literal compliance with the reorganization provisions is not enough; a transaction will be governed by the statutory provisions only if it comes within the presuppositions, as well as the language, of the provisions. The courts have driven this truth home with a variety of formulations, usually classified as the business-purpose, step-transaction, and continuity-of-interest doctrines.").
274. To explain more fully: two business entities can combine into one in many different ways. In particular, the law recognizes and defines a merger as typically requiring a shareholder vote and may also provide for shareholders to receive the court-determined value of their shares in lieu of what the merger terms themselves indicate.
275. See, e.g., DEL. CODE ANN. tit. 8, §§ 251-258 (2001 & Supp. 2008);
276. MODEL BUS. CORP. ACT §§ 11.01 (a), 11.02 (a), 11.04 (b) (2005);
277. WILLIAM A. KLEIN & JOHN C. COFFEE, JR., BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 215-18 (10th ed. 2007) (discussing the appraisal remedy historically and in various jurisdictions). Parties often do structure their combinations as mergers and follow the associated statutory requirements, but sometimes parties combine their businesses in other ways, deliberately aiming to fall outside the statute.
278. See, e.g., DEL. CODE ANN. tit. 8, §§ 271, 275 (2001 & Supp. 2008) (recognizing and imposing procedural requirements upon asset sales and corporate dissolutions as transactions distinct from mergers);
279. JEFFREY D. BAUMAN ET AL., CORPORATIONS LAW AND POLICY 433-36 (6th ed. 2006) (acknowledging different business combination structures). In some jurisdictions, only companies that combine expressly using the merger statute are subject to its provisions; in those jurisdictions, statutes impose necessary and sufficient conditions for inclusion in the merger category.
280. See, e.g., Hariton v. Arco Elecs. Inc., 188 A.2d 123, 125 (Del. 1963). In other jurisdictions, however, courts have applied the merger statute to, for instance, require a shareholder vote or allow shareholders to have their shares valued by a court even though the combination was achieved in some way other than by following the merger statute.
281. See, e.g., Rath v. Rath Packing Co., 136 N. W.2d 410, 418 (Iowa 1965);
282. Farris v. Glen Alden Corp., 143 A.2d 25, 30-31 (Pa. 1958). In other words, those courts recognize transactions that do not follow the steps required to effectuate a merger under the applicable merger statute as de facto mergers that trigger rights available when a statutory merger occurs. It is noteworthy that Delaware and many other states reject the doctrine of de facto merger, valuing predictability over arguments about equity.
283. See generally WILLIAM A. KLEIN ET AL., BUSINESS ASSOCIATIONS 713-15 (6th ed. 2006) (describing origins of the de facto merger doctrine);
284. Wendy B. Davis, De Facto Merger, Federal Common Law, and Erie: Constitutional Issues in Successor Liability, 2008 COLUM. BUS. L. REV. 529, 539-40 (describing the de facto merger doctrine).
285. See BARSALOU, supra note 113, at 25-31.
286. See generally Arthur B. Markman & C. Hunt Stilwell, Role-Governed Categories, 13 J. EXPERIMENTAL & THEORETICAL ARTIFICIAL INTELLIGENCE 329, 330 (2001). A related term, "exemplar", is sometimes used in the literature. While prototype and exemplar are not completely synonymous, for purposes of this Article they can safely be treated as such; accordingly, we refer only to prototypes and mean by our use of this term to include exemplars as well.
287. In a sense, a category that is defined by necessary and sufficient conditions represents a special case of a category defined by prototype. In other words, a prototype could encompass all the conditions that are necessary and sufficient for membership in the category. Most, however, do not. Importantly, the psychology literature distinguishes prototype-centered categories from those defined by necessary and sufficient conditions.
288. See BARSALOU, supra note 113, at 28-29. We find it worthwhile to distinguish the two category types in this Article to help summon the intuition that there will always be penumbral cases and to provide an intuitive sense of how we might resolve such cases.
289. See, e.g., Elisabeth Eaves, Los Angeles, FORBES. COM, Mar. 1, 2007, http://www.forbes.com/lists/2007/3/forbeslife-cx-singles07-Los-Angeles-2503. html (stating that George Clooney is the "most eligible bachelor" in Los Angeles);
290. Top 100: America's Most Wanted, PEOPLE, July 10, 2000, at 60, 62 (naming George Clooney the most eligible bachelor in 2000);
291. see also WINTER, supra note 122, at 85-92.
292. See BARSALOU, supra note 113, at 34.
293. "Bachelor" as a category centered around a prototype is a standard example in the literature, as is the observation that the Pope is not a prototypical bachelor.
294. See, e.g., WINTER, supra note 122, at 85-89. Winter's discussion develops far more nuance than is relevant for our account on use of the term prototype.
295. See also BARSALOU, supra note 113, at 30.
296. See, e.g., WINTER, supra note 122, at 139-65.
297. See generally FREDERICK SCHAUER, PROFILES, PROBABILITIES, AND STEREOTYPES 266-77 (2003) (discussing generalities and their effect on lawyers and law).
298. See WAYNE R. LAFAVE, SUBSTANTIVE CRIMINAL LAW § 14.1 (2d ed. 2003) (listing types of murder recognized at common law and existing in various statutes);
299. see also id. §§ 14.2, 14.4-.5 (discussing each of these types in depth).
300. See id. § 15.2 (a) (describing "a killing while in a reasonable 'heat of passion'" as "the most common sort of voluntary manslaughter... rather than murder or no crime");
301. see also, e.g., Cooper v. State, 977 So. 2d 1220, 1223 (Miss. Ct. App. 2007) (categorizing a killing in the heat of passion as manslaughter rather than murder under Mississippi law);
302. Rhodes v. Commonwealth, 583 S. E.2d 773, 775 (Va. Ct. App. 2003) (recognizing a homicide in the heat of passion as voluntary manslaughter rather than murder under Virginia law
303. (quoting Wilkins v. Commonwealth, 176 Va. 580, 583 (1940))).
304. See LAFAVE, supra note 133, § 1.6 (a) (describing justifiable homicide as "no crime at all" notwithstanding intent to kill);
305. see also, e.g., MISS. CODE ANN. § 97-3-15 (2006) (declaring the killing of another person justifiable, and thus legally authorized, under specified circumstances);
306. VT. STAT. ANN. tit. 13, § 2305 (2009) (declaring a killing of another person under specified circumstances "guiltless").
307. This is consistent with one of the most central provisions of the existing federal income tax laws, which defines "gross income" for such purposes as "income from whatever source derived" but also by a list of specific items, the first of which is "compensation for services." 26 U. S. C. § 61 (a) (2006). Indeed, wages have been included among items expressly listed as income since some of the earliest income tax statutes.
308. See, e.g., Tariff Act of 1913, ch. 16, 38 Stat. 114, 167 (1913).
309. See 26 U. S. C. § 61 (a) (8).
310. See Gould v. Gould, 245 U. S. 151, 152 (1917) (concluding that alimony was not part of "the entire net income arising or accruing from all sources" subject to income tax under the Tariff Act of 1913).
311. See, e.g., Deborah A. Geier, Simplifying and Rationalizing the Federal Income Tax Law Applicable to Transfers in Divorce, 55 TAX LAW. 363, 364 (2002) (arguing that practical line-drawing between alimony, child support, and property settlements is impossible).
312. See Shannon Petersen, Comment, Congress and Charismatic Megafauna: A Legislative History of the Endangered Species Act, 29 ENVTL. L. 463, 467 (1999) (describing the Endangered Species Act as designed to be "a largely symbolic effort to protect charismatic megafauna representative of our national heritage"). In fact, although bald eagles were officially listed as endangered species in 1978, the Bald Eagle Protection Act of 1940 preceded the Endangered Species Act and influenced its provisions.
313. See Bald Eagle Protection Act of 1940, ch. 278, 54 Stat. 250 (1940);
314. Determination of Certain Bald Eagle Populations as Endangered or Threatened, 43 Fed. Reg. 6230 (Feb. 14, 1978). Bald eagles have since been delisted by the Department of the Interior, though they remain protected by the provisions of the Bald Eagle Protection Act.
315. See Removing the Bald Eagle in the Lower 48 States from the List of Endangered and Threatened Wildlife, 72 Fed. Reg. 37, 346 (July 9, 2007);
316. Lawrence P. Mellinger, Symbolic Recovery: The Bald Eagle Soars Again, NAT. RESOURCES & ENV'T, Spring 2008, at 54.
317. See 16 U. S. C. § 1532 (8), (14), (16) (2006) (defining "species" to include "any subspecies of fish or wildlife or plant" and defining "fish or wildlife" and "plant" in broadly inclusive terms);
318. see also Final Rule to List the Illinois Cave Amphipod as Endangered, 63 Fed. Reg. 46, 900 (Sept. 3, 1998);
319. Determination of Endangered Status for the Delhi Sands Flower-Loving Fly, 58 Fed. Reg. 49, 881 (Sept. 23, 1993).
320. Specifically, the ESA's definition of species includes "distinct population segments" of species. 16 U. S. C. § 1532 (16). The ESA does not define what constitutes a distinct population segment, and there has been substantial litigation over whether this or that particular group of animals represents a distinct population segment and thus a separate species eligible for listing and protection under the ESA.
321. See, e.g., Nw. Ecosystem Alliance v. U. S. Fish & Wildlife Serv., 475 F.3d 1136, 1145-50 (9th Cir. 2007) (reviewing an agency determination that three populations of western gray squirrels, all living in Washington State, are distinct for ESA purposes);
322. Nat'l Ass'n of Homebuilders v. Norton, 340 F.3d 835, 842-52 (9th Cir. 2003) (evaluating an agency finding that pygmy-owls in Arizona are distinct from pygmy-owls in northwestern Mexico).
323. See, e.g., Billings v. Town of Grafton, 515 F.3d 39, 48 (1st Cir. 2009) ("Of course, behavior like fondling, come-ons, and lewd remarks is often the stuff of hostile environment claims, including several previously upheld by this Court.");
324. Sommatino v. United States, 255 F.3d 704, 712 (9th Cir. 2001) (recognizing allegations of "intentional touching and... sexually suggestive and vulgar remarks are typical of the offensive workplace behavior giving rise to an action to remedy a hostile work environment");
325. Martha Chamallas, Title VII's Midlife Crisis: The Case of Constructive Discharge, 77 S. CAL. L. REV. 307, 356-57 (2004) (recognizing claims of sexual harassment by female plaintiffs as prototypes of hostile work environment as well as constructive discharge claims);
326. Henry L. Chambers, Jr., A Unifying Theory of Sex Discrimination, 34 GA. L. REV. 1591, 1610 (2000) ("The typical hostile work environment is a workplace tinged with sexual advances, explicit sex talk, sexual innuendo, gender-based hostility, or some combination of such conduct that is severe enough to affect an employee's ability to do her job.").
327. See, e.g., Elisabeth A. Keller & Judith B. Tracy, Hidden in Plain Sight: Achieving More Just Results in Hostile Work Environment Sexual Harassment Cases by Re-Examining Supreme Court Precedent, 15 DUKE J. GENDER L. & POL'Y 247, 256-71 (2008) (arguing that the courts are inconsistent in applying the standards for hostile work environment sexual harassment and offering examples).
328. See BARSALOU, supra note 113, at 28-29.
329. This is the famous example first discussed in H. L. A. Hart, Positivism and the Separation of Law and Morals, 71 HARV. L. REV. 593, 606-15 (1958). It has been cited and discussed many times since.
330. Is there an argument by which a cat might be a vehicle, if it were transporting (presumably unintentionally) fleas? This is an argument made by one of our students, in a context too convoluted to recount. The answer is probably yes, but, as the one of us who responded to our student said, for purposes of legal analysis and ordinary language, we can mostly assume such possibilities away-although perhaps not always.
331. See Schauer, supra note 91, at 1111 (summarizing Hart's example in these terms).
332. Of course, this glosses over the major issue of whose intent counts, and what counts as appropriate evidence of intent. See supra notes 87-90 and accompanying text (discussing the difficulties of identifying and applying statutory purpose).
333. See supra note 91 and accompanying text.
334. See supra notes 59-65 and accompanying text.
335. See supra note 109 and accompanying text (discussing security as an ordinary versus technical term).
336. See supra note 109.
337. See, e.g., SEC v. W. J. Howey Co., 328 U. S. 293, 297-98 (1946) (concluding that securities may include items of "a more variable character" if they meet the purpose of the Act).
338. See 26 U. S. C. § 170 (c) (2006) (allowing taxpayers a deduction for contributions made only to charities that fall within certain categories, including educational organizations but excluding individuals);
339. Rev. Rul. 57-211, 1957-1 C. B. 97 (denying deduction for donation to hospital to cover the cost of care for a particular individual).
340. Compare 26 U. S. C. § 61 (a) (12) (defining gross income for federal income tax purposes as including income from discharge of indebtedness), with id. § 103 (excluding interest earned from investments in state and local government bonds from gross income for federal income tax purposes). Section 108 does exclude income from the discharge of indebtedness from gross income under limited circumstances which include insolvent or bankrupt taxpayers; some taxpayers who lose their homes to foreclosure may fall within these exclusions.
341. See id. § 108 (a) (1) - (2). For at least some other taxpayers who lose their homes to foreclosure but are not insolvent or bankrupt, Congress adopted temporary relief for discharges of indebtedness occurring between December 31, 2008, and January 1, 2013.
342. See 26 U. S. C. A. § 108 (a) (1) (E) (West Supp. 2009).
343. See generally WINTER, supra note 122, at 169. There are also other types of categories, including Wittgenstein's conceptualization of categories like "game."
344. See LUDWIG WITTGENSTEIN, PHILOSOPHICAL INVESTIGATIONS §§ 65-71 (1953).
345. As the Stanford Encyclopedia of Philosophy notes: [i]t is here that Wittgenstein's rejection of general explanations, and definitions based on sufficient and necessary conditions, is best pronounced. Instead of these symptoms of the philosopher's 'craving for generality,' he points to 'family resemblance' as the more suitable analogy for the means of connecting particular uses of the same word. There is no reason to look, as we have done traditionally-and dogmatically-for one, essential core in which the meaning of a word is located and which is, therefore, common to all uses of that word. We should, instead, travel with the word's uses through 'a complicated network of similarities, overlapping and criss-crossing'.... Family resemblance also serves to exhibit the lack of boundaries and the distance from exactness that characterize different uses of the same concept.
346. Anat Biletski & Anat Matar, Ludwig Wittgenstein, in STANFORD ENCYCLOPEDIA OF PHILOSOPHY § 3.4 (2009), http://plato.stanford.edu/entries/ wittgenstein/#Lan (internal citation omitted). Categories founded on family resemblance may have their place in law, but they do not warrant separate analysis. Our contrast is, in a sense, between categories that are formed organically, reflecting some sort of internal relationship between the members versus categories that are formed by history and, to caricature, edict, pronounced to have particular members by authority of the pronouncer. The former is, again to caricature, a discovery; the latter is a creation.
347. MURPHY, supra note 113, at 62;
348. see also Lawrence W. Barsalou, Ad Hoc Categories, 11 MEMORY & COGNITION 211 (1983).
349. See, e.g., Martha Chamallas, Deepening the Legal Understanding of Bias: On Devaluation and Biased Prototypes, 74 S. CAL. L. REV. 747, 785-86 (2001); (Pubitemid 33636468)
350. William E. Gallegher & Ronald C. Goodstein, Inference Versus Speculation in Trademark Infringement Litigation: Abandoning the Fiction of the Vulcan Mind Meld, 94 TRADEMARK REP. 1229, 1256 (2004).
351. See BARSALOU, supra note 113, at 174;
352. see also Barsalou, supra note 158.
353. Some goal-derived categories develop into categories that are ex ante specified to a significant degree. As a court rules on cases involving particular fact patterns, and sets forth certain principles, the category can become progressively more rule-like, as more of the typical cases are those the common law has already addressed.
354. 17 C. F. R. § 240.10b-5 (2009).
355. See, e.g., BITTKER & EUSTICE, supra note 125, ¶ 12.61[3] (describing the step transaction doctrine as "the judicial requirement that all integrated steps in a single transaction must be amalgamated in determining the true nature of a transaction").
356. See, e.g., Stephen S. Bowen, The End Result Test, 72 TAXES 722, 722-23 (1994) (recognizing and describing three different conceptualizations of the step transaction doctrine-the end result test, the mutual interdependence test, and the binding commitment test).
357. One common example given for this intuition is the following: People are more readily able to imagine a prototypical chair than a prototypical piece of furniture.
358. See generally WINTER, supra note 122, at 24-25.
359. See Kaplow, supra note 10.