Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Doctrine of Election
Aubree L. Helvey and Beth Stetson*
“The hardest thing in the world to understand is the income tax.” Albert Einstein spoke these words. The complexities of tax preparation and reporting have certainly not diminished over the years. One cause for the complexity of the federal tax code is the countless number of tax elections (elections) offered to taxpayers. Elections require taxpayers to choose from two or more possible tax treatments for a single taxable event and are usually adopted by Congress in an attempt to provide relief and equity through increased flexibility. The ability to elect an alternate valuation date for estate property, for example, was first created in 1935 to address a nationwide decline in property values caused by the Great Depression. Prior to 1935, executors were required to use a decedent’s date of death in assessing property values for estate tax purposes. During the Depression, property values declined so quickly that for many estates by the time the estate tax was paid the tax itself exceeded the value of the estate property. The addition of an alternate valuation date election improved the equity in the tax code by providing executors flexibility when determining gross estate values.
The benefits proffered by elections have not been absolute. Early in the history of the Code, the Service began successfully arguing that taxpayers should be bound to their initial choices between alternative tax treatments, even if the original election did not provide the greatest tax benefit, and despite the fact that the Code and Treasury regulations did not bind taxpayers to the original election. The courts quickly coined the terms “doctrine of election” and “binding election rule” when referring to this new theory that was serving as precedent. In a 2002 Technical Advice Memoranda, the Service provided a succinct summary of the doctrine of election:
The doctrine of election, as it applies to Federal tax law, consists of two elements: (i) a free choice between two or more alternatives, and (ii) an overt act by the taxpayer communicating the choice to the Commissioner; i.e., a manifestation of choice. A taxpayer who makes such an election may not, without the consent of the Commissioner, retroactively revoke or amend it merely because another alternative now appears to be more advantageous (citations omitted).
When the doctrine of election first entered tax jurisprudence, Code provisions did not consistently or pervasively address the procedural aspect of making an election. Procedural issues include whether elections must be made on an original return or are permitted for the first time on an amended return, whether a specific form or elective statement is required, and whether elections can be revoked. The judiciary applied the doctrine of election to address these gaps. Over time, however, Congress began to draft language that specifically identified the procedural requirements for making, and being bound to, an election. As Congress provided greater statutory and regulatory clarity regarding the binding nature of elections, courts gradually placed less emphasis on the applicability of the doctrine of election, a judicial doctrine, and instead focused on interpreting and applying the language of relevant Code provisions and Treasury regulations. Congress eventually passed section 446(e), statutorily prohibiting unauthorized changes in methods of accounting, and thus removing the need, in most “timing” cases, for continued application of the doctrine of election.
This Article describes why the judicial doctrine of election should no longer be a part of tax jurisprudence; instead, the courts should interpret and apply the language of the Code election provisions and underlying authorities. The authors submit that the doctrine of election may lack a valid legal foundation and may also be contrary to congressional intent. From both a substantive legal and practical perspective, the doctrine of election creates inequities and ambiguities in tax jurisprudence. Application of existing Code provisions, Treasury regulations, and other judicial doctrines provides sufficient and more equitable guidance when resolving disputes concerning taxpayer elections.
*Aubree L. Helvey is an Assistant Professor, Business Law, Cameron University, Lawton, OK; J.D.; C.P.A. Beth Stetson is an Assistant Professor of Accounting, Oklahoma City University, Oklahoma City, OK; J.D.; Ph.D. We extend our gratitude and special thanks to Sylvia Burgess, J.D., LL.M., for her support and insightful suggestions.