Yariv Brauner University of Florida, Levin College of Law Why Examples? Yariv Brauner University of Florida, Levin College of Law

Examples in Tax Regulations Pervasive Important Over 85% of survey responders reported the use of examples as either frequent or very frequent No guidance, no scholarship Obvious? Natural appeal: professional, human Only 9% of the survey participants opined that the use / drafting of examples are "just right." Lack of consensus over their status and purpose The article limits itself to examples in tax regulations

The COI Example Treas. Reg. §1.368-1(e)(2)(v), ex. 1. Context: reorganization (tax free) treatment for mergers Logic: efficiency / paper transactions should not trigger tax enough of the old target shareholders must “continue” with their investment even if now it is in the format of another legal entity: the surviving corporation. Note: the extent of participation (or control) in the surviving entity is irrelevant for COI 40% line drawn based on case law Other case law 50% required for a ruling

Transfer Pricing Example Treas. Reg. §1.482-4(c)(4), ex. 1 The norm: arm’s length (comparability) A U.S. pharmaceutical company develops a new drug in the United States and licenses it to its subsidiary in country X and to an unrelated company in country Y. The IRS condones the use of this “internal comparable,” based on similarity of profit potential X and Y are neighboring countries, similar in terms of population, per capita income and the incidence of disease. Costs of producing and marketing are also expected to be approximately the same. The terms for the licenses are also identical in every material respect.

Parks v. Commissioner, 145 T.C. No. 12 (2015) Private foundation was hit with excise taxes for radio ads related to issues on ballots (§ 4945) How to distinguish between an attempt to influence legislation and educating the public on same matters? The Regs.: should not “refer to” ballot initiatives Examples: messages using language "widely used" or "identified with" specific legislation are excisable - expand the prohibition… The Court bases its decision on the examples, avoiding general interpretation of the regulatory language Courts have, however, gone the other way (inconsistent)

Why Examples? Reliance on examples is natural & automatic Limits of language Cognitive processes / learning Survey (primary purpose) 40% mere illustrations [coffee, ect.], but…. Examples are never neutral 13% explanatory purpose [TP example] 5% shape the contours of norms [Parks example] 5% target specific actions or transactions [Pfizer] 2% no specific goal [routine, examples restating reg.] 33% mixed, inconsistent goals Clientele Behavioral insights

“Where” Examples? Examples that simply rehash the regulatory language (43% state that they are inappropriate) Examples that add little [TP / air tickets] 47%: inappropriate (simplistic/unrealistic) Examples that shape the scope [Parks / VRDI] 68% inappropriate, but only 20% say they should be discontinued Examples that blur the scope / contradictory 20% specify as inappropriate Clearly unsystematic approach to the drafting of examples

Very Preliminary Conclusion First, pay attention to impact Settle legal status Consider behavioral aspects availability, representativeness, and anchoring May use them actively / nudge Clientele Consider alternative guidance (rulings) Second, clarify acceptable goals (and non exclusivity) Targeting should be questioned Third, provide guidance on the use of examples Too general examples Examples that add nothing to the regulatory language Unrealistic examples Encourage a learned use of examples to illustrate formulaic, ordering, and similar rules (safe harbors/No-Nos)