Calvin H. Johnson (University of Texas at Austin - School of Law) has posted Point The Supreme Court’s Statutory Interpretation in Gitlitz: A Failed Approach to Interpretation and a Bad Decision (ABA Tax Times Fall 2020) on SSRN. Here is the abstract:
The Supreme Court’s decision in Gitlitz v. Commissioner is an irresponsible decision disrupting the logic of tax for the benefit only of abuse. In Gitlitz the Supreme Court gave the equivalent of a double deduction, both an appropriate exclusion of cancellation of indebtedness income for an insolvent Subchapter S corporation and also an inappropriate increase in shareholder basis. The combination of the exclusion and shareholder basis generated a tax loss that had no economic substance, a loss that in Judge Posner’s wonderful phrase “did not impinge on the world.” ...
The approach in Gitlitz allowing an absurd tax deduction shows a hostility to the tax system that is inappropriate for a court in its role as a faithful servant. There are fundamental principles underlying the tax law, including antagonism to double deductions and deduction of phantom losses. The Supreme Court has a duty to interpret tax law in favor of coherent principle, and Gitlitz violates fundamental principle.
A court must defer to a Congressional tax policy, even if they disagree with it. But tax policy is easily distinguished from error or absurdity where Congress never debated the issue nor saw the result now obviously absurd. Gitlitz is on the error or absurdity side of the line, akin to 2 +2 = 5, and both Court and Administration needs to correct such errors as expeditiously as possible. If I tell my babysitter to teach my children some games, it does not authorize teaching craps or strip poker.
