Source: https://info.taxnotes.com/conferencepapers_judicial_approaches_0818
Timestamp: 2019-04-21 19:07:08+00:00

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A. Is the Chill Factor Real?
Consequently, judges are often faced with submissions that taxpayer recovery in claims against tax officials should be denied because of chilling effect concerns. This article examines the different judicial approaches to cases addressing those concerns in the United States, Canada, Australia, and New Zealand. The goal is to distill from those approaches guidelines for consistent judicial treatment of chill factor concerns in tax cases. It is hoped that the guidelines could minimize unconscious, incremental erosion of taxpayer rights and avoid creating an environment of potentially unjustified tax exceptionalism.
As with most public policy topics, the chill factor effect raises numerous concerns, including fundamental questions about whether chilling effects are real and observable and, if so, whether they should be feared. Debate also surrounds the appropriate weighing of chilling concerns against countervailing policy effects of imposing liability on tax officials.5 There are also questions about whether tax officials in particular respond overdefensively to adverse judicial determinations and what form any overdefensiveness might take. Judges must be mindful of those topics when addressing chill factor concerns in tax cases.
In addition to the variability and authority-specific nature of the results of the studies, it is questionable whether the findings in any one jurisdiction would readily transfer to others. The seemingly contradictory results might simply indicate that different public bodies will respond differently to potential chilling effect triggers. A further complication is that responses to adverse judicial determinations are likely to change over time as public service attitudes, policies, and practices evolve, reducing the utility of older studies.
None of the preceding empirical work or academic commentary examines overdefensiveness in a tax context. However, tax cases raise their own complexities. For example, judges must weigh the possible adverse motivational effects of holding tax officials liable against possible countervailing motivational effects on taxpayers. Those effects might offset any observable short-run chill factor effects and lead to long-term overall improvements in tax administration by fostering voluntary compliance.
Unfortunately, just as there are no tax-specific studies on the potential chilling effects on tax officials, there have also been no empirical studies on possible positive effects of successful claims against officials. The most closely applicable studies are those examining possible links between taxpayer compliance and taxpayer perceptions of justice. One study on the impact of justice concerns on tax compliance reviewed the results of numerous studies and concluded that “taxpayers are less likely to be compliant with a tax system they consider unjust, unfair, and, thus, illegitimate.”15 Should taxpayers perceive unfairness or injustice in restricting the liability of tax officials because of chill factor concerns, the effect may be a reduction in voluntary compliance. Conversely, positive compliance benefits could result from allowing taxpayers to succeed in claims against tax officials more often, despite potential chilling concerns.
It may also be possible to extrapolate from studies linking the effect taxpayer sanctions have on compliance16 and to hypothesize on a possible positive link between greater sanctions against tax officials and taxpayer compliance. It would, however, be a significant leap to assert that taxpayer motivations and responses will be the same as those of tax officials.
Despite the logical appeal of those hypotheses, it is difficult to predict what motivates tax officials to engage in risk-averse behavior. Responding to the threat of liability to taxpayers could manifest itself differently and in varying degrees, depending on a range of factors, including the official’s authority and experience, whether the threat is of personal or organizational liability, the official’s knowledge and understanding of the ramifications of adverse judicial outcomes, and the degree of legal certainty about the limits on the potential liability of tax officials.
There is also the broader philosophical question of whether protecting the treasury or revenue function requires taking extra care to avoid setting precedents that might generate overdefensive responses by tax officials. The question is important because any challenge to a revenue authority’s actions indirectly creates vulnerabilities in the funding of the other government functions and initiatives.20 Accordingly, it could be argued that in tax cases, judges must consider both the direct and indirect ramifications of imposing liability on tax officials.
Judges must frequently adjudicate arguments about potential chill factor effects of imposing liability on tax officials. This section examines the contrasting judicial approaches in the United States, Canada, Australia, and New Zealand.
The chill factor argument has received less sympathy in other cases. For example, Sherman v. Canada (Minister of Internal Revenue),  F.C. 1423, involved a claim for access to statistics about tax collection assistance activity between the CRA and IRS that the CRA refused to release to the taxpayer. The court agreed with the taxpayer’s contention that “the chilling effect on future investigations is not a valid reason to refuse disclosure.” That approach is consistent with that in Rubin v. Canada Minister of Transport,  2 F.C. 430, in which the court described the chill factor argument opposing release of information as “nebulous.” Canadian judges have generally taken the view that the public interest in disclosure and the positive effects that greater accountability would have on service standards outweigh any potential chilling effect of disclosure.
Another court elaborated on that argument, confirming that chilling effect concerns should be afforded less weight if malicious or deliberate intent of a public official is alleged.33 If taxpayers seek to impugn official behavior falling short of malice (more akin to negligent behavior), chill factor concerns should be given greater consideration. That parallels Lamer’s approach in Nelles, but Australian judges have generally given far less consideration to chill factor concerns than their Canadian or U.S. counterparts have.
The Australian High Court briefly discussed the topic in Pape v. Federal Commissioner of Taxation, (2009) 238 CLR 1. The commissioner of taxation argued that the taxpayer sought to limit the constitutional power of appropriation, which would cause Parliament to constantly look over its shoulder and fear the long-term consequences “if it made an appropriation outside power.”34 The court rejected that argument, stating that “the occasional declaration that federal legislation is invalid does not cause the progress of government to be unduly chilled or stultified.” Neither the commissioner nor the court provided any evidence to justify their respective views.
That lack of detailed consideration of chill factor arguments is also evident in New Zealand. Ch’elle Properties (NZ) Ltd. v. Commissioner,  NZHC 190, involved a negligence claim against the commissioner of Inland Revenue. The court cited chill factor concerns in rejecting the plaintiff’s claim. It affirmed the views in Rolls Royce New Zealand Ltd v. Carter Holt Harvey,  1 NZLR 324, that “there is a legitimate public interest in regulatory bodies being free to perform their role without the chilling effect of undue vulnerability to actions for negligence.” Again, there was no judicial discussion of any chill factor concerns.
The examination of the relevant case law reveals many differing judicial approaches to chill factor concerns. It is still possible, however, to formulate guidelines for addressing those concerns in a principled and legally consistent manner, irrespective of jurisdiction. Four guidelines are set out below.
The chill factor effect should have greater weight when the cause of action imposes personal liability on individual tax officials. For example, chilling effect fears are often raised in U.S. Bivens-based constitutional damages actions, which involve claims against individual officers. If officials are prone to react in an overdefensive manner, they are more likely to do so when personal liability is at stake; hence, extra caution is required to prevent triggering overdefensive responses to adverse outcomes.
Conversely, if negligent or innocent mistakes have been made causing taxpayer harm, the potential chilling effects of imposing liability should be given greater consideration. There is a common thread among the judicial comments in the jurisdictions examined: In particular, chilling effect concerns feature prominently in negligence cases against tax officials in Australasia and Canada.
Therefore, significant evidentiary weight should be afforded to chill factor fears if liability on individual officers is proposed for lower standards of misbehavior, such as negligent or unintentional mistakes. That approach would help align judicial reasoning in the jurisdictions examined and would compel judges to recognize that overdefensiveness concerns should not be treated as an “all or nothing” proposition.
The chill factor effect should be afforded greater evidentiary weight if allowing a claim to proceed would generate legal uncertainty about whether tax officials can be sued. That principle is based on the fact that the chilling effect stems from concerns regarding overdefensive behavior, not defensive behavior per se. Consequently, it is easy to appreciate the potential for officials to respond overdefensively if their potential exposure to liability is uncertain or indeterminate, even if they are acting rationally.
Greater weight should be afforded to chilling effect concerns in cases involving challenges to discretionary or policy functions versus purely operational or administrative ones. There is an inherent logical appeal in ensuring that tax officials are not overdefensive in exercising legislatively sanctioned discretions, such as whether to prosecute tax offenders, how to interpret tax laws, and how to apply limited tax administration funds.42 In contrast, it is more difficult to sustain an argument for avoiding overdefensiveness to challenges to purely operational functions, such as administrative activities undertaken to implement policy or discretionary decisions.
The reasoning behind that distinction is that many of the operational functions of revenue authorities are like those of any other large business — basic, repetitive clerical and mechanical tasks carried out by employees whose work helps implement higher-level policies and decisions. Their activities are characteristically procedural. In the long run, defensive responses to liability for malfunctions in operational tasks are likely to result in improvements in carrying out procedural tasks.43 Disproportionately defensive responses pose little direct threat to the revenue base.
Potential overdefensiveness effects should be weighed against the potential positive effects on tax administration activities that imposing liability on tax officials would have. As noted, the extent of any chilling effect from imposing liability on public officials is far from clear or universally accepted. Hence, sound legal analysis demands that judges considering chill factor concerns should engage in that weighing process.
The first three guidelines in this section are essentially examples of a weighing process. For example, it is crucial to weigh possible overdefensive effects against the prospect of providing immunity to tax officials who have acted with dishonesty or malice. The potential adverse consequences of allowing the harmful behavior are likely to outweigh any overdefensive effects of imposing liability.
However, a specific guideline is needed to emphasize that judges should always consider possible positive consequences of imposing liability on tax officials whenever the question of a consequent chilling effect is raised. As noted, most judges do not engage in any weighing process. At a minimum, whenever chill factor concerns are raised to resist imposing liability on tax officials, judges should always attempt to weigh those concerns against other possible positive effects, such as on taxpayer morale and compliance and short- and long-term improvements in tax administration service standards and efficiency.
While significant uncertainty surrounds those possibilities, similar uncertainties surround the chill factor effect itself. Further, that sort of judicial consideration could trigger legislative attention and further empirical work to resolve those uncertainties.
There are significant complexities and controversies regarding the existence of any chill factor effect. Further, it is unclear whether potential overdefensive behavior should be a concern and how it might manifest itself in the tax context. The only certainty is the absence of empirical evidence that could be used to confidently predict positive or negative motivational effects of imposing liability on tax officials. Consequently, courts considering taxpayer claims against tax officials should resist giving chilling effect concerns only a cursory review.
Also, the case law examined reveals little uniformity in the judicial treatment of chill factor concerns in tax cases. Judicial approaches vary from unqualified acceptance to outright rejection. Few judges in the jurisdictions examined have subjected overdefensiveness concerns to the rigors of evidentiary rules.
Even so, several common threads can be drawn from those different judicial approaches that can lead to a more legally sound and predictable approach to addressing those concerns. This article has extrapolated those threads and set them out as four basic guidelines for judges and policymakers. None of them is a perfect solution in every case, and in many cases, more than one would need to be applied to address the problem. That is unsurprising — public policy concerns are typically incapable of being addressed in a single, formulaic manner, and chill factor concerns are no exception.
However, the guidelines address the fundamental problems associated with considering overdefensiveness purely on a discretionary, case-by-case basis, which can invite uncertainty. They also encourage a more detailed and nuanced approach that could lead to the development of judicial commentary that could help taxpayers and administrators understand their rights and responsibilities. The guidelines could also serve as a primer for empirically testing the validity of various chill factor concerns and assisting tax administrators and policymakers in foreseeing possible overdefensive behavior and minimizing its harm.
1 Thses referred to as the “chilling” or “overdefensiveness” effect, all used interchangeably in this article.
2 These arguments have been used to defend Revenue powers to revoke or modify revenue rulings on a retroactive basis. See, e.g., Edward Morse, “Reflections on the Rule of Law and ‘Clear Reflection of Income’: What Constrains Discretion?” 8 Cornell J. L. & Pub. Pol’y 445, 490 (1999).
3 For example, reductions in IRS tax collection actions in the 1990s have been attributed to the threat of personal actions for damages against tax officials. See Christopher Pietruszkiewicz, “A Constitutional Cause of Action and the Internal Revenue Code: Can You Shoot (Sue) the Messenger?” 54 Syracuse L. Rev. 1, 5 (2004). See also Seth Kaufman, “IRS Restructuring and Reform Act of 1998: Monopoly of Force, Administrative Accountability, and Due Process,” 50 Admin. L. Rev. 819, 827 (1998).
4 In Harlow v. Fitzgerald, 457 U.S. 800 (1982), the U.S. Supreme Court expressed concern about “the general costs of subjecting officials to the risks of trial — distraction of officials from their governmental duties, inhibition of discretionary action, and deterrence of able people from public service.” Those comments were cited with approval in Mitchell v. Forsyth, 472 U.S. 511, 526 (1985).
5 This examination extends to claims against tax officials in their personal capacities as well as claims against the administration.
6 The U.K. Law Commission lamented those facts in two reports on administrative redress for citizens from public bodies. See “Administrative Redress: Public Bodies and the Citizen,” Consultation Paper No. 187 (2008); and “Monetary Remedies in Public Law: A Discussion Paper” (2004), at [7.10]-[7.11].
7 See Joseph Cordes and Burton Weisbrod, “Government Behaviour in Response to Compensation Requirements,” 11 J. Pub. Econ. 47 (1979).
8 See Rosemary O’Leary, “The Impact of Federal Court Decisions on the Policies and Administration of the U.S. Environmental Protection Agency,” 41 Admin. L. Rev. 549 (1989).
9 See, e.g., Charles Johnson, “Judicial Decisions and Organisational Changes: Some Theoretical and Empirical Notes on State Court Decisions and State Administrative Agencies,” 14 L. & Soc’y Rev. 27 (1979); and Bradley Canon, “Studying Bureaucratic Implementation of Judicial Policies in the United States: Conceptual and Methodological Approaches,” in Judicial Review and Bureaucratic Impact: International and Interdisciplinary Perspectives (2004).
10 Robin Creyke and John McMillan, “The Operation of Judicial Review in Australia,” in Judicial Review and Bureaucratic Impact: International and Interdisciplinary Perspectives 161 (2004).
11 See, e.g., Osborne Reynolds, “The Discretionary Function Exceptions of the Federal Torts Claims Act,” 57 Geo. L.J. 81, 121-123 (1968); Paul Craig and Duncan Fairgrieve, “Barrett, Negligence and Discretionary Powers,” Pub. L. 626, 635 (1999); Susan Kneebone, Tort Liability of Public Authorities 393 (1998); Keith Stanton et al., Statutory Torts 57 (2003); Harry Woolf, Protection of the Public — A New Challenge 60 (1990); Cornelius Peck, “The Federal Tort Claims Act: A Proposed Construction of the Discretionary Function Exception,” 31 Wash. L. Rev. 207, 223 (1956); and Donal Nolan, “Suing the State: Governmental Liability in Comparative Perspective,” 67 Mod. L. Rev. 844, 859-860 (2004).
12 Daryl Levinson, “Making Government Pay: Markets, Politics, and the Allocation of Constitutional Costs,” 67 U. Chi. L. Rev. 345 (2000).
13 See Peter Schuck, Suing Government (1983). See also Section III, infra.
14 Lachlan Roots, “A Tort of Maladministration: Government Stuff-Ups,” 18 Alternative L.J. 67, 71 (1993).
15 Michael Wenzel, “The Impact of Outcome Orientation and Justice Concerns on Tax Compliance: The Role of Taxpayers’ Identity,” 87(4) J. Applied Psychol. 629 (2002).
16 Those studies conclude that harsher sanctions might foster greater taxpayer compliance. See Jeffrey Roth, John Scholz, and Ann Witte, 1 Taxpayer Compliance: An Agenda for Research91 (1989).
17 Leslie Book, “The Collection Due Process Rights: A Misstep or a Step in the Right Direction,” 40 Hous. L. Rev. 1145, 1160 (2004).
18 Schuck, “Suing Our Servants: The Court, Congress, and the Liability of Public Officials for Damages,” Sup. Ct. Rev. 281, 309-312 (1981).
19 Pietruszkiewicz, supra note 3, at 64-65.
20 “The cost may be borne by another department, a bureaucracy independent from the one whose actions are most directly associated with the injury.” David Cohen, “Suing the State,” 40 U. Toronto L.J. 630, 647 (1990).
21 U.S. judges in particular have acknowledged that some principles, such as some constitutionally protected rights, should take priority over tax collection and administration activities. See National Commodity and Barter Association National Commodity Exchange v. Gibbs, 886 F.2d 1240, 1248 (10th Cir. 1989).
23 See, e.g., Stankevitz v. IRS, 640 F.2d 205 (1981), applying precedent set in Butz v. Economou, 438 U.S. 478, 508-517 (1979).
24 Leave to bring action is typically denied. See, e.g., Capozzoli v. Tracey, 663 F.2d 654 (5th Cir. 1981); and Morris v. United States, 521 F.2d 872 (9th Cir. 1975).
Undercover IRS employees furnished $100,000 in cash to the plaintiff, who lost it. The employees apparently did not like the idea of trying to explain the loss, and instead attempted to recover the money by threatening to dismember the plaintiff’s children. The threats forced the plaintiff into drug and weapons offenses in an attempt to satisfy the employees. The plaintiff claimed that the threats were a denial of due process.
26 Gibbs, 886 F.2d at 1248.
27 The case law is far from settled. Pietruszkiewicz has asserted that “a Bivens remedy may or may not be available depending on the Circuit in which the case is litigated.” Supra note 3, at 55.
28 Baddour Inc. v. United States, 802 F.2d 801, 807-808 (5th Cir. 1986).
29 Nelles,  2 SCR at 195.
30 783783 Alberta Ltd. v. Attorney-General (Canada et al.), 2010 ABCA 226.
31 Canadian Taxpayers Federation v. Ontario (Minister of Finance), (2004) 73 O.R. (3d) 621.
32 San Sebastian Pty Ltd. v. Minister Administering the Environmental Planning and Assessment Act 1979, (1986) 162 CLR 340, 372.
33 Northern Territory v. Mengel, (1995) 185 CLR 307. All cases alleging malicious conduct by Australian tax officials have failed, typically because of the difficulty in proving malice, so that distinction has yet to be applied or discussed in a tax case.
35 See Commissioner v. Payne, (2001) 177 ALR 270, 281.
36  2 SCR at 197.
37 As Lamer alluded in Nelles.
38 There is also Canadian authority for that kind of approach in unjust enrichment claims involving tax legislation, albeit in the context of the ability to raise a claim in cases of noncompliance with statutory time frames. See British Columbia Ferry Corp. v. MNR,  4 FC 3. See also Michael Beninger, “Taxpayer Rights: Emerging Legal Techniques,” paper presented at the annual Canadian Tax Foundation Conference (Sept. 24-27, 2000), at [10.8].
39 That recommendation is consistent with the tortious approach (in Canada and Australia, for example) requiring express consideration and weighing public policy concerns when the imposition of a duty of care in novel circumstances is proposed. Both countries derive their approaches from the United Kingdom’s two-stage approach developed in Anns v. Merton Borough Council,  2 All ER 492, which requires public policy consideration at the second stage.
40 Indeterminate liability or “floodgate” arguments go hand-in-glove with chill factor concerns, and judges frequently discuss them together. See, e.g., 783783 Alberta; Nelles; and Vennes.
41 Pietruszkiewicz, supra note 3, at 67-68.
42 See note 4, supra.
43 That is consistent with Roots’ analysis of chill factor concerns summarized in Section I, supra.
44 See Ham v. Los Angeles County, 46 Cal. App. 148, 162 (1920) (“It would be difficult to conceive of any official act, no matter how directly ministerial, that did not admit of some discretion in the manner of its performance, even if it involved only the driving of a nail”); and Barrett v. Enfield London Borough Council,  2 AC 550 (“Even knocking a nail into a piece of wood involves the exercise of some choice or discretion”).
Heinz Hink and David Schutter, “Some Thoughts on American Law of Government Tort Liability,” 29 Rutgers L.J. 710, 721-722 (1965-1966). The distinction has generated much U.S. judicial discussion. See, e.g., Dalehite v. United States, 346 U.S. 15 (1953); Indian Towing Co. v. United States, 350 U.S. 61 (1955); and United States v. Gaubert, 499 U.S. 315 (1991).
46 Following the precedent set in Anns,  2 All ER 492. For discussion, see Stephen Bailey and Michael Bowman, “The Policy-Operational Dichotomy — Cuckoo in the Nest,” 45 Cambridge L.J. 430, 431-436 (1986).
47 See, e.g., Mitchell, 472 U.S. 511.
48 Scott, supra note 25, at 520.

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