Legitimate Expectations extract from Vague Concepts and uncertainty in tax law

Legitimate Expectations

Legitimate expectations are about the respect for rights that are clearly established and consolidated by statute or judicial precedents over the years. They should include only basic constitutional rights such as the right to be taxed by law.

The right to receive from the tax authority the same treatment regarding other taxpayers that are in a similar situation is also to be considered.

It is a legitimate expectation of both taxpayers and the Treasury that the courts decide cases in a way to make the outcomes of the next similar cases as predictable as possible. And by using vague legal concepts, they are certainly not contributing to it.

If courts go on naming different concepts that in the end mean mostly the same thing, uncertainty will rise at a faster pace.99 In tax judicial review, legitimate expectation is not a right to a certain court decision on the merits, but rather an expectation that the courts will review the Treasury’s behaviour to see if the principles of natural justice, as English law knows it, have been respected, if the basic values of democracy were not violated and so on.100 If, for example, the IRS has interpreted one same statute the same way for many years, it cannot change its interpretation without previous due notice to the taxpayers because they had a legitimate expectation to be treated the old way. And according to that expectation, they planned their business, as well as their social and economic life.

Consequently, if the taxpayer, who had previously consulted the tax authority for some reason, has been notified by the Treasury of a change of policy, he must have the opportunity to argue that the new policy is not applicable to him. It is a continuous conflict between the need for legal certainty and the how precise they become in each case they decide.

F.A. Hayek says that "The judge ... is not concerned with what any authority wants done in a particular instance, but with what private persons have 'legitimate' reasons to expect". See Hayek, LAW, LEGISLATION AND LIBERTY; v. 1, RULES AND ORDER 98 (Routledge et Kegan Paul, 1973).

P.P. Craig makes the same point although not in a tax law context. See Craig, Legitimate Expectation: A Conceptual Analysis, 108 L. Q. Rev. 85 (1992). John Rawls explains legitimate expectations by saying that “In a well-ordered society individuals acquire claims to a share of the social product by doing certain things encouraged by the existing arrangements. The legitimate expectations that arise are the other side, so to speak, of the principle of fairness and natural duty of justice. For in the way one has a duty to uphold just arrangements, and an obligation to do one’s part when one has accepted a position in them, so a person who has complied with the scheme and done his share has a principle of legality, which in tax law (as in public law in general) means that the Treasury has to conform to its authorized powers.

Even if cases where the courts recognize binding effects to ultra vires statements become very common, there is no danger that this jurisprudence might serve as an incentive to the tax authorities making statements beyond its powers. The reasoning is simple: if it becomes clear that the IRS rulings are repeatedly going beyond its legal powers, then a broader solution should be the punishment of those who are responsible for the ultra vires rulings.

The courts should not stop protecting those who relied on those rulings because their duty is to judge the breach of people’s rights, not to let rights be violated because protecting them could lead to more frequent illegal behaviours by the Tax authorities.

Allan holds a very interesting point of view by arguing that legitimate expectation is about justice. On the other hand, he also says that to find out what justice is, F.A. Hayek’s theory should be followed and applied to public law. In other words, what he is saying is that because positivism had succeeded in demonstrating that there is no positive criterion to define justice, a negative one should be adopted.

Therefore, in Allan’s view, it is easier to say what is not justice rather than what is justice. He also states that “Rules of just conduct were determined by a persistent effort to bring consistency into the system of rules inherited by each generation”. They are bound to meet his legitimate expectations”. See John Rawls, A THEORY OF JUSTICE 275 (Revised ed., Oxford University Press 1999).

In R. v. Board of Inland Revenue, ex p. M.F.K. Underwriting Agencies Ltd, [1990] 1 All E.R. 91, the English court decided that the Inland Revenue rulings are binding where directly applicable but in circumstances less formal a deeper investigation is required.

There is an important academic discussion about whether there is also a substantive legitimate expectation that differs from a procedural one. As explained above, if it is possible to have legitimate expectations for substantive basic rights, there is nothing wrong in saying that these rights are an example of substantive legitimate expectations. As a result, rights consolidated by settled practice, or included in rulings, in general or specific representations by the IRS107, are considered substantive legitimate expectations.