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How do court decisions lead to changes in tax law?

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This solution explains how court decisions lead to changes in tax law. Examples are provided.

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Please see response attached, which is also presented below. I hope this helps and take care.

RESPONSE:

Interesting question! Let's take a closer look through discussion and illustrate court case example.

1. How do court decisions lead to changes in tax law?

The process is fairly straightforward. For example, a court case will be brought before the courts, and the judge will make a ruling. If the legal issue or the ruling does not have an existing tax law (e.g., challenges existing laws, or if the case brings to light a 'new' legal issue), then the court ruling could lead to proposed changes in the tax law at the legislative levels. For example, as seen in the court ruling in the following example court case, when a new legal issues comes before the court, it often results in a increase in the number of similar cases being brought before court (e.g. artificial subsidiary set up for tax reasons, as in the example below), which means that changes to the tax laws become more pressing, mainly because the increase in cases could mean a backlog of similar cases if a new law does not prohibit that behavior. That is, the court decision or ruling(s) on 'novice legal issues often leads to an increase number of similar cases that in turn lead to changes in tax laws. Also, changes to the tax laws are important for consistency in the ruling of similar case (e.g., the judge has directive).

For example, let's look at the illustrate example below which ...

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