Tax Practice Gets a Mary Kay Makeover: The Tale of Peterson and the Danielson
Joy Sabino Mullane
What controls the tax consequences of a transaction–the transaction’s form or its substance? This is a foundational issue that the government and taxpayers repeatedly clash over. Recently, the government was able to tip the scales significantly in its favor when the Eleventh Circuit expanded the scope of the Danielson rule, which already favors the government. Danielson is a strict rule that binds contracting parties to the form of their transaction regardless of the underlying substance, unless the taxpayer can prove that the form would be unenforceable as a result of mistake, undue influence, fraud, duress, et cetera. In the case of Peterson v. Commissioner, the Eleventh Circuit applied the Danielson rule to bind a taxpayer to contract terms that were added post-hoc via a unilateral modification to which the taxpayer could not meaningfully consent. In other words, the taxpayer had no real say in the “form” at all and wanted to contest the “form,” but could not do so because she had earlier agreed to Mary Kay’s contracts of adhesion containing unilateral amendment clauses when she was a member of its independent sales force. No other court has used Danielson in this way.
Although controversial when first created, there has been little academic discussion of the Danielson rule in over twenty years. This article considers the Danielson rule in light of Peterson and argues that there is no justification sound enough to allow for application of the Danielson rule in the context of a post-hoc unilateral amendment for which one party cannot meaningfully consent. The Danielson rule, as well as other non-disavowal doctrines, should be appropriately constrained. At a bare minimum, contracts of adhesion and changes due to unilateral amendment clauses should not bind a subordinate party for tax purposes.