Collaboration Theory and Corporate Tax Avoidance


Eric C. Chaffee


Tax revenue is the primary source of income for the government, yet corporations regularly engage in tax avoidance. Corporate managers and advisers commonly claim that the corporate form requires that they undertake this behavior because the nature of that form mandates it. Direct and indirect references are made to the classic case of Dodge v. Ford, as providing an edict that corporations must engage in unrelenting profit maximization that requires them to undertake aggressive tax avoidance.

As explored in my co-authored piece with Professor Karie Davis-Nozemack, Corporate Tax Avoidance and Honoring the Fiduciary Duties Owed to the Corporation and Its Stockholders, the “Dodge Mandate,” as it may be termed, is far from absolute. In Dodge, the court held, “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.” When put that way, rather than being an absolute edict to maximize profits, the Dodge Mandate is at most a requirement that corporate managers seek profit. In addition, although the Dodge Mandate can be derived from fiduciary duties that managers owe within the firm, the business judgment rule provides those managers wide latitude in how they seek profit.

The essential nature of the corporate form is the better place to begin in understanding when and to what extent engaging in tax avoidance is mandated. This approach has not been taken previously in the existing literature. The debate over the essential nature of the corporate form is expansive and has coalesced into three prevailing theories of the firm, i.e., concession theory, real entity theory, and aggregate theory. The problem is that while each of these theories explains how the corporation exists, each fails to explain why the corporation exists. I have developed a competing theory, which I term “collaboration theory,” that better explains the essential nature of the corporate form.

By understanding the corporation as a collaboration between the government and the individuals organizing, operation, and owning the corporation, the impermissibility of aggressive corporate tax avoidance becomes apparent. Collaborators in business ventures owe each other a duty of good faith, and the contractual nature of the corporation carries with it a duty of a good faith as well. As a result, the notion becomes fanciful that depriving the government of revenue through aggressive corporate tax avoidance strategies is required or even acceptable


Collaboration Theory, Tax, Tax Avoidance, Taxation, Theory of the Corporation

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76 Washington & Lee Law Review 93 (2019)


COinS Eric C. Chaffee Faculty Bio