Defective Judicial Reasoning as Both Sword and Shield in Administrative Tax Litigation

The Jurisprudence of Reasoned Decision-Making

A certain tax dispute concerning undisclosed sources of income persisted for seven years, traversed five judicial determinations, and returned twice from the Supreme Administrative Court (Naczelny Sąd Administracyjny, hereinafter “SAC”) for reconsideration. The protracted nature of this litigation stemmed neither from factual complexity nor from novel questions of law, but rather from the successive adjudicating panels’ repeated failure to articulate adequate reasoning in support of their conclusions.

This case constitutes an instructive paradigm for practitioners of tax law: it illustrates how deficiencies in judicial reasoning and inadequacies in administrative determinations may serve as efficacious procedural instruments—while simultaneously demonstrating that such instruments cut both ways.

I. Anatomy of a Seven-Year Procedural Battle

A. Chronological Overview

Before proceeding to procedural analysis, the chronology of events warrants examination:

The taxpayer ultimately lost on the merits. Nevertheless, for seven years he successfully deferred enforcement of an obligation exceeding PLN 200,000. The determinative factor was not substantive legal argument, but rather the requirements governing proper reasoning in judicial decisions and administrative determinations.

II. The Constitutional Dimensions of Adequate Reasoning

A. Statutory Framework

Pursuant to Article 141 § 4 of the Law on Proceedings Before Administrative Courts (Prawo o postępowaniu przed sądami administracyjnymi), judicial reasoning must encompass: a concise statement of the case; the grounds raised in the complaint; the positions of remaining parties; and the legal basis for the disposition together with its explanation.

The requirement appears deceptively straightforward. In practice—as this case demonstrates—it constitutes a procedural minefield even for experienced judicial panels.

B. The Supreme Administrative Court’s Doctrinal Articulation

In its judgment of January 25, 2018 (II FSK 21/16), the SAC articulated a principle of general applicability regarding reasoning standards:

“The Supreme Administrative Court cannot, in cassation proceedings, construct proper reasoning on behalf of the court of first instance, including assessment of the factual record in accordance with the requirements and standards derived from Article 141 § 4, as this would effectively deprive both parties of their right to genuinely two-tiered judicial proceedings.”

The doctrinal import is clear: where reasoning proves defective, the SAC will not undertake remedial reconstruction—it will vacate and remand for proper articulation.

III. First Round: The Taxpayer Attacks Provincial Administrative Court Reasoning

In 2015, the Provincial Administrative Court in Gdańsk (Wojewódzki Sąd Administracyjny w Gdańsku, hereinafter “PAC”) dismissed the taxpayer’s complaint, accepting the tax authorities’ findings as correct. The taxpayer filed a cassation appeal with the SAC, alleging inter alia violation of Article 141 § 4.

The SAC found merit in this contention. In its January 2018 judgment, the cassation court employed notably direct language:

“The considerations of the court of first instance are essentially conclusory, failing to address with sufficient precision and specificity the particular evidence—or even categories of evidence—material to the case.”

More significantly, the SAC identified internal contradictions within the PAC’s reasoning. The court of first instance had written that the authorities “did not contest the fact of the loan agreements’ execution” nor that the lender “made cash deposits into the taxpayer’s bank account.” Simultaneously, however, the PAC concluded that these funds “could not have originated from her assets” and that “these transactions, ostensibly real, did not occur.”

The SAC’s critique was pointed:

“One cannot rationally explain how Ms. Z. made a cash deposit into the taxpayer’s bank account—which the tax authorities allegedly did not contest—if these funds could not have originated from her assets and the transaction, ostensibly real, did not occur. It therefore remains unclear whether the deposit was ‘made,’ and if so, from whose funds, or whether it simply did not occur.”

This exemplifies the paradigmatic deficiency of reasoning inconsistency—a defect that independently warrants vacatur regardless of substantive merit.

IV. Second Round: The Authority Attacks Provincial Administrative Court Reasoning—Deploying the Same Ground

Following vacatur of the initial judgment, the PAC reconsidered the matter and in May 2018 vacated the tax authority’s determination. The court faulted the authorities for inconsistency: if they questioned the lender’s capacity to extend a loan in 2007, why did they not similarly question the loan from 2006? The lender’s financial circumstances had not materially changed between those years.

This time, it was the tax authority that filed a cassation appeal—likewise alleging violation of Article 141 § 4.

In its December 2018 judgment (II FSK 3000/18), the SAC again vacated the PAC decision. The cassation court determined that the PAC had:

• erroneously concluded that the authorities questioned only one of the loan agreements (when in fact they questioned both);
• made only conclusory reference to “significant gaps” in the evidentiary record without specifying their scope; and
• found the case file incomplete, whereas the SAC in its prior judgment had identified no such deficiency.

The SAC articulated an important doctrinal limitation regarding challenges to reasoning adequacy:

“A claim of Article 141 § 4 violation may be sustained where the complainant demonstrates that the court failed to explain, in a manner adequate to that provision’s purpose, the authorities’ application of legal provisions. Article 141 § 4 permits challenge to the completeness of reasoning elements, not to its substantive correctness.”

This distinction proves critical: Article 141 § 4 protects against formal deficiencies in reasoning, not against erroneous legal analysis.

V. Requirements for Administrative Tax Determinations

Parallel to the requirements governing judicial reasoning, tax proceedings impose analogous obligations upon administrative authorities. Pursuant to Article 210 § 1(6) and § 4 of the Tax Ordinance (Ordynacja podatkowa), the reasoning supporting a determination must include: identification of facts the authority found established; the evidence credited; the reasons for declining to credit other evidence; and explanation of the legal basis with citation to applicable provisions.

The PAC in its May 2018 judgment aptly characterized the function of these requirements:

“The authority’s reasoning process must find reflection in the determination’s justification, such that the addressee—and moreover the court conducting legality review—has the opportunity to examine not merely the authority’s conclusion, but also the analysis the authority conducted.”

The reasoning requirement for tax decisions is not mere formality—it constitutes a guarantee of the right to defense. The taxpayer must understand why he lost in order to mount an effective appeal.

VI. Third Round: The Provincial Administrative Court Finally Produces Adequate Reasoning

In April 2019, the PAC in Gdańsk considered the matter for the third time. On this occasion—bound by the guidance of two SAC judgments—the court produced reasoning satisfying Article 141 § 4 requirements.

In a seventeen-page justification for judgment I SA/Gd 492/19, the court analyzed in detail:

Regarding the loan agreements:

• the lender’s and her spouse’s income from 1971 through 2006;
• their 2006 application for relief from a PLN 700 tax obligation due to difficult financial circumstances;
• the implausibility of a former bank employee maintaining “lifetime savings” in cash;
• the absence of loan repayment despite the deadline’s passage.

Regarding the fiduciary agency agreement:

• the principal’s maximum possible savings (approximately PLN 132,000 versus the claimed PLN 150,000);
• the transfer of funds to the agent without spousal knowledge after two years of marriage;
• the principal’s complete inaction over six years;
• the property’s sale to third parties rather than to the principal.

The court addressed each complaint ground, explained the application of Central Statistical Office data, and analyzed the burden of proof in undisclosed income proceedings.

The judgment dismissing the complaint was sustained—because on this occasion, the reasoning satisfied all requirements.

VII. Practical Implications: Leveraging Reasoning Deficiencies

This case yields valuable guidance for practitioners engaged in representation in tax disputes before the courts:

A. For Taxpayers and Their Counsel

Identify internal contradictions. Reasoning that confirms a fact in one passage while negating it in another is defective per se—independent of substantive merit.

Identify analytical gaps. Where the authority or court omits material evidence or fails to explain the basis for declining to credit it, a procedural challenge lies.

Document failure to address grounds raised. Reasoning must respond to all complaint grounds. Omission of any ground constitutes Article 141 § 4 violation.

Recognize the limitations. A challenge to reasoning adequacy concerns completeness of formal elements, not correctness of legal analysis. Not every unfavorable determination suffers from defective reasoning.

B. For Tax Authorities

Maintain consistency. Where you question a third party’s financial capacity in one year, explain why you do not question it in the preceding year.

Be specific. Conclusory assertions that “the evidentiary record exhibits gaps” without specifying which gaps themselves constitute a gap in reasoning.

Address the taxpayer’s evidence. Even where you decline to credit it, you must explain why—you cannot simply disregard it.

VIII. The Cost of Defective Reasoning

The M.W. case illustrates the actual costs of reasoning deficiencies:

For the justice system:

• Five judicial determinations (three PAC, two SAC)
• Seven years of proceedings
• Multiple judicial panels engaged
• Two instances of PAC work “wasted”

For the parties:

• The taxpayer avoided paying PLN 209,353 (plus interest) for seven years
• The authority could not enforce the obligation for seven years
• Both parties bore the costs of protracted litigation

This serves as a cautionary illustration for all participants in administrative court proceedings: adequate reasoning is not formalism, but rather a condition for the effective administration of justice.

IX. Formal Requirements as Substantive Guarantees

In conclusion, the deeper significance of reasoning requirements warrants emphasis. As the PAC aptly observed in one of this case’s determinations:

“The determination’s reasoning cannot leave doubt that all circumstances received thorough consideration and evaluation, and that the ultimate disposition follows as their logical consequence. Only a determination containing reasoning composed according to the principles specified in Article 210 § 1 of the Tax Ordinance will realize the principle of confidence in tax authorities, the essence of which is that each participant in proceedings should be convinced of participating in a process conducted with integrity, and that the authorities conducting that process are free from any improper influence.”

The requirements governing reasoning—whether in judicial decisions or administrative determinations—are not bureaucratic invention. They constitute a fundamental guarantee that the disposition results from rigorous analysis rather than arbitrary decision-making. They ensure that a party can understand the basis for an adverse outcome and effectively vindicate her rights at the next stage.

When this guarantee fails—as it did twice in this case—the entire system loses efficiency. Cases return, decisions multiply, costs mount. Yet a properly reasoned determination from the outset would have sufficed.

The foregoing analysis demonstrates that procedural requirements governing reasoned decision-making serve not merely formal purposes, but constitute essential safeguards of substantive rights. The seven-year odyssey of the M.W. case stands as testament to both the efficacy of challenging defective reasoning and the systemic costs such deficiencies impose upon the administration of justice.

Related Practice Areas:

• Tax Litigation
• Appeals to Administrative Courts
• Tax Proceedings
• Court Representation
• Tax Advisory Services

Robert Nogacki

Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.