Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___ , 134 S. Ct. 557 (12/3/13), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. (Here is my follow through post, More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book (what else could he do with such a tempting target):

Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 

In my Federal Tax Procedure book (not yet revised for the above, which, I doubt, is the last word on the issue), I discuss the Blue Book as follows (footnotes omitted):

2. But Then There’s the Blue Book. 

After a major revenue act or at the end of each Congress, the Staff of the Joint Committee on Taxation (“JCT”), a congressional joint committee of House and Senate members with a deep and prestigious staff to assist the Senate and House of Representatives on tax legislation, will usually produce a Staff General Explanation of the legislation.  This Staff General Explanation is often referred to as the “Blue Book.”  The Blue Book states the JCT Staff's understanding of the legislation that was passed based upon the legislative history and the Staff's unique insights into the process in which the Staff itself was a major participant.  The Blue Book often does that by including verbatim the key portions of the legislative history for enacted legislation.  It has thus been said that the purpose of the Blue Book is to “to provide a single, comprehensive source of legislative history for major tax acts.” 

The Blue Book is not itself legislative history, even though it may incorporate, often  verbatim, legislative history such as explanations from the Ways and Means Committee, the Finance Committee and Conference Committee Reports.  One of the major criticisms of the Blue Book is that it may depart from or add to or “spin” the statutory text and the legislative history in order to correct problems or fill gaps that became apparent shortly after enactment of the statute.  The Administration and private interests often lobby heavily for particular spins to be included in the Blue Book in the hope that the text of the Blue Book will ultimately influence the IRS’s and the courts’ interpretations of the legislation.  For this reason, some courts are wary of the Blue Book where it goes beyond parroting or paraphrasing the statute or the direct legislative history; of course, when all the Blue Book does is parrot the actual legislative history, the actual legislative history is the source for interpretation and is real legislative history. 

Although not legislative history, courts, even those which on occasion express concern about the role of the Blue book, rely upon the Blue Book as some indication of what Congress intended.  As one court reasoned: 

[A]s other federal courts around the country have noted, the Blue Book, as an interpretation of the statute by experts involved in the drafting process and very familiar with the problems being addressed, plainly has some value, particularly where the statute is ambiguous and the only available legislative history is limited to expressing broad policy goals. See Estate of Wallace v. Commissioner, 965 F.2d 1038, 1050 n.15 (11th Cir. 1992) (Blue Book is “a valuable aid to understanding”); McDonald v. Commissioner, 764 F.2d 322, 336 n.25 (5th Cir. 1985) (Blue Book is “entitled to great respect”); Hutchinson, 765 F.2d at 669 (although not legislative history, Blue Book can be “highly indicative” of Congressional intent); Ravenswood Group v. Fairmont Assocs., 736 F. Supp. 1285, 1287 (S.D.N.Y. 1990) (citing to Blue Book explanation). Where, as here, the explanation offered by the Blue Book accords both with the explicit statements of broad Congressional intent and with the most logical and consistent reading of somewhat ambiguous statutory provisions, that explanation is entitled to some weight. 

Still, in a case where a prior precedent purportedly relied upon a Blue Book which in fact was silent on the issue, the Fifth Circuit recently noted that it was: 

[N]ot suggesting that the Blue Book is high-quality legislative history. It is not available to members of Congress when they vote on the corresponding tax bill, and it is not approved by committee members. Still, although the Blue Book does not reflect congressional intent as reliably as a concurrent committee report does, according interpretive weight to the Blue Book could be appropriate, depending on the case. See Michael Livingston, What's Blue and White and Not Quite as Good as a Committee Report: General Explanations and the Role of 'Subsequent' Tax Legislative History, 11 Am. J. Tax Pol'y 91 (1994) (arguing that the Blue Book's interpretive weight should depend on the case and the role it is performing in the court's reasoning). 

In a tough interpretive issue, you should be prepared to exploit a Blue Book interpretation that is in your favor and defend against a Blue Book interpretation that is not in your favor. 

Finally, Blue Books are also used to identify potential areas in which the legislative language may not have achieved or fully achieved Congress’ intent for the legislation and thus provides a roadmap for potential “technical corrections” legislation (which we discuss below) or for the IRS to address in Regulations under the IRS rule-making authority (also discussed below).  

Also, I have extended and updated my comments here:  More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

Addendum 12/10/13 8:45 am:

For a good crisp discussion of the holdings, see Alan Horowitz, Supreme Court Rules for Government on Both Issues in Woods (Tax Appellate Blog 12/3/13), here.