Interpretive and Legislative Regulations and the Relationship to Chevron (2/26/17)

I have been struggling with the APA distinction between legislative and interpretive regulations and how that distinction might be impacted by the Chevron doctrine.  I link here my latest revision to my Federal Tax Procedure Book currently due to publish in August 2017 (and will be available for free download on my SSRN account, here, then).  (Note that the linked current status of the revision may not be final, but I think it is fairly close to final subject to comments from this blog entry.)

Basically, I conclude that the historic distinction between legislative and interpretive regulations remains even after Chevron and its progeny, although some loose thinking / language about Chevron has muddied the water as to the historic distinction.  I will state the historic distinction and refer readers to the linked documents for more details (both pro and con).

The historic distinction is (from Kenneth Culp Davis, Administrative Rules - Interpretative, Legislative, and Retroactive, 57 Yale L.J. 919, 928 (1948) (footnotes omitted)):

According to the theory, legislative rules are the product of a power to create new law, and interpretative rules are the product of interpretation of previously existing law.  Legislative rules may change the law but interpretative rules merely clarify the law they interpret.

Then I say in  my text (footnotes omitted):

To illustrate this discussion, I use examples at the extremes of a spectrum.  Such examples  can offer key insight even though much of the play in the real world is between the extremes where things become less certain.  Here are the extremes on the issue at hand.  Code § 162(a)(2) allows deductions for expenses incurred while “traveling ... away from home in the pursuit of a trade or business.”  The regulation, adopted under the general authority stated in § 7805(a), interpreted “traveling ... away from home” text to require that the taxpayer must sleep or rest, sometimes called the overnight rule.  The Supreme Court sustained the regulations’ interpretation of the statutory text. The regulation was an interpretive regulation.  By contrast, § 1502 delegates to the IRS the authority to adopt regulations that the IRS “may deem necessary” for consolidated reporting among an affiliated group of corporations.  The regulations do so in mind numbing detail, in regulation after regulation.  The consolidated return regulations are legislative regulations.

The Chevron doctrine may be summarized as a rule of interpretation of a statute that defers to an agency interpretation under this analysis:  Step One, if the text is plain (not ambiguous), that meaning applies, end of analysis; do not go past Step One; and Step Two, if the text is not plain (ambiguous), the agency interpretation applies unless unreasonable.  Under my analysis (perhaps not mainstream), Chevron only applies to agency regulations that are interpretive and does not apply to legislative regulations.

The linked text relates to the foregoing with more detail.

I address in this blog the current movement to eliminate or throttle back on Chevron deference.  There are speculations about at least judicial throttling back when Judge Neil Gorsuch is confirmed as a justice on the Supreme Court.  And, there is pending legislation that would eliminate Chevron deference.  The proposed legislation would take away the authority of the judiciary to apply Chevron.  Although not mentioning Chevron by name, the proposed legislation would require courts do the following with respect to agency rulemaking:  (i) "decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies" and (ii) take away from courts the authority to interpret a statutory "gap or ambiguity as an implicit delegation to the agency of legislative rule making authority and [to] rely on such gap or ambiguity as a justification either for interpreting agency authority expansively or for deferring to the agency’s interpretation on the question of law."

First, note that this speaks only as to interpretive issues related to Chevron, not legislative rulemaking authority.

Second, I just pose this practical question.  If the Supreme Court or the legislation would eliminate the Chevron doctrine, what would that mean for legislative regulations?  Under my interpretation (summarized above and detailed in the linked document), Chevron is a rule of interpretation applying only to statutory interpretations.  Chevron is not a rule that can apply to a legislative regulation under the traditional definition of legislative regulation (a regulation establishing the substantive rule).

If as some claim, Chevron applies to legislative regulations, what would happen to, for example, the consolidated return regulations under § 1502 after the demise of Chevron (either judicial demise or legislative demise)?

Tax Procedure Book Errata - FBAR Filing Date (2/26/17)

Book Outline Section	Nature of Update	Location for current editions
Ch. 19.  Foreign Bank Account Reports (FBARs) And Related. III. Requirements for Filing the FBAR.	Update on FBAR Filing Date Requirements	Student Ed. p. 604 (substitute for first full paragraph on page) Practitioner Ed. p.  890 (substitute for last paragraph on page)

A reader posted a reminder under another blog entry that the due date for the FBAR report, FinCEN 114, here, is now due April 15 for the prior year's report.  When the filing date falls on a weekend day or on a holiday, the filing date is the next succeeding business day (a weekday that is not a holiday).  Accordingly, the due date for the 2016 year is April 18, 2017 (per the IRS web site here).  And, FinCen is providing an automatic extension (no filing required to obtain the extension) until October 15 (which, for the 2016 report, will be October 16, 2017, because October 15 is a Sunday).

Here is my discussion in the current draft for the next revision (due August 2017) of my Federal Tax Procedure Book (note that the footnote numbers are not the ones that will be in the final text)):

The FBAR was historically required to be filed on June 30 for the prior year.  In 2015, Congress changed the filing date to April 15 (contemporaneously with the individual income tax return due date for calendar year taxpayers, which can be the next succeeding business day if April 15 falls on a weekend or holiday) with the ability to obtain a 6-month extension to October 15 (also contemporaneous with the extended due date for individual income tax returns and also extended to the next succeeding business day if October 15 falls on a weekend or holiday). n1 Under the current instructions, FinCEN grants an automatic extension from April 15 to October 15; the automatic extension applies without any action on the filer’s part other than not filing by the original due date.  n2
   n1 § 2006(b)(11), the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41).  The effective date of this FBAR filing provision is the filing year 2016 (i.e., the 2016 FBAR is due April 15, 2017 (actually, on the next succeeding business day), subject to the automatic extension to October 15, 2017 noted in the text).
   n2 FinCEN web page, titled New Due Date for FBARs (12/16/16), viewed 2/1/17, providing in relevant part after noting the statutory due date of April 15 (emphasis supplied):
To implement the statute with minimal burden to the public and FinCEN, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.  (Please note: The due date for FBAR filings for foreign financial accounts maintained during calendar year 2016 is April 18, 2017, consistent with the Federal income tax due date.)
One might even say that, as thus formulated, the real filing due date is October 15.

Some helpful web pages (including the one mentioned in fn. 2 above are:

• New Due Date for Filing FinCEN Form 114 -- 12-JAN-2017, here.
• Individuals Filing the Report of Foreign Bank and Financial Accounts (FBAR), here.
• BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114), here.

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, [citation coming later] (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.

Tax Procedure Book Errata - Notice of Deficiency Determination (2/11/17)

  

Book Outline Section	Nature of Update	Location for current editions
Ch. 11 Notice of Deficiency I.   The Notice of Deficiency and its Role in the System (A Reprise).      A.  General.      B.   What is a Notice of Deficiency?             1.  A Deficiency.              2.  The Notice of Deficiency.                      a.   The Notice, Determination and Explanation.                             (1)    The Determination Requirement.	Discussion of a recent case, Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion), here, holding that a notice of deficiency stating $0.00 deficiency but with attachments indicating that a claimed tax benefit had been denied was a valid notice of deficiency	Student Ed. P. 358 (after the 2d full paragraph) Practitioner Ed. p.  504 (after the carryover paragraph at the top)

               The tolerance for some level of imperfection in notices of deficiency is understandable given the ability to resolve or moot the problems by filing a Tax Court petition for redetermination.  But, what about a document in the regular form of a notice of deficiency that states the amount of the deficiency as $0.00?  A taxpayer receiving such a document would know that it is described as a notice of deficiency and that he may file a petition for redetermination is he does not agree.  But the deficiency is stated to the $0.00, and he may agree with that number.  In a 2017 reviewed opinion of the Tax Court (with strong concurring and dissenting opinions), the Court held that the standard form letter for a notice of deficiency that stated that the deficiency amount was $0.00 but included attachments clearly indicating that a deficiency had been determined because a claimed credit was disallowed met the requirements for a notice of deficiency.  n1635a The majority formulated the questions presented as:

   n1635a   Dees v. Commissioner, 148 T.C. ___, No. 1 (2017) (reviewed opinion).

• “Whether the notice objectively put a reasonable taxpayer on notice that the Commissioner determined a deficiency in tax for a particular year and amount.  If the notice, viewed objectively, sets forth this information, then it is a valid notice”
• If, however, that inquiry does not provide an answer (i.e., the notice is ambiguous as to the requirements for a deficiency, then, for the notice to be valid, the evidence “establish that the Commissioner made a determination and that the taxpayer was not misled by the ambiguous notice.”  The majority elsewhere in the opinion frames the latter inquiry as to whether the “taxpayer was prejudiced by an ambiguous notice.”  On the latter point, the majority concluded as follows:

The notice on its face is ambiguous, but the Commissioner has established that he made a determination and that Mr. Dees was not misled by the notice. Mr. Dees timely filed a petition to challenge the notice, and that petition makes clear that Mr. Dees understood that the Commissioner had disallowed his refundable credit: He stated in his petition both that the Commissioner had erred in denying his premium tax credit and that he had documents to substantiate his entitlement to the credit. This establishes that Mr. Dees was not misled by the notice.

 The tests thus enunciated may be described as an objective test and a subjective test. n1635b

   n1635b Judge Ashford’s concurring opinon says that “The opinion of the Court delineates a two-prong approach (with both objective and subjective elements) to determining our deficiency jurisdiction * * * *.”

               As with the last known address requirement for notices, a taxpayer desiring to present this issue should consider the statute of limitations on assessment.  If the taxpayer brings the issue to the IRS’s attention while the statute is still open (either in some administrative process or by petition to the Tax Court, the IRS may solve the problem by issuing a new notice.  If the taxpayer files a petition in the Tax Court while the statute is still open, the mere filing of the petition will suspend the statute of limitations until the Tax Court decision is final even if the notice is ultimately determined by the Tax Court to be invalid. n1635c

   n1653c  §§ 6213(a) (prohibition on assessment which Tax Court petition for redetermination is pending; and 6503(a)(1) (suspension during period of prohibition).  See Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (holding that the filing of a Tax Court petition invoked the suspension even if the notice of deficiency was invalid or the filing was not by the proper person; per § 6503(a)(1), the suspension occurs “if a proceeding in respect of the deficiency is placed on the docket of the Tax Court”).

Addendum:  Links to statutes cited:

• § 6213(a), here.
• § 6503(a)(1), here.

Tax Procedure Book Errata - Correct Status of the Tax Court (1/2/17)

Book Outline Section	Nature of Update	Location for current editions
Ch. 2 III.B.2. Article I Courts	Correct the status of the Tax Court as an Article I court independent of the judicial system subject to Article III and independent of the executive branch.  Prior to this change, the text in the current version indicated that the Tax Court was within the executive branch of Government.  It is not.  An error that should have been corrected previously.	Student Ed. P. 70 Practitioner Ed. p. 101

Change the paragraph on the United States Tax Court to read as follows:

               The United States Tax Court is an Article I court independent of the Article III judicial system and independent of the executive branch.  § 7441.  n339 The Tax Court has jurisdiction over tax related claims only.  Generally, the Tax Court has jurisdiction to redetermine deficiencies proposed by the IRS and resolve certain other disputes with the IRS. The Tax Court is the principal court in which tax controversies are litigated.
   n339 See Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392, 395 (1971); and Freytag v. Commissioner, 501 U.S. 868, 890-892 (1991. In 2015, in response to the Kuretski case (cited below in the footnote), Congress added this sentence to § 7441: “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government;” that sentence codifies a clause from Freytag v. Commissioner, p. 891 “[t]he Tax Court remains independent of the Executive * * * Branch[es].” The President does have the power to power to remove Tax Court judges “for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”  § 7443(f).  Two key cases have held that the President’s limited power to remove Tax Court judges does not violate separation of powers principles (although the two cases reach the conclusion for different reasons).  Battat v. Commissioner, 148 T.C. ___, No. 2 (2017) (holding that the interbranch removal power did not implicate Article III because the Tax Court does not exercise Article III judicial power; Battat also has a good discussion of the history of the Tax Court from its inception as the Board of Tax Appeals to its current status); and Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014) (holding before the amendment noted above, that the Tax Court was an executive branch court that could permissibly be subject to Presidential removal); see also Byers v. United States Tax Court, 2016 U.S. Dist. LEXIS 135596 (D. D.C. 2016) (holding that the Tax Court is a court exempt from FOIA and containing a good discussion of the status of the Tax Court).  See also Brant J. Hellwig, The Constitutional Nature of the United States Tax Court, 35 Va. Tax Rev. 269 (2015).

Tax Procedure Book Errata - Corporation Income Tax Return Filing Date (1/2/17)

Book Outline Section	Nature of Update	Location for current editions
Ch. 5 ¶ 4.A., Time for Filing Returns - General	State C Corporation filing date as a result of 2015.  For most C Corporations, the statute changes the return due date for most C Corporations from the 15th day of the third month to the 15th day of the fourth month (from March 15 to April 15 in the case of C Corporation calendar year taxpayers).  The first two sentences will be replaced with the text below.	Student Ed. P. 108-109 Practitioner Ed. p. 152

Insert as indicated

               Individual and most C Corporation income tax returns are due on the 15th day of the fourth month after the close of the tax year (i.e., April 15 for calendar year returns; virtually all individual returns are calendar year returns, but for taxpayers on a fiscal year, the return is due on the 15th day of the fourth month after the close of the fiscal year). 530a  This filing date rule does not apply until 2025 to C Corporation taxpayers with a fiscal year of June 30. 530b  Partnership and S Corporation returns are due on the 15th day of the third month after the end of the tax year (March 15 for calendar year returns).   530c   n530a § 6072(a).  The filing date of the 15th day of the fourth month (April 15 for calendar year reporters) for C Corporations is effective for 2016 returns filed in 2017.  Prior to that effective date, the due date for C Corporation returns was the 15th day of the third month (March 15 in the case of calendar year reporters).
   n530b Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, (P.L. 114-41) § 2006(a)(3).   I have no idea as to the reason for this exception to the general rule due date of the 15th day of the fourth month.  The net effect of the new rules is that for those Corporate taxpayers wanting to file by the pre-change date of 15th day of third month can still do so and can still file by the former extension date of 15th day of the ninth month because the extension date for the new rule will be October 15th.  So, I am not sure what was achieved by excepting fiscal year Juen 30 filers in the real world.
   n530c § 6072(b).

I will make consistent changes to the discussion of extension dates in the next section in both editions.  Essentially, returns now due on the 15th day of the fourth month (April 15 for calendar year individuals and most C Corporations) can be extended for  six months to the 15th day of the tenth month.