Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (6/26/19; 7/2/19)

In Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], the Supreme Court decided to retain Auer deference, at least for now.  I offer some preliminary thoughts on the opinions in Kisor and may revise them as I think further and consider others comments.

Although perhaps oversimplifying for analysis, I think Auer deference functions like Chevron deference but one step removed from the statutory text.

• Chevron deference applies to some reasonable agency interpretations of ambiguous statutory text.
• Auer deference applies to reasonable agency subregulatory interpretations of  ambiguous agency regulations (which for this purpose may be either (i) ambiguous legislative regulations (e.g., in a tax context, ambiguous consolidated return regulations) or (ii) ambiguous interpretive regulations entitled to Chevron deference (e.g., in a tax context, say ambiguous “away from home” interpretive regulations entitled to deference as in Correll)).

In Kisor, while re-affirming Auer deference, the opinions were fractured as to what Auer continues to mean and whether it may be on life support.  All we can say for sure is that Auer lives (for now, although its precise application may be muddled and Kisor clearly restricts Auer’s application over what some of the prior less restrained applications suggested).

I don't want to get into the Justices competing views of Auer deference.  The pundits will be doing that for some time now.

I do want to get into what, if anything, Kisor says about the legislative / interpretive issue that I have fulminated about recently.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure Blog 6/21/19), here; and Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/23/19), here.

Just to restate the issue.  Some, a considerable consensus in the scholarly community, claim that the interpretive regulation is no longer viable, having been conflated into legislative rules by judicial opinions after the adoption of the APA.  I reject that notion.  I do note as an important pushback Justice Breyer's comment in the Kisor oral argument:  “there are hundreds of thousands, possibly millions of interpretive regulations.”   Justice Breyer is, of course, an administrative law expert (he and Justice Kagan are the administrative law experts on the Court), and he thinks that interpretive regulations are still viable.  (Significantly, at oral argument, no Justice challenged the notion that interpretive regulations were a viable APA category.)

The Kisor opinions, as I said, were fractured, with some key points not gathering a majority. The Justices in the plurality for the Court opinion which I discuss herein were Justices Kagan (author), Ginsburg, Breyer and Sotomayor.  Remember  that Justices Kagan and Breyer are the Court's administrative law experts, so from the perspective I focus on (the APA distinction between legislative and interpretive regulations), Justice Kagan's opinion concurred in by Justice Breyer are most important to the legislative /interpretive issue.

Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (6/23/19; 7/2/19)

The immediately preceding blog reported my new article posted on SSRN titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure 6/21/19), here.  One of the threads in the claim that the APA category of interpretive regulations is no longer viable is the notion that Chevron deference, when applied to interpretations in agency rule (regulations in specific), gives the interpretation the force of law, supposedly the hallmark of a legislative rule (which must be by notice and comment regulation) rather than an interpretive rule.  I argue in the article that "force of law" is a slippery concept, but in this context is the consequence of a regulation being legislative and not a test that a regulation is legislative.

I address in this blog a new development that, I think, refutes the notion that Chevron deference for agency interpretations is relevant to the issue of whether rules (including regulations) are legislative or interpretive.

I noted in the article that, on March 27, 2019, during oral argument in Kisor v. Wilkie (Sup. Ct. No. 18-15), Justice Breyer, an administrative law expert (along with Justice Kagan), said: “there are hundreds of thousands, possibly millions of interpretive regulations.”  I noted in the footnote (p. 5 n. 14) that Justice Breyer was formerly a professor of administrative law at Harvard Law School and is the lead author on a leading administrative law book which continues with his name as a nominal author. Stephen G. Breyer, et al., Administrative Law and Regulatory Policy (8th ed. 2017 Walters Kluwer), co-authored with four other recognized administrative law experts, Richard B. Stewart, Cass R. Sunstein, Adrian Vermeule, and Michael E. Herz.  (Justice Kagan also taught administrative law at Harvard Law School.)

Justice Breyer is at it again, this time refuting the notion that Chevron sounded the death knell of the interpretive regulation.

In PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., 588  U.S. ___, ___ S.Ct. ___, 2019 U.S. LEXIS 4181 (2019), here, decided June 20, 2019, the issue was judicial reviewability of final orders of the Federal Communication Commission (FCC).  The FCC had issued a final Order interpreting the prohibition on "unsolicited advertisement" as used in the Telephone Consumer Protection Act of 1991, 47 U. S. C. §227(b)(1)(C).  The statute gave courts of appeals “exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity of” certain “final orders of the Federal Communication Commission.” 28 U. S. C. §2342(1).  That "exclusive review" was required in a proceeding brought within 60 days after the entry of the order.  The issue was whether a district court, in an application of the law long after the FCC adopted the Order, precluded the district court from considering the merits of the interpretation in the Order.

Justice Breyer for the majority felt that the issue turned upon preliminary issues not yet addressed by the courts--whether Order was (p. 5, cleaned up)

• "the equivalent of a legislative rule, which is issued by an agency pursuant to statutory authority and has the force and effect of law."

or

• "the equivalent of an interpretive rule, which simply advises the public of the agency’s construction of the statutes and rules which it administers and lacks the force and effect of law?"

Note the phrasing of "equivalent of."

Article on the Continued Viability of the APA Category of Interpretive Regulations (6/21/19)

I have posted on SSRN my article titled "The Report of the Death of the Interpretive Regulation Is an Exaggeration."  Here is the SSRN preferred citation with link to the Abstract page:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400489.  The article may be downloaded at that site.

The following is a brief summary of the SSRN abstract which is linked above:

There is a notion that the Administrative Procedure Act (APA) categories of legislative regulations and interpretive regulations have been conflated into the legislative regulation category so that the interpretive regulation category is now extinct.  The APA does not make the interpretive regulation category extinct, but the notion is based on judicial developments that in effect amend the APA to effectively legislate the category out of the statute.  (OK, that is argumentative.) That notion has considerable traction in the administrative law scholarly community, as I note in the article.  A consequence of this notion, if viable, is that Treasury (and presumably other agency) regulations that go into effect without notice and comment (e.g., Treasury Temporary Regulations) are illegal, and that interpretations in regulations that do no more than interpret the statute cannot have retroactive effect.  I push back on that notion.  With the considerable traction in the scholarly community, I may be wrong.  But, I feel compelled to state my case.

Any feedback from readers will be appreciated.

A subset of the article dealing with the Altera case was presented in Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19), here.

Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:

"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."

The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):

[*2]  

"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 

* *  * *

Ninth Circuit Reverses Unanimous Tax Court in Altera (6/7/19; 6/20/19; 7/2/19)

I have blogged on the Ninth Circuit's prior opinion reversing the unanimous Tax Court in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (reviewed opinion), here. Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here. That opinion was reversed because it was rendered after one of the panelist died.  Ninth Circuit Withdraws Altera Opinions (8/7/18; 8/13/18), here.  Another judge was substituted for the deceased judge and oral argument was heard by the reconstituted panel.

The Ninth Circuit reconstituted panel, with all members apparently still alive, issued its opinion reversing the unanimous Tax Court.  Altera Corp. v. Commissioner, ___ F.3d ___, 2019 U.S. App. LEXIS 17143 (9th Cir. 2019), here.

Altera has been quite a saga, including the strange concept of a dead judge joining a majority opinion.  At the outset, it might be worth doing a tally of the judges on the merits.  In just the win-lose category.  There are two judges giving the win to the IRS, but they are the most important judges -- two of the three judges on the reconstituted panel.  All the other judges (other than the deceased Ninth Circuit judge who apparently voted before his death) who voted on merits held against the IRS.  Those judges are the dissenting judge on the reconstituted panel and all of the judges (15 in number) who voted on the reviewed opinion in the Tax Court.  So, just counting heads, two judges thought the IRS should win; 16 thought the IRS should lose.  (And this is not counting the dead judge's vote for the original panel opinion, which, if counted, would have been 3 for the IRS and 16 for the taxpayer.)  For those with the time to review an anecdote from my earlier appellate career at DOJ Tax for a Government appeal, like Altera, from a reviewed Tax Court opinion with most of the judges voting for the taxpayer, see Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here.

Now to the current opinions from the reconstituted panel with living panel members.  The split is as it was in the withdrawn opinion.  Judge Thomas was for the IRS; Judge O'Malley from the Federal Circuit (by designation for the original and reconstituted panel) was for the taxpayer.  The swing judge was Judge Graber from the Ninth Circuit, designated to the panel to replace the deceased Judge Reinhardt.  Like Judge Reinhardt, the swing judge voted with Thomas whose opinion thereby became the majority just as with the withdrawn opinion.

I am focusing here only on the new panel majority and dissenting opinions.  I make no attempt to compare the differences between the withdrawn opinions and reconstituted panel current opinions; I just assume that, in broad strokes, the positions are the same (with some interim tweaking) since the same judges wrote the panel majority and dissenting opinions. (Readers interested in the withdrawn panel majority and dissenting opinions can look at my prior blog or Google any other comment on them.)  Readers interested in a discussion of the differences between the withdrawn and the current opinions might watch the Miller & Chevalier Tax Appellate Blog, here, because, in a quick posting on the blog on Friday, there the author said:  "Although it borrows heavily from the withdrawn opinion (indeed, much of the language remains similar if not the same), there are some notable differences between today’s opinion and the withdrawn opinion. We will post some observations after a more careful comparison."  Steve Dixon, Ninth Circuit Again Upholds Cost-Sharing Regulation in Altera (Tax Appellate Blog 6/7/19), here.

In broad outline, the panel majority opinion holds:

1.  Chevron Analysis.

   a.  Chevron Step One. Section 482 is ambiguous on the issue presented (whether the qualified cost sharing arrangement ("QCSA") must include employee stock option costs in allocating income from the intangible ).  Accordingly, Chevron Step One is passed.

   b.  Chevron Step Two.  The regulations' requirement that employee stock option costs be included in the QCSA costs is reasonable and therefore the interpretation that the court applies, by Chevron deference, in Chevron Step Two.

2.  State Farm Analysis.  The promulgation of the regulation requirement met the reasoned decisionmaking requirement and was not procedurally defective.