Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (10/30/19)

Some conservative/libertarians who claim loudly to fear the administrative state are now worked up over a tax case.  In Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), here, which I discuss in my Federal Tax Procedure 2019 Practitioner edition (p. 188 n. 832).  Baldwin applied the dreaded Chevron and Brand X, feared as tools of the dreaded administrative state.

The background is the timely mailing timely filing rule of Section 7502.  Baldwin held that, because of changes in the regulations (through the filters of Chevron and Brand X), the requirements of 7502 pre-empt the field of timely mailing-timely filing.  Here is the discussion in the text and footnote of the practitioner edition.

2. Common Law Mailbox Rules.
    a. General. 

The Supreme Court has summarized the common-law mailbox rule:  

The rule is well settled that if a letter properly directed is proved to have been either put into the post office or delivered to the postman, it is presumed, from the known course of business in the post office department, that it reached its destination at the regular time, and was received by the person to whom it was addressed.  

This rule may apply in tax cases, although the decisions are varied as to how and if it applies (i.e. some courts hold that § 7502 pre-empts the field, particularly in light of changes to the underlying regulations n832 ).
   n832 Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019). Regs. § 301.7502-1(e)(2) provides that, if there is no actual delivery (which would set the latest date), proof of proper use of the USPS methods or the designated PDS methods “are the exclusive means to establish prima facie evidence of delivery.” DOJ (and thus the IRS’s) position, accepted by the Court in Baldwin, is currently arguing that these regulations to limit mailing as delivery to the prescribed method are exclusive under the authority of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) on the basis that the statute itself is ambiguous as to the application of the mailbox rule. As such, not only is the regulation valid, it pre-empts earlier judicial authority to the contrary under Nat’l Cable & Telecomms.  ss’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (which hold that Chevron qualified interpretive regulations can pre-empt judicial authority except where the judicial authority precludes the interpretation).

The Cato Institute, NFIB and some scholars have filed an amicus brief on the Baldwin petition for cert. See William Yeatman, Baldwin v. United States Is Ideal Vehicle to Revisit Reflexive Deference, 36 Yale J. on Reg.: Notice & Comment (10/29/19), here.  I recommend the article, although it uses APA-speak which may not be familiar to many tax procedure types who spend their time wallowing around in the IRC.  The linked article has further links to the amicus brief.  A key excerpt from the article:

Giants in Tax Law: Roger John Traynor (10/26/19; 8/26/23)

I am spending more time than perhaps I should reading some old law review articles by giants in the tax law.  I will do a series of posts introducing these giants to younger lawyers whose knowledge of them may be hazy or nonexistent and offering some of the nuggets I have found in my reading.

I start with Roger John Traynor.  Traynor's Wikipiedia entry is here.  Wikipedia reports that Traynor "is widely considered to be one of the most creative and influential judges as well as legal scholars of his time."  Some other items from Wikipedia:

• At Boalt Hall of UC Berkeley, Traynor wrote groundbreaking articles on taxation, while serving as editor-in-chief of the California Law Review, and became a full-time professor in 1936.
• Traynor took leave from Boalt Hall "in 1937 to help the Treasury Department draft the Revenue Act of 1938."

From their work on the 1938 act, and the mitigation provisions specifically, Traynor and two of his colleagues wrote what, in my mind, is one of the finest article ever written on a Code subject, specifically the mitigation provisions (now in §§ 1311-1314 of the 1986 Code).  John M. Maguire, Stanley S. Surrey and Roger John Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L. J. 509 (Part 1), here, and 719 (Part 2), here (1939). Fans of tax history should recognize the co-authors -- Maguire and Surrey, but perhaps more on them later.  If you want a good introduction to the mitigation provisions of the Code, I highly recommend the article.  For grins, I provide at the bottom of this blog entry an anecdote from my personal experience with the mitigation provisions involving yet another giant in the tax law, Harvard Law Dean Erwin Griswold, then Solicitor General of the United States.

Traynor wrote another law review article from his work on the 1938 Revenue Act:  Roger John Traynor, Administrative and Judicial Procedure for Federal Income, Estate, and Gift Taxes-A Criticism and a Proposal, 38 Colum. L. Rev. 1393 (1938).  Unfortunately, I do not have a link to the article.  I obtained a copy from HeinOnLine, here.  But retrieving the article requires subscriptions.  I obtained my copy from the UVA Law Library, but I don't think I am authorized to post it, so I just have to leave readers to their own resources to obtain a copy if they are interested.

Traynor surveys some big issues with tax administration and tax procedure, many of which are still with us today.  I will discuss and quote some of this article:

1.  Traynor laments the process of self-assessment, examination, notice of deficiency, litigation (Board of Tax Appeals (now Tax Court) and district and Claims Court and Courts of Appeals) and how inefficient it is when the taxpayer starts off with all of the relevant facts (certainly as compared with the IRS) which, if the IRS is to protect the revenue, the IRS must learn afresh and may not learn at all.  Traynor is armed with a lot of statistics to back up his arguments.  He proposes a procedure that would force the taxpayer to divulge facts earlier in the process (and be limited to the facts so divulged) so that the IRS can make decisions on the basis of those facts (unless the IRS contests them) and the taxpayer then limited to the record presented to the IRS rather than having de novo review.  (Of course, that happens in the refund suit via the required claim for refund and variance doctrine, but Tax Court litigation in deficiency cases is de novo.)

Some History on the Innocent Spouse Provisions (10/24/19)

I thought I would point readers to Bryan Camp's recent post Bryan Camp, 100th Lesson From The Tax Court: The Role Of Innocence In § 6015 Spousal Relief (Tax Prof Blog 10/21/19), here.

I offer the following bit of history regarding the original enactment in 1971.  This is from a footnote in my Federal Tax Procedure book:

A bit of history not essential for understanding the innocent spouse provisions.  The innocent spouse provisions were enacted in the early 1971.  Before that enactment, I was working at DOJ Tax Appellate Section and handled one of the more egregious cases in the context, involving separate property liability (Ramos v. Commissioner, T.C. Memo. 1969-157 (held spouse held liable, although “harsh”), rev’d 429 F.2d 487 (5th Cir. 1970)) and was aware of other cases in the office involving joint return liability in harsh contexts (e.g., Scudder v. Commissioner, 48 T.C. 36 (1967) (held spouse liable under joint liability provision), rev'd on other grounds, 405 F.2d 222 (6th Cir. 1968)).  From that work, I drafted proposed legislation that, if enacted, would grant innocent spouse relief.  The Assistant Attorney General for the Tax Division sent the proposal to the IRS with a recommendation that the IRS work on it and make a formal proposal to Congress.  The IRS resisted.  The AAG finally advised the IRS that, if the IRS would not make a proposal to Congress, DOJ Tax would.  At the point, the IRS worked on and made the proposal resulting in the initial innocent spouse provisions (§§ 6013(e) and 66).  The IRS proposal and resulting statute were much stricter than my proposal sent to the IRS by the AAG, but as the AAG said half a loaf is better than no loaf.  And, later, in 1998, the innocent spouse provisions were substantially liberalized.

I offer here a bit more that only real tax procedure geeks could possibly care about.

1.  When first assigned the Ramos case in DOJ Tax Appellate, I tried to get the IRS to give up the case.  There was almost no revenue involved.  But the IRS felt strongly about maintaining the integrity of the community property split even to "innocent spouses."  (Actually, in my mind, the Ramos case should have been prevented by the exercise of discretion at an earlier audit stage; by the time I was assigned the case, Tax Court Judge Featherston (a DOJ Tax alumnus) had already upheld its application to this hapless taxpayer and the IRS wanted to fiercely defend his holding; so I just had to defend the case on appeal.)

FTPB Update 04 - District Court Litigation Types (10/22/19)

I am doing the Updates differently, principally because I have learned how to do footnote links in the blog entry itself.  Accordingly, I have determined that printing the Updates as blog entries rather than separate pdfs will make it more useful to most readers.  I have created a page (to the right), titled FTPB Cumulative Update List with Links, here, that collects all updates in the context of the Table of Contents.

Caveat:  (i) Students using the Student Edition should ignore the footnotes here (just as I do not provide footnotes in the Student Edition; and (ii) the footnote number begin with 1 here rather than the footnote numbers in the text being revised.

Section Affected	Edition page numbers
Ch. 12.  Litigation    II.  Choices of Courts       B.  District Courts  2. Types of Tax Litigation In District Courts Replace the entire section (I highlight in red the revised wording)	Practitioner Ed. pp. 621-622 Student Ed. pp. 429-430

                        2.         Types of Tax Litigation In District Courts.

            District courts are courts of limited jurisdiction, meaning they can only hear cases authorized by the United States Constitution or federal statutes.  District courts have original jurisdiction for any case arising under federal statutes, the Constitution, or treaties,¹ and are specifically conferred jurisdiction for tax refund suits against the United States.  28 U.S.C. § 1346(a)(1) and § 7422(a).  Historical note: Prior to 1966, refund suits could also be brought against the Collector based on illegal exactions without invoking § 1346(a)(1) which was subject to some limitations in earlier periods;² hence a number of leading tax cases from the pre-1966 period are refund suits brought against the Collector. E.g., Lewis v. Reynolds, 284 U.S. 281 (1932).³

            I also note prominently the collection suit.⁴  The Government may bring a collection suit in the district court to reduce an assessment to judgment and to obtain judicial remedies with respect to the tax liability.  If the taxpayer has not by that time judicially contested the underlying tax liability, he or she can do so in that collection suit. ⁵ Sometimes a collection suit is combined with a refund suit.  The classic case is the so-called divisible tax case–best exemplified by the fairly common trust fund recovery penalty under § 6672.  As I  note elsewhere (pp.  ff.), this penalty is usually litigated by a refund suit.  The putative responsible person will pay a small amount to meet the jurisdictional prerequisite that there be a payment which could be refunded.  In the resulting refund suit, the Government will typically file a counterclaim for the balance of the amount that has been assessed.  That counterclaim is a collection suit that could have otherwise been brought independently by the Government to obtain a judgment for the unpaid tax.  The Government will pursue the matter as a counterclaim in order to get the putative responsible person's liability for all quarters concluded in one litigation.

            In addition, the district courts have a potpourri of other jurisdiction, examples of which include jurisdiction to quash an IRS formal document request (“FDR”),⁶ to order more disclosure of a written determination,⁷ to consider petitions for readjustment of partnership adjustments,⁸ jurisdiction to approve a levy on a principal residence,⁹ general jurisdiction to enter orders and judgments necessary or appropriate for the internal revenue laws,¹⁰ jurisdiction over summons enforcement proceedings,¹¹ actions to enforce a lien and declare a sale,¹² certain injunctions against persons abusing the tax system,¹³ wrongful levy suits where a third party claims his or her property was levied upon to pay another taxpayer’s taxes,¹⁴ declaratory judgments for § 501(c)(3) organizations,¹⁵ review of jeopardy assessments and levies,¹⁶ and so on and on.¹⁷  I discuss some of these in other sections of this book.

            For purposes of this course in this section, please focus your attention on the refund suit jurisdiction and its collection suit counterpart.

The Mitigation Provisions of the Code Are Hard (10/18/19)

In Whitesell v. Commissioner, T.C. Memo. 2019-126, here, the facts are somewhat complex but for present purposes are fairly presented in the Court's opening summary:

P-H owned a 100% interest in WIC, an S corporation. In 2008, a Michigan trial court entered a civil monetary judgment against WIC. For tax years 2008, 2009, and 2010, R allowed WIC $10,982,856 in deductions for the judgment and interest thereon. In 2011, the Michigan Court of Appeals reversed the trial court and remanded the case. In 2015, R determined deficiencies for 2010 and 2011. The deficiency for 2011 was premised in part on R’s determination that WIC must include $10,982,856 in income for tax year 2011 because 2011 was the year in which the Michigan Court of Appeals reversed the judgment. Ps filed a petition in this Court in October 2015 and filed an amended petition in December 2015. In neither pleading did Ps challenge R’s determination of the amount of income inclusion ($10,982,856) or the year of inclusion (2011). Three years later, in October 2018, Ps moved to file an amendment to the amended petition to assert that WIC had settled the Michigan lawsuit in 2013 and that the income inclusion had to be made for the 2013 tax year. By the time Ps filed their October 2018 motion, the three-year period for assessing tax for Ps’ 2013 tax year had expired. 

My simplified summary of key facts (with assumptions):

1.  In 2008, through WIC, taxpayers' S corporation, Whitesell deducted approximately $11 million (rounded down to the nearest million) based upon a judgment in a lawsuit.  The validity and timing of this claimed deduction was not in issue.

2.  In 2011, the deficiency year, the judgment was reversed.

3.  In 2013, the parties settled the suit.  I could not find what that settlement amount was, but let's assume for purposes of this discussion that WIC paid a net of $5 million.

Just on these bare facts, from an economic perspective, WIC (and thus the shareholders) are entitled to a net $5 million for their actual expenses.  But, because of the timing of the events and the annual accounting system, there are alternative possibilities in getting to the right net amount.

There are at least 3 ways to do it.

1.  Say that no deduction is allowable until 2013 (when the settlement occurred), then only $5 million would be deductible.  Under this choice, in the final analysis, "the pot is right."

2.  But, as happened, say $11 million is claimed as a deduction in the year of the judgment (2008), then we know that, by the end (2013), $6 million in deductions are excessive and, on a tax benefit theory, that $6 million has to come back into income.  That could happen in 2013 when the final settlement occurs.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

3.  As a variation, the taxpayer (at the insistence of the IRS) must include the $11 million as income when the judgment is reversed in 2011.  If this choice happened, then when the liability was settled in 2013, the taxpayer would have a $5 million deduction in  2013 because there would then be no excess deductions taken in earlier years.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

Make Tax Procedure Great Again Caps for Sale (10/14/19; 6/2/22)

I am offering for sale the "official" cap -- Make Tax Procedure Great Again (see image at right).

I offer them for a per unit cost that covers my costs of purchase, tax and mailing.  Here is the breakdown, with the costs depending upon the number purchased by me which I will then pass on.

Number Ordered	My Per Cap Cost	Tax	Total	Your Price
12	$25.73	$1.54	$27.27	$30.00
20	$20.23	$1.21	$21.44	$25.00

As you can see, I am not really looking to make money on the sale of caps.  I suspect that the difference between my purchase price and sales price is just a bit more than the cost to mail the caps, but not much.

Let me know if you are interested by emailing me at jack@tjtaxlaw.com. Please specify (i) whether you want Tax Crimes cap or the companion Tax Procedure cap (see here) or both caps and (ii) the quantity that you want.

After I determine the number interested, I will set the final Purchase Price and then advise where to send the check and provide the delivery address for the caps.  Keep in mind that the caps are not yet made.  I am told that the time to make and deliver the caps to me is about 2 weeks.

Added as of 6/2/22: I have taken down the image of the Make Tax Procedure Great Again cap from the column on the right.  Since the image is no longer a regular part of the blog, I include it here for future reference.

On Statutory Interpretation - Textualism / Originalism (10/11/19; 10/16/19)

Just this week, I was working on the issue of “original public meaning” to update my Federal Tax Procedure Book and earlier article that needs refreshing (soon) for posting on SSRN.  Original public meaning is a strategy for interpreting text – constitutional and statutory.  (I suppose, also, since it is text interpretation, we might apply it to religious texts, like the Bible, but that is a related but different subject.)

Just this week, the Supreme Court held oral arguments in Bostock v. Clayton County and Harris Funeral Homes v. EEOC (see SCOTUSBlog summary here).  The issue is whether Title VII of the Civil Rights Act of 1964, which bars employment discrimination “against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin,” bars sex discrimination based on sexual orientation (Bostock), or on transgender status (Harris).  The issue is one of statutory interpretation of the word sex in the statute.  What does sex mean?  (I suppose it is not like pornography, difficult to define but we know it when we see it.)  Does the statutory text mean what sex meant in the statutory context in 1964 or can its meaning evolve as the context for its application changes?  (One variant of the question involving textual interpretation, although not a Constitution or statute, is the Declaration of Independence declaring that "all men are created equal"; do we interpret that as the signers of the declaration or the public at the time would have interpreted it (it does not include blacks whether free or slave and likely not women as well) or in light of developed reason (really, all men and women are created equal).)

The general category of statutory interpretation that looks to the text and context as interpreted upon enactment (1964) for meaning is called “originalism.”  Originalism itself can break down into categories, including original public meaning.

So, I thought I would offer first my revisions to the Federal Tax Procedure discussion (keep in mind that these revisions will appear in the 2020 edition, and are likely to be further revised before formal publication).  In the text of this blog I offer just the text without the footnotes.  The text with the footnotes can be downloaded here (note I have revised this offering as of 10/16/19 to correct a reference in one of the footnotes from Judge Higginbotham to Judge Ho; note also that I have made some small changes since originally posted on 10/11/19).  I discuss originalism under the heading textualism (which I generally contrast to purposivism) because conservative textualists tend to fall in the originalist camp; I offer the whole section on statutory interpretation (which is an 10/16/19 expansion of the text originally covered on 10/11/19).

(2) Approaches to Statutory Interpretation. 

(a) Introduction. 

There are two broad categories of statutory interpretation encountered frequently in tax practice (as well as other areas of law).  They are: (i) textualism and (ii) purposivism.  I only introduce the general concepts and note their outer parameters.  These approaches play out in constitutional interpretation and in statutory interpretation. 

Before moving to these categories of statutory interpretation, I want just to offer a broad high level view of the process.  All theories of statutory interpretation, I think, are based on the notion that courts, in interpreting the statutes, are the faithful agents of Congress which enacted the statutes.  Although some view the faithful agent of Congress claim as facile in the hard context of statutory interpretation, it is still, I think, fair to say that, since Congress rather than the courts legislate, Congress is the one through the statutory text that says what the law is despite Justice Marshall’s famous sound bite in Marbury v. Madison, 5 U.S. 137 (1803) that the courts “say what the law is.”  Congress says what the law is, and Courts are supposed to say what Congress legislated.  So I think that faithful agency to the law Congress enacted is the heart of statutory interpretation.  The “faithful agency” claim may be more persistent with textualists, but in my view the claim is not more persuasive with textualism.  Perhaps a subtle nuance on the faithful agency is that, it is at least the strong starting point, although it must be filtered through controlling or persuasive interpretations after enactment. 

(b) Textualism. 

Textualism is an interpretive strategy that focuses principally or even exclusively on the statutory text enacted by Congress.  Justice Scalia was perhaps the most vocal advocate.  Focusing on the statutory text, the goal for textualists is to determine and apply the “original meaning” (sometimes called the “original public meaning”) at the time of adoption or enactment. subject perhaps only to the use of linguistic canons of interpretation.  With the rising prominence of Justice Scalia’s proclaimed textual brand of textualism, even Justice Kagan has proclaimed that “we’re all textualists now.”