Baldwin Cert Denied with Justice Thomas' Rant on Chevron and My Rant on His Rant (2/24/20; 2/27/20)

Today, the Supreme Court denied the taxpayer’s petition for certiorari in Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), cert. denied (U.S. Feb. 24, 2020) (No. 19-402), here.  For my prior discussion of the issue see Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (Federal Tax Procedure Blog 10/30/19), here.

The issues presented in the cert petition were:

(1) Should Brand X be overruled?
(2) What, if any, deference should a federal agency’s statutory construction receive when it contradicts a court’s precedent and disregards traditional tools of statutory interpretation, such as the common-law presumption canon?

The petition limited its focus to Brand X deference permitting an agency to adopt an interpretation of an ambiguous statute, at least in some cases, inconsistent with a prior judicial interpretation.  See National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967, 984 (2005).

Justice Thomas, the author of Brand X, filed a dissent to the denial of certiorari.  His dissent is with the denial and is linked above.  Justice Thomas confesses that he was wrong in the Brand X opinion, saying:

Although I authored Brand X, “it is never too late to ‘surrende[r] former views to a better considered position.’” South Dakota v. Wayfair, Inc., 585 U. S. ___, ___ (2018) (THOMAS, J., concurring) (slip op., at 1) (quoting McGrath v. Kristensen, 340 U. S. 162, 178 (1950) (Jackson, J., concurring)). Brand X appears to be inconsistent with the Constitution, the Administrative Procedure Act (APA), and traditional tools of statutory 7interpretation. Because I would revisit Brand X, I respectfully dissent from the denial of certiorari.

Setting aside Justice Thomas' complaint about Brand X, Justice Thomas starts his dissent with skepticism about Chevron, the foundation for Brand X.  Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 844 (1984).  Justice Thomas asserts: “Chevron is in serious tension with the Constitution, the APA, and over 100 years of judicial decisions.”

In my opinion, Justice Thomas is wrong. I have written at length about the history of Chevron.  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN: https://ssrn.com/abstract=3400489. See particularly par. III.B. of the article, captioned “Deference to Agency Interpretations Before Chevron” and beginning on p. 68, here.

District Court Teaches Confusing Summary Judgment Lesson (2/19/20)

In United States v. Feldman, 2020 U.S. Dist. LEXIS 24162 (E.D. Mich 2/12/20), CL here (and docket entries here) in a collection suit, the Court denied the United States’ motion for summary judgment, starting the exegesis as follows (Slip Op. 1-2):

And the IRS says that every reasonable jury would agree with it and [*2]  so this Court should grant it summary judgment. But the Court believes that there is a genuine dispute over how much income Feldman received in 2001 and 2002, and thus a genuine dispute over whether the IRS has reasonably determined the amount of tax owed. Accordingly, as explained below, the Court will deny the IRS' motion for summary judgment.

The Court wanders around a bit in its discussion, and in the course of starting the wandering with the following comment (Slip Op.):

“Unfortunately, the parties in this case have put little effort into figuring out the proper summary-judgment burdens.”

So the Court sets about to instruct the parties.  Unfortunately, at least as I see it, the Court gets the analysis for the most significant issue wrong, in part because it does not understand the facts and the law of how stock transactions are reported in brokerage accounts.

I will try to summarize the key facts for purposes of this blog’s discussion. I note that I have not studied in detail the underlying submissions by the parties, but I spot checked a couple of the documents and incorporate them as background in this discussion.

I think the relevant facts are:

(i) Feldman did not file returns for 2001 and 2002;

(ii) the IRS assessed tax for those years based, according to the court, on a list of “seven payments from brokerage firms to Feldman;” The brokerage firms issued Forms 1099-B for stock transactions in Feldman’s account(s).  On Forms 1099-B a brokerage (or other financial) firm lists sales proceeds for stock (or other financial assets) sold in the client’s account(s).  Apparently, the list referred to was the IRS computer generated list of the amounts the brokerage firm reported as sales proceeds on the Forms 1099-B issued to Feldman for transactions in his account. Basically, the transactions would have been sales of stock (or other financial assets) where the sales proceeds were deposited into the taxpayer’s account with the brokerage firm.

(iii) the brokerage firm did not distribute to Feldman all of the proceeds it received and reported on Forms 1099-B.  Rather, because Feldman had written bad checks to the brokerage firm, the brokerage firm reduced any amounts ultimately paid to the taxpayer by the amount of its claim for bad check amounts.  There may have been some other offsets as well.  So, in sum, the amounts reported on the Forms 1099-B would have exceeded the amounts the brokerage firm actually distributed to the Feldman.

The relevant facts may be illustrated in a simple example: (i) brokerage firm sells stock from taxpayer’s account for $1,000 and receives that amount into the taxpayer’s account with the brokerage firm; (ii) brokerage firm collects from that $1,000 an amount of $200 for a bad check (or any other amount the taxpayer owes the brokerage firm); (iii) brokerage firm pays the taxpayer the net of $800.  In these facts, the Form 1099-B reports $1,000 proceeds (payments received by the brokerage firm on sale) and does not report the actual cash payment to the taxpayer of $800.  On his tax return, the taxpayer’s gain should be reported as follows: (i) amount realized $1,000 proceeds; (ii) less the taxpayer’s basis in the stock sold (the example does not quantify the basis and, in the years involved, basis was not a reporting item on Form 1099-B); and (iii) producing the taxable gain on the sale of the stock.

GAO Report on Virtual Currency Guidance (2/13/20)

The Government Accountability Office (“GAO”) issued a report titled:  Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance (2/20), here.  The Report is addressed "to the Ranking Member, Committee on Ways and Means, House of Representatives.”  The ranking member is the minority ranking member, Kevin Brady (R.-TX).  (I suspect that all members of Congress have received complaints about the IRS initiatives against virtual currencies, so favored by crooks and tax cheats, but also suspect that Republican members are more sympathetic to the complaints from people whose real or hidden agenda is not to pay tax).

At any rate, the Report summarily describes virtual currencies, including cryptocurrencies such as Bitcoin, generally, estimates the size of the market, the regulation by agencies (such as CFTC, FinCEN and SEC), the tax treatment of virtual currency and the IRS’s compliance efforts for virtual currencies, including sharing of information with other agencies.

I focus here on what the Report says about IRS guidance for tax reporting requirements for virtual currency transactions.  The guidance includes principally Notice 2014-21 (including public comments), Revenue Ruling 2019-24 and Frequently Asked Questions (FAQs) released in October 2019.  The principal guidance is Notice 2014-21 which the GAO Report describes as follows (p. 8 n. 15):

According to IRS Notice 2014-21, a taxpayer generally realizes a capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. Capital gains may be subject to lower tax rates than ordinary gains. Capital gains and losses are classified as long-term or short-term. Generally, if a taxpayer holds the asset for more than one year before disposing of it, the capital gain or loss is long-term. If a taxpayer holds it one year or less, the capital gain or loss is short-term. For more information, see IRS Publication 544, Sales and Other Dispositions of Assets.

The Report has a section titled: “IRS’s 2019 Virtual Currency Guidance Answers Some Taxpayer Concerns, but Presents Additional Challenges for Taxpayers.”  See pp. 18-20.  This sections reports concerns and complaints about the published guidance.

The Report then has a section titled: “IRS Did Not Include That the 2019 FAQs Are Not Legally Binding.” See pp. 20-21.  Since I focus the rest of this blog to that portion of the report, I will just excerpt it in full here (some footnotes omitted):

Altera Petition for Certiorari (2/12/20; 2/13/20)

Readers of this blog will know that the Altera drama has been the topic of many of my thoughts. See Altera Corp. v. Commissioner, 145 T.C. 91 (2015), rev’d 926 F.3d 1061(9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019), cert. pending (2/10/20).  Just search on the word Altera and pull up all blog entries mentioning Altera.  And, if you followed the citation to the end, you see that Altera just filed a petition for certiorari.  That petition is here.

The petition states the questions presented as:

1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq.  

2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 

3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that the agency has offered a “permissible” interpretation of the statute in litigation.

I think there is less to those issues than presented by Altera in its petition.  I will think about it more and present my ideas when I have time to think them through and articulate them.  At the inception of my thought process, I do think that there are some conceptual threshold issues that the petition just assumes away.  I will deal with that in later comments.

In the meantime, I do note that Chevron was a key basis for the Ninth Circuit decision, the petition does not make a frontal assault the concept of Chevron deference.  Rather, based on the questions presented, Altera attacks on procedural regularity grounds (even if the interpretation in the regulation is a reasonable interpretation of the statute, the regulation failed procedural regularity).

Added 2/13/20 11:00 am:

ICF Reg Map Available for Notice and Comment Regulation Process (2/10/20)

Readers of the Federal Tax Procedure Blog will know that I have used some blog entries to discuss administrative law, the APA and the intersection of tax and those subjects.  One of those intersections is found in the regulations process, a process that federal agencies generally share. In a recent posting, Professor Chris Walker alerted readers to the “ICF Reg Map” and linked to it.  See Christopher J. Walker, Release of 2020 Reg Map: A Guide to the Federal Informal Rulemaking Process (Notice and Comment Blog 2/5/20), here.   The direct link to the ICF Reg Map is here.  The Wikipedia description of ICF, originally an initialism (not to be confused with an acronym) for Inner City Fund, is here.

Professor Walker praises the Reg Map as a useful tool for students, clients navigating the rulemaking process, and new lawyers at federal agencies and “on the Hill.”  I, an old lawyer, found it useful as well.

ICF’s Reg Map® provides federal agencies, Congressional committees, law schools, and others in the public and private sector with an overview of how the federal rulemaking process works. Designed to hang on your office wall or door, this complimentary 2’x2’ poster—updated in 2020—contains:

• Practical information on how the U.S. federal informal rulemaking process works and guidance for regulators on required components of procedural tasks and potential challenges along the way;
• Citations to relevant statutes, regulations, and Executive Orders;
• References to authoritative interpretations of important rulemaking concepts; and
• FAQs and a “Frequently Used” terms and abbreviations table that serves as a handy reference for agency program staff, journalists, students, and others interested in understanding the process.

In addition to the hard copy Reg Map to hang on your office wall or door, the Reg Map is also available for download in pdf format.

Tax Court Rejects Tax Savings Clause to Save Conservation Easement (2/9/20)

In Railroad Holdings, LLC v. Commissioner, T.C. Memo. 2020-22 (2/5/20), here, the Tax Court denied a conservation easement deduction because, as stated in the syllabus, “the conservation purpose of the easement was not 'protected in perpetuity' within the meaning of I.R.C. sec. 170(h)(5)(A).” 

I won’t get into the substantive requirements that the particular easement failed to satisfy, but basically the description of the transfer flunked the regulations requirement that, if the easement is later extinguished, the donee receive a proportionate share of the extinguishment proceeds.

I do want to present the Tax Court’s rejection of what I would call a tax saving clause intended to solve the problem of a disqualifying condition by retroactively eliminating the condition through interpretation or construction.  The Court’s discussion of that issue is in outline paragraph V.C. at pp. 16-19 of the Slip Op.  The Court’s holding is crisp, so I will just quote it:

C. “Construction of Terms” 

Article VI.D of the deed provides that the deed “shall be construed to promote * * * the conservation purposes of this Conservation Easement, including such purposes as are defined in Section 170(h)(4)(A)”. See supra pp. 5-6. Petitioner insists on the importance of part D, criticizes the Commissioner for failing to include it in his memorandum, and quotes part D with this portion underlined: 

Any general rule of construction to the contrary notwithstanding, this Conservation Easement shall be liberally construed in favor of the grant to protect the Conservation Values and effect the policies and purposes of SERLC. If any provision of this Conservation Easement is found to be ambiguous, an interpretation consistent with its conservation purposes that would render the provision valid should be favored over any interpretation that would render it invalid. * * *  

However, petitioner does not explain how this provision should affect our interpretation of the extinguishment provision and does not give any other commentary on this provision. In fact, part D of article VI of the deed has no effect on the outcome of this case. 

More on § 6751(b)'s Written Supervisor Approval Requirement (2/4/20)

Keith Fogg has a great post today on the continuing § 6751(b) saga.  Belair Woods – The Ghouls Continue (Procedurally Taxing Blog 2/4/20) here.  Readers know that saga – the § 6751(b), here, requirement that a penalty cannot be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.”  I have covered this saga in many posts, but the most relevant is the one I posted when Belair Woods was decided along with other contemporaneous decisions.  FTP2019 Update 05 - § 6751(b)'s Requirement for Supervisor Written Approval for Penalties (Federal Tax Procedure Blog 1/11/20; 11/17/23), here.  Another good read on the issue is Bryan Camp’s Lesson From The Tax Court: A Practical Interpretation Of The Penalty Approval Statute § 6751 (Tax Prof Blog 1/13/20), here.

Keith, Bryan and I lament the shoddy legislation.  But, the courts (and we) have to take the statute and it is,

If one were a textualist (such as Justice Kagan who famously asserted "we're all textualists now," but she did not mean it exactly as Justice Scalia did), then you would, as Judge Lauber did, focus on the word "determination" because that is the word the statute uses.  My quick and dirty search on LII for the the word determination in the IRC 1986 (26 USC) shows the word used 511 times.  I looked at some of those, but could not discern that the word is a sufficient term of art that might be applicable to § 6751(b).  So, it is unclear what determination means, particularly when drafted by a bunch of ideologues with no background for tax procedure or even appreciation of the IRS. (See my comment #2 below.)

We could apply a dictionary (a favorite of textualists who view anything but the text (particularly legislative history) with disdain).  I do note in passing that, use of a dictionary, seems to make the dictionary something like legislative history (and politically unaccountable legislative history), but let’s move on.

Merrian-Webster, here, on line offers several nuanced definitions of “determination” applicable in different contexts.  These are the ones that seem appropriate (emphasis supplied):

1alaw : a judicial decision settling and ending a controversy
b: the resolving of a question by argument or reasoning
3a: the act of deciding definitely and firmly
b: firm or fixed intention to achieve a desired end

So, let’s say that this dictionary captures the word determination in 1998 when § 6751(b) was enacted.  I think it is fair to say that the concept in use of the word “determination” is that a decision has been made.  It is not that the actor (a court, a government agent, or everyday person) is thinking about doing something; it is that the actor has made a decision to do something.

But, the statute also says that the determination must be the "initial determination."  I don't think a dictionary is going to help there, but the statutory text does indicate that there can be more than one determination and that the locus for the text  is the first one.

Judge Lauber addresses this concept (Slip Op. 14-16):