Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Crimes Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/22/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

Legislative Adjudicatory "Rulemaking?" (3/14/20; 3/16/20)

I write today on a wrinkle that I recently discovered relating to an argument that I made in an article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 1/25/20), posted on SSRN, here.  In that article, I stated (p. 104) that

The APA confers no legislative rulemaking authority on agency adjudicatory bodies, whether courts or the BIA or any other agency tribunal. Under the APA, the exercise of delegated legislative authority requires the regulations process of Notice in the Federal Register, receipt and consideration of Comments from the affected or interested public, publication in final in the Federal Register with a reasoned explanation of the comments and the decisions made, and an effective date 30 days after publication in final. BIA opinions are not subject to Notice and Comment, are not published in the Federal Register, and are not prospective only (e.g., at a minimum, they can apply the interpretations in the case); this suggests that BIA opinions are interpretive rather than legislative in character at least for APA purposes.

I made that statement in the context of critiquing then Judge Gorsuch’s opinions (panel and concurring) in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016), here.  Judge Gorsuch treated the Board of Immigration Appeals decision as legislative adjudicatory rulemaking.  Perhaps adjudicatory rulemaking is an oxymoron but hang with me for now.

My statement was not nuanced.  I learned that from recently reading the following draft article:  Kristin E. Hickman and Aaron Nielson, Narrowing Chevron’s Domain (February 28, 2020). 70 Duke Law Journal (2021, Forthcoming) (SSRN here) which focused my attention on SEC v. Chenery Corp., 332 U.S. 194 (1947) (often referred to as Chenery II), here.  Professors Hickman and Nielson explain Chenery II as follows (pp. 13-14, here, footnotes omitted):

Agencies can deliberately create policy through either rulemaking or adjudication. This surprising reality was blessed by the Supreme Court in 1947, in a foundational case known as Chenery II. There, following the agency’s decision on remand from Chenery [I] (which held that nothing in the common law, which is all the agency had cited, prohibited the corporate [*14] transactions at issue), the Court allowed the Securities and Exchange Commission (“SEC”) to delineate what was and was not lawful for corporate reorganizations case-by-case through adjudication, rather than through rulemaking. The Court, over Justice Jackson’s dissent, explained that although rulemaking has important advantages and should be preferred, an agency may announce policy in a common-law fashion through adjudication. Thus, the Court explained that there is “a very definite place for the case-by-case evolution of statutory standards. And the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.” The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.” And because adjudication is retroactive (indeed, that is a key dividing line between rulemaking and adjudication), it follows that agencies can make policy through adjudication, and policies so developed are then applied against individual parties based on past conduct. The Court has often reiterated this principle.

There is a lot to unpack there.  The framework that I use is the APA distinction between legislative rulemaking which generally must be prospective and interpretive rulemaking which generally may be retroactive to the date of the enactment of the ambiguous statutory text.  In my article, I develop that distinction, using tax examples–(i) consolidated return regulations for legislative rulemaking and (ii) the away from home sleep or rest regulation approved in  United States v. Correll, 389 U.S. 299 (1967), here, for interpretive rulemaking.  If we overlay that framework (at least by analogy) to the adjudication context, I submit that legislative rulemaking (or its equivalent by adjudication) must be by notice and comment regulation under the APA and that adjudication, with retroactive effect, can only be by interpretation of the existing ambiguous statutory text.

I don’t think that is the thrust of Professors Hickman and Nielson’s draft article, but there may be some semantical issues involved.  The key quote from above is: “The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.”  (bold-face supplied by JAT.) The semantics, using the APA categories, is that interpretive regulations may, in some non-APA sense, be “lawmaking” if given Chevron deference.  But, as I argue at length in my article, that is not the sense that the APA uses in distinguishing between legislative and interpretive rulemaking, with prospectivity required for legislative rulemaking and retroactivity allowed for interpretive rulemaking.

Guedes Cert Denial on Bump Stock as Machinegun, Justice Gorsuch's Cryptic Statement and My Digression (3/2/20; 3/5/20)

The Supreme Court this morning denied certiorari in Guedes v. Bureau of ATF, 920 F.3d 1, 7 (D.C. Cir. 2019), here, cert. den. 589 U.S. ___, ___ S. Ct. ___ (3/2/20), here.  Guedes is not a tax case, but a case involving the definition of "machinegun" (under the National Firearms Act, 26 U.S.C. 5845(b)), the statutory term with the definition adopted under interpretive authority granted in IRC § 7805(a), through § 7801(a)(2)(A) which delegates authority to the Code’s tax provisions governing firearms to the Attorney General and a parallel delegation to the Attorney General in the Gun Control Act (18 U.S.C. § 926(a)).  In adopting the new regulation defining the statutory word machinegun to include “bump stocks,” the Attorney General said that the definition was an interpretation, albeit a new one including bump stocks, of the governing statutory text–machingun and said that the definition was consistent with plain meaning of the text (Chevron Step One) but if not, then Chevron deference would apply (Chevron Step Two).  (There is nuance on the Chevron Step Two analysis, see the next paragraph.)  On appeal to the D.C. Circuit, the Government relied only on the plain meaning and did not rely upon Chevron deference.  (There is also nuance there, see the next paragraph.)

In this regard, Chevron deference is meaningful only at Step Two and then only if the agency adopted interpretation is not persuasive to the court but otherwise within the zone of reasonable interpretations.  See generally 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. In other words, if the statutory text is ambiguous at Step One and the court agrees with the agency reasonable interpretation at Step Two, there is no Chevron deference.  Chevron deference applies only at Step Two where the court’s interpretation is different than the agency’s reasonable interpretation and the court adopts, by deference (known as Chevron deference), the agency reasonable interpretation.  So, the government’s argument could prevail at either Chevron Step One (no ambiguity) or Chevron Step Two (ambiguity but agency definition is persuasive among reasonable interpretations).  (I develop the limited scope of Chevron deference in the article by positing five categories of statutory interpretation, see the article breakdown on the categories and relevance to Chevron, with only the Fifth Category relevant to Chevron beginning on p. 65, here; in this regard, others have noted Chevron's limited scope, e.g., Nicholas R. Bednar & Kristin E. Hickman, Chevron's Inevitability, 85 Geo. Wash. L. Rev. 1392, 1398 (2017) ("Rhetoric notwithstanding, Chevron alone does not truly drive the outcome in most of the cases in which courts apply it.").

Taking that as the background, the D.C. Circuit opinion is confusing, to say the least.  For a fuller discussion of Guedes, I refer readers to my article on p. 97, here.  For present purposes, the D.C. Circuit treated the regulations interpretation as a legislative rule and accorded it Chevron deference although neither party requested Chevron deference for the interpretation.  I have noted in my article that regulations interpretations of statutory text are interpretive rules, whether promulgated with notice and comment or not.  Moreover, if indeed the rule in question were legislative, then it is tested under Chevron only as to the scope of the authority delegated, otherwise the regulation is the law and not an interpretation of the law.  The law in Guedes is not the regulation, but the statutory term machinegun.