11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21)

Subsequent blog entry adding some procedural nuance:  Regulations Interpreting Pre-1996 Code provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22), here.

In Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), 11^th Cir. here and GS here, the Court invalidated regulation § 1.170A-14(g)(6)(ii) denying charitable donations of partial interests (such as easements) for conservation purposes if the deed requires that, upon extinguishment, the proceeds be shared between donor and charitable donee ratably to the value between the conservation easement and the donor’s retained property rights as of the time of the donation.  Specifically, the regulations did not permit in that sharing calculation, the subtraction of value of post-donation improvements incurred by the donor.  Such subtraction, if allowed, would allocate that portion of the value exclusively to the donor rather than sharing with the charitable donee according to the date of donation values).  The Regulation interpreted the § 170(h)(5)(A) requirement that:

(A) Conservation purpose must be protected
A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.

Two issues are potentially implicated.

(i)              Was the regulation properly promulgated under the procedural requirements for regulations in the Administrative Procedure Act (“APA”)?  Those requirements include a statement of purpose addressing significant comments in the Notice and Comment process (sometimes called Reasoned Decisionmaking) which may be tested under the APA’s arbitrary and capricious standard under 5 USC 706(2)(A).  This is sometimes referred to as the State Farm test.  Motor Vehicles Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).  This test is a procedural regularity test only and, as to interpretations in the regulation, do not test the validity of the interpretation.  (Thomas Merrill, a noted scholar, has suggested that Reasoned Decisionmaking or some variation including a reasoning concept is better called “process review,” to avoid confusing it with the ambiguous requirement of “reasonableness,” which is the deference test for an interpretation. Thomas W. Merrill, Re-Reading Chevron, 70 Duke L. J. 1153, 1171-1172 (2021); process review seems to focus better on the inquiry into the procedural validity of the regulation.).

(ii)            Was the interpretation in the regulation a valid interpretation either because it is the best interpretation of the statute (regardless of deference) or, if not the best interpretation, subject to Chevron deference?  Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).  In this regard, a Notice and Comment regulation interpretation adopted in a procedurally invalid way is not entitled to Chevron deference but should still carry the day if it is the best interpretation of the statute.  BTW, this is why an interpretive regulation differs from a legislative regulation; if a legislative regulation is procedurally defective or even does not exist, there is no law in the statute to apply; if an interpretive regulation is procedurally defective or does not exist, there is still the statute a court can apply based on its best interpretation.  For example, the quintessential tax legislative regulations are the consolidated return regulations; if there are no consolidated return regulations or they are procedurally invalid, there is no law for consolidated returns; by contrast, most tax regulations are interpretive regulations where if there were no interpretive regulations or if the interpretation in the regulations were not valid (qua interpretation), there would still be the statute which the court could interpret to resolve the dispute.

The 11^th Circuit held in Hewitt that the regulation failed the procedural regularity test in (i) above because, in adopting the Final Rule, Treasury failed to consider and discuss a material significant comment regarding the extinguishment formula as to whether the value of post-donation improvements by the donor must be shared with the charitable donee.  Failing the procedural regularity test, the regulation was invalid thus precluding any Chevron deference.  Had the regulation passed the procedural regularity test in (i), Chevron deference might have been an issue.

FinCEN Adopts Immediately Effective Final Rule Omitting the Regulations Statement of the 2004 Willful Penalty Prior to the 2004 Statutory Amendment (12/26/21)

Readers may recall that the FBAR willful penalty, as amended in 2004, provides a maximum penalty of the greater of $100,000 or 50% of the amount in the account on the reporting date.  31 U.S.C. §5321(a)(5)(C).  Prior to 2004, the maximum willful penalty was $100,000.  After the 2004 amendment, FinCEN did not amend the regulation, 31 CFR § 1010.820(g), to reflect the change in the statute.  After the amendment, creative lawyers pursued the argument that, by leaving the regulation in tact, FinCEN exercised its discretion under the amended statute to maximize the FBAR willful penalty at $100,000 and thus could not assert a higher penalty under the amended statute.  That argument finally failed.  E.g., Norman v. United States, 942 F.3d 1111, 1117-1118 (Fed. Cir. 2019).

FinCEN has deleted subsection (g), thus eliminating any confusion (real or feigned) about the effect of the statutory amendment.  The Final Rule states that it is immediately effective on the date issued (12/23/21).  See 86 FR 72844, 72844-72845, here.

I have no idea why FinCEN took so long to make that deletion.

JAT Notes:

What is the effect of stating an effective date of 12/23/21?  Why didn’t FinCEN just state that the effective date was the 2004 amendment effective date?  Certainly, the deleted subsection (g) had been effectively deleted by 2004 amendment, as recognized by the court opinions prior to 12/23/21.

While I can't provide a definitive answer as to FinCEN's reasoning, I will step through my analysis.:

Fifth Circuit Affirms Agency Best Interpretation of Statute, thus Not Applying Chevron (12/20/21; 12/15/22)

On 12/21/21 and 12/15/22, significant additions by adding paragraphs 3, 4 and 5 to JAT Notes below.

In Cargill v. Garland, 20 F.4th 1004 (5th Cir. 12/14/21), CA 5 here and GS here,  the Fifth Circuit panel sustained the ATF regulations interpretation of the statutory term “machinegun” to include bump stocks.  Judge Higginson for the unanimous panel reasoned that the interpretation was the “best” interpretation.  On that holding, Chevron deference was irrelevant, for as the panel noted (p. 1009 n. 4):

   n. 4 Cargill also argues that if the statute is ambiguous, the Bump Stock Rule is not entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), reasoning primarily that Chevron does not apply to cases involving criminal statutes and that ATF explicitly waived Chevron in the district court. Because we conclude that bump stocks are "machinegun[s]" under the best interpretation of the statute, we do not address whether the Rule is entitled to deference. See Edelman v. Lynchburg Coll., 535 U.S. 106, 114 (2002) (explaining that "there is no occasion to defer and no point in asking what kind of deference, or how much" would apply in cases where an agency has adopted "the position we would adopt even if there were no formal rule and we were interpreting the statute from scratch")

In my recent update to the article titled The Report of the Death of the Interpretive Regulation Is an Exaggeration (see SSRN here), I presented this phenomenon as a category (which I call Category 3) where courts do not defer to the agency interpretation. I presented this category with others to show the limited application of Chevron deference.  That discussion in the article is presented in the Postscript to the article at pp. 118–124, which starts here; the Postscript only may be viewed and downloaded here.

The panel noted the state of play on the bump stock rule at the time of the decision as (p. 1006 n. 2):

   n2 Three other circuits have also rejected challenges to the Bump Stock Rule. In April 2019, the D.C. Circuit denied a motion for a preliminary injunction against the Rule, concluding that the statutory definition of "machinegun" is ambiguous and that the Rule is entitled to Chevron deference. Guedes v. Bureau of Alcohol, Tobacco, Firearms & Explosives, 920 F.3d 1 (D.C. Cir. 2019) (per curiam). One judge dissented, arguing that the Rule contradicts the statute's plain language. Id. at 35 (Henderson, J., dissenting). The Supreme Court denied certiorari, 140 S. Ct. 789 (2020), though Justice Gorsuch issued a statement arguing that the Rule is not entitled to Chevron deference. Id. at 789-91 (Gorsuch, J., statement regarding denial of certiorari). In May 2020, the Tenth Circuit denied another motion to preliminarily enjoin the Rule, for similar reasons as the D.C. Circuit. Aposhian v. Barr, 958 F.3d 969 (10th Cir. 2020). Four months later, the Tenth Circuit vacated that opinion and granted a rehearing en banc, 973 F.3d 1151 (10th Cir. 2020) (en banc), but it subsequently reversed course, vacating the order granting rehearing en banc and reinstating the original panel opinion. Aposhian v. Wilkinson, 989 F.3d 890 (10th Cir. 2021) (en banc). Five judges dissented from the decision to vacate the en banc order. Id. at 891 (Tymkovich, C.J. dissenting, joined by Hartz, Holmes, Eid, and Carson, JJ.). The plaintiff in that case has filed a petition for certiorari in the Supreme Court. Petition for Writ of Certiorari, Aposhian v. Garland, No. 21-159 (U.S. Aug. 4, 2021). Finally, in March 2021, a Sixth Circuit panel granted a preliminary injunction against the Rule, holding that the Rule is not entitled to Chevron deference and is not the best interpretation of the NFA. Gun Owners of Am., Inc. v. Garland, 992 F.3d 446, 450 (6th Cir. 2021). However, the Sixth Circuit vacated that decision, 2 F.4th 576 (6th Cir. 2021) (en banc), and an evenly divided en banc court affirmed the district court's judgment upholding the Rule. No. 19-1298, ___ F.4th ____, 2021 WL 5755300 (6th Cir. Dec. 3, 2021) (en banc); see Gun Owners of Am. v. Barr, 363 F. Supp. 3d 823, 826 (W.D. Mich. 2019).

The Court also held (pp. 1013-1014) that, since its best interpretation of the term “machinegun” did not present an ambiguity, the rule of lenity did not apply.

JAT Notes:

Final Update of Article on APA, Legislative and Interpretive Regulations, and Chevron (12/16/21)

I have posted to SSRN a major update of my prior article titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  The update is dated December 14, 2021.  The Abstract summarizing the scope of the article is here.  The Abstract offers links to view or download the article.

This will be the last update for this article.  (There was one update before this.)  If there is something new that I feel appropriate to discuss in an article on SSRN, I will write a new article.

CAVEAT:  The Abstract has two problems that I do not know how to fix:

1. As of this morning, the Abstract has a concluding paragraph that I cannot delete for some reason.  That concluding paragraph is carried over from the last update and does not apply to this update.  I have posted a revision for the Abstract that, when approved, will caution that, if there is text below that point, it is a vestige and readers should ignore that concluding paragraph.  The following is the concluding paragraph that readers should ignore:

Note: The principal revisions in the draft linked here are discussions of Supreme Court cases in June 2019. I did make some other minor corrections as well. This "final draft" of the article replaces one originally posted June 6, 2019. I have made substantial revisions to the earlier draft. I do not have plans for further revisions, although I will likely make substantial revisions on this subject to the more summary presentation in my Federal Tax Procedure books (Practitioner and Student Editions) posted on SSRN.

2.  The SSRN suggested citation for the article states my author name twice as if there were joint authors of the publication.  As it appears now, the suggested citation is:

Townsend, John A. and Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (December 14, 2021). Available at SSRN: https://ssrn.com/abstract=3400489 or http://dx.doi.org/10.2139/ssrn.3400489 

The corrected citation in SSRN suggested format should be:

Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (December 14, 2021). Available at SSRN: https://ssrn.com/abstract=3400489 or http://dx.doi.org/10.2139/ssrn.3400489

Actually, the citation that I prefer uses the current convention of identifying the author with first name first:  

John A. Townsend. The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN December 14, 2021), https://ssrn.com/abstract=3400489

Proposed Four Step Chevron Test to Isolate When Deference is Outcome Determinative (12/10/21; 12/11/21)

 I write to follow up on this blog entry: Sixth Circuit En Banc Panel Ties on the ATF Bump Stock Regulation, Thus Affirming Only the Judgment of the District Court Sustaining the Regulation (Federal Tax Procedure Blog 12/6/21), here.  Prior to the Gun Owners en banc disposition discussed in that blog entry, I had added to my draft article the following as a proposed test to isolate when Chevron is really outcome-determinative (footnotes omitted):

            D.        Proposal - Four Step Chevron to Isolate Chevron Deference.

            I think much of the commotion and angst about Chevron deference is driven by political ideology.  Chevron is the bogeyman proxy for the evils of the administrative state.  The notion is that the administrative state is inconsistent with freedom (whatever exactly that is in a large and diverse democracy where some freedom constraints are required), and Chevron is the poster child because it empowers the administrative state by taking away “rights” that should be in the legislature or the courts rather than evil administrators out to screw citizens.  I think that claim is overblown, as I discuss in the Categories discussed above showing the limits of Chevron deference.  To avoid the hyperbole to which Chevron has been subjected in political and legal discourse, I suggest reformulating Chevron into four steps which do not change the substance of the Chevron two step formulation but isolates when a court is actually deferring to an agency interpretation:

Step 1.  Is the statute ambiguous?  If no, stop here, with the court applying the unambigious interpretation.  If yes, go to Step 2.

Step 2.  Is the agency interpretation reasonable within the scope of ambiguous statutory text?  If no stop here, with the court applying its interpretation.  If yes, go to Step 3.

Step 3.  Is the agency interpretation the best interpretation within the scope of the ambiguous statutory text?  If yes, stop here, with the court applying the best interpretation.  If no, go to Step 4.  [*]

Step 4.  Is the agency interpretation a reasonable interpretation (but not best) within the scope of the ambiguous statutory text?  

a. If the answer is yes, defer to the less persuasive agency interpretation.  (Readers should note that this is the only circumstance that a court defers to the agency interpretation in an outcome determinative sense.)

b. If the answer is no, do not defer to the less persuasive agency interpretation.

Whirlpool's BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22)

In Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944 (6th Cir. Dec. 6, 2021), CA6 here and GS here, affirming 154 T.C. 142 (2020), here, Whirlpool tried to smoke a tax shelter, of the bullshit variety, first past the IRS then past the Tax Court (Judge Lauber) and the Sixth Circuit (Judges Kethledge and Norris in the majority on the panel). Whirlpool failed, a well-deserved failure; Whirlpool earned the failure. Basically, through smoke and mirrors Whirlpool attempted to give the appearance that it had successfully shifted profits offshore, thus avoiding U.S. tax.

I won’t get into the technicalities of how Whirlpool hoped to avoid (or evade) U.S. tax. Judges Lauber (Tax Court) and Kethledge (6^th Circuit) handle that discussion well. Besides, that maneuver does not implicate tax procedures.

I write because of how Judge Kethledge addressed the issue of statutory interpretation. I have included statutory interpretation both in my Federal Tax Procedure Book and in my blog entries here. Judge Kethledge presents himself as an originalist, which for present purposes is a textualist requiring that the words of the Constitution or statutes when the words were adopted or ratified. See e.g., the Wikipedia entry for Judge Kethledge here.

The concern I address is what the words mean when adopted or ratified. One thing textualists claim to eschew when determining the original meaning of the words is legislative history. Judge Kethledge genuflects to that claim. For example in a review of his book, Lead Yourself First: Inspiring Leadership Through Solitude, by Raymond M. Kethledge and Michael S. Erwin, here, the following is stated (emphasis supplied):

In a recent speech, he recalled learning one trick of the Washington trade, namely that young staffers write legislative history — which is not part of any law but which some judges will apply if they like it better than the law — often with no oversight whatsoever from the senators themselves. It is therefore no wonder that he has never relied upon legislative history to interpret statutory language.

In Whirlpool, however, it appears that relying on legislative history is precisely what Judge Kethledge does to derive a specialist meaning for some of the statutory text.

My observation is that textualists (basically the same category as originalists) such as Judge Kethledge eschew legislative history except when they don’t. They ignore legislative history when doing so supports the outcome they desire and then deploy legislative history when it supports the outcome they desire. Certainly, in Whirlpool, Judge Kethledge relies on legislative history to determine the outcome. Enough  said.

 JAT Notes (Other):

Sixth Circuit En Banc Panel Ties on the ATF Bump Stock Regulation, Thus Affirming Only the Judgment of the District Court Sustaining the Regulation (12/6/21)

In Gun Owners of America, Inc. v. Garland, ___ F.4th ___, 2021 U.S. App. LEXIS 35812 (6^th Cir. 12/3/21), here, the Court en banc by terse order affirmed the district court judgment sustaining the bump stock regulation based on an 8 to 8 split among the judges.  Judges on either side of the split wrote separate opinions in support of and against affirming the district court judgment, although none of the opinions received support of a majority of the en banc panel.  The district court opinion sustained the validity of the bump stock regulation and the panel Circuit opinion reversed the district court judgment.  Therefore the affirmance of only the judgment (and not on the basis of the district court opinion or the panel opinions) seems to mean that the result only has been affirmed with no precedential value in the district court opinion, the Circuit Court panel opinions, or the en banc separate opinions. (If I am incorrect in how I read the en banc outcome, I hope someone with post a comment or email me at jack@tjtaxlaw.com to correct me.)

In all events, it appears that now there is no conflict among the Circuits on the validity of the ATF’s bump stock regulation and, hopefully, no reason for the Supreme Court to take the case on the basis of conflict among the Circuits.  (My speculation is that a conflict is likely to occur when a case gets before the more ideologically oriented Fifth Circuit.)

Since the en banc separate opinions are not precedential and seem to only rehash arguments that have previously been addressed in the panel opinions, I am reluctant to address the en banc separate opinions here.  I have already addressed the arguments made in the en banc separate opinions via comments on the panel opinions in Gun Owners of America, Inc. v. Garland, 992 F. 3d 446 (6^th Cir. 2021)  and comments on the preceding opinions in Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 2019) and Aposhian v. Barr, 958 F.3d 969 (10th Cir. 2020).  The relevant prior blogs on the prior opinions are (in reverse chronological order):

• Circuit Conflict in Important Cases that Allow the Supreme Court to Take Cert and Pronounce on the Difference between Legislative and Interpretive Regulations (Federal Tax Procedure Blog 3/30/21; 12/6/21), here.
• More Thoughts on APA and Legislative and Interpretive Regulations Inspired by Recent Cases (Federal Tax Procedure Blog 4/8/21; 4/11/21), here.
• Tenth Circuit Wobbles on Legislative / Interpretive Distinction (Federal Tax Procedure Blog 5/13/20), here.
• Guedes Cert Denial on Bump Stock as Machinegun, Justice Gorsuch's Cryptic Statement and My Digression (Federal Tax Procedure Blog 3/2/20; 3/5/20), here.
• Legislative Rules And Chevron Deference An Oxymoron? (Federal Tax Procedure Blog 1/31/20; 2/10/20), here.

Tax Court (Judge Lauber) rejects Coca-Cola’s Untimely Motion for Reconsideration (12/3/21; 11/9/23)

There is a subsequent development in this case. On 11/8/23, the Court entered decision in Coca Cola Co. v. Commissioner, T.C. Memo. 2023-135. This opinion decides the remaining key issue but calculation issues will be resolved, if necessary, in order to enter the final Decision.  I discuss this Memo Opinion, here.

I wrote earlier on the Coca-Cola case, Coca-Cola Co. & Subs, v. Commissioner, 155 T.C. 145 (2020), TC Dkt # 750 here. See Tax Court (Judge Lauber) Issues Significant Transfer Pricing Decision in Coca-Cola; Burden of Proof Issues (11/19/20; 11/25/20), here; and More Coca-Cola - On Transfer Pricing and Blocked Income Regulation (11/23/20), here.  

The Tax Court (Judge Lauber) recently denied two related Coca-Cola motions:  “at docket entry #747, a Motion for Leave to File Out of Time a Motion for Reconsideration of Findings or Opinion Pursuant to Tax Court Rule 161 (Motion for Leave) and concurrently lodged, at docket entry #748, a Motion for Reconsideration.” The complete docket entries are here.

The problem is that the motions were filed untimely.  Judge Lauber notes (p. 1):

            Under Rule 161,1 a party shall file a motion for reconsideration of an opinion or findings of fact within 30 days after the opinion is served “unless the Court shall otherwise permit.” Petitioner filed its Motion for Leave 196 days after our Opinion was served. Whether to grant a party’s motion for leave to file a motion for reconsideration in such circumstances is within the Court’s discretion. Louisville & Nashville R.R. Co. v. Commissioner, 641 F.2d 435, 443-444 (6th Cir. 1981), aff’g on this issue 66 T.C. 962 (1976); Thompson v. Commissioner, T.C. Memo. 1989-303, 57 T.C.M. (CCH) 783, 784.

The Order is a short 8 pages.  Suffice it to say that Judge Lauber was not impressed with Coca-Cola's arguments (including bringing in the undoubtedly very expensive big gun (real or imagined), Michael Luttig (Wikipedia here), to belatedly enter the fray after the battle had been lost in the Tax Court).

I am now trying to get the motions, responses and replies. The problem is that filed pleadings are not available generally from the Tax Court DAWSON (like PACER, but not as good as PACER for a host of reasons I won’t get into now).  Even worse, under the current implementation of DAWSON, so long as the docket for the case has any document filed under seal, the entire docket list is unavailable.  Here is what DAWSON returns when you request the docket:

 

In this case with 750 docket entries, simply because some small subset of the documents listed on the docket entries is under seal, then the entire list of docket entries is unavailable.  That makes no sense to me.  PACER has long since been able to provide a complete list of  docket entries even when some particular entries cannot be accessed because under seal, so that documents  not under seal can be identified and obtained online simply by paying the PACER fee.

I won’t go further into the Tax Court’s disservice to the public in its current implementation of DAWSON.  I do say that, in a number of respects, the Tax Court version prior to DAWSON was not as good as PACER, but it was far better than the DAWSON “upgrade.” Enough on that rant for now.  

When I and if I get the pleadings behind this Order I will likely have more to say.

Civil Liability for Conduct that is Acquitted in Criminal Case (11/20/21)

 The Kyle Rittenhouse acquittal on all counts is in the news.  Acquittal or conviction (on some or all counts) was sure to become a political charged phenomenon.  I don’t deal with the political issues here. I respond to a question I was asked yesterday as to whether Rittenhouse’s acquittal absolves him of potential civil liability related to the same conduct for which he was acquitted and specifically address the criminal tax analog of the phenomenon.

For a discussion of the nontax answer, I point readers to this discussion:  Euguene Volokh, Could Kyle Rittenhouse Be Sued for Negligence? (The Volokh Conspiracy 11/20/21), here.  Professor Volokh answers the question succinctly at the beginning of the blog post:

A criminal acquittal doesn't preclude a civil lawsuit out of the same claims. First, the acquittal resolves only that guilt couldn't be proved beyond a reasonable doubt (requiring, say, a >90% confidence level); the standard for civil liability is preponderance of the evidence (which requires just >50%, or perhaps ≥50%, if the injury is easily proved and the burden is then shifted to the defendant to prove self-defense).

A similar phenomenon plays out in the criminal tax area.  A criminal tax evasion acquittal does not prevent the imposition of the civil fraud penalty in § 6663.  And, for the same reason:  the burden of proof for the civil fraud penalty is less than for the criminal penalty. so that acquittal is not issue or claim preclusive for the civil fraud penalty.  Civil liability for the civil fraud penalty requires that the Government prove civil fraud liability by clear and convincing evidence, a burden that as articulated is less burdensome (so to speak) for the Government than the beyond a reasonable doubt standard.

 Here is the key paragraph from my Federal Tax Procedure Book (2021 Practitioner Edition), p. 333 here (footnotes omitted from the quote but may be viewed at the link here):

If the taxpayer is acquitted of the tax evasion charge, however, the IRS may still assert the civil fraud penalty (the acquittal is not preclusive that there was no civil fraud).  Why?  A finding of not guilty is not necessarily a finding of innocence; it is only a finding that the government failed to prove guilt beyond a reasonable doubt.  In an ensuing civil tax case, the government must establish fraud only by clear and convincing evidence, a substantially lesser burden than the beyond a reasonable doubt requirement for criminal conviction.  Accordingly, the IRS may and usually does assert the civil fraud penalty when the taxpayer has been acquitted.

Most civil liability exposures relate to liabilities such as negligence discussed above that require proof of liability by a preponderance of the evidence.  Liability for the civil fraud penalty requires proof by clear and convincing evidence, a standard that falls somewhere between beyond a reasonable doubt (the criminal conviction standard) and preponderance of the evidence.  For discussion of the difficulties in articulating these standards, particularly in jury instructions useful to a jury, see discussion in my book pp. 331-332, here, particularly at n. 1414 and pp.601-602.

This post is cross posted on the Federal Tax Crimes Blog here.

Help Appreciated on Chevron Discussion (11/19/21)

I am trying to finish up a major revision to an article I wrote involving the administrative law and Administrative Procedure Act (“APA”) distinction between legislative and interpretive regulations.  A significant part of the article deals with Chevron deference. 

I am posting one part of the Chevron deference discussion in the article where I break down various interpretive categories with the goal of showing Chevron deference is far less outcome determinative that all the commotion about Chevron would suggest.

That part of the discussion in pdf format is here.  I would appreciate any feedback (particularly critical feedback) that might be offered.  Please offer your comments directly to me at jack@tjtaxlaw.com.  Alternatively, if you think it might be useful for reader comment, post as a comment here.

Issue with Viewing and Downloading Older Linked Document (11/14/21)

I am getting periodic email requests for permission to view and download documents linked in earlier blog entries that were posted on my Google Docs account.  When I originally posted those items, viewing and downloading did not require permission.  For some reason, Google made changes that made some or all of those earlier linked documents require permission to view and download.  Those getting the message that permission is required have the opportunity to email a request for permission.  Please email me and I will give permission.  

Thank you for your interest in this Blog.

Tax Court Judge Gustafson Enters Order Permitting IRS to Concede Without Merits Decision (11/6/21)

In an order in Puglisi v. Commissioner (T.C. Dkt Nos. 4796-20, 4799-20, 4826-20, 13487-20, 13488-20, 13489-20 Order served 10/29/21), here, the Tax Court (Judge Gustafson) permitted the IRS to concede the deficiency adjustments related to the taxpayers' microcaptive insurance and thus move to decision in the case.  Readers know that the IRS believes – strongly believes—that many forms of microcaptive insurance are abusive.  Many microcaptive deficiency cases are pending, and, of course, the Supreme Court recently held in CIC Svcs., LLC v. IRS, 593 U.S. ___, 141 S.Ct. 1582 (2021) that the material advisor reporting requirement imposed by IRS Notice for abusive microcaptives could be subject to pre-enforcement review.  As to CIC, see Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.

In the Puglisi Order, the IRS conceded all of the adjustments related to the microcaptive insurance. Typically, if the IRS concedes, the taxpayer may be more than willing to accept the concession and move on, perhaps trying to recover attorney fees and costs under §7430.  In this case, the taxpayers apparently are unable to recover under § 7430 "' because of the technical limitations of I.R.C. section 7430.'”  (Slip Op. 6.) Here, the taxpayers do not want to move on but want to litigate the merits of the issues the IRS conceded. What is going on that requires an order of 17 pages?

The taxpayer speculates, as recounted in the Order, that (Slip Op 8-9):

Respondent has now concluded that he wants to abandon the tax deficiencies asserted in his notices of deficiency, apparently because he recognizes that Petitioners' cases are not the litigation vehicles that he wants to use to present his theories to this Court. But while Respondent is willing to abandon the asserted deficiencies, he is not willing to concede the inaccuracy of his determinations underlying the adjustments * * *. [The motions for entry of decision make a] strategic attempt to “concede” the overall amounts at issue, in order to avoid an adverse ruling on the specific determinations in the notices of deficiency * * *.

Judge Gustafson addressed the IRS’s litigating strategy later (Slip Op. 16-17):

Court Holds that Erroneous Refund Suit Accrues on the Date the Taxpayer Receives the Check (11/5/21)

In United States v. Page, No. CV-20-08072-PCT-JAT, 2021 U.S. Dist. LEXIS 206339 (D. Ariz. Oct. 25, 2021), CL here, the court held that, based on controlling 9^th Circuit precedent, an erroneous refund suit accrues on the date the taxpayer receives  the refund check rather than later date (specifically when the taxpayer cashes the check).  That holding is consistent with the court’s prior holding that I discussed here:  When Does the Statute of Limitations Start on the Erroneous Refund Suit? (4/29/21), here.

I offered what I can in the earlier blog entry, so I point to that here.  I will just say that, if indeed 9^th Circuit precedent controlled the result, I think it the precedent is wrong, but only the 9^th Circuit can overrule the precedent.  See my thoughts in the earlier blog entry.

Good Tax Court Opinion on Interest Consequences of Distinction between Deposits and Payments (11/2/21)

In Hill v. Commissioner, T.C. Memo. 2021-121, GS here, Judge Lauber held that a portion of a remittance labeled the taxpayer as a deposit will be treated under the interest rule for deposits under § 6603 rather the interest rule than for overpayments.  Judge Lauber states nicely the issue and holed in the opening paragraphs (footnote omitted):

            Currently before the Court is petitioner’s motion to redetermine interest under section 7481(c) and Rule 261.  In 2012 petitioner remitted [*2] to the Internal Revenue Service (IRS or respondent) a check for $10,263,750, designating the remittance as a “deposit” to be applied toward his anticipated gift tax liability for 2011. In a stipulated decision entered July 19, 2019, we determined a gift tax deficiency of $6,790,000 for 2011 and no overpayment for any year. After our decision became final, the IRS sent petitioner a check for $3,473,750, the amount of his excess deposit, but without any interest.

            Respondent concedes that petitioner is allowed interest on the excess deposit, and he computes the interest due as $218,122, calculated using the Federal short-term rate. See sec. 6603(d)(4) (cross-referring to section 6621(b)). But respondent contends that we lack jurisdiction to redetermine interest under section 7481(c), which permits reopening a case for this purpose only where “the Tax Court finds under section 6512(b) that the taxpayer has made an overpayment.” In respondent’s view, petitioner made a deposit, not a payment of tax, and our decision did not determine any “overpayment.”

            Disavowing his repeated designations of the remittance as a “deposit,” petitioner contends that the $10,263,750 check constituted a “payment” of gift tax. And he insists that our decision in effect determined an “overpayment,” because it  [*3] included the parties’ below-the-line stipulation that petitioner had a “prepayment credit” of $10,263,750 that would be “applied to * * * [his] tax year 2011 gift tax liability.” From these premises petitioner concludes, not only that we have jurisdiction to redetermine interest, but also that he is due interest of $1,267,323, the sum calculated using the Federal short-term rate plus three percentage points, the interest rate  specified for “overpayments.” See sec. 6621(a)(1). Concluding that respondent has the better argument, we will deny petitioner’s motion.

I recommend the full opinion for its great discussion of the history of the deposit/payment distinction and the operation of § 6603 designed to somewhat mitigate the difference in interest for deposits and payments.

District Court Denies Government Request to Certify 6103 Issue on Republishing Public Information (11/2/21)

In United States v. Zak (Dkt. 1:18-cv-05774 Entry 330 Dated 10/22/21), Cl here and the CL Docket Entries are here, the Court denied the Government’s motion to certify appeal to the 11^th Circuit on an issue that has split the Appellate Courts.  One of the defendants, Clark, asserted a counterclaim against the United States for damages from violating § 6103’s prohibition on disclosure of return information.  See § 7431 (permitting damages)

The alleged disclosure was the republication of return information from the Government’s complaint.  In a motion to dismiss, the Government argued the information was publicly disclosed in the complaint and therefore its republication of already public information did not give rise to damages.  Clark argued that the Government could still be liable if the immediate source for the return information disclosed was the IRS’s files subject to § 6103 rather than from other public information.

In a July 6, 2021 order, the court held for Clark (Slip Op. 3):

In that Order, the Court emphasized that the Eleventh Circuit has never recognized the Ninth Circuit's “implicit exception” to § 6103's confidentiality requirement for “all tax return information that has become a matter of public record,” and that several other Circuits had expressly refused to do so. (Id. at 9, 13.) The Court was more persuaded by the narrower approach taken by the Fourth, Fifth, Seventh, and Tenth Circuits, under which liability under § 6103 depends on the immediate source of the disclosed information rather than its public or non-confidential status. (Id. at 11–12.) The Court also expressed doubts that the Seventh Circuit's rule permitting the subsequent republication of return information contained in a judicial opinion would similarly apply to the republication of return information contained in a complaint that was prepared by the Government's own lawyers. (Id. at 14–15.)

The Government then moved to certify the following issue to the 11^th Circuit (Slip op. 6):

Whether 26 U.S.C. § 6103 prohibits publication by the government of taxpayer information that has already been lawfully and publicly disclosed by the government in a judicial proceeding pertaining to tax administration?

In the Order discussed here dated 10/22/21, the District Court denied (Slip op. 6-11) the request to certify because the Government “failed to establish a genuine doubt as to the correct applicable legal standard here,” so the Government “failed to show the requisite substantial ground for difference of opinion to warrant an interlocutory appeal.”  The Court also held (Slip op. 11-13) that the immediate appeal would  not advance the litigation. 

Tax Court Dissects Complex Acquisition Transaction With Senior and Subordinated Debt Characterization in Issue (10/27/21)

In Tribune Media Co. v. Commissioner, T.C. Memo. 2021-122, here, issued yesterday, the Tax Court addressed a complex acquisition of the Chicago Cubs and held (in a 127 page opinion), that

• Certain debt (subordinated debt (called “sub debt”)) was equity rather than debt for tax purposes (slip op. 56-90.)  The result of holding the sub debt to be equity was that, under the partnership disguised sale rules, gain was recognized to the extent of the sub debt.  Specifically, and more precisely, since the parties agreed that the partnership disguised sale rules applied, the Court held that the treatment of the sub debt as equity meant that the exception for debt-financed distributions did not apply to that debt.  (This aspect of the transaction planning had been designed to qualify as debt-financed distributions.)  This holding turned upon the debt-equity distinction familiar to tax practitioners and even students of tax law.  The Court held (Slip op. 90) that “Although the sub debt had the superficial appearance of bona fide debt, it more closely resembles equity.”

• The senior debt in the transaction was bona fide recourse debt that could be allocated to support the debt-financed distribution exception to the disguised sale rules.  (Slip op. 91-119.)  With respect to the senior debt (slip op. pp. 118-119) the Court concluded (Slip op. 118-119, footnote omitted):

The Cubs transaction was a disguised sale in both form and substance. The economic reality of this transaction lies squarely within the intent of the disguised sale statute. The parties to the transaction formed a bona fide partnership that operates the Cubs franchise with assets contributed by Tribune. And the partnership in fact distributed cash to Tribune. This transaction also substantively fits into the debt-financed distribution exception for a disguised sale, receiving the distribution tax free up to the amount of the senior debt guaranteed by Tribune. CBH borrowed the senior debt, and Tribune guaranteed the senior debt. When such a transaction is explicitly provided for by Congress and followed by a taxpayer in both substance and form, we will not recharacterize it.The doctrine of substance over form is applied to prevent taxpayers from mislabeling transactions to achieve a desired tax consequence. Petitioners did not mislabel the transaction here; the economic substance of the Cubs transaction is a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations.

Freeman Law International Tax Symposium on 11/18 and 11/19 (10/19/21)

The following international tax program may be of interest to FTPB readers:  Freeman Law International Tax Symposium on November 18 and 19 (link for information and registration here).  The Symposium has some great participants, some well-known to tax procedure and tax controversy enthusiasts, and covers topics such as international tax topics, including civil and criminal penalty enforcement, cryptocurrency enforcement trends, and global tax reform.

District Court Enforces Summons to Delaware Dept of Insurance for Micro-Captive Information (10/4/21)

The district court has enforced the IRS summons issued to the Delaware Department of Insurance (“DDOI”) for information and documents on about 200 micro-captive insurance companies that DDOI issued certificates of authority.  United States v. Del. Dep't of Ins., No. 20-829, 2021 U.S. Dist. LEXIS 186623 (D. Del. Sep. 29, 2021), CL here.  I previously wrote on the Magistrate’s Report and Recommendation (“Report”) to enforce the summons.  Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (Federal Tax Procedure Blog 7/19/21), here.  Substantial portions of the district court’s Background are simply a copy and paste from the Magistrate’s Report.

DDOI raised arguments of error in the Magistrate’s Report related to the interpretation and application of the McCarran-Ferguson Act (“MFA”):

(1) by applying a “threshold test” of whether the conduct at issue constitutes the business of insurance for a non-antitrust case; and (2) by determining that the challenged conduct does not constitute the “business of insurance.” DDOI also argues that the Report erred by failing to recommend dismissal of the Petition on the grounds that the MFA reverse-preempted the Summons.

The resolution of this issue gets into arcana of the MFA, so I won’t delve into it here in detail.  In summary, the district court held that, in non-antitrust cases, there was a threshold requirement for MFA that the activity in question constitute the business of insurance.  In doing so, the district court has an interesting discussion of precedential authority in the Third Circuit regarding whether a subsequent panel opinion that seems inconsistent with an earlier panel precedential decision can reverse the earlier holding without en banc consideration.  The Court finds that, under Third Circuit, authority, the prior precedential opinion controls.  Interesting.

The district court also affirmed the Magistrate’s Report’s finding that the activity in question was record maintenance rather than insurance subject to MFA.

The district court then summarily rejected the DDOI argument for reverse preemption under the MFA.

Supreme Court Grants Cert on Issue of Whether CDP 30-day Time Limit is Jurisdictional (9/30/21)

The Supreme Court granted the petition for writ of certiorari in Boechler v. Commissioner, 2020 U.S. App. LEXIS 23306 (8^th Cir. 2020) to consider the following question:

Whether the time limit in Section 6330(d)(1) is a jurisdictional requirement or a claim processing rule subject to equitable tolling.

The Procedurally Taxing Blog has a good discussion on the grant of cert:  Christine Speidel, Supreme Court Agrees to Decide Whether the CDP Petition Filing Deadline Is Jurisdictional (Procedurally Taxing Blog 9/30/21), here.

There are other time limits in the IRC for the taxpayers and the IRS to act.  The quintessential time limit is the 90-day period for filing a petition for redetermination of a deficiency.  That has always been deemed jurisdictional, meaning that a taxpayer either complies with it or does not; there is no equitable relief for failure to file in the time period.  Another quintessential time limit is for filing a claim for refund, which the Court held in United States v. Brockamp, 519 U.S. 347 (1997) did not permit equitable tolling.  Congress thereafter enacted § 6511(h), here, to permit some equitable factors to toll the refund claim time period requirement.

Two reasonable inferences from Brockamp and § 6511(h) are:

• Some time periods in the IRC are jurisdictional in the sense that equitable tolling is not permitted.
• When Congress wants time periods, particularly those required for orderly functioning of the ubiquitous tax system, to be subject to equitable tolling, it provides specifically for that relief.

In this context, the § 6330(d)(1) time limitation is hard to distinguish between the petition for redetermination and claim for refund time periods.

More on Footnotes (9/28/21)

In prior editions of my Federal Tax Procedure Book, I offered Appendix C as a digression on footnotes.  I posted a blog entry with that Appendix C in its final version before I dropped the Appendix from the FTPB.  See On Footnotes and the Demise of Appendix C from FTPB (7/28/21), here.  Still, I continue my interest in footnotes and the uses and abuses of footnotes.  So this posting caught my eye:  Eugene Volokh, Footnotes and Exile (The Volokh Conspiracy 9/26/21), here.  It is very short, which tempts me to “copy and paste” it,  I don’t want to come close to some copyright or other infringement, so I just link the offering.  I will offer this quote (fair use):  “Footnotes are the Siberia of your article or your brief—and endnotes, I suppose, the Kamchatka (the peninsula, not the vodka).”

On the endnote thing, I have to say that I generally do not like endnotes.  Like much of life, the benefits of choices are mixed.  Footnotes are easier to read because one need only glance down to the bottom of the page, rather than having to turn to the end of the publication for the endnote.  Endnotes require some extra effort and thus are less distracting than footnotes simply because a reader may not take the trouble to read the endnote.  The downside of footnotes is that they are too easy to read, simply a downward glance will work.  If they are easy to read, the reader may be tempted to read the footnote which usually distracts from the flow of the text.  So the question is whether your footnotes are of such quality that you want to discourage most readers from reading them; if so, use endnotes.  If, however, you want your readers to sometimes actually read the note, use footnotes.

At one time I offered my FTPB with notes as footnotes and endnotes (two separate versions).  It was easy to turn the footnotes version into an endnoted version.  I finally concluded that, if a reader does not want to be distracted by footnotes or endnotes (most students), then get the Student edition without footnotes or endnotes.  If a reader sometimes or often reads footnotes, then the footnoted Practitioner edition is the way to go.  I just felt that few would be interested in endnotes, so I quit generating an endnote edition.

DOJ OIG Reports on DOJ Tax Expert Contracting (9/26/21)

The DOJ Office of the Inspector General (“OIG”) issued this press release of a new report:  DOJ OIG Releases Report on the Audit of Certain Tax Division Contracts Awarded for Expert Witness Services (9/23/21), here.  The report is here.  I quickly browsed the report.  Most of the report relates to internal process requirements, probably of little interest most readers of this blog.  Still, those who encounter DOJ Tax Division experts in their practice might be interested in the report and might even find some use of the information in the report.

The Executive Summary of the Report is on the introductory pages I & ii.

Some interesting points:

• The contracted high hourly rate for the contracts reviewed was $850 for the expert.
• The following observation was made regarding description of the services for the time increments charged (a phenomenon also true of lawyer’s billing on a time basis):

For example, on one invoice, an expert witness described 10 hours of work as “review materials, think about the issues, talk with staff, and prepare for call.” While we are not questioning any amounts associated with the vague invoice  descriptions, we believe it is important for the invoices to contain sufficient details to tie the services to the contract deliverables. Therefore, we recommend that the Tax Division require future invoices for contracted expert witness services to contain adequate descriptions that clearly tie to contract deliverables.

IRS Enjoined from Enforcing Tax Shelter Notice Requirement for Material Advisor for Microcaptive Transactions (9/22/21)

In CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, the Court held that the Anti-Injunction Act (§ 7421(a)) did not preclude a contest by a “material advisor” of IRS  Notice 2016–66 requirement to report micro-captive transactions.  See Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.  Accordingly, the Supreme Court remanded the case to the Court of Appeals which remanded it to the district court. 

In CIC Services, LLC v. IRS (E.D. Tenn. No. 3:17-cv-110 9/21/21), CL here, the district court held that the Notice was a legislative rule that required promulgation by notice and comment regulation.  Based on that holding, the court found the requirements for an injunction were met and that the injunction should be applied with respect to CIC.  I suppose that means, practically, that the IRS cannot impose penalties for any failure by CIC to comply with the requirements of the Notice  (Note, however, that the opinion says that “CIC also notes that, to date, it has complied with the Notice’s requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year.”).

This is a major win for the tax shelter industry but probably not the last word in this saga.

Without getting into the nitty-gritty on the application of the APA’s legislative/interpretive distinction (upon which turns the notice and comment regulation requirement), I suppose that the going forward solution for the IRS would be to use the immediate effect Temporary Regulation, with "good cause statement," process with contemporaneous Proposed Regulations for the notice and comment process.  The APA requirement for good cause is “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B).  Potentially abusive tax shelters should be sufficient for immediate effect under this provision. 

I am not sure that the court correctly determined that the Notice was a legislative rule requiring notice and comment (or good cause statement).  Because the court made the legislative determination with sound bites rather than detailed analysis, I won’t address that here.  I suppose the Government will appeal to the Sixth Circuit on an expedited basis because of the injunction.

The CourtListener (CL) docket entries for the case are here.

JAT Comments (added 9/22/21 2:30pm:

Revised Federal Tax Procedure (2021 Student Ed.) with Links (9/20/21)

I have posted a revised version of Federal Tax Procedure (2021 Student Ed.) on SSRN, here https://ssrn.com/abstract=3897432.  The principal revision is to provide links to the cases cited, the Code sections cited, and links for the table of contents and cross references in the text, so that it is more user-friendly for students.

I will not prepare a similar revision for the 2021 Practitioner Edition, but will incorporate that feature in both 2022 Editions which I expect to publish in early August 2022.

Court Sustains Almost $350 Million Jeopardy Assessment Arising from Sham / Bullshit Tax Shelter (9/18/21)

In Kalkhoven v. United States, 2021 U.S. Dist. LEXIS 175844 (E.D. Cal. 9/15/21), CL here, the Court sustained the IRS’s jeopardy assessment against Kevin Kalkhoven, a venture capitalist (Wikipedia, here).   Section 6861 allows the IRS to assess tax, such as income tax, which is otherwise subject to the prohibition on assessment in § 6213(a).  Students will recall that § 6213(a), the central feature of the deficiency notice preassessment litigation system, prohibits assessment before the issuance of a notice of deficiency and, if the taxpayer petitions the Tax Court for redetermination, until the Tax Court decision becomes final.  The delay in assessment, particularly if a Tax Court petition is filed, can be substantial.  And, when the tax liability relates to a TEFRA partnership, as here, further delays are encountered if the partnership litigates as it did here.

Section 6861 allows a jeopardy assessment to permit immediate assessment where the IRS determines that the collection of the as yet unassessed tax is in jeopardy.  The IRS determined that collection of tax was in jeopardy because of the large amount of tax to be assessed in the future because of Kalkhoven’s investment in the Son-of-Boss sham (aka, in my words, bullshit) tax shelter in BCP Trading and Investments, LLC v. Commissioner, 991 F.3d 1253 (D.C. Cir. 2021).  He had also invested in another such shelter, Woodside Partners v. Commissioner, docket no. 5685-16 (expected to generate a $25 million tax for Kalkhoven).

As a result of expected tax liabilities from these “investments,” the IRS made jeopardy assessments, under § 6861, totaling almost $350 million  (Gov’t response, Dkt # 22, p. 1.)  The IRS followed the procedure in § 7429 for appropriate approvals.  Kalkhoven invoked his right for expedited internal review in Appeals and then, upon obtaining no relief, for expedited judicial review in the district court.  The Court rejected his claim to relief, thereby sustaining the IRS’s jeopardy assessment.  The opinion is short (12 pages), so I recommend it, particularly for tax procedure students.  

Sustaining the jeopardy assessment is not a determination that the taxpayer actually owes tax in the amount assessed; it is just a determination that, on the facts known to the IRS, it is reasonable to believe that tax is due and collection is in jeopardy.  For more on the jeopardy assessment process, see the discussion on my 2021 Federal Tax Procedure Book (Practitioner Edition), here.

For further background, readers might want to review the docket entries in the case (CourtListener here, which permits some of the key documents to be viewed or downloaded).

 

On Complexity and Algorithms in Tax Administration (9/8/21)

The Procedurally Taxing Blog has a good post this morning, Bob Probasco (Guest Blogger), Complications from Extensions and Unprocessible Returns (Procedurally Taxing Blog 9/8/21), here.  It delves into the interaction of  (i) the Beard test for a valid return (Beard v. Commissioner, 82 T.C. 766 (1984), affd. 793 F.2d 139 (6th Cir. 1986)), (ii) the differences between a Beard-valid return and a processible return, and (iii) the arcana of interest computations based on those differences and the interaction of § 7508A disaster relief.  Bob does a great job weaving through that stuff, so I won’t even try to summarize it here (too great a risk of showing my ignorance).  Rather, I found Bob’s conclusion in this dance through tax arcana should resonate with students of the tax law and tax procedure:

Two Final Thoughts

            First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

            Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpretation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate. 

 JAT Comments:

“Deference” to Judicial Opinions (with War Story) (9/1/21)

Yesterday, I posted Draft Article on Interpretive Regulations and Chevron Deference (Federal Tax Procedure 8/31/21), here, where I solicited review assistance for a draft article.  One of the major topics of the article is judicial deference to agency interpretations, now called Chevron deference.  In the draft article, I differentiated between judicial deference to agency interpretations and judicial deference to opinions of other judges or courts.  I state in the article:  “Care must also be taken when using the term deference because it is employed in other contexts to serve a similar, but not the same, function whereby judges defer or give special respect to (i) other specialized courts for legal interpretations in their areas of expertise” or (ii) to particular judges.  I then offered this footnote with a “war story” (fn 279 in the current draft article):

The footnote (3 paragraphs) is:

   n279 A good example is deference or special respect sometimes accorded Tax Court interpretations in specialized areas of tax law, despite the usual interpretation of § 7482 to require de novo review.  See Amandeep S. Grewal, The Un-Precedented Tax Court, 101 Iowa L. Rev. 2065, 2096 (2016) (Tax Court “even sometimes receives special deference from the appellate courts,” collecting in footnote 211 examples of cases where. because of Tax Court’s special expertise, the courts of appeals give “respect” or even defer to Tax Court legal interpretations); Leandra Lederman, (Un)Appealing Deference to the Tax Court, 63 Duke L.J. 1833 (2014) (collecting authority related to deference or something like it to Tax Court review and concluding that courts of appeals should give de novo review to Tax Court legal interpretations without deference); and Andre L. Smith, Deferential Review of the United States Tax Court: The Chevron Doctrine, 37 Va. Tax Rev. 75 (2017) (arguing for Chevron deference or something like it for Tax Court legal interpretations).

            Another example from personal experience that intersected with then Judge Stevens who later, as Justice Stevens, authored the Chevron opinion.  While with the Department of Justice Tax Division Appellate Section, I handled the appeal in Standard Oil Co. (Indiana) v. Commissioner, 465 F.2d 246 (7th Cir. 1972).  The issue involved an esoteric oil and gas tax concept termed “economic interest.”  Judge Stevens said in the opinion (p. 251, n. 15):  “We give special deference to the views of the Fifth Circuit which has considered the issue on several occasions.” I think that there was an understanding at the time such as Judge Stevens articulated that the Fifth Circuit had special expertise in the area of oil and gas taxation deserving of what he called deference.  I am not suggesting that then Judge Stevens meant deference in exactly the way he later deployed the term deference in Chevron or courts used the term deference to agency interpretations pre- and post-Chevron, but I do think Judge Stevens meant something stronger than Skidmore-type deference (or persuasion).  On what Skidmore means, if anything, see p. 75, n. 307; and Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here.

            Yet other examples are where the Supreme Court or other courts give some special consideration, even “hints of deference,” given a lower court’s or even a specific judge’s expertise.  Aaron-Andrew P. Bruhl, Following Lower-Court Precedent, 81 U. Chi. L. Rev. 851, 868-869 (2014).

Other Comments (Personal War Story Off-Topic):

Old Lawyer; New Trick (9/1/21)

The old saw is that you can’t teach an old dog new tricks.  Extending that saying to lawyers (distinguishable from dogs in the lovability category), you can’t teach old lawyers new tricks. 

I am an old lawyer and am happy to say that I learned a new trick that I will implement in my publications in the future (most importantly, the 2022 Editions of the Federal Tax Procedure Book to be published in August 2022).  The new trick is to automatically generate in my word processing documents (WordPerfect) links to the Table of Contents items (permitting the reader to jump from the Table of Contents to the item) and cross-reference items (also permitting the reader to jump to the cross-referenced page and footnote).  Those links not only show up in the WordPerfect document but, when WP’s print to pdf function is used, are available in the pdf document as well.

I don’t know how long that capability has been in WP, but I just found it. So, old dog, new trick.  I will put that functionality in the 2021 Federal Tax Procedure Book (Student Edition) and put a revised version on SSRN.  When I do that, I will also provide links to Cornell’s Legal Information Institute Code Sections and to some of the key cases (on Google Scholar).   That will take some time to check to make the links where necessary and check them.  When I get that done, I will post a blog entry.  I hope I can get that done by the end of next week.

 I will not do that for the 2021 Practitioner Edition but will have the links in the 2022 Editions.

Draft Article on Interpretive Regulations and Chevron Deference (8/31/21)

About two years ago, I posted on SSRN here an article titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  I posted one revision in August 2020.  I am now on my second and last revision.  I have substantially revised the content, for, I think, the better.  Before posting that new revision, however, I solicit and would welcome comments on the article from those willing to undertake the adventure.  Any reader willing to do so should please email me at jack@tjtaxlaw.com for a pdf version of the draft article.  (The pdf version has links to help get around the pdf document (cross-references, etc.) and even to certain key documents on the web (such as the Attorney General’s Manual on the APA in 1947)).

The subject matter generally is Professor Kristin Hickman’s claim that APA category of interpretive tax regulations no longer exists.  The relevant APA categories are legislative or interpretive.  Professor Hickman's claim is that all tax notice and comment regulations are legislative rather than interpretive.  Since tax is not exceptional, that claim means that interpretive regulations no longer exist in the APA universe outside tax.  The article contests Professor Hickman’s claim.  The article deals with general administrative law and APA concepts but focuses on the tax setting for regulations that have traditionally been considered interpretive.  The article deals also with Chevron deference.

The article is 113 pages (excluding opening pages and table of contents) with 457 footnotes.  (The devil is in the footnotes, so to speak.)  I attach a copy of the cover page and table of contents here to offer an idea of the scope of the article.

Of course, any help that is offered will be acknowledged with the permission of the commenter.

Finally, for what it is worth, I did the MS Word reading ease check to test my draft article against some others (arbitrarily chosen).  Here are the results I got:

Chevron and Interpreting Through Agency Adjudications (8/28/21; 9/3/21)

I am updating an article I wrote earlier and realize that the working draft has some digressions in the footnotes are best eliminated from that article.  However, some of those digressions are, I think, worthy of being recorded somewhere, so I will post them as blog entries.

 The context for the digression was the statement in the body of the draft update to the article that, beyond interpreting in rulemaking, agencies interpret in adjudicatory proceedings.  The interpretation process in agency rulemaking is much the same as for adjudicatory proceedings.  They both can involve interpretation of ambiguous statutory text within the scope of the ambiguity.  Courts test those interpretations in either context for reasonableness and overturn them if the interpretations are not reasonable.  In the agency rulemaking process, that review is under the Chevron Framework.  So too, courts test reasonableness in agency adjudicatory proceedings under the Chevron framework.  Thus, in both types of interpretation—rulemaking and adjudication—the same test applies as Chevron is currently applied.

In Kristin E. Hickman and Aaron Nielson, Narrowing Chevron's Domain, 70 Duke L. J. 931 (2021), the authors argue for constricting Chevron to apply only in rulemaking and not in adjudication.  A key component of the argument is that through agency adjudicatory interpretations, agencies are legislating rather than interpreting.  Professor Hickman makes the same argument for interpretations in regulations (such as Temporary and Final Treasury Regulations) which may have an effective date before the Final Regulations after Notice and Comment are issued.  My article critiques the latter claim.  But I want to address the claim in the adjudication context because, in my opinion, agencies do not engage in legislative rulemaking in adjudications.  That is a point I address in text and footnotes that I have deleted from the article.

So here is my digression now deleted from the article.  I attach a pdf of the article with the footnotes here.

            One other predicate matter.  Besides interpreting ambiguous statutory text by rulemaking, agencies can interpret ambiguous statutory text in adjudicatory proceedings.n1  For example, the Board of Immigration Appeals ("BIA"), a Department of Justice adjudicatory body, is "the highest administrative body for interpreting and applying immigration laws." n2  By delegation from the Attorney General, n3 the BIA resolves "appeals from certain decisions rendered by Immigration Judges and by district directors of the Department of Homeland Security (DHS) in a wide variety of proceedings in which the Government of the United States is one party and the other party is an alien, a citizen, or a business firm." n4

             This adjudicatory administrative process functions like a court proceeding, resolving disputes between parties by interpreting and applying the law.n5 Although not rulemaking, adjudicating presents the legislative/interpretive distinction; if, in adjudications, agencies were to attempt to create law outside the interpretive space allowed by the ambiguous text, the agency would be improperly legislating which requires legislative rulemaking with Notice and Comment and Prospectivity.n6  I recognize that some authorities assert that adjudications interpretations can be legislative in character and on that basis question retroactive effect.n7 I disagree, but need not address the issue because this article deals with legislative rulemaking via the Notice and Comment process as to which the law is relatively clear.

Footnotes:

Musing on Citation of Obvious Propositions and Footnotes (8/24/21)

I am working on a legal article tonight.  The issue I am concerned with is whether I need to support everything I say with some citation, usually in a footnote.

In the conventions of legal scholarship, almost every point we make in a brief must have a citation, often in footnotes.  Really?

When I was at DOJ Tax Appellate, I suggested (probably in a bullshit session) that we have a convention to use a citation which I call “O.P.” which stood for obvious proposition.  Why should we have to cite something for the observations that are obvious? For example, if we have to say that the sun rises in the East, do we really have to cite something for the proposition?  Could we not just say:  "The sun rises in the East.  O.P."?

My suggestion was not formally presented or formally rejected by the powers that be in the Appellate Section.  

In some sense, the concept may be implemented by some scholars and judges in writing.  They just state the proposition and move on.  Nevertheless, in my writings, I continue to struggle with the issue of whether I need to cite authority for such obvious propositions.

My problem, since I am a prolific footnote writer (aka abuser), is that, if I have to cite such authority, I would do so in a footnote.  As we all know from reading footnotes (particularly my footnotes), footnotes are terrible temptations to wander and distract.

Now, what does this have to do with Federal Tax Procedure?  Not much except to say that I have some 4600 footnotes in my Federal Tax Procedure (2021 Practitioner Ed.).  Some of those footnotes, perhaps many, deal with obvious propositions that just logically extend from the information in the text.  I do that because I think that more specific citation than O.P. might be helpful to practitioners even though, in many cases, the proposition is obvious from the discussion in the text.  (I don't have a citation for that last statement.)

Other Resources for Tax Procedure (8/24/21)

I recently advised that I have made available on SSRN, the 2021 editions of my Federal Tax Procedure Book.  2021 Federal Tax Procedure Editions Now Available for Download on SSRN (Federal Tax Procedure Blog 8/8/21), here.  I post here some other resources that are available for persons interested in federal tax procedure.

The definitive work is Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters), here (Disclosure, I am the principal author of Chapter 12, titled Criminal Penalties and the Investigation Function).  I assume that most persons interested in tax procedure are aware of this resource, often referred to as just Saltzman (with no disrespect for Les Book who now manages and contributes to the resource).

The American Bar Association Tax Section offers two books that readers may find useful, one a general book on tax procedure and the other a specialized book on Tax Court litigation.

• Effectively Representing Your Client Before the IRS, 8th Edition, Edited by Christine S Speidel and Patrick W Thomas, here.  The Table of Contents is here.
• Litigating a Case in Tax Court, By Sean Murphy Akins, Kandyce Lyndsey Korotky, and David M Sams, here.  This book is Chapter 7 of Effectively Representing Your Client Before the IRS.  The book is accompanied by a routinely updated website that provides many sample pleadings and related documents. The Table of Contents for the book is here; an excerpt from the book is here. 

I have added the two ABA Books to the Federal Tax Procedure Links in the right-hand column of the blog.

The Impact of Chevron Deference is Exaggerated (8/19/21; 8/21/21)

I recently wrote on Judge Lauber’s Opinion in Lissack v. United States, 157 T.C. 63 (2021), here.  See Tax Court Holds that Collected Proceeds for Whistleblower Awards under § 7623(b) Do Not Include Unrelated Collections (8/18/21; 8/19/21), here. I discussed the Court’s discussion regarding Chevron deference.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  Chevron established what is now referred to as Chevron deference (although deference had been in the law for a long time, with Chevron provided only a regular structure to apply deference).  I believe that Chevron is much cited and much misunderstood.  I pointed out in the blog that Judge Lauber stumbled into Chevron but finally got the analysis correct by testing the interpretive regulation for reasonableness of the interpretation within the scope of the ambiguous statutory text.  I also said in the blog (comment 5) that I would be writing another separate blog about a key aspect of the Chevron jurisprudence that is also misunderstood – when does a court really defer under Chevron?  As I said, by not clearly stating what they are doing, courts overstate the outcome-determinative effect of Chevron deference.  I write now to further explain.  (I attach here a pdf of the current state of the working draft for my article to be published on SSRN later this month (hopefully).)

First, here is my crisp statement of outcome-determinative deference:

Deference is a court applying a reasonable agency interpretation of ambiguous statutory text despite the court’s belief that there is a more reasonable interpretation of the ambiguous statutory text.  That’s it.

Second, inherent in that definition of deference is a very limited domain for outcome-determinative Chevron deference, far more limited than the commotion, particularly among conservatives and libertarians, support.  Consider these categories of judicial interpretation related to agency interpretations (note that I develop this in the context of agency interpretive regulations doing no more than interpreting statutory text):

            1.        If the statute is unambiguous, the statute controls without either the court or the agency interpreting it further.  No deference there.  

All further Categories assume that the statute is ambiguous:

Tax Court Holds that Collected Proceeds for Whistleblower Awards under § 7623(b) Do Not Include Unrelated Collections (8/18/21; 8/19/21)

In Lissack v. United States, 157 T.C. 63 (2021), here, the Tax Court (Judge Lauber) held (quoted from the Syllabus):

P filed Form 211, Application for Award for Original Information, claiming that T had failed to report membership fees as gross income. R initiated an examination on the basis of P’s claim. During the examination R determined that T had properly treated the membership fees as nontaxable deposits but also discovered an unrelated issue--that T may have claimed an erroneous deduction. R expanded the scope of the examination to include the latter issue and ultimately disallowed the deduction, yielding a $60 million adjustment. R subsequently denied P’s whistleblower claim on the ground that he had not supplied any information about the erroneous deduction.

A whistleblower is eligible for an award only if R “proceeds with an[] administrative or judicial action * * * based on information” supplied by the whistleblower and collects proceeds “as a result of the action.” I.R.C. sec. 7623(b)(1). The parties have filed cross-motions for summary judgment addressed to the question whether P is entitled to an award under this standard.

Held: Although R proceeded with an administrative action, P is not eligible for a whistleblower award because R did not collect any proceeds “as a result of the action.” See I.R.C. sec. 7623(b)(1). The examination of the erroneous deduction issue constitutes a separate administrative action that was not initiated on the basis of P’s claim. See sec. 301.7623-2(a)(2), (b)(1) and (2), Example (2), Proced. & Admin. Regs. 

Held, further, the construction of I.R.C. sec. 7623(b)(1), as set forth in these regulations, is valid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).