Judge Halpern Synthesizes Taxpayer and IRS Burdens when Seeking a Tax Result Based on Substance Rather than Form (5/31/21)

In Complex Media Inc. v. Commissioner, T.C. Memo. 2021-14 (as revised 3/31/21), TN here and TC Dkt entry 87 here, in a 103 page opinion, Judge Halpern had some interesting discussion on issues important to tax procedure fans.  I won’t try to slice and dice the entire opinion but will just point out the discrete parts that caught my attention.

1. “This Court has never accepted the Danielson rule. And, because the cases before us are not appealable to the Third Circuit (or to any other appellate court that has accepted the Danielson rule), the Golsen doctrine does not require us to apply that rule here.”  (Slip Op. 53-54.)

2. More interesting is the Court’s discussion as to the different burdens when the IRS and the taxpayer seeks to avoid the form of the transaction.  The key excerpt is (Slip Op. 63-64):

In sum, as our caselaw has evolved, it has become more hospitable to taxpayers seeking to disavow the form of their transactions. While we no longer reject those arguments out of hand, as we did in Swiss Oil Corp., J.M. Turner & Co., and Television Indus., we have repeatedly indicated that taxpayers may face a higher burden than the Commissioner does in challenging transactional form. On occasion, as in Glacier State Elec. Supply, we have suggested that the taxpayer's higher burden might be an evidentiary one. But we have not identified specific factual questions that should be subject to a higher burden than that imposed by Rule 142(a) or articulated the quantum of evidence necessary to meet that burden. [*64] Nor have we offered a clear justification for imposing on the taxpayer a higher burden to prove facts relevant to the disavowal of form than the generally applicable preponderance of the evidence standard.

Therefore, we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content--not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits (to either the taxpayer itself, as in Estate of Durkin, or to a counterparty, as in Coleman) that are inconsistent with those the taxpayer seeks through disregarding that form. When the form that the taxpayer seeks to disavow was chosen for reasons other than providing tax benefits inconsistent with those the taxpayer seeks, the policy concerns articulated in Danielson will not be present.

I have revised the relevant discussion in my Federal Tax Procedure book working draft to be published in August.  I link here a pdf of the discussion with the changes redlined.  Note that the page numbers and footnote numbers will be different in the final version published in August.

JAT comments:

1. In the key excerpt from the opinion, Halpern says “we now conclude.”  That sounds like it is stating a precedential rule for the Tax Court judges signaled by the use of "we" rather than "I".. Memorandum opinions are usually said to not have binding precedential value.  E.g., Dunaway v. Commissioner, 124 T.C. 80, 87 (2005).  But even if they don’t have “binding” precedential value, the have some persuasive value.  See e.g., Kornman Associates Inc. v. United States, 527 F.3d 443, 460 n. 16 (2008).  See generally Amandeep S. Grewal, The Un-Precedented Tax Court, 101 Iowa L. Rev. 2065, 2096-2101 (2016).  Certainly, such opinions would have considerable persuasive authority, perhaps rising to binding, at least with the authoring judge (Halpern here).  Now, as to other Tax Court judges, who knows? I speculate that another Tax Court judge who disagrees with another judge’s memorandum opinion will likely find his draft opinion assigned for T.C. opinion (rather than have conflicting nonbinding memorandum opinions) or, more likely if the conflicting judges felt strongly about the issue, full court review.  I also note that Judge Halpern has argued  (James S. Halpern, What has the Tax Court Been Doing? An Update, Tax Notes 1277, 1278 (May 30, 2016)"

The second, practical, change is the Court’s increasing practice of citing its own memorandum opinions as precedential. Judge Murdock would be less likely to have approved that development. The classification of opinions by precedential weight serves an important signaling function. The Court’s relatively indiscriminate citation of memorandum and division opinions risks confusion and frustrates the signaling function that classification ought to achieve. I propose that the Court return to its historical custom of not citing memorandum opinions as legal precedent.

2. I am surprised that the decision was not a T.C. opinion given the importance I attach to the excerpted holding above.  I suspect that, once Halpern synthesized and distilled the rule he pronounces (apparently a novel synthesis and distillation), he would have urged that it be a precedential T.C. opinion.  But that is speculation.

3. T.C. opinions and some T.C.M. opinions have a summary of facts and holdings in a format similar to Supreme Court Syllabuses.  This is particularly true of long T.C.M. opinions, with some judges favoring them more than others.  Complex Media has such a summary, which for lack of a better word, I will call a Syllabus.   In Complex Media, the Syllabus does not add anything of substance or clarity to the points I excerpt above.  The relevant parts of the Syllabus are:

Held: A taxpayer's ability to identify an alternative path to a given end result that provides more favorable tax consequences than the path actually taken is not enough to entitle the taxpayer to the desired tax treatment. Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974). 

Held, further, because any tax planning involved in structuring the transactions in issue was focused on insulating PS' continuing partners from the consequences of the redemption of SG's interest and not on the achievement of a tax benefit inconsistent with allowing P increased bases in the assets it acquired from PS, P is not precluded from seeking to disavow the form of its transactions.

I have previously written that it is possible that, for some Supreme Court opinions, the wording of a Syllabus might help clarify the language in the opinion itself. See Supreme Court Opinion Syllabus as Persuasive Authority? (Federal Tax Procedure Blog 2/8/21), here.  As I note in the blog, even when the Supreme Court Opinion Syllabus is written by some staff attorney, the Justice authoring the opinion generally has to approve it and, in that sense, make the Syllabus his or her own and a judge's contemporaneous statement of his or her understanding of the opinion language ought to have some force.  If the Syllabus language offers insight into the meaning of the opinion language, can it be considered in interpreting the opinion language?  I have found one notable instance but it is too nuanced and complex to get into here; suffice it to say that I thought that the nuance added by the wording of the Supreme Court Syllabus might be some persuasive authority as to the meaning of the opinion; in other words, the Syllabus wording was not inconsistent with the opinion language but did add some key nuance that offered insight into the meaning of the opinion language.  I think that is particularly true of Tax Court opinions, particularly T.C.M. opinions where the Syllabus is written by the judge (or the judge’s clerk, in which case the judge signs on to the Syllabus; I am not sure who writes the Syllabus for a T.C. opinion but would think that the authoring Judge reviews the Syllabus makes it his or her own).  Like I say, that is not an issue in Complex Media, but I could see it being an issue in the right case.