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. ___, No. 7 (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).

JAT Comments:

1. The Syllabus offers a good summary of the holding.  Readers wanting more detail will find it well presented in the decision.

2.  I will exercise blog authorial license to rant about one of my pet peeves—Judge Lauber’s Chevron deference analysis in the second “Held” for the validity of the regulations cited in the first “Held.”

Judge Lauber discusses the validity of the Regulation outline paragraph C.1. of the opinion, pp. 13-22.  In that discussion, Judge Lauber applies a straight-forward Chevron analysis—reasonableness of the interpretation--and finds the regulation interpretation of the statute reasonable under Chevron.  That is the holding and, in my view, is a clearly correct application of Chevron.  But Judge Lauber mixes into his discussion not only the Chevron test of reasonableness of the interpretation, but also, quoting Chevron, that the interpretation is not “arbitrary, capricious, or manifestly contrary to the statute.”  Mixing in the arbitrary and capricious test is a misreading of Chevron.

The arbitrary and capricious” test is not a test of reasonableness of an interpretation but a procedural regularity test—was the regulation properly issued and provide the proper Reasoned Decisionmaking explaining the provision.  The arbitrary and capricious test is most properly associated with Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983), so that the arbitrary and capricious test is often stated to be the State Farm test.

I am currently in the process of updating an earlier article where I lay out the differences in great detail, but in the meantime, I urge readers wanting more to read Catskill Mts. Chptr. of Trout Unlimited, Inc. v. United States EPA, 846 F.3d 492 (2d Cir. 2017), here, cert. denied, sub nom. New York v. EPA, 583 U.S. ___ (2018), GS here, the pertinent parts of which I quote (pp. 507, 523-524):

As the Supreme Court, our Circuit, and other Courts of Appeals have made reasonably clear, State Farm and Chevron provide for related but distinct standards for reviewing rules promulgated by administrative agencies. State Farm is used to evaluate whether a rule is procedurally defective as a result of flaws in the agency’s decisionmaking process. Chevron, by contrast, is generally used to evaluate whether the conclusion reached as a result of that process—an agency’s interpretation of a statutory provision it administers—is reasonable.

* * * *

Much confusion about the relationship between State Farm and Chevron seems to arise because both standards purport to provide a method by which to evaluate whether an agency action is “arbitrary” or “capricious,” and Chevron Step Two analysis and State Farm analysis often, though not always, take the same factors into consideration and therefore overlap. See Judulang, 132 S. Ct. at 483 n.7 (stating, in a case governed by the State Farm standard, that had the Supreme Court applied Chevron, the “analysis would be the same, because under Chevron step two, we ask whether an agency interpretation is arbitrary or capricious in substance” (internal quotation marks omitted)); Pharm. Research & Mfrs. of Am. v. FTC, 790 F.3d 198, 204, 416 U.S. App. D.C. 129 (D.C. Cir. 2015) (noting that it is “often the case” that an agency’s “interpretation of its authority under Chevron Step Two overlaps with our arbitrary and capricious review under 5 U.S.C. § 706(2)(A)”); Am. Petroleum Inst. v. EPA, 216 F.3d 50, 57, 342 U.S. App. D.C. 159 (D.C. Cir. 2000) (“The second step of Chevron analysis and State Farm arbitrary and capricious review overlap, but are not identical.”). We read the case law to stand for the proposition that where a litigant brings both a State Farm challenge and a Chevron challenge to a rule, and the State Farm challenge is successful, there is no need for the reviewing court to engage in Chevron analysis. As the Supreme Court has explained, “where a proper challenge is raised to the agency procedures, and those procedures are defective, a court should not accord Chevron deference to the agency interpretation.” In other words, if an interpretive rule was promulgated in a procedurally defective manner, it will be set aside regardless of whether its interpretation of the statute is reasonable. If the rule is not defective under State Farm, though, that conclusion does not avoid the need for a Chevron analysis, which does not incorporate the State Farm standard of review. In fact, in many recent cases, we have applied Chevron Step Two without applying State Farm or conducting an exacting review of the agency’s decisionmaking and rationale.

Bottom line, Judge Lauber conflates the two different tests while applying only the Chevron reasonable interpretation test to produce the result in the case.  Let me say that a lot of other people conflate the tests as well because of misinterpreting a key paragraph in Chevron where the language refers to the test for legislative regulations which are the law.  As Judge Posner said, there is nothing to interpret for legislative regulations.  Legislative regulations can be struck down if arbitrary and capricious -- i.e., not promulgated with procedural regularity.  But, being the law, there is nothing to interpret and applying a Chevron reasonableness of the interpretation test is an oxymoron.  With interpretations of statutory text as in interpretive (rather than legislative) regulations, there is something to test against the statutory text for reasonableness of the interpretation, which is the Chevron test.  So, as often when this type of imprecise thinking occurs, Judge Lauber gets it right although muddling in getting there.  The Supreme Court makes the same mistake.  E.g., Mayo Foundation for Med. Educ. v. United States, 562 U.S. 44 (2011) (which ultimately applies Chevron reasonableness).  Fortunately, there are judges like the Catskill panel who will do the work of discerning rather than confusing.

3.  I will also rant about the Tax Court’s strange, really strange, implementation of its new website, the DAWSON.  The Tax Court issued this opinion yesterday and it was available yesterday only on its web page for a day’s opinions.  Normally, after the day of issuance of an opinion, the opinion can be accessed only by a docket or opinion search by case name or docket number.  Yet, this publicly issued opinion is no longer available on the Tax Court website because, apparently, the docket entries were sealed.  My search produces the following message:  “This case is sealed and not accessible to the public.”   (Note: on 8/20/21 around 10:30am, I obtained a copy from a third party source which, I presume, downloaded the opinion on the day it was posted to the daily opinions (after which it disappeared from access on the Tax Court's website).  I link the opinion at the start of this blog entry.  The lament I make about this type of phenomenon on DAWSON is still applicable.)

The old website permitted all opinions to be accessed by date, judge, etc., in database format.  It is really strange that the Tax Court had that functionality on its prior website but has apparently not made it available on the supposedly new and improved DAWSON website.  That type of functionality is an easily implemented database feature.  Perhaps implementing the coding for past opinions was a time-consuming problem and might be in-process to permit the functionality someday, but there is no reason that I am aware of that it can’t be allowed for new opinions as they are issued.

Comments 4 and 5 were posted on 8/19/21 at 3pm.

4. The comment below from sissyfussy is a good one. I recommend blog readers read it also, and caution that, in making his comments, the commenter was limited to the syllabus.  

5.  When I corresponded with sissyfussy off-line, I noted that there is an important Chevron issue that I had not addressed.  I will write a separate blog, probably tomorrow, on that issue.  And I will post on SSRN a more detailed article on it later, hopefully by the end of August.  In a nutshell, the argument proceeds thusly:

• Chevron is outcome determinative only the judge affirmatively determines that the best interpretation is not the agency interpretation (let's call it the "less-best" interpretation) and defers to the "less-best" agency interpretation.  Stated otherwise, if the agency interpretation, which must be reasonable, of course, is the best interpretation, the judge does not defer to it.
• In many cases, including this one, the judge seems to stop at determining that the agency interpretation is a reasonable interpretation within the interpretive space allowed by the ambiguity in the statute and thus applies the agency interpretation without determining whether it is the best interpretation or, instead is a “less best” interpretation.  So, to chant Chevron's test and then stop upon merely pronouncing the agency interpretation reasonable does not mean that the judge deferred to the agency interpretation in an outcome determinative sense.
• Here is the further nuance I add to that analysis, if judges struggle to determine what is the best interpretation, articulate and support that best interpretation, and then apply the “less-best” agency interpretation, then Chevron does determine the outcome by deferring to that "less-best" agency interpretation.  
• I speculate that, if the judge were to determine the best interpretation is not the agency interpretation, the judge will have the tools at Chevron Step One and Step Two to apply the judge’s best interpretation rather than the agency “less-best” interpretation; I further speculate that that would mean that Chevron is not outcome determinative except in very few cases despite all the commotion about Chevron; and that raises the question of when a judge is in equipoise as to the whether the agency and any other interpretation is the best interpretation, but I will get into that in the blog that I will publish soon.  I finally speculate that Judge Lauber in Lissack may agree with the IRS interpretation (see e.g., the first paragraph on p. 21), in which case Judge Lauber really did not defer to a "less-best" the agency interpretation.