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.