Professor Yin Article on the Tax Legislation Process and Legislative History (12/17/22)

George Yin, a retired UVA law professor (bio here) has published an article that takes on some of the conventional wisdom of jurists and scholars who reject or are at least suspicious of legislative history as useful for statutory interpretation. Those jurists (including most prominently the late Justice Scalia) and scholars often are considered textualists, although that is a broader category than those who reject or are suspicious of legislative history. Yin calls the subcategory “new textualists” or sometimes just textualists.  Yin’s article is George K. Yin, Textualism, Textualism, the Role and Authoritativeness of Tax Legislative History, and Stanley Surrey (December 4, 2022). Law and Contemporary Problems, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4286174.

Here is the SSRN Abstract description of the article:

When Stanley Surrey died in 1984, the school of thought sometimes known as the “new textualism” that has gained such influence in the United States over the last three decades had not yet emerged. Surrey would have been very interested in this development. As revealed in his recently published memoirs, he had extensive first-hand experience with the tax legislative process and recognized early on the connection between that process and statutory interpretation. He would have been surprised by some of the assumptions about the process underlying the new textualist claims as well as recent empirical findings about the process reported by scholars.

This essay aims to fill in some of Surrey’s missed engagement. Drawing on his memoirs and other sources, the essay describes aspects of the tax legislative process—the preparation of tax statutes and legislative history—of significance to statutory interpretation and the positions of the new textualists. Importantly, the description is at the granular level at which Surrey experienced it, material not generally included in standard political science or legal scholarship on the topic. After considering the on-the-ground realities of the tax legislative process, this essay contends that in interpreting tax statutes, courts should rely upon both textual canons and other common tools of judicial interpretation (questioned by recent scholar-empiricists) and legislative history (questioned by textualists). The essay also explains why, contrary to the claims of textualists, committee reports are authoritative evidence of statutory meaning.

Yin’s article is particularly directed to interpretation of federal tax statutes (i.e., principally the Codes in 1939, 1954 and 1986 iterations). Yin is former Chief of Staff of the Joint Committee on Taxation, which is heavily involved in the tax legislative process and in producing legislative history. He knows the process and knows that the claims these textualists make about legislative history are not true for tax legislation.

The process Yin describes for tax legislation--but apparently perhaps to a lesser degree for other legislation-- involves both tax legislation experts (the JCT) and each House’s legislative counsel who bring statutory drafting expertise to the table that the tax Committees and their members usually lack.

I have written on the use of legislative history before. See the following that I think relate to the topics in Yin’s new article:

Tax Court Holds that § 6213(a) Time Deadline for Petitions for Redetermination Is Jurisdictional, Thus Not Subject to Equitable Relief (12/13/22)

I have not yet written on Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022)  (unanimous reviewed opinion), TCPamphlet here & GS here.

The holding is that the § 6213(a) 90-day / 150-day period for petitions to redetermine deficiencies is jurisdictional, meaning that there is no equitable relief to file out-of-time petitions. I won’t analyze the holding because the opinion speaks for itself and makes, perhaps, the best case for the holding. (That is not a statement that it is a correct holding.) The issue was whether § 6213(a) was subject to the recent trend to treat time statutory time deadlines as claims processing rules rather than jurisdictional requirements (meaning must be met). The most relevant and recent iteration is Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022), where the Court held that the § 6330(d)(1) 30-day CDP deadline was not jurisdictional, thus subject to equitable relief.

Readers interested in this area of law have already seen several, perhaps many, comments on the Hallmark holding. I don’t think I have anything to add to those commentaries. Perhaps the longest and strongest criticism of the Hallmark opinion is in a series of posts by Carl Smith on the Procedurally Taxing Blog titled What’s Wrong with the Tax Court’s Hallmark Opinion: Part 1 ….., here (I think there are more Parts to come, but the link is a search link and should pick up the later Parts). 

I am agnostic as to the resolution of the issue of whether the § 6213(a) deadline must be met (jurisdictional) or not (claims processing subject to equitable relief). However, I do note that there are some consequences if that particular deadline is deemed to be claims processing rather than jurisdictional that should be considered given the collateral provisions (such as statute of limitations suspension while the taxpayer can file a petition, etc.); I am not sure they have been fully dealt with in the Hallmark opinion, perhaps because the Court held that the deadline was jurisdictional; still they should be considered as perhaps reasons that the deadline must be jurisdictional in order to make the parts of the superstructure work.

Supreme Court Grants Cert in Polselli on Issue of a Collections Summons to Third Party Requires Notice to Taxpayer (12/10/22)

The Supreme Court granted the petition for writ of certiorari in Polselli v. IRS (Sup. Ct. Case No. No. 21-1599).  The opinion of the Sixth Circuit in the case is at Polselli v. Dept. of Treasury, 23 F.4th 616 (6^th Cir. 2022), GS here.  The Order granting cert is dated December 9, 2022, here.  The documents are not consistent as to the case name, but I infer that the case name is Polselli v. IRS as stated on the docket here.  See discussion in the Note at the end of this blog.

The question presented in the petition is (with introduction) (Pet p. i):

            The Internal Revenue Code generally requires the IRS, when it serves a summons on a third-party recordkeeper for records pertaining to a person “identified in the summons,” to give that identified person notice of the summons. I.R.C. § 7609(a)(1). If the IRS issues a summons directing a bank to produce an accountholder’s records, for example, it must generally notify that accountholder of the summons. Section 7609 then provides that “any person who is entitled to notice of a summons under subsection (a) shall have the right to begin a proceeding to quash” that summons in district court. Id. § 7609(b)(2); see id. § 7609(h)(1). In other words, only a person entitled to notice of a summons can seek judicial review of that summons.

            There are a few exceptions to the notice requirement. As relevant here, the IRS need not provide notice of “any summons … issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).” Id. § 7609(c)(2)(D).

            The question presented is whether the § 7609(c)(2)(D)(i) exception applies only when the delinquent taxpayer owns or has a legal interest in the summonsed records (as the Ninth Circuit holds), or whether the exception applies to a summons for anyone’s records whenever the IRS thinks that person’s records might somehow help it collect a delinquent taxpayer’s liability (as the Sixth Circuit, joining the Seventh Circuit, held below).

JAT Notes:

Law Prof Article on the APA Tax Revolution and My Extended Comments (12/1/22; 12/3/22)

Readers of this blog may be interested in a recent article by Professor Reuven S. Avi-Yonah (Michigan Law bio here), The APA Tax Revolution, 177 Tax Notes Fed. 981 (Nov. 14, 2022), here. He says there is an APA Tax Revolution, I think principally started by Professor Kristin Hickman (bio here). Professor Avi-Yonah pronounces: "Hickman has won the debate, and the APA revolution in tax law is here to stay." The debate is grounded in her claim that there are no interpretive Treasury regulations and extensions of that claim (including that Treasury's Temporary Regulations have historically violated the APA, hence Treasury has routinely in the past violated the APA). Professor Hickman and I disagree on that point. See The Report of the Death of the Interpretive Regulation Is an Exaggeration  117-118 (SSRN December 14, 2021), here. Professor Hickman's claim is bottomed on various developments post-Chevron that, she claims, eliminate the interpretive regulation category. (I find Professor Hickman somewhat elusive about those developments; I deal in my article with those rabbit trails I could identify.)

To be sure, there is a lot of commotion on the point, with many scholars and courts accepting Professor Hickman's premises. For the reasons noted in my article, I think they do so without fully thinking through the point from historical perspective as to the meaning of the APA. (See my concluding points about APA original meaning below.)

Most importantly, the Supreme Court has not spoken in a precedential holding on the key issue of whether there are interpretive regulations, so we don't know what the Supreme Court would say on that issue. (See also my concluding points about APA original meaning below.)

There have been contrary Supreme Court voices on that issue. I go into detail in my article. I won't repeat that detail here but ask readers to consider the background and two examples:

Background: As I note in my article, Professor Hickman claims that there are no longer any interpretive Treasury regulations which, if true, would mean there are no other agency interpretive regulations. (Remember her drumbeat claim that tax is not exceptional.) At our ABA Tax panel presentation in October, I asked Professor Hickman whether the regulation considered in Chevron was a legislative regulation. She said yes, an answer I knew she would have to give because she has said too often that there are no longer interpretive regulations. (To be fair, in most of our discussions, Professor Hickman claims that post-Chevron developments are the bases for her claim, but she did say on the panel that Chevron was a legislative regulation under her claim.)  Consider her answer against the following:

Illustrative examples of important voices claiming Interpretive regulations exist:

Conservative Ninth Circuit Judges Unsuccessfully Question Constitutionality of Pass-Through Taxation without "Realization" (12/25/22)

We don’t normally encounter constitutional issues in federal tax. There are some, however. See e.g., Justice Ginsburg' successful constitutional attack in Moritz v. Commissioner, 469 F.2d 466 (10th Cir. 1972), cert. denied, 412 U.S. 906 (1973), memorialized in the movie On the Basis of Sex (see Sex and Tax (Federal Tax Crimes Blog 1/7/19) here, where the pre-Judge/Justice Ginsburg with her husband Marty (best tax lawyer ever) in the background succeeded in having a Code provision declared unconstitutional.  

Another instance not yet successful but imagined is asserted by a minority of the Ninth Circuit in a dissent to denial of petition for rehearing en banc. Moore v. United States, 53 F.4th 507 (9th Cir. 11/22/22), CA9 here and GS here, denying the petition from Moore v. United States, 36 F.4th 930 (9th Cir. 2022), CA9 here and GS here. 

While Moore is not a tax procedure case, I mention it because it illustrates the lengths to which conservative-bent judges will go to try to restrain the federal government in a way that can throw a monkey-wrench into settled expectations of our tax system. They often mount these attacks in tax procedure cases, with the APA a tool of their angst (see Bryan Camp, The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here. The judges on the Moore dissent were authoring Judge Bumatay (Trump) and joiners Ikuta (Bush), Callahan (Bush), and Vandyke (Trump). A frequent target for such types is the administrative state. The target this time was Congress in enacting a statute that required a type of pass-through taxation for certain foreign corporations. By pass-through, I mean requiring the owner of an entity to include in the owner’s income for tax purposes the income earned by the entity even if the income is not distributed from the entity to the shareholder. Readers of this blog who, I hope, are familiar with the tax structure we have, know that there are any number of pass-through entities that are essential to the tax we have. To mention a few, S Corporations, partnerships, and some foreign corporations. I cannot recall any serious claims by serious people that the pass-through taxation was unconstitutional.

First Circuit Sustains Holding That Late Filed Return Is Not a Return for Bankruptcy Discharge (11/25/22)

As readers of this blog know, there are a lot of fun facts about the Internal Revenue Code and the twists and turns it has taken from passage, amendment, and application by the IRS and the Courts (including interpretation). Sort of like the line from the Major-General’s song in G&S’s Pirates of Penzance:

About binomial theorem I'm teeming with a lot o' news,
With many cheerful facts about the square of the hypotenuse.

OK, no more diversions. The topic today is the famous “hanging paragraph” (sometimes called the “so-called hanging paragraph,” the “unnumbered hanging paragraph,” etc.) in the Bankruptcy Code at 11 USC § 523(a), here [I link the Code section because you just have to see it in context to fully enjoy it; it appears sort of just out there at the end of subsection (a) and just before subsection (b)]. The hanging paragraph is also referred to as “§ 523(a)(*)” (or some variation with an asterisk). In full, the hanging paragraph is:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.

There are other hanging paragraphs in the U.S. Code (either the positive law Codes or the compilation Codes (on which see On the Internal Revenue Code (Title 26), the U.S. Codes, and Statutes, here).

This Bankruptcy Code’s hanging paragraph has created discordant notes in the courts as to the meaning of the statutory text: “the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  (Emphasis supplied.) Specifically, does “applicable filing requirements” mean that the return has to be timely in order to achieve a discharge? This often comes up in the context of the IRS having prepared a substitute for return (“SFR”) pursuant to § 6020(b) after the taxpayer failed to file a return. The tax computed in the SFR is assessed. The IRS tries to collect. The taxpayer dodges and weaves. The taxpayer, wanting to rid himself (or herself) of this nuisance, then checks out the possibility of a bankruptcy discharge. The taxpayer’s lawyer, unaware of or unconcerned about the hanging paragraph commotion in the courts, advises that the taxpayer needs to file a return and wait two years before filing for bankruptcy. So he files a tax return mimicking the results of the SFR, waits two years, seeks bankruptcy protection and, hopefully, discharge of the tax liability. 

Supreme Court Denies Cert in Whirlpool Financial; On Phantom Regulations (11/23/22)

I previously wrote on the petition for writ of certiorari (colloquially “cert petition”) stage in Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944 (6th Cir. Dec. 6, 2021), CA6 here and GS here. See Petition for Cert in Whirlpool, SG Waiver of Response, and Several Amici Arguing for Cert (Federal Tax Procedure Blog 8/5/22; 8/16/22), here. My even earlier blog on the Sixth Circuit opinion is: Whirlpool's BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22), here. In the blog on the cert petition, I noted that the Solicitor General in effect claimed that the cert petition was a nothingburger (to use a popular term), by filing a one-sentence waiver of response. Despite the waiver, the Supreme Court ordered the SG to respond. See the Supreme Court docket entries here. The SG filed a brief in opposition (colloquially a “brief in opp”). On that record before the Court, on November 21, 2022, the Supreme Court denied the cert petition.

There is nothing substantive that I think would be helpful to readers to add. I thought that, particularly for students, it might be helpful to offer something briefly on the “phantom regulation” concept which is not mentioned in the Sixth Circuit opinion but are mentioned in the cert petition. I will only try to summarize at a high level, but direct to my discussion in my book Federal Tax Procedure (2022 Practitioner Ed.) (SSRN https://ssrn.com/abstract=4180710. I there note that the issue is often raised by the taxpayer seeking a benefit where the statute seems to command a regulation for the benefit and ask the question whether the IRS can deny the benefit by simply not promulgating a regulation? Here, the shoe is on the other foot, with the IRS achieving the benefit where, in one way of reading the statute, the IRS has not promulgated a regulation required by the statute. I state how the Tax Court has dealt with the issue (p. 69, footnotes omitted):

In a 2016 * reviewed opinion, the Tax Court concluded the task is to determine whether the statutory text, considered in light of the legislative history or other interpretive tools, can be applied without further explication in a regulation. The analysis turns upon whether “Congress couched its delegation of rulemaking authority in mandatory or permissive terms.” If mandatory, the Court could treat the delegation of authority as  self-executing” and could discern from the statutory text as interpreted the result that Congress intended the IRS to adopt and apply in the case at hand.

    * The quote in the book says it is a 2017 opinion; the opinion was 2016: 15 West 17th Street LLC v. Commissioner, 147 T.C. 557 (2016) (Reviewed opinion) (I will correct in the 2023 editions). 

That quote is focused on a taxpayer seeking the benefit in the absence of regulations. Does the same analysis apply if the IRS seeks the benefit in the absence of a statutory delegation of requirement or authority to promulgate regulations? Arguably, that is what the Sixth Circuit did without mentioning the term phantom regulations. At least that is what Whirlpool Financial claimed in its cert petition, albeit indirectly by citing (p. 3) Andy Grewal, The Sixth Circuit Conjures Phantom Regulations, Yale J. on Regul. Notice & Comment (Feb. 21, 2022), here. In its response, the SG did not mention the term. In its reply, Whirlpool Financial only mentions the term in citing Grewal’s article.

Court of Federal Claims Rejects Defective § 6603 Strategy for Multiple Transferee Liabilities (11/21/22)

In Dillon Trust Company LLC v. United States, ___ Fed. Cl. ___, 2022 U.S. Claims LEXIS 2575 (11/10/22), FC here and GS here, the Government moved for partial dismissal for lack of jurisdiction and for partial summary judgment with respect to plaintiff’s interest-related claim. I focus here on the interest-related claim.

The background is an intermediary or Midco transaction by a family corporation with the assets stripped out of the corporation by direct or indirect transfer to shareholders without paying the large tax corporate liability generated by the corporation. In initially reporting the transaction, the corporation claims the benefit of a bullshit tax shelter to effectively zero out the gain and tax, but on audit and denial of bullshit tax shelter benefit, the gain is taxed to the corporation which has no assets (because the shareholders stripped them out directly or indirectly). So, the IRS has to chase the “transferees” – here the shareholders – to collect the payment through transferee liability under § 6901.  I cover these transactions in Federal Tax Procedure (2022 Practitioner Ed.), here, at pp. 745-746. In a footnote, I quote Alterman Trust v. Commissioner, T.C. Memo. 2015-231, at *2:

Courts, including this court, have been plagued by Midco cases. Rarely do these cases present themselves for a determination of the underlying liabilities. Instead, these cases are postured so that the courts are asked to determine whether someone other than the taxpayer should be on the hook for the taxpayer's liability. They are transferee liability cases, and so are these cases.

The corporate taxpayer involved was Humboldt Shelby Holding Corporation (“HSHC”) which was unable to pay the tax, the gross valuation misstatement penalty, and the interest on each. The corporate liabilities as of August 2014 were “a federal income tax deficiency of $25,617,887 and a gross valuation misstatement penalty of $10,247,155, plus interest, which remained unpaid.” The transferees the IRS targeted were certain Dillon family trusts (with the parties agreeing that the results would apply to all of the family trusts as direct or indirect transferees). 

Among other arguments in this refund suit, the trusts argue that they cannot be held for transferee liability for the gross valuation misstatement penalty “because they lacked knowledge of HSHC’s plan to carry out the tax shelter scheme that formed the basis of the I.R.C. § 6662 penalty.”  Good luck to them on that. 

But in this case, the  court only addressed interest issues. The interest issue arose from the trusts’ apparent desire to invoke § 6603 to prevent the running of interest during the period of the deposit. I cover § 6603 in Federal Tax Procedure (2022 Practitioner Ed.) pp. 268-272. The rules of § 6603 are not particularly complex, but the application of those rules in the Dillon Trust case was complex because of the machinations involved where the trusts, as putative persons liable for transferee liability, apparently thrusted about to achieve some purpose to avoid interest but did so in which appears to be a haphazard fashion. The result is that, although the IRS had the deposit money in a large amount and for a significant period, the taxpayer and the transferees achieved no interest benefit under § 6603 that might have been achieved had they structured the deposits/payments differently.

District Court Holds IRS Tax Shelter Notice Imposing Obligations Invalid as a Legislative Rule Without Notice-and-Comment But Limits Holding to Parties (11/20/22)

In GBX Associates, LLC v. United States (N.D. Ohio Case No. 1:22cv401 Dkt. # 21 Memo. Opinion & Order 11/14/22), CL here and GS here, the Court held consistent with Sixth Circuit (including lower court) opinions that IRS Notice 2017-10, entitled “Listing Notice- Syndicated Conservation Easement Transactions,” was invalid because it was a legislative rule adopted without notice-and-comment.  After reaching that conclusion, the court focused on the APA language in 5 USC § 706(2) that the court “hold unlawful and set aside agency action” found to be “not in accordance with law” or ” without observance of procedure required by law “ The question was whether the scope of the remedy could include not only the plaintiff a material (investment advisor) before the court but universal applying throughout the country to all similarly situated parties.  The relief could either be granted by a universal injunction commanding the IRS not to apply the Notice or by “vacatur” declaring the rule null and void which would cover IRS action against all parties similarly situated not before the court.  The latter is sometimes call universal or nationwide vacatur.

I think the opinion is quite good in discussing the issues.  In a nutshell, the issue is whether an invalid rule (here the Notice requirements) adopted without the notice-and-comment required for legislative rules, making it void ab initio, should allow or require piecemealing the remedy, requiring it to be litigated by various aggrieved persons throughout the country.  The Court said (Slip Op. p. 18, cleaned up):

As noted above, GBX asserts that the Notice 2017-10 should be in vacated in whole (and not just as to GBX itself) because, by its very nature, the “set aside” remedy of vacatur set forth in APA § 706(2) acts against the agency action itself—not the government actor. GBX asserts that, under established case law from the Third, Ninth, and D.C Circuit Courts of Appeals, the “ordinary result” upon a finding of unlawful agency action is that the [agency action] itself is vacated—not that its application to the individual petitioners is proscribed. Defendants strongly disagree, arguing the law on this issue is, in fact, unsettled and “hotly contested.” Defendants emphasize, in particular, that the Sixth Circuit has not expressly ruled on this issue and that at least one district court in this Circuit has rejected GBX’s argument and declined to order universal relief under § 706(2).

The Court in GBX exercised her discretion in concluding (Slip Op. p. 32): "The Court declares that Notice 2017-10 is unlawful and hereby sets that Notice aside as to Plaintiff GBX Associates, LLC only."

This litigant-only or universal application issue is presented in Texas v. United States, 40 F. 4th 205 (5^th Cir. 2022) (per curiam), GS here, a nontax case.  The Fifth Circuit opinion summarized its holding (at 212, emphasis supplied by JAT):

Tax Court in Reviewed Opinion Invalidates Notice Identifying Reportable Transactions (11/10/22)

In Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022) (reviewed opinion), TCPamphlet here,, TN here and GS here, the Court held that Notice 2017-10, 2017-4 I.R.B. 544 was invalid because the Notice is a legislative rule improperly issued by the IRS without notice and comment. As a result, the Court “set aside” the Notice and prohibited the imposition of § 6662A (here) accuracy-related penalties for understatements for reportable transactions identified in the Notice. The case turns upon the application of the APA requirement that legislative rules be promulgated as notice-and-comment regulations except for contemporaneous “good cause” statement or congressional exception to the notice-and-comment, neither of which the Court found to apply.

In high level overview, the question was whether the IRS must identify transactions subject to the penalty in a regulation (either Final or Temporary (interim final)) or could identify transactions in a Notice which is subregulatory guidance. The statute referred to transactions identified in regulations under § 6011. The regulations under 6011 defined reportable transaction as a transaction that is the same or substantially similar to one of the types of transactions that the IRS has determined to be tax avoidance transactions and identified by notice, regulation, or other form of published guidance. Reg. § 1.6011-4(b)(2).

The Court reasoned that the Notice which clearly was not a regulation did not meet the statutory command that the transaction be identified in a regulation. Although it included a lot more words and reasons, that is the guts of the holding. As a result, the Court invalidated the application of the penalty in the case and stated (p. 24 n. 22): “Although this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.” 

This holding is a big deal. Syndicated conservation easements as they have been reported in many cases are clearly the type of abusive transactions that Congress intended the penalty to apply once the IRS identified them. The Court held that the IRS improperly identified these transactions by subregulatory guidance rather than by regulation, a procedural footfault. A lot of people clearly abusing the system will escape penalties clearly meant to apply to them and that would have applied except that the Court held that  the IRS promulgated the rule in a procedurally incorrect way.

First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (11/9/22)

I am late posting on Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), 1^st Cir. here and GS here. So the principal point of this blog is to point to the excellent writings of others, which I provide below.

The basic holding of the case (as I understand it) is that, based on CIC and Direct Marketing, the Anti-Injunction Act, § 7421(a) (“AIA”)) does not apply to IRS actions to gather information as opposed to actions to assess and collect tax. As a result, under CIC, a taxpayer can have pre-enforcement review challenging the validity of the JDS and the resultant unlawful acquisition and retention of his financial information, on the notions that; (i) the APA § 702 contemplates pre-enforcement review of IRS information gathering activity (as opposed to assessing or collecting activity) and (ii) the ex parte John Doe Summons (“JDS”) is an information gathering function rather than a tax assessing or collecting function.

My only comment is that the underlying issue as to whether a taxpayer can get pre-enforcement review of the validity of a JDS is an important one.  The holding seems to portend a wide swath of pre-enforcement challenges in various other IRS information-gathering activities.  In a comment posted to a  PT Blog, I asked (cleaned up for typos):

Justice Gorsuch's Newest Rant on Chevron and the Administrative State (11/7/22; 11/8/22)

Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough, 143 S. Ct. 14 (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here; Supreme Court docket entries here.  

As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1153 (10th Cir. 2016), GS here, he rants alone, unable to attract any other Justices’ concurrence in his concurrence.  I will write more later today or tomorrow on his rantings; in the meantime, readers can read the rant (only 16 pages) without being distracted by my counter-rant.  I will say that my text search indicates that he does not repeat his Brizuela concurring rhetoric about elephant in the room. At least that is good, but he does have some other rhetorical sound bites that may play well with persons who hate the administrative state as much as he does.

When I write more, I will post it to this blog entry and note the date and time I added it.

Added 11/8/22 ___ pm 2:15 pm:

1. Justice Gorsuch makes clear that he does not like Chevron “deference” because, he believes, it allocates interpretive power to agencies that should belong to the courts. I think readers interested in this area should respectfully consider his arguments (sort of like Skidmore respect for arguments in non-majority opinions.). I do not deal in detail with the arguments because they are addressed in my article,  The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here. (Referred to in this blog entry as Report of the Death.)

2. I disagree with two major points in Justice Gorsuch’s argument:—

 (i) courts did not defer to agency interpretations before Chevron was elaborated after the decision in 1984 but instead only gave respectful consideration to agency interpretations a la some Skidmore-type respect to determine the best interpretation);  and

(ii) the APA § 706 allocated to the courts all interpretive power over ambiguous statutory text just as the Constitution requires from the sound bite in Marbury v. Madison.

Gorsuch Claims in Bittner Oral Argument that "nobody promulgates regulations anymore": True or False? (11/4/22)

This post discusses a claim that Justice Gorsuch made in oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.) The link for the typed transcript is here; the link for the audio is here.

The issue in Bittner is whether the FBAR nonwillful penalty of up to $10,000 applies per form (regardless of the number of foreign accounts not reported) or per account (for each account that should have been but was not reported on an FBAR for the year).

In the context of discussing guidance documents, Justice Gorsuch said (Tr. p. 64): "[N]obody promulgates regulations anymore. It's too troublesome."

That claim is demonstrably false. He may have meant that agencies disfavor and mostly do not use formal rulemaking (which does not require promulgation of regulations), although agencies regularly use informal rulemaking requiring promulgating notice and comment regulations. Here is the difference between the two as I explain Federal Tax Procedure (2022 Practitioner Ed.), SSRN here, at p. 57 n. 256.

   n256 The informal rulemaking process is described in 5 U.S.C. § 553, whereas the formal rulemaking process is described in § 556. David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Yale L.J. 276, 282 (2010) ("The first technique, so-called 'formal' rulemaking, involves onerous trial-type hearings and is rarely required unless a specific statute calls for rules to be 'made on the record after opportunity for an agency hearing.' Far more common is the second technique, variously known as 'informal,’ 'notice-and-comment,' or 'section 553' rulemaking.").  The formal rulemaking process is rarely used in agencies generally.  See Perez v. Mortgage Bankers Assn., 575 U. S. 92, 128 n5 (2015) (Thomas, concurring) (noting that (i) "almost all rulemaking is today accomplished through informal notice and comment," in contrast to the formal rulemaking process requiring "elaborate trial-like hearings in which proponents of particular rules would introduce evidence and bear the burden of proof in support of those proposed rules," citing 5 U. S. C. §556; and (ii) "formal rulemaking is the Yeti of administrative law" with "isolated sightings of it in the ratemaking context, but elsewhere it proves elusive.”). Informal rulemaking is permitted unless the authorizing statute mandates formal rulemaking.  United States v. Florida East Coast R. Co., 410 US 224, 236-238 (1973). 

I am not trying to pick on Justice Gorsuch, but he is an administrative law wannabe expert as shown by his ranting about Chevron and related confusion I address in my article The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here, at pp.  110-116 under the caption "b. Gorsuch's Imagined Elephant in the Room.").

Added 11/7/22 3:30 JAT Comment:

1. Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here.  As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142. 1153 (10th Cir. 2016), GS here, Justice Gorsuch could not get any other Judge (this time 8 others rather than 2) to agree with what he has to say. (Of course, any of the other Justices could have not joined his opinions for a host of reasons rather than his over the topic rhetoric and questionable claims about the history of deference.  I will post a separate blog entry on his dissent in Buffington.

3rd Circuit Holds that Collection Statute of Limitations Is Suspended through Supreme Court Finality (11/2/22; 11/3/22; 11/7/22)

Section 6330(e)(1) ( provides that certain levy actions and certain statutes of limitations (including collection) are suspended while Collection Due Process (“CDP”) “hearing and appeals therein are pending.”  Readers will recall that the taxpayer invokes the CDP hearing by making a timely request and then, if not satisfied, can petition the Tax Court for review.  The Tax Court will then review, and that taxpayer and the IRS have the standard appeals processes to the Court of Appeals and, by petition for writ of certiorari, to the Supreme Court.

In United States v. Weiss, 52 F.4th 546 (3rd Cir. 11/2/22), CA3 here, the Court held that, for statute of limitations suspension in CDP cases, “appeals therein” and “pending” mean not until all appeals processes (including Supreme Court, if invoked as it was in Weiss) are final.  That holding stated that way makes sense—even common sense. 

But, it was not so simple for the Third Circuit.  The authoring judge, Judge Phipps, seized the opportunity to elaborate in 15 pages not including the cover caption page -- bringing out the dictionaries and other interpretive tools to tackle the weighty issue of what “appeals therein” and “pending” mean.  Stating the standard pablum that you look to the meaning of statutory words at the time of enactment, the judge holds forth on that and finds some potential ambiguity that can be cleaned by going through dictionaries and maxims. 

For those interested in reading footnotes, I commend footnotes 2-4, covering most of pages 8-10, particularly n4 where he holds forth on the “autohyponym.”  That was a new word for me.  He explains in the footnote:

Referral to Procedurally Taxing Blog on Tax Court Delays (10/31/22)

I refer readers to It is Time To Take Remedial Steps To Improve The Timeliness of Tax Court Dispositions (Procedurally Taxing Blog 10/31/22), here.  The subject is concern that, at various key points in the litigation process in the Tax Court, there are bottlenecks that result in some cases being delayed beyond what seems appropriate, given the important role the Tax Court serves in our ubiquitous tax system. It is perhaps hyperbole to state the common phrase that justice delayed is justice denied. Our litigation system involves delays, but that does not justify unnecessarily long delays of the type the authors have observed in some Tax Court litigation.

The post is signed by several persons who observe and write on tax system, focusing on procedure.  They are:

Leslie Book
Keith Fogg
Steve Olsen
Nina Olson
Jack Townsend

I encourage readers having creative ideas on how to make the system more timely make comments on the PT blog entry linked above or perhaps even offering a submission to the PT Blog Team for a Guest Blog.

To me, the most shocking point made in the PT blog is that the Tax Court (really through such management as the Tax Court has) does not track these bottlenecks. I have worked on databases for over 30 years now. I believe that most, if  not all, of the key data to track the bottlenecks is already in the Tax Court’s database system. I project that Tax Court management could easily establish some type of computer routine to extract key management information on cases and judges that are bottlenecks in the system.

Finally, although I suspect that most readers of this blog already make the Procedurally Taxing Blog part of their regular reading on tax procedure.  If not, I highly recommend it. 

What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (10/21/22; 11/8/22)

Last week, I participated in a panel at the ABA Tax Section Fall Meeting in Dallas. The panel was offered by the ABA Tax Section Teaching Taxation Section. The program was titled “Classification of Tax Regulations and the APA.” The panel participants were Les Book (moderator), Kristin Hickman, Gil Rothenberg, and me. The program dealt in part with some issues that Professor Hickman and I have engaged in the past. On those issues, Hickman and I continue to engage without agreement. 

I say "without agreement," but in fact Hickman and I did agree (i) on the starting point that, at the enactment of the APA in 1946, the APA permitted both legislative rules (must be notice and comment regulations) and interpretive rules (including, although not required, notice and comment regulations such as Treasury used for interpretive rules adopted as regulations) and (ii) that for well after the APA, the category of interpretive notice and comment regulations was alive and well, without controversy. Our point of continuing disagreement is whether something has changed that original meaning of the APA, so that notice and comment regulations that do no more than interpret ambiguous statutory text no longer exist but are now legislative regulations. That disagreement is not the focus of this posting but may underly some of the analysis in this posting.

In the panel discussion, I repeated my recent claim that Chevron deference is inapplicable if the agency interpretation is the best interpretation. The corollary to this is that Chevron’s domain in an outcome determinative sense involves only deference to “not best” agency interpretations. We only touched on that issue lightly in the panel, but one panelist questioned whether "best interpretation" was a meaningful concept. (Added 10/25/22 11:00am:  On Chevron's domain as limited to not best interpretations, see e.g., Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005) (“Chevron requires a federal court to accept the agency’s construction of the statute, even if the agency’s reading  differs from what the court believes is the best statutory interpretation.”).)

I thought it might be helpful to say further what I mean by “best interpretation.”  The best (or most persuasive) interpretation is the interpretation which the court would apply based solely on interpretive tools in the absence of an agency interpretation or, if there is an agency interpretation, in the absence of Chevron deference. The court’s job in statutory interpretation is to determine and apply the best interpretation of the statute to the facts before the court. (BTW, it is important to note that courts cannot legislate, so courts’ exercise of interpreting a statute to determine the best interpretation is not legislative.  See Is Statutory Interpretation a Legislative Act When Agencies Do It But Not When Courts Do It? (Federal Tax Procedure Blog 4/8/22; 10/23/22), here.). 

If the agency interpretation is that best interpretation, the court applies that interpretation because it is the best interpretation and not because it is deferring to the agency interpretation. Of course, in determining the best, most persuasive interpretation, the court should consider respectfully the agency interpretation. Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (Skidmore respect is not deference (although frequently mislabeled as deference) and applies at Chevron Step One as well as in generally determining the most persuasive interpretation.) See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here. Deference—real deference--is only outcome determinative if the court invokes Chevron to apply a “not best” interpretation over the court’s own best interpretation.

That best interpretation concept is simple and, I think, irrefutably true. There will always be a “best interpretation” so defined because, in the absence of an agency interpretation, it is the interpretation the court would apply to decide the case. In deciding whether or not to apply Chevron deference to an agency interpretation, a court will have to know what the best interpretation is (i.e., what the court would do without deference to the agency interpretation). How else could a court determine whether an agency interpretation is “reasonable” or “permissible” even though not best (the requirement for Chevron deference)?

The Reasonable Standard—Parody, Statutory Interpretation, and Chevron (10/9/22)

Many readers of this blog will likely already have heard about the Onion’s Amicus Brief on the petition for certiorari in Novak v. City of Parma (Sup. Ct. No. 22-293), Supreme Court docket entries are here; Novak’s petition for certiorari is here; the Onion’s Amicus Brief is here. The Onion (Wikipedia here) is a satirical medium, often parodying serious newspapers.  The Novak case arises from Novak’s parody on Facebook of a local police department’s web page. For the parody, Novak was arrested, indicted, prosecuted but acquitted of disrupting public services. Novak then sued the City and two investigating officers. The Sixth Circuit held that the City and the investigating officers had qualified immunity from suit. Novak v. City of Parma, 33 F.4th 296 (6th Cir. 2022) 6th Cir. here and GS here. Novak petitioned for writ of certiorari. The questions presented in the petition are:

1. Whether an officer is entitled to qualified immunity for arresting an individual based solely on speech parodying the government, so long as no case has previously held the particular speech is protected.

2. Whether the Court should reconsider the doctrine of qualified immunity.

 These are important questions. 

 In defense of parody, The Onion filed its Amicus Brief in defense of parody.  The Brief is well written, serious, and, on its points, persuasive (I think).  Highly recommended. In part relevant to posting here, Onion’s Amicus Brief argues (pp. 10-12) for the “reasonable reader” standard—whether a reasonable reader would understand the offering to be parody without an express disclaimer. 

Beyond being an entertaining and hopefully persuasive argument, the reasonable reader test offers an opportunity to address briefly the reasonable concept in other legal contexts relevant to this blog; Often, when a case outcome is determined by some “reasonable” conduct, what is reasonable is left to the judgment call of the judge or jury without any clear definition without any clear guidance as to what reasonable means.

The Onion's reasonable reader construct caught my attention because I just addressed the standard in discussing statutory interpretation in the Working Draft for my Federal Tax Procedure Book. One interpretive strategy I describe is:  “much in vogue now, is often called “original public meaning” or sometimes just original or ordinary meaning that some imagined reasonable person (or reasonable audience) at the time of enactment would have attached to the text.”  The footnote to that statement in the Working Draft is:

Government Files Collection Suit in Liberty Global Raising Procedural Issues (10/8/22; 10/12/22)

I  previously reported on a refund suit in which the court held invalid the IRS’s temporary regulation that, if valid, would have taxed a complex structured transaction designed to avoid tax.  See Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here, discussing Liberty Global, Inc. v. United States (D. Colo. Dkt. 1:20-cv-03501-RBJ #46 Order dtd. 4/4/22), CL here and GS here,  The holding in the case was not a holding that disposed of the entire case, so it remains pending.

On October 7. 2022, the Government filed a complaint and then an amended complaint in a new case seeking to collect additional tax for the same year as involved in the prior case noted in the above paragraph.  See United States v. Liberty Global Inc. (D. Colo. Civ. # 1:22-cv-02622), CL dkt entries here (with the original complaint at dkt entry 1 and the amended complaint at docket entry 4) (I have not compared the original and amended complaints, but focus on the amended complaint here.) The amended complaint seeks judgment in amount (final amount to be determined) of $283,965,223 (including 20% accuracy-related penalty).

I don’t claim to understand the complexity and steps of the transactions at issue, but just note that, according to the amended complaint, it was a structure with 4 steps involving foreign entities related to Liberty Global, with 3 steps being without substance but necessary to facially qualify Liberty Global for the tax benefit claimed at step 4.  The 3 steps, the amended complaint claims, were without substance. should be disregarded for federal tax purposes, and thus the claimed benefit at step 4 should be denied.

The United States asserts in the amended complaint (par. 31) that it will seek to consolidate the case with the earlier refund case.

JAT Comments:

1. This tax strategy--more properly bullshit tax shelter if the Government’s claims are true --appears to have been a promoted shelter by Deloitte rather than something Liberty Global cooked up.  (See Amended Complaint par. 7.)  And, if the Government’s claims are true, the claimed tax benefits of the structure are a gaping loophole to what Congress meant to cover in the statute.  In other words, too good to be true but may be true anyway. (Presumably, as with past such shenanigans, Deloitte got paid based on some “value-added” basis rather than reasonable fees related to the work done.) 

2. As best I understand it, the temporary regulations invalidated in the refund case and also involved in the new collection suit were designed to address the gambit Liberty Global and Deloitte attempted to exploit. According to the complaint (par. 26), Liberty Global reported on its initial 2018 return consistent with the temporary regulations.  Just over 2 months after filing the original return, Liberty Global filed an amended return claiming a refund of $95,783,237 based on the invalidity of the temporary regulation.  As noted above, the court held in that refund suit that the temporary regulation was invalid, but the matter is still pending in the district court apparently to address other issues as to whether Liberty Global is entitled to a refund. I presume that the disclosures on the amended return were adequate to put the IRS on notice of the game being played, although disclosure does .  (I discuss below in paragraph 4 the § 6676 Erroneous claim for refund or credit penalty, which has no relief for adequate disclosure as allowed in some § 6662 accuracy-related penalties, including the economic substance accuracy-related penalty.)

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22; 10/6/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

Added 10/6/22 11:44am:  The foregoing is the question presented that appears on the Supreme Court's docket entries questions presented link, here.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Brockman Jeopardy Assessment of $1.4+ Billion Sustained (10/2/22)

On 9/30/22, the district court sustained the IRS’s $1.4+ Billion jeopardy assessment for taxes, fraud penalties, and interest.  United States v. Brockman (S.D. TX No. 4:22-CV-202 Dkt. # 71 Memo Opinion and Order 9/30/22), here (as retrieved from PACER); see also CL Dkt entries here (the pdf does not yet show up on the CL docket entries but should shortly).  The IRS asserted that the assessment “represents the largest jeopardy assessment/levy case in the history of the United States and features tax fraud on an unprecedented” scale.” (internal quotation marks omitted).

I won’t get into the details since the opinion is short (13 pages) and easily readable (with some nice graphics).  The opinion plows no new ground in jeopardy assessment law.  It is noteworthy (if at all) only because of the size of the assessments and the facts leading to the assessments.

I note that FBAR assessments (which certainly have been made or will be made, depending upon the statute of limitations) are not included.  There is no jeopardy assessment authority for FBARs, but the IRS does not need jeopardy assessment authority for FBARs because it can assess the FBAR penalties without predicate requirements for income tax assessments.  Of course, with FBAR assessments, the IRS will not have the substantial collection tools available for tax assessments and will have to proceed by suit to reduce the FBAR assessments to judgment.

I don’t know what type of estate Brockman had at death and the assets the IRS can get through various third-party liability remedies (such as transferee and similar state law remedies, alter ego, etc.), but I speculate that, with the probable size of the FBAR assessments and third-party liabilities, the IRS will be able ultimately to substantially wipe out his net worth (with third-party liabilities).  Of course, he lived large during his lifetime. And his death permitted him to escape criminal responsibility and liability.

This blog entry is cross-posted to my Federal Tax Crimes Blog.  Until this blog entry, I have not posted on the Brockman trajectory on the Federal Tax Procedure Blog.  For other postings on Brockman on the Federal Tax Crimes Blog, see here.

11th Circuit Holds that a Taxpayer Motion for Injunctive-Type Relief in a Closed Case Is Not Subject to § 7421(a), the AIA (9/27/22)

In United States v. Meyer, 50 F.4th 23  (11th Cir. 9/26/22), CA11 here and GS here, the Court outlines the issue in its opening paragraph:

    The Anti-Injunction Act, 26 U.S.C. § 7421(a), provides in relevant part that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person[.]” The question before us is whether the Act bars a defendant from moving—in an action initiated by the government—for a protective order to restrain the government from using his responses to requests for admission when assessing a tax penalty in a separate administrative proceeding. Because moving for a protective order in an action filed by the government does not amount to maintenance of a “suit,” we hold that the Act does not apply.

The Court then offers some more factual detail (Slip Op. 2-4):

             In 2018, the government filed a complaint against Michael L. Meyer, alleging that he promoted a tax evasion scheme in which he advised his clients to claim unwarranted federal income tax deductions for bogus charitable donations. The government sought to enjoin him from operating his business, as well as disgorgement of all of the proceeds from his scheme. Over the course of the next year, the parties engaged in extensive discovery. As relevant here, the government served over 1,500 requests for admissions upon Mr. Meyer under Federal Rule of Civil Procedure 36. Mr. Meyer answered the requests with the assistance of counsel.

            Mr. Meyer eventually settled with the government and agreed to a permanent injunction prohibiting him from, among other things, representing anyone other than himself before the IRS; preparing federal tax returns for others; or furnishing tax advice regarding charitable contributions. On April 26, 2019, the district court entered a final permanent injunction against Mr. Meyer and closed the case. The order did not include any language regarding the confidentiality or future use of discovery-related materials.

            On July 24, 2020, Mr. Meyer received a notice from the IRS informing him that he owed millions of dollars in penalties in connection with his promotion of an abusive tax shelter. See 26 U.S.C. § 6700. The notice included an attached Form 866-A, Explanation of Items, which detailed the basis of the IRS’ decision. The Explanation of Items specifically relied on Mr. Meyer’s Rule 36 admissions, obtained in the 2018 tax case that had been filed by the government. Those admissions were also attached as a composite exhibit.

Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (9/20/22)

In Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 9/13/22), CA11 here and GS here, the Eleventh Circuit has become the second Circuit to push against the machinations courts, principally the Tax Court, in trying to apply the written supervisor requirement of § 6751(b). In my Federal Tax Procedure book 370 (2022 Practitioner Edition) (available on SSRN here), I introduce the problem in the nonsensical statutory text (footnotes omitted):

Second, § 6751(b)(1) prohibits the assessment of a penalty “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Although not stated in the statute, the purpose of the requirement is to prevent agents from improperly using the threat of a penalty as inappropriate leverage–a “bargaining chip”–to extract concessions when the IRS institutionally had not made a determination to  assert a penalty. The wording of the statute, however, is facially nonsensical because there is no such thing in the tax law as the determination of an assessment and, in any event, the assessment comes long after the threat of penalties could have been made to bully taxpayers. In statutory interpretation lingo, if not nonsensical, the statutory text is “ambiguous,” a characterization which has spawned many opinions as the courts try to deal with the deficiencies in the statutory text through purposive interpretation strategies to apply the text as the courts think or speculate Congress intended but did not say in the statutory text. Section 6751(b) is a quintessential case illustrating this struggle to interpret and apply “ambiguous” statutory text on an ad hoc, case-by-case basis to interpret the “law” that can then be applied in future cases.

I then provide in the following pages (371-377) wanderings through the maze of opinions trying to make sense of this landscape. Basically, the wanderings show courts’ attempts to construct policy (or law) on an ad hoc basis around a statute with facially nonsensical text. These opinions behind these wanderings focus on IRS communications to the taxpayer rather than “the initial determination of such assessment,” as if communications were a proxy for that statutorily required initial determination.

The Eleventh Circuit decided that it could, and should, decide the case before it on the basis of the statutory text rather than the meanderings of courts crafting solutions, based principally on a purpose stated in the legislative history.

Second Circuit NonTax Opinion on Glitches in the Appellate Process with JAT War Story (9/11/22)

Most readers of this Federal Tax Procedure Blog do not have such tunnel vision that developments outside the tax procedure area are ignored. Many readers will have read or heard about a major bank, Citibank, mistakenly making payments to hedge funds aggregating almost $1 billion on not yet due amounts. Some of the hedge funds tried to keep the mistaken payments (about $500 million) because, they claimed, they were eventually entitled to them anyway. Citibank sued those hedge funds to recover. The district court (SDNY) held that the hedge funds were entitled to retain the mistaken payments based on some arcane creditor concepts in New York law and in the Restatement of Restitution. The Second Circuit reversed and held that the funds must be returned to Citibank. Citibank, N.A. v. Brigade Capital Management, 49 F.4th 42, 58 (2d Cir. 2022) (2d Cir. 9/28/22), CA2 here and GS here.  I won’t get into the merits of that resolution. I focus instead on the procedural trajectory of the case in the Court of Appeals.

I pick up this procedural trajectory from David Lat’s Judicial Notice (09.10.22): Weird, Wild Stuff (Original Jurisdiction Notice 9/10/22), here. I excerpt the following:

[T]he intricacies of the discharge-for-value doctrine, ably explored in 131 pages of opinions-a majority opinion by Judge Pierre Leval for himself and Judge Robert Sack, and a concurrence in the judgment by Judge Michael Park-are far less interesting than all the meta-commentary about the judicial process and the breaking of the fourth wall.

            In his concurrence, Judge Park complained that "this is a straightforward case that many smart people have grossly overcomplicated and that we should have decided many months ago." In response, Judge Leval added an addendum to his opinion in which he acknowledged that the judgment "has taken a long time to produce," for which he accepted "sole responsibility."

            Pulling back the curtain on the judicial decision-making process, Judge Leval explained that one reason for the delay was a change in disposition: he and Judge Sack originally decided to certify the question to the New York Court of Appeals, prepared a draft opinion to that effect, but then decided against certification-mainly because it would add another year of delay, and also because they "became increasingly persuaded, despite initial uncertainties," that Citibank deserved to win.

             Judge Leval then went on to discuss the nature of appellate judging:

            A decision of a court of appeals must satisfy two requirements, which pull it in different directions. It should, as rapidly as reasonably possible, tell the parties who wins. At the same time, recognition that the decision serves as precedential law requires that it rest on, and clearly explain, sound legal principles. In a money dispute, the parties ordinarily care little for the precedential effect of the decision; their interest is to get a rapid answer to who gets the money. A court, however, must pay careful attention to the decision's precedential function…. Finding the best accommodation between the objectives of speed and legal soundness is not always easy.

Freeman International Tax Law Symposium October 20 & 21 (9/5/22)

The following international tax program may be of interest to FTPB readers:  Freeman Law International Tax Symposium (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.  The program qualifies for CLE, CPE and CE.

Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (9/1/22)

 This blog will alert readers of a new Tax Court opinion, Lamprecht v. Commissioner, T.C. Memo. 2022-91, involving the accuracy-related penalty for failure to report income from foreign accounts. (The opinion may be retrieved at docket entry 181 from the docket entries, here; or GS here.) I will set up my discussion from the syllabus for the key points decided (on the value of the syllabus see point 6 at the end of this blog):

            Ps are citizens of Switzerland who lawfully resided in the United States, where P–H worked as an investment consultant managing investments for himself and his clients. Ps filed U.S. income tax returns for 2006 and 2007 which understated their income in both years by omitting income that Ps treated as foreign sourced.

            In 2008 the IRS issued to Swiss Bank a John Doe summons which sought to discover the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns.

            In 2010 Ps filed amended returns for 2006 and 2007 on which they reported the previously omitted income. Upon examination of Ps’ 2006 and 2007 returns, R determined an accuracy-related penalty under I.R.C. § 6662 against Ps for each year on the basis of the tax attributable to the income omitted from the original returns, and issued to Ps a notice of deficiency. Ps timely filed a petition to challenge the penalty determinations in the notice of deficiency, arguing (1) that the IRS failed to comply with I.R.C. § 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns for 2006 and 2007 are “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c)(3), [*2] precluding penalty liability, and (3) that assessment of the accuracy-related penalties for 2006 and 2007 is barred by the statute of limitations under I.R.C. § 6501.

            Held: The amended returns are not “qualified amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons.

            Held, further, assessment of the accuracy-related penalties is not barred by the statute of limitations under I.R.C. § 6501 because the limitations period was suspended by the service of the John Doe summons pursuant to I.R.C. § 7609(e)(2).

            Held, further, the IRS complied with the written supervisory approval requirement of I.R.C. § 6751(b)(1).

            Held, further, Ps are liable for the I.R.C. § 6662 accuracy-related penalties as determined by R for the 2006 and 2007 years.

Eaton Wins Big on Appeal in Long-Running Contentious Litigation Over APAs (8/27/22)

In Eaton Corp. v. United States, 47 F.4th 434 (6th Cir 8/25/22), here and GS here, the Court gave Eaton a victory on all points of contention in long-running and highly contentious litigation over the Advance Pricing Agreement (APA). The APA is an advance agreement as to how the taxpayer will report its covered transfer pricing products or intangibles in future years so that, provided the taxpayer reports pursuant to the agreement, the IRS will not audit except to confirm reporting consistent with the agreement. (At least in earlier audits I handled, the APA methodology could be spread to past open years, if appropriate, but past years were not in issue in Eaton.)  The Court signals its holdings in its opening short paragraph:

            Taxes may well be “what we pay for civilized society,” Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting), but that doesn’t mean the tax collector is above the law. This case arises from the IRS’s efforts to circumvent basic contract law.

Not an auspicious start for the IRS.

In holding for Eaton, the Court resolved the following issues.

1. In a section captioned “Wrongful Cancellation: Burden of Proof,” the Court resolved a burden of proof issue. (Slip Op. 8-12.) The IRS argued that, since it made the § 482 adjustments in the notice of deficiency because Eaton violated the APA agreement, the standard was “arbitrary and capricious.”  The Court held that, because the predicate issue was whether Eaton violated the APA, the issue is one of contract interpretation as to whether Eaton breached the contract. (Under that notion, only If Eaton breached the contract, would Eaton then have the burden to prove that the IRS’s § 482 adjustments were arbitrary and capricious.)  As to the contract interpretation issue, the IRS bore the burden of proving that Eaton had breached the contract.

2. On the issue of whether Eaton violated the contract, the Court held (Slip Op. 12), applying contract law, that Eaton had not breached the agreement and therefore the IRS did not have the right to cancel the contract and issue the notice of deficiency with § 482 adjustments.

Transfer Pricing: Finite Valuation and Ranges (8/20/22)

        I have just started reading a tax, more or less, history, at least anecdotal history. Michael Keen, & Joel Slemrod, Rebellion, Rascals, and Revenue, (Princeton University Press 2021), here.   Early in my reading, something caught my eye because of a case I perused earlier in the day, Medtronic, Inc. v. Commissioner, T.C. Memo. 2022-84 (Decided 8/18/22), T.C. docket entry 74 at docket entries for the case here and GS here). I say I perused because the opinion is 75 pages (with three-page appendix of the experts’ brief biographies). I read closely only certain parts, including the part I discuss here. Medtronic involves transfer pricing for intangibles, which most commonly involve transactions between a U.S. taxpayer and a foreign affiliate offering opportunities to manipulate (lower) the U.S. tax base and thus achieve major U.S. tax “savings.”  The drill in these cases for the taxpayer is to lower the U.S. tax base and for the IRS to increase the U.S. tax base. That’s an oversimplification, but not much of one. The theoretical mechanism for achieving that is to peg the tax results of the related party transaction to a standard of an uncontrolled transaction between unrelated parties. This standard is notoriously difficult for intangible assets.

           Professors Keen and Slemrod offer a good tongue-in-cheek description (pp. xvi-xvii):

Many of the tax episodes we look at may at first seem far-fetched or ridiculous. Some are stories of disastrous missteps and cruelty. Some, we admit, teach no useful lesson that we can discern, but are just pleasingly gaudy and preposterous. But along with the follies there are also episodes of remarkable wisdom. For it is a theme of the book that, when it comes to designing and implementing taxes, our ancestors were addressing fundamentally the same problems that we struggle with today. And they were no less ingenious—not just in creating taxes, but also in avoiding and evading them—than we are. We should not feel too superior to our forebears, given the taxes we have nowadays. The idea of taxing chimneys may seem quaint to us. But we suspect our descendants will find some of the things that we do today more than a little peculiar, such as taxing multinationals by trying to figure out what some entirely different and hypothetical set of companies would have done in the unlikely (possibly inconceivable) event that they found themselves in the same circumstances. And they would be right.

        My observation of transfer pricing over the years is that these transfer pricing cases are just valuation cases, with a lot of zeroes to justify litigation with a lot of commotion to prompt a lot of legal and expert fees. My anecdotal observation of this type of case over the years is that many unnecessary legal and expert fees are generated in litigating them. But that is another story. 

        For now, I want to focus on Medtronic (this opinion rather than the earlier Tax Court and Eighth Circuit opinions, Medtronic, Inc. v. Commissioner, T.C. Memo. 2016-112 (sometimes Medtronics I), vacated and remanded, T.C. Memo. 2016-112, 900 F.3d 610 (8^th Cir. 2018) (sometimes Medtronic II). As an aside, the petition in the Medtronic case was filed in 2011, Medtronic I was decided in 2016, Medtronic II was decided on August 18, 2018, and Medtronic III was decided 8/16/18, and Medtronic III was decided on remand is dated 8/18/22. Interesting.