Statutory Interpretation: Best vs. Least Bad (1/23/22l 1/25/22)

I have stated my definition of deference as follows: 

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

See John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration 70 (SSRN last revised 12/15/21), here. This requires that the court actually determine the best interpretation and then defer to a lesser agency interpretation

Some state that Chevron deference can include a court applying a reasonable agency interpretation without the court having to struggle with the issue of the best interpretation. I divide reasonable agency interpretations into two relevant categories:  (i) the best interpretation, which is perforce reasonable; and (ii) an interpretation that is less than the best but still reasonable (whatever that means). Category (i) involves no deference; Category (ii) involves deference. If the court stops at determining that the agency interpretation is reasonable without determining the best interpretation, the court may or may not have deferred to a less persuasive agency interpretation.

These Categories and ones I discuss in my article Postscript (separately available here) depend upon the potential for a "best" interpretation. In Polselli v. United States Dep't of the Treasury-IRS. 23 F.4th 616 (6th Cir. 1/7/22), CA6 here and GS here, although not in a Chevron context, the dissenting judge stated the concept of the best interpretation as: "the least bad interpretation."  For purposes of Chevron analysis, I think the best and the least bad interpretation are the same. The term "least bad interpretation" may be catchy, but I think the term best (or better) interpretation is more appropriate for statutory interpretation.

I discuss Polselli (although not in the Chevron context) in my earlier blog. 6th Circuit Holds Summonses in Aid of Collection Do Not Require Notice to Taxpayers Or Others (Federal Tax Procedure Blog 1/13/12, here); see also Leslie Book, Polselli v US: Circuit Split on Notice Rules For Summonses to Aid Collection (Procedurally Taxing 1/20/22), here.

Added 1/25/22 9:30am:  

Further Discussion of NTA Annual Report (1/17/22)

I recently posted to advise to advise of the NTA’s 2021 Report to Congress. National Taxpayer Advocate Annual Report to Congress and Related Documents (1/14/22), here. The Full Report is here.  I said I would post later on portions that might be interesting to readers of this blog. I focus in this posting on the part of particular interest to readers of this blog – the section on Most Litigated Tax Issues (pp. 183-205.  There is a lot of detail, including statistics and informative graphs in that portion. I can’t cover it all, but summarize key parts here:

1. Ten Most Litigated Issues in Tax Court (pp. 183-188). In identifying the ten most litigated positions in the Tax Court, the Report states that it is transitioning its methodology. The Report explains (p. 183) the transitioning and the methodology used in this Report. The Report then (p. 184)  puts the result in tables for the old method (relying on issued opinions) and the revised method (using issues identified in petitions).

2. Top Issues in Other Courts (pp. 188). The Report discusses lien cases and summons enforcement. The Report does not mention refund suits;  although a staple historically for contesting tax issues, refund suits are relatively rare since most tax issues are litigated in the Tax Court through deficiency jurisdiction and CDP jurisdiction.

3. NTA Recommendations to Mitigate Tax Disputes (apparently this applied to Tax Court and nonTax Court disputes (pp. 189-190).  The recommendations are for §§ 7403, 6751, and 7602.

4. Tax Litigation Overview (pp. 190-195) discussing the “variety of courts [that] share concurrent jurisdiction over federal tax litigation,” including Tax Court, District Courts, Courts of Appeals, Court of Federal Claims, Bankruptcy Courts, and Supreme Court. The Report offers Figure 3.6 (p. 191) that graphs the “Docketed Inventory in Tax Court, District Court, and Federal Court of Claims for BYs 2012-2021. The overwhelming majority (I think well over 90%) are in the Tax Court. And, as I understand it, 95% of the Tax Court cases are deficiency cases. Figure 3.7 (p. 191) shows the “Dollars in Dispute” among those courts for the same period, with the District Court and Court of Federal Claims share of the total increasing, but the majority is still in the Tax Court. Figure 3.8 shows “Portion of Total Dockets and Dollars in Dispute by Amount Category” for FY 2021. The Report says (p. 192) that there has been a decrease in tax cases in the District Court from 788 to 763 but that “0.8 percent of civil tax cases in district courts in 2020 were resolved through trial.”

National Taxpayer Advocate Annual Report to Congress and Related Documents (1/14/22)

The National Taxpayer Advocate’s 2021 Annual Report to Congress, here.  The related “Purple Book” with the NTA’s legislative recommendations is also out, here, along with an Appendix related to the recommendations, here.  I focus in this blog entry primarily on notifying readers of the documents.  I will likely offer more sibstamtovediscussion in later blog entries as I deem warranted.

I offer some of the NTA’s general comments (here) in her introductory remarks (which have more discussion later in the Report):

1. "2021 Was the Most Challenging Year Ever for Taxpayers," including backlogs leading to long refund delays, telephone service the worst ever, premature collection notices.
2. The pandemic stretched IRS resources but other reasons included the combination of underfunding and imposing more responsibilities on IRS.
3. The Discussion of the Most Serious Problems Encountered by Taxpayers is on pp. 32-182, starting here.  I won’t discuss these here but they are not unimportant.

Most Litigated Issues

The discussion of Most Litigated Issues is from pp. 183-205, starting here.  This is the section that the target audience for this blog will likely find most interesting.  I will not discuss this section now but will post on significant features later as I digest the information.

6th Circuit Holds Summonses in Aid of Collection Do Not Require Notice to Taxpayers Or Others (1/13/12)

Note: The Supereme Court granted a petition for writ of certiorari in Polselli.  See Supreme Court Grants Cert in Polselli on Issue of a Collections Summons to Third Party Requires Notice to Taxpayer (12/10/22), here.

In Polselli v. United States Dep't of the Treasury-IRS. 23 F.4th 616 (6th Cir. 1/7/22), CA6 here and GS here, the Court held that the IRS summonses to the banks of the taxpayers' wife and lawyers were issued in aid of collection of the taxpayers' taxes and therefore were exempted from the requirement to notify the taxpayer or third parties of the summonses. The general rule is that the taxpayer must be notified of third party summonses. § 7609(a). The exception for summonses in aid of collection of assessed taxes.  § 7609(c)(2)(D)(i).

The Court rejected the 9^th Circuit's holding in Ip v. United States, 205 F.3d 1168 (9th Cir. 2000). As discussed by the 6th Circuit, the Ip rule is: "Under the Ip rule, the IRS may issue a summons to a third-party recordkeeper without notice only if (1) the third-party is the assessed taxpayer, (2) the third party is a fiduciary or transferee of the taxpayer, or (3) the assessed taxpayer has 'some legal interest or title in the object of the summons.'" I discuss Ip at p. 410 n. 1795 of the Federal Tax Procedure book (available free on SSRN here). I have revised that footnote with the revisions indicated in red for the 2022 Practitioner Edition:

     Second,  summonses used in aid of collection of an assessed liability against the taxpayer or a transferee require no notice to the party whose liability is being investigated  (again,  usually the taxpayer). n1795  This would often be a  summons to a  person having assets that might be levied to collect the assessed liability.    Thus,  for example,  the requirement for notice  of third-party record keeper summonses does not apply to such summonses. n1796
   n1795 § 7609(c)(2)(D).  Congress enacted this exception to notice from concern "that giving notice of a third-party summons to the taxpayer would allow him to withdraw the funds in his accounts before the summons could be enforced." Barmes v. United States, 199 F.3d 386, 389 (7th Cir. 1999). One court has noted that, although the plain language of the statute exempts the IRS from having to give notice for a summons issue in aid of collection, a more subtle reading of the legislative history permits the statute to be interpreted to require notice in some cases. See Ip v. United States, 205 F.3d 1168 (9th Cir. 2000) (deriving "the rule that a third party should receive notice that the IRS has summoned the third party's records unless the third party was the assessed taxpayer, a fiduciary or transferee of the taxpayer, or the assessed taxpayer had 'some legal interest or title in the object of the summons.'"); Viewtech, Inc. v. United States, 653 F.3d 1102, 1104-5 (9th Cir. 2011) (citing and quoting Ip), acknowledging that the plain language of the statute is inconsistent with the Ip holding but applying it anyway)). Other courts have rejected Ip. See e.g., Polselli v. United States Dep't of the Treasury-IRS. ___F.4th ___. 2022 U.S. App. LEXIS 527  (6th Cir. 1/7/22) (describing the Ip rule as: "the IRS may issue a summons to a third-party recordkeeper without notice only if (1) the third party is the assessed taxpayer, (2) the third party is a fiduciary or transferee of the taxpayer, or (3) the assessed taxpayer has "some legal interest or title in the object of the summons;" and declining to follow Ip based on the literal meaning of the statute and rejecting Ip's foray into legislative history; also citing Haber v. United States, 823 F.3d 746, 751, 753 (2d Cir. 2016) that preliminary court review may be available to test whether the summons was issued in aid of collection); and Ginsburg v. United States, 2002 U.S. Dist. LEXIS 19046 (D. Conn. 2001) (declining to follow Ip because other cases are more persuasive and noting that the Government's position is that Ip is wrongly decided because the statute is "clear and unambiguous.").
   n1796 The exception excepts such summons from  §  7609.    So the general requirement within  §  7609  that requires notice to such third party recordkeepers is not applicable.    By contrast,  as noted below in the text,  which excepts summonses in criminal investigations  §  7609,  by special provision,  the requirement for notice for third party recordkeeper summons is made applicable for such summonses in criminal investigations.

D.C. Circuit Holds Tax Court Has No Jurisdiction To Consider WBO Action in Declining To Consider A WB Claim By Not Forwarding for Examination (1/12/22)

In Li v. Commissioner, ___ F.4th ___, 2022 U.S. App. LEXIS 2022 U.S. App. LEXIS 697 (D.C. Cir. 1/11/22), DCCir here and GS here, the Court held that the Tax Court has no jurisdiction to review under § 7623(b)(4) the IRS Whistleblower Office (“WBO”) determination that the whistleblower (“WB”) has not submitted sufficient specific information for the WBO to refer the matter to an Examination function for possible action (an audit) that might result in a WB award.  The Court of Appeals raised the issue on its own motion as it is entitled to do for lack of jurisdiction.  The Court of Appeals’ jurisdiction is dependent upon the Tax Court having had jurisdiction.

The opinion is short, so I refer readers to the opinion if they want more than the opinion I offer.

In making the holding, the Court specifically rejected contrary holdings in Cooper v. Commissioner, 135 T.C. 70, 75 (2010) and Lacey v. Commissioner, 153 T.C. 146 (2019) which held that the Tax Court had jurisdiction over WB claims that were not forwarded to the Examination function.  Note that, since appeals in WB cases must go to the D.C. Circuit, this opinion will be conclusive unless reversed by the panel, the D.C. Circuit en banc, or the Supreme Court.

The Court recognizes a potential exception to its holding in fn. 2 on p. 7:

   n2 Li does not argue on appeal that the IRS, in fact, did proceed against the target taxpayer based on information in her Form 211 application. So we need not and do not decide whether the Tax Court would have jurisdiction to hear a whistleblower’s claim in a case in which the IRS wrongly denied a Form 211 application but nevertheless proceeded against a target taxpayer based on the provided information.

Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 5/12/23)

Note: See discussion at the bottom of this blog entry of the Proposed Regulations to impose a new reporting obligation for past transactions not disclosed under  Notice 2017–10.

My immediate past posting was on Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021),  11^th Cir. here and GS here.  See 11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21), here.  In that blog entry, I discussed some administrative law issues, mostly the Administrative Procedure Act ("APA").  As I noted, the effect of Hewitt holding is only to declare the regulation invalid because of procedural irregularity under the APA's arbitrary and capricious standard in 5 U.S.C. § 706(2)(A), here (also called variously the State Farm test, the hard look test, and testing the regulation for the agency's reasoned decisionmaking).

Today, I add that Treasury may fix the regulations problem retroactively by a new round of Notice and Comment and promulgating a new regulation adopting an interpretation of the statute that will pass the arbitrary and capricious test of procedural regularity.  (Whether the regulation would be precisely the same as the one invalidated would depend on whether in light of experience and the comments the older invalidated regulation needs to be updated.)

Tax procedure enthusiasts will know that § 7805(b) provides limitations on retroactivity of regulations promulgated under § 7805(a).  I won't go through those limitations now but link the Code section here.  Those limitations were adopted in 1996.  Prior to 1996, Treasury regulations under § 7805(a) could be retroactive to the effective date of the statute being interpreted.  The reason is that, contrary to ill-considered claims by some courts and scholars of relatively recent vintage, § 7805(a) regulations are interpretive regulations which interpret the statute and do not create new law (a requirement for legislative regulations).  The current limitations in § 7805(b) as revised in 1996 do not apply to Code provisions enacted prior to 1996, so that the law of retroactivity for § 7805(a) regulations applies.  (I cover this in my Article, John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 12/15/21), here, linking to the article for reviewing or downloading, at pp. 61-62.  (As an aside, this retroactivity feature for regulations interpreting pre-1996  Code provision was the whole point of the United States v. Home Concrete & Supply, LLC, 566 U.S. 478, 504-505 (2012) where the regulation interpretation was retroactive and failed only because the interpretation (as opposed to the regulation) was foreclosed by the Supreme Court’s earlier Colony case (see particularly Justice Kennedy's dissent).)