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.

Chevron Deference: Much Ado About Not Much (8/15/21)

This is my third offering on the most recent D.C. Circuit opinion in Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 8/9/22), DCCir here,  and GS here. My prior offerings are (chronological order):  Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here; and § 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (Federal Tax Procedure Blog 8/11/22), here.  (Note that I omitted from my original discussion the parallel Fifth Circuit opinion in Cargill v. Garland, 20 F.4th 1004 (5th Cir. 12/14/21), CA 5 here and GS here; see Fifth Circuit Affirms Agency Best Interpretation of Statute, thus Not Applying Chevron (Federal Tax Procedure Blog 12/20/21; 12/21/21), here.)

The point I want to make here explicit that which may be only implicit in my prior offerings. When courts defer (or parties (usually the Government) argue that a court should defer) to a “reasonable” agency interpretation, they often do not differentiate between (i) those reasonable agency interpretations that are the best interpretations and (ii) those agency interpretations that are not the best interpretations but are only reasonable agency interpretations qualifying for Chevron deference.  Thus, by chanting "reasonable" and Chevron and appearing to defer, many (I think most) cases involve agency interpretations that are the best interpretations so there is no deference at all.  That is the key point of this new Guedes opinion (and the Cargill opinion). 

And, that is why courts should, as did the court in the new Guedes and in Cargill opinions, make clear what the best interpretation is so that they can either (i) apply that interpretation without any nonsense about Chevron or (ii) apply Chevron only when Chevron deference is outcome determinative – i.e., when the agency interpretation is not the best interpretation.  Keep in mind that, in making the determination as to the best interpretation, courts should give Skidmore respect (not deference) to the agency's interpretation because the agency, not the courts, has been assigned to administer the administrative scheme and is in a better position to deal with subtleties in administration than a court is.  See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21).

As to the latter applying Chevron deference only when the agency interpretation is not the best interpretation, I point readers to some discussion in my article John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), https://ssrn.com/abstract=3400489:

In the postscript to the article (pp. 122-123) I offer the following reformulation of steps preserving Chevron's basic teaching but isolating when it is outcome determinative (footnotes omitted):

§ 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (8/11/22)

I recently posted a blog on Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here,  and GS here. See Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here. The essence of this new Guedes case is that an interpretation that is the best interpretation of the statute applies without any deference to the agency interpretation. The best interpretation controls, not because it is the agency interpretation, but because it is the best interpretation. So, for example, even if that best interpretation is in an interpretive regulation, the best interpretation controls. And the best interpretation controls even if the regulation is procedurally invalid. I have made that point (not much discussed in the mainstream claims) in several blog posts. I list only a few:  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; Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here; and Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22), here.

I focus here on the consequences of this key point—the best interpretation of the statute controls independently of the validity or characterization of the regulation in which the best interpretation may appear. Readers may recall that § 7805(b) limits retroactivity for § 7805(a) regulations interpreting Code sections enacted after the effective date of the 1996 amendments to § 7805(b). For regulations interpreting Code sections enacted before the 1996 effective date, the interpretations may be fully retroactive to the date of enactment of the Code sections being interpreted. So, imagine a hypothetical Code section enacted after 1996, say enacted in 1997, so that § 7805(b) applies to limit the retroactivity of an interpretive regulation. Suppose that, in 2022, the IRS adopts a regulation interpreting the Code section. The regulation qua regulation cannot apply retroactively to 1997. But, the best interpretation can and should apply retroactively to 1997. (I need to clarify what retroactive means in this context; the interpretation has to be within the range of reasonable interpretations since the date of enactment so, in that sense, the interpretation is not retroactive; but the retroactive language is often used to describe the concept of the interpretation later recognized (in the example, in 2022) as the best interpretation applying from the date of enactment.)

The point is that an interpretation in a Treasury regulation (Temporary or Final) otherwise subject to the § 7805(b) time limits will avoid those time limits if the interpretation is the best interpretation of the statute.   Let me repeat that so that it sinks in:  An interpretation that is the best interpretation can and should apply retroactively without regard to § 7805(b). Indeed the best interpretation is effective even if announced in subregulatory guidance (such as Revenue Ruling or Notice). What that necessarily means is that § 7805(b)’s time limits practically apply only to an agency regulation interpretation that is not the best interpretation and thus needs a valid regulation (in this case within the § 7805(b) time limits) for Chevron deference.

This raises some questions:

Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (8/9/22; 8/15/22)

In Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here and GS here, the Court rendered an important decision.  Although it is not a tax case, it deals with administrative law themes – APA and deference – important in the tax area.  The case involved the proper interpretation of the statutory term “machine guns” [I split the statutory word "machineguns" as is common] includes so-called “bump stocks.”  There was an earlier Circuit opinion in Guedes, Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 2019), here, cert. denied cert. denied, 589 U. S. ___, 140 S.Ct. 789 (2020); see 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.

The Court summarized the key conclusion of the opinion in the opening (Slip Op. p. 3):

The central question on appeal is whether the Bureau had the statutory authority to interpret “machine gun” to include bump stocks. Employing the traditional tools of statutory interpretation, we find that the disputed rule is consistent with the best interpretation of “machine gun” under the governing statutes. We therefore affirm.

 The Court expounds (Slip Op. pp. 8-10)

             The threshold question is whether to treat this case as a matter of pure statutory interpretation or to apply the Chevron framework. Both parties advocate for the former. Plaintiffs argue that Chevron does not apply for a multitude of reasons: the rule is interpretive in nature; the government waived Chevron deference; the Court may not apply Chevron to a statute with criminal penalties; and the rule of lenity must supersede Chevron in the criminal context. The Bureau also characterizes the Rule as interpretive, and it likewise urges us to analyze the Rule under a statutory interpretation framework.

            The Guedes II panel employed the Chevron framework—just as the District Court had done—in denying the motion for preliminary injunction. The panel concluded that the Bump Stock Rule was a legislative rule; the Bureau explicitly relied on Chevron in crafting it; the government cannot recharacterize a rule as legislative or interpretative during litigation; and the government cannot waive Chevron. 920 F.3d at 18, 21–23.

            Ultimately, we need not wrestle with the Chevron framework here. Rather, the parties have asked us to dispense with the Chevron framework, and in this circumstance, we think it is appropriate to do so. See Am. Hosp. Ass’n v. Becerra, 142 S. Ct. 1896 (2022) (rejecting agency’s interpretation “after employing traditional tools of statutory interpretation,” rather than inquiring into the interpretation’s reasonableness under Chevron). Using a statutory interpretation lens, we decide that the Bureau offered the best construction of the statute without wading into the subsidiary questions that the Chevron analysis poses.

Precedential Effect of Published Plurality Appellate Opinion That Majority of Panel Doesn't Accept (8/9/22)

In Trafigura Trading v. United States, 29 F.4th 286 (5th Cir. 3/25/21), CA5 here and GS here, the Court affirmed the district court judgment that the taxpayer was entitled to a refund.  The district court held that the reason for the refund was that the tax violated the Export Clause of the Constitution.  (For purposes of this blog, getting into the merits of the reason the tax violated the Export Clause is not important.)  On the Government’s appeal, the Fifth Circuit 3-judge panel affirmed, with one judge (Judge Ho) issuing a “plurality” opinion, another judge (Judge Wiener) concurring only in the judgment but not Judge Ho's opinion, and a third judge (Judge Graves) dissenting from Judge Ho's opinion.

The question that I and some colleagues have discussed recently, perhaps without definitive conclusion, is:

What is the precedential effect of the Fifth Circuit plurality opinion by Judge Ho, which as the F.4^th citation indicates was published?

Judge Ho’s opinion was only his opinion and was not approved by either Judge Wiener (concurring in judgment only) or by Judge Graves (dissenting).  The only judge on the panel who addressed the issue of precedential effect was Judge Graves who, in his dissenting opinion says (p. 796 n. 1):

    n2  Judge Wiener concurs only in the judgment, which means that Judge Ho’s opinion does not have a quorum and does not constitute precedent in this Circuit. Indest v. Freeman Decorating, Inc., 168 F.3d 795, 796 n.1 (5th Cir. 1999) (Wiener, J., concurring). Thus, I refer to it as the plurality when referencing any portion other than the judgment. 

This seems a straight-forward bar (if accurate) to precedential effect of Judge Ho’s opinion, but there is some confusion (at least in my mind) about the last sentence (saying Judge Ho’s non-precedential plurality opinion includes only “any portion other than the judgment.”  What does that mean?  Judge Ho’s opinion itself does not have a judgment.  There is a Fifth Circuit judgment (here) but it only says in relevant part that “the judgment of the District Court is affirmed.”  Presumably, this Fifth Circuit judgment is the judgment that Judge Graves refers to. 

 By contrast to the Fifth Circuit judgment, the district court judgment, here, says

Having determined that § 4611(b) violates the Export Clause of the United States Constitution, the Court orders the Government to refund Trafigura $5,215,924 in § 4611(b) taxes that Trafigira paid for the tax periods in issue, as well as statutory interest pursuant to 28 U.S.C.A. § 2422.  This is a Final Judgment and finally disposes of all claims and causes of action asserted by any party.

Technically, as I understand it, the district court judgment is only the amount that the United States owes the taxpayer.  The reason for that debt amount is not part of the judgment and in many judgments with which I am familiar the judgment only states that the taxpayer is entitled to a refund without elaboration of the reasons.  (Similarly in the Tax Court where judgment-equivalent “decisions” are rendered, they do not state the reasons for the tax, refund determined, or no deficiency.)  For the limited effect for which judgments are important (such as enforcing the judgment), merely stating the amounts is all that is required and, I think, is the judgment.

So, I infer that, since Judges Graves and Wiener did not concur with the Judge Ho’s opinion, Judge Ho’s opinion is not precedential.

Petition for Cert in Whirlpool, SG Waiver of Response, and Several Amici Arguing for Cert (8/5/22; 8/16/22)

The Sixth Circuit recently called out Whirlpool’s bullshit tax shelter. 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; see Whirlpool’s BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22), here. Not surprisingly, given the stakes, Whirlpool filed a petition for certiorari. See the Supreme Court docket entries here for handy links to the documents I discuss here.

Here is the trajectory of filings from the docket entries:

• On June 30, 2022, Whirlpool filed its petition. The question presented is (without the context fluff in the petition:

Whether the divided Sixth Circuit properly held—in conflict with precedent of this Court and settled administrative-law principles—that a statute that is conditioned on regulations delineating its reach may be enforced without regard to those regulations?

• On August 3, 2022, the United States through the Solicitor General (SG) filed its one-sentence Waiver:  “The Government hereby waives its right to file a response to the petition in this case, unless requested to do so by the Court.”  [Wow! Take that Whirlpool; when I was with DOJ Tax Appellate, I don’t remember any case where we did that rather than filing a brief in opposition; I interpret the waiver as saying that the petition is not of sufficient merit to warrant a brief in opposition; there has to be a backstory there.]
  
  
• On August 3 and 4, three amicus briefs were filed on behalf of (i) the National Association of Manufacturers, (ii) a group of major national accounting firms (PWC, Deloitte Tax LLP, and KPMG LLP; and (iii) a group consisting of the Silicon Valley Tax Directors Group, National Foreign Trade Council, Information Technology Industry Council, and Technet. 

Only one of the amicus briefs (# iii above) states the question to set up the arguments in the amicus brief, by just quoting the question presented in the petition. I thought that a bit odd that two of the amicus briefs left out the question presented for which they were arguing cert should be granted. But, what do I know? 

What is all the kerfuffle about, particularly when the SG has given the petition the back of her hand? 

Exxon Strikes Out on Its Tax Refund Claims But Dodges the § 6676(a) Penalty Bullet (8/4/22; 8/8/24)

In Exxon Mobil Corp. v. United States, 43 F.4th 424 (5th Cir. 8/3/22), CA5 here and GS here, Exxon Mobil (“Exxon”) filed a mammoth claim for refund claiming that it had misreported two separate tax matters on its original income tax return.  The first item it misreported (paying more tax than it claims was due) was worth “worth a billion dollars” related to the proper tax treatment of payments arising from an oil and gas transaction.  Related to this first claim, the IRS imposed a § 6676(a) 20% penalty worth about $200 million.  The second item, called by the Court a “purported blunder” (not a good sign to use the purported adjective) “this one worth $300 million,” about how to treat the renewable fuel tax credit.

I have two gut level comments.  

First, Exxon has and has had for a number of years one of the best tax departments ever and certainly the funding to buy the best outside legal talent available.  (General Electric used to claim that it tax department was the best law firm ever, but as those who have been watching, General Electric’s supposed inside best tax firm got them into bullshit tax shelters, so much for the best claim.)  So, why would these supposed legal giants overreport Exxon’s tax liability?  The answer as this new case determines, Exxon did not overreport the tax liability.  

Second, so what is this, shall I call it bullshit, about an amended return claiming that their legal geniuses overreported Exxon’s tax liability by $1.3 billion.  (I am sure those legal geniuses had a sigh of relief over this outcome.) And while many might claim that $1.3 billion for Exxon is pocket change, still that is the stuff that tax department promotions and pay is based on (and for outside counsel litigating aggressive positions, contingency fees).

2022 Editions of Federal Tax Procedure Book Online at SSRN (8/3/22)

The Federal Tax Procedure Book Editions (Student and Practitioner) are available on SSRN for viewing or downloading.  The links for the editions are on the FTP Blog page in the right-hand column titled "Federal Tax Procedure Book (2022 Editions)," here,

Please note that related items are available on the pages linked in the right-hand column of this Blog.