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.)

3. I am not sure of the procedural posture of the new case to collect underpayments for 2018 and relationship to the old refund case for 2018 still pending. Based on what I know or think I know, the claim could have and perhaps should have been brought as a counterclaim in the refund suit.  See FRCP 13, here.  That possibly involves compulsory and permissive counterclaim issues;. I have not attempted to research these issues, so I just raise them here and may get back to it later.

4. The collection suit asserts (pars. 38 & 39) only an accuracy-related penalty of 20% for “claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law,” citing § 6662(a), (b)(6).  It is not clear how this penalty factors into the refund claim for which there is a 20% penalty for claims without reasonable cause, including a claim that would be subject to § 6662(b)(6).  See § 6676(c).  I wonder if bringing the prompt refund suit was an attempt to strike before the IRS could assert the § 6676 penalty; which might also implicate the FRCP Rule 13 counterclaim issue discussed above in par. 3.

5. More on the regulations issue addressed in the refund case and addressed in my prior blog (linked in the opening paragraph), I think it is critical to again note that the regulation and the interpretation are two different things. If the temporary regulation were procedurally invalid (because of a defective good cause statement or otherwise), the interpretation can still be valid and carry the day for the Government (and thus not in need of Chevron deference requiring a valid regulation).  In interpreting the statute (as with Chevron Step One), the court should use all the tools of statutory interpretation (including Skidmore respect).  Also, among the tools of statutory interpretation are, as cited in pars. 33,. 36, 38, and 39 of the amended complaint:  "26 U.S.C. § 7701(o) (the codified economic substance doctrine), or judicial doctrines, including the business purpose, step transaction, and/or substance over form doctrines."  Those tools of statutory interpretation can operate to deny the benefit claimed, whether or not the temporary regulation has a procedural footfault.  (As a side note, I believe that the holding of a procedural footfault is questionable and likely wrong.)

6.  Paragraph 5 leads directly into the issue that I have discussed in several blogs--that the best interpretation of the statutory text will control even if the agency adopts the best interpretation in a procedurally invalid regulation.  Looking at this from another angle, Chevron deference is meaningful and outcome determinative only if the agency interpretation is not the best interpretation of the statute.  The Supreme Court so spoke in Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005) (emphasis supplied by JAT):

If a statute is ambiguous, and if the implementing agency’s construction is reasonable, 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.

There may be some ambiguity in this interpretation of Chevron's "domain" to include only reasonable not best interpretations that a court may (but not must) apply.  Still, I think it is self-evident that Chevron can be outcome determinative only when it results in a court applying the not best interpretation because when the court applies an agency best interpretation it is not deferring to the agency interpretation.  The best interpretation is the interpretation a court would apply in the absence of an agency interpretation.  If the interpretation is the best interpretation, it is simply irrelevant that the agency also pronounced the interpretation in some format whether or not the format, whether procedurally valid or not, would be eligible for Chevron deference.

7. If indeed the Chevron "space" is only for reasonable not best interpretations that a court will actually defer to, then the questions has to be asked as to just how common that deference is given.  The reason this is important is that, in most cases, courts naturally gravitate to the best interpretation (again as determined with appropriate Skidmore respect).  I intuit without empirical research that courts would instinctively avoid not best interpretations in determining outcomes; Chevron allows ample escape hatches to having to apply not best interpretations.  My anecdotal research indicates that, while courts noise about Chevron deference a lot, outcome determinative Chevron deference is less than the commotion about Chevron would suggest.  Is Chevron on Life Support; Does It Matter? (Federal Tax Procedure Blog 4/2/22; 4/3/22), here.  If my anecdotal research is correct, even if the Supreme Court conservatives and libertarians suspicious of the administrative state were to overturn Chevron or any other form of deference and direct courts to apply the best interpretation always, there would not be as much difference in outcomes as Chevron lovers or haters imagine.

8. Finally, I will be appearing on a panel at the ABA Tax Section Meeting in Dallas on October 14.  The topic for the panel is Classification of Tax Regulations and the APA.  In connection with that presentation, I have prepared updated a summary of my detailed article on SSRN: A Key Point Summary of The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN Sept. 16, 2022), https://ssrn.com/abstract=4089906).  (Note, this was submitted to SSRN as a revision yesterday and seems to be available on SSRN although I have not yet received approval of the revision; those interested might try it and if for any reason the old version is still there, email me for a copy or check back with SSRN after a few days to allow processing of the revision.

9. Added 10/12/22 5:45 pm:  One pleading issue in the Amended Complaint that surprised me is that there is no allegation that the “unpaid federal income taxes and additions to tax for the tax year 2018” have been assessed. Usually, in tax collection suits, there is an allegation of the assessment. However, it seems to be clear that tax collection suits filed within the 3-year assessment period do not require an assessment. § 6501(a); for analogous collection suit authority without assessment within the assessment limitations periods, see:  §§ 6215(a) (taxes determined by the Tax Court); 6232(f)(6) (partnership rules related to assessment and collection); 6696(d) (preparer penalties); and 7611(d)(2)(A)(i) (certain church tax). This suit was clearly within the 3-year assessment period for the original return was filed “on or about October 19, 2019 (see par. 26). However, even then it is not clear to me that the tax involved (but not the additions) was not already assessed. The Amended Complaint alleges that original return reported “reported the ‘TGH Transaction” (Project Soy Step 4) in a manner that was consistent with the temporary Treasury regulations.”  The IRS assesses tax reported on the original return. The amended return seeking to avoid the tax (claiming less tax due than originally reported and claiming some refund) was filed on December 23, 2019. There is no indication that the IRS abated or refunded any portion of the original assessment. So, I am not sure whether there is an outstanding assessment for the unpaid tax sought (maybe Liberty Global did not actually pay all of the tax reported on the original return in which case there would  be, as alleged, unpaid tax that was assessed). I would have thought that, if all or any portion of the underpaid tax in the collection suit had been assessed, it would have alleged the assessment,  Just a mystery to me. I would appreciate someone knowing the answer enlightening me by comment or email.