Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (12/24/25)

As I close out my postings for the year, I decided to report on Castro v. United States, 2023 WL 8825316 (5th Cir. 12/21/23), unpublished (CA 5 here; GS here). The Fifth Circuit panel did not think it worthy of publication, so I initially decided to forego making it a topic of a blog. But then I learned that the plaintiff, John Anthony Castro, has been “player” in a series of tax cases is a presidential candidate, a Republican seeking to take Trump’s place as the frontrunner and ultimate nominee. See Castro’s Wikipedia page here (i) offering significant discussion of his playing in tax cases and (ii) noting that his status as a licensed attorney may be in doubt. So, I’ll discuss the recent 5^th Circuit opinion, for its discussion of settled law that do not justify a precedential opinion. In this opinion, Castro appears as plaintiff rather than as attorney (although, I suppose, he could be pro se attorney for himself).

In order avoid recreating the wheel with new discussion (with no temptation to plagiarize or make up new words without value) and given that brevity of the relevant discussion in the opinion, I just quote the opinion (using the cleaned up technique to eliminate parts that are not relevant to the point I want to make).

During an IRS criminal investigation into Castro, criminal investigative agent Tuan Ma (“Agent Ma”) contacted two potential witnesses to obtain information in furtherance of his investigation. The parties dispute whether Agent Ma disclosed to the two potential witnesses that Castro was under criminal investigation but that the investigation did not target the two potential witnesses. For the purpose of summary judgment, we assume that Agent Ma did in fact disclose such information to the two potential witnesses. The two potential witnesses submitted affidavits indicating that they spoke with Agent Ma after he reassured them that they were not under investigation.

            Even accepting as true that Agent Ma made the alleged disclosures in violation of §6103 of the Internal Revenue Code, a safe harbor provision shields the Government from liability if the agent's disclosure was based on “a good faith, but erroneous, interpretation of section 6103[.]” 26 U.S.C. §7431(b)(1) (“No liability shall arise under this section with respect to any inspection or disclosure . . . which results from a good faith, but erroneous, interpretation of section 6103[.]”). This circuit uses an objective standard to evaluate the applicability of this “good faith” exception to liability under the Internal Revenue Code.

Article on The Tax Contribution to Deference and APA § 706 Posted on SSRN (12/14/23)

I have just posted this article to SSRN here.

The recommended SSRN cite is: Townsend, John A. and Townsend, John A., The Tax Contribution to Deference and APA § 706 (December 14, 2023). I don’t know why SSRN doubles up on my name, but have just not tracked it down. (If anyone knows how to fix that, please send me an email.)

 The abstract is at the link and then links to the pdf version. Here is my abstract of the SSRN abstract.

The tax authorities supporting APA to include deference are compelling. These tax authorities have been marginalized in the discussion. The law at the time of the APA in 1946 was settled to include deference when (i) the statute was ambiguous and (ii) the agency interpretation within the scope of the ambiguity was reasonable. That was Chevron deference before Chevron. That alone would support interpreting APA § 706 to include deference. But, there is more, § 706 states the standard of review for interpretations “not in accordance with law” which the Supreme Court interpreted in Dobson, a 1943 tax case, to mean review with deference rather than review de novo.

There is a lot of tax history in this rather short article. One key matter of interest is the roles in the tax system occupied by Justice Robert H. Jackson, Wikipedia here. He served successively in the following positions: Chief Counsel of the IRS, Assistant Attorney General Tax Division, Solicitor General, Attorney General, and Supreme Court Justice. He moved into all of those positions in a period of less than 10 years. Later, he also took a leave of absence from the Supreme Court to be the chief prosecutor at the Nuremburg war crimes trial. Jackson features prominently in the article as author of the Dobson decision, a unanimous decision, which authoritatively interpreted the Tax Court standard of review "not in accordance with law" to mean deference--hence Dobson deference--much like Chevron deference. The standard "not in accordance with law was incorporated in APA § 706.

I would appreciate any comments anyone would care to make to me.  My email address is jack@tjtaxlaw.com.

Fun Fact: The original draft of this article was over 140 pages long. I then bumped it down to 47 pages. It now is 32 (including appendix with the versions as it moved from the AG Final Report in 1941 to enactment in 1946).

Fun Chevron: AI Weighs in on Chevron’s Future (and Golsen) (12/12/23)

Chevron deference and its possible demise is much in the news recently with the Supreme Court’s acceptance of two parallel cases that address the following question: 

Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451), here; and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219), here.

I decided to ask various AI platforms what they could offer on whether the Supreme Court will overrule Chevron deference. Here are the answers from three AI platforms (alphabetical order by AI platform without only formatting (such as bold face) offered by the AI; Chevron is not formatted) [Note that I use the free-to-me versions of each platform]:

Bard (Google)

Whether the Supreme Court will overrule Chevron deference is uncertain. While there are indications suggesting both possibilities, ultimately the Court's decision will depend on the specific case and the justices' interpretations of the law.

Arguments in favor of overruling Chevron deference:

• Increased judicial activism: Some argue that Chevron deference grants excessive power to federal agencies, diminishing the role of the judiciary in interpreting the law.
• Lack of democratic accountability: Others argue that agencies are not accountable to the same democratic processes as elected officials, making Chevron deference potentially undemocratic.
• Concerns about agency expertise: Some believe that agencies may not always have the necessary expertise to interpret complex laws.

Arguments in favor of retaining Chevron deference:

• Promotes administrative efficiency: Chevron deference allows agencies to implement and enforce laws without lengthy court challenges, promoting efficiency.
• Recognizes agency expertise: Agencies often possess specialized knowledge and experience relevant to the laws they administer.
• Reduces judicial workload: Deference to agency interpretations can reduce the burden on the courts, allowing them to focus on other matters.

Recent developments:

• Supreme Court agrees to hear case challenging Chevron deference: In May 2023, the Supreme Court agreed to hear a case related to the National Marine Fisheries Service's interpretation of a fishing law. The case could have significant implications for Chevron deference.
• Conservative justices express skepticism: Some conservative justices have expressed skepticism towards Chevron deference, suggesting a potential shift in the Court's stance.

Conclusion:

It is too early to predict whether the Supreme Court will overrule Chevron deference. The Court's decision will likely depend on the specific arguments presented in the case and the justices' individual interpretations of the law. However, recent developments suggest that the Court may be more receptive to challenges to Chevron deference than in the past.

Here are some resources that provide further information on this topic:

• Deference and its Discontents: Will the Supreme Court Overrule Chevron? (CRS Report): https://thehill.com/opinion/judiciary/4238063-what-happens-if-the-supreme-court-overturns-chevron/
• Supreme Court to Consider Major Case on Power of Federal Regulatory Agencies (SCOTUSblog): https://www.scotusblog.com/2021/11/chevron-deference-at-stake-in-fight-over-payments-for-hospital-drugs/
• Supreme Court to Consider Overruling Chevron Deference (Baird Holm LLP): https://www.theregreview.org/2022/07/14/pierce-chevron-deference/  [JAT Note: the link is to an article by Richard Pierce, a noted expert in administrative law]

On the Tax Court's Golsen Rule (12/3/23; 12/5/23)

In Kraske v. Commissioner, 161 T.C.___ No. 7 (2023), GS here, the Court provides a good application of its Golsen rule. Golsen v. Commissioner, 54 T.C. 742, 756-58 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), cert. denied, 404 U.S. 940 (1971). The Golsen rule, in brief, is that, in the case before it, the Tax Court will adopt a square prior holding of the court of appeals to which the case is appealable even if the Tax Court believes that Circuit's prior holding is wrong. Kraske gives me an opportunity to expound briefly on Golsen. 

Short statements about the Golsen Rule.

• The rule prior to Golsen was called the Lawrence rule. Lawrence v. Commissioner, 27 T.C. 713, 718 (1957), rev’d, 258 F.2d 562 (9th Cir. 1958). The Lawrence rule was that the Tax Court should apply the interpretation it felt best regardless of appeal to a Circuit which, through prior precedent, was likely to reverse. Golsen is a rule of judicial expedience.
• In determining whether there is such a conflict between the Tax Court’s best interpretation and the relevant Circuit Court’s holding, the Tax Court should determine whether the court of appeals decision at issue “is so clearly on point that it would be futile” to issue a decision contrary to it. See Sanders v. Commissioner, 161 T.C. ___ No. 8, *6-*7 (2023) here (reviewed opinion on the jurisdictional issue). I analogize this review to the much-ballyhooed Chevron Footnote 9 rigorous statutory interpretation to eliminate ambiguity at Chevron Step One. If by vigorous review of the Circuit’s case authority, the Tax Court finds that the authority is not squarely on point (meaning, I think, that the authority can be meaningfully distinguished or otherwise not applicable), the Tax Court can then apply its own best interpretation.
• Professor Camp says that the Golsen rule requires that the Tax Court “basically decide the likelihood that the Circuit Court of Appeals would reverse the Tax Court in the case at hand.” Bryan Camp, Lesson From The Tax Court: The Rules For Penalty Approval Depend On Geography (Tax Prof Blog 10/30/23), here, discussing Kraske. That raises the question whether a trial court such as the Tax Court can reasonably predict that a higher court would reverse; after all, the Circuit could reconsider and reverse its prior holding. That’s a judgment call which I don't think factors in that possibility. If the Tax Court makes the wrong judgment, I’m sure the Circuit Court will let it know.
• Where the Circuit’s interpretation is not squarely in point, concerns for “uniformity in interpretation” throughout the country require that the Tax Court apply its own best interpretation. Lardas v. Commissioner, 99 T.C. 490, 494-5 (1992).

Tax Case Illustrating the First Rule of Persuasion--Avoid Irritating the Person You Seek to Persuade (12/3/23)

In Fitzgerald Truck Parts, Inc. v. United States, 2023 WL 8100540, 2023 U.S. Dist. LEXIS 208420 (M.D. Tenn. 11/21/23), CL here and GS here, “After a trial held in Cookeville, Tennessee between July 10 and July 14, 2023, a jury found that Fitzgerald Truck Parts and Sales, LLC (“Fitzgerald”) was not liable for excise tax on some  12,830 glider semi trucks sold between 2012 and 2017.” The Government moved for Judgment as a Matter of Law or New Trial. The Court denied the motion.

I am not sure there is any federal tax procedure issue involved in the opinion, except that tax procedure necessarily involves trial procedures. For that reason, this decision is a doozy, primarily because the judge appears (my inference) to be irritated with the Government claims on the motion.

The essential facts are recounted in the opinion (pp. 1-3 bold face supplied by JAT):

          For more than 30 years, and up until Environmental Protection Agency (“EPA”) regulations essentially abolished the market, Fitzgerald manufactured glider semi-trucks. It did so by placing rebuilt engines and transmissions from wrecked highway tractors into glider kits produced by original equipment manufacturers. The kits from those manufacturers generally included such things as the cab, frame, sheet metal, mounting brackets and steering gear, to which the rebuilt powertrains were then added. Through this method, the goal was to offer for sale essentially a new truck – albeit with a rebuilt engine and transmission – at a lower price than a comparable truck from the factory.

          Not only did the customer receive a reduction in price, the customer was also not on the hook for  excise taxes, at least if the governing regulations were followed. Herein lies the core of the parties’ dispute.

          Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” of “tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.” 26 U.S.C. § 4051(a)(1). The code also contains a safe harbor provision that states:

(f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.

26 U.S.C. § 4052(f)(1).

          It has been Fitzgerald’s position throughout that the trucks it produced met the safe harbor [*3] provision. The Internal Revenue Service (“IRS”) disagrees. In accordance with IRS regulations, Fitzgerald paid the excise tax on one truck for each quarter of the tax years at issue, meaning excise taxes were not paid on some 12,800-plus gliders. The stakes are enormous, especially for a company that is no longer producing trucks, and never collected the excise tax from the purchaser in the first place. Those taxes are more than ten million dollars. Penalties and interest place that figure in the neighborhood of $300 million.

Justice Sandra Day O'Connor, Tufts, Chevron Deference, Dobson Deference, and APA § 706 (12/2/23)

Yesterday, Sandra Day O’Connor died. See Linda Greenhouse, Sandra Day O’Connor, First Woman on the Supreme Court, Is Dead at 93 (NYT 12/1/23), here. She served many iconic roles in our legal history. I won’t attempt to catalog those roles and her achievements. I present in this blog some of her history in a tax and administrative law context that I hope is of some interest to some readers. 

In 1983, Justice O’Connor burst into my consciousness because of her concurring opinion in Tufts v. Commissioner, 461 U.S. 300 (1983), here. Tufts addressed an issue arising from the then infamous footnote 37 in  Crane v. Commissioner, 331 U. S. 1  14 n. 37 (1947), here. See for an illustrative discussion of Crane’s importance in the tax law in a series on important cases in different disciplines, Vada W. Lindsey, The IRS’s Hollow Victory in Crane v. Commissioner, 331 U.S. 1 (1947), here. (noting that, by itself, Crane may not seem important but its importance ever after is in the term “tax shelter,” which I discuss below)

Crane addressed the issue of how to treat the taxpayer’s disposition of property subject to a nonrecourse debt. The taxpayer there had acquired the property subject to a nonrecourse debt equal to the value of the property; the taxpayer included the nonrecourse debt in the basis for the property, and, while she held the property, had taken depreciation on tax basis including the nonrecourse debt. The taxpayer then disposed of the property subject to the nonrecourse debt. The question was whether, in reporting the tax consequences on disposition, the taxpayer should include the nonrecourse debt and any other consideration (there $2,500 cash) in amount realized. The amount realized is the minuend of the calculation of gain realized; from that minuend, basis is subtracted (subtrahend) to compute gain realized. The Court held that the nonrecourse debt was included in the calculations as follows:

1	Cash (net)	$2,500
2	Nonrecourse debt	$200,000
3	Amount Realized (1+2)	$202,500
4	Less Undepreciated Basis *	($175,000)
5	Yields Gain Realized (3-4)	$127,500

This calculation comports with the actual tax results, where the taxpayer had taken $25,000 in depreciation offsetting other income but had walked away with cash of $2,500 net from dealing in property. The tax books balance by including the nonrecourse debt in amount realized. If the Court had held the amount of the nonrecourse debt was not included in the amount realized calculation, the tax books would not have balanced because the taxpayer would have gained the interim depreciation offsetting other income without some balancing to account for the fact that the debt was nonrecourse meaning the taxpayer never paid for the tax deductions (either in cash or an equivalent amount of offsetting income).

Crane involved property worth the value of the nonrecourse debt at acquisition and disposition. The Court said in fn. 37:

   n37 Obviously, if the value of the property is less than the amount of the mortgage, a mortgagor who is not personally liable cannot realize a benefit equal to the mortgage. Consequently, a different problem might be encountered where a mortgagor abandoned the property or transferred it subject to the mortgage without receiving boot. That is not this case.

Crane and its implications, fn. 37 in particular, spawned many tax shelters (abusive and otherwise) where taxpayers could acquire property subject to nonrecourse debt, claim the tax benefits of a “cost” basis in the property including the nonrecourse debt that would never cost anything, and then, to the extent that the nonrecourse debt exceeded the value of the property, never have a balancing tax entry because not included in calculation of amount realized.

Most of the abusive tax shelters have a familiar theme generally—false excessive valuations of the property with false deductions for depreciation or some other tax benefits (e.g., credits). The current in vogue abusive tax shelter is the syndicated conservation easement, the abusive variety of which depend on grossly excessive valuations to “justify” claimed charitable contribution deductions. In earlier times based on what some read as the implications of Crane, shelter promoters “sold” the opportunity for deductions that would never cost anything (including never being reversed by income inclusions). (Of course, the more “white-shoe” variety of abusive tax shelters, the transfer pricing abuse, involve abusive valuations in transfer pricing.)

Liberty Global Confirms the Saying that, for Forum Choice, Taxpayers Should Avoid the Tax Court When Claims Lack Technical Merit (12/1/23; 3/9/24)

In Liberty Global Inc. v. Commissioner, 161 T.C. ___ No. 10 (11/8/23), GS here, the Court held against the taxpayer on its claims based the Overall Foreign Loss (“OFL”) provisions of the Code. Judge Toro does a nice job of explaining the provisions (with some easy (relatively) to understand examples, so I won’t attempt to here).

I post the case here because I have related cases which involved tax procedure issues. Given the amounts involved discussed in the Tax Court case, it is not surprising that Liberty Global left no stone unturned to avoid the result the Tax Court now delivered. The prior postings are (in reverse chronological order):

• Liberty Global Court Holds that Government May Proceed by Collection Suit without a Notice of Deficiency (Federal Tax Procedure Blog8/13/23), here.
• Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (Federal Tax Procedure Blog1/16/23; 1/19/23), here.
• Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here.
• Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here.

JAT Comments:

1. The taxpayer reported the transaction on 2010 return Schedule UTP (Form 1120), Uncertain Tax Position Statement as follows (Slip Op. 5):

[Liberty Global] entered into a transaction to sell its entire interest in its Japanese subsidiary, [J:COM], during the year. [Liberty Global] recognized a gain on the sale and due to recharacterization of the gain also recognized deemed section 902 credits as part of the overall transaction. The issues are the application of the rules under section 904 to the transaction and whether the amount of the foreign tax credit taken as a result of the transaction is appropriate.

I presume that the disclosure got the IRS’s attention. At least in this case UTP worked. 

Added 3/9/24 9:00 pm: The UTP disclosure apparently avoided the IRS assertion of a penalty. For a good discussion of this case, see Lee A. Sheppard, Foreign Tax Credit Recapture and Schedule UTP, 113 Tax Notes Int'l 421 (1/22/24).

Notice of Intent to Update and Correct Federal Tax Procedure Book Practitioner and Student Editions (11/24/23)

I have been pointed to and discovered myself some errors in the August 2023 editions of the Federal Tax Procedure that I feel need to be corrected by an interim edition before the next scheduled publication in August 2024. Some are minor issues that most readers could identify and mentally correct in context. Others (although thankfully not many) are errors in substance that escaped my attention and therefore, the opportunity to correct. Others are purely stylistic-for example, all case citations were italicized (earlier editions underlined case citations); I changed that in the 2023 working draft for the 2023 editions; for some reason unknown to me, WordPerfect's publish to pdf routine eliminated the italicizing for the cases. (That routine had the benefit of producing a bookmarked Table of Contents.) Adobe Acrobat's print drive will preserve the original formatting (including italics for cases), so that is print process I will use for the revision/update. (Although it will not produce a bookmark table of contents; oh well.)

The revision/update versions will be "red-lined" to show changes in the 2023 editions since I published the originals in August 2023. Those changes will be both correction of errors as noted above, plus new matters I added after the August 2023 editions. (I tend to stay reasonably up to date for new matters and corrections throughout the year, so most material new matters since August 2023 will be in the revised editions.)

I hope to get the revised editions out by the end of the year so that it can be available for academic periods starting in January 2024. I am not sure what to call it. Perhaps mimicking software updates, I will call the editions 2023.1 editions.

I apologize for this inconvenience to readers.

Failure to File Penalty When Return Not Filed-What is Reasonable Cause to Avoid the Penalty? (11/24/23)

In Lee v. United States, 84 F.4^th 1271, (11^th Cir. 8/24/23) (GS here), the Court held that reliance upon a return preparer to e-file a tax return is not reasonable cause for the failure to file penalty. This is a logical and probably necessary holding from Boyle’s bright line holding for those penalties applying for failure to file and pay by mail. United States v. Boyle, 469 U.S. 241 (1985), here.

Lee serves as a reminder that taxpayers assume the risk of their preparer’s failure to file (whether in hard copy format or by e-file). Of course the taxpayer has to sign the hard copy manually and should be able to know at least whether that essential act was done in time. So, if signing the return occurs in time, the taxpayer should simply mail the return in one of the § 7502 guaranteed timely mailed, timely filed way.

In this regard, readers may want to review Judge Lagoa’s “specially concurring” opinion warning of the risks in this process for manually mailed and efiled returns.

I posit one hypothetical as a possible reasonable cause defense for failure to file timely. Assume an individual taxpayer with an extended filing date of 10/15/XX. He engages with a competent preparer to whom he timely delivers all documents and data required to prepare the return and offer it to the taxpayer for filing and mailing in early October. The expectation is that the taxpayer will do the guaranteed timely mailing-timely filing method under § 7502. During the preparation phase, the taxpayer and the preparer correspond as necessary to make sure the preparer has the information sufficiently to prepare the return competently and timely and is progressing in a timely manner to meet the early October time to deliver to the client for filing. On October 13/XX, the taxpayer goes to the preparer’s office to sign, physically signs, and takes possession of the return, bringing a properly addressed envelope with a postage-paid envelope for one of the guaranteed timely mailing -timely filing methods. The taxpayer finds at the preparers office that for some reason the return has not been prepared and the underlying documents and data are in such a mess that the mess cannot be resolved in time to file the return timely. Would that be reasonable cause? Surely this is a different case than Boyle where the problem resulted from the adviser giving incorrect legal advice as to the filing date so that, apparently no attempt was made to prepare a return in time for timely filing. Also, assume that the failure to file penalty is $1,000,000. Would you take the case on a contingency fee?

Of course, taxpayers who can prove that they reasonably relied upon the preparer under state law have a likely cause of action under state law. But pursuing that right might be expensive, timely, and perhaps fruitless.

Submitted - Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706 (11/18/23)

Yesterday, I submitted my article for publication (hopefully). The article is titled Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706.

Here is the abstract I submitted with the article (always subject to change prior to publication).  I provide links to the key documents cited for blog readers' convenience through quick web connection.

Abstract

The Supreme Court granted two petitions for writ of certiorari to address in the October 2023 Term whether Chevron deference should be overruled or clarified. Chevron is shorthand for deference articulated in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). [The two Supreme Court cases are Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451), here, and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219), here.

The key features of Chevron deference are: (i) ambiguity (or silence sometimes treated as ambiguity) in the statute and (ii) agency reasonable interpretation within the scope of the statutory ambiguity. Deference with those features has been used in statutory interpretation judicial review since well before Chevron and the APA.

One of the issues on cert is whether the APA Scope of Review provision (5 U.S.C. § 706), here, precludes, requires, or permits deference. Some in the legal community (including judges, but none so far in opinions of their respective courts) argue that the APA, properly interpreted, precludes deference. The most prominent argument that § 706 precludes deference is by UVA Law Professor Aditya Bamzai in The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here. Using some of Professor Bamzai’s claims, I address whether § 706 precludes deference. This article does not address other bases (such as constitutional) against deference.

This article asserts that § 706 permits deference. Since so much has already been written on that issue, this article focuses on new discussion of the tax background largely ignored in the competing claims on § 706 and deference. By tracing the relevant tax history prior to the APA’s enactment in 1946, the article shows the claim that § 706 precludes deference is a misreading of the history. The article argues that deference with the characteristics of Chevron deference preceded the APA. Further, contrary to Professor Bamzai’s claim, such deference in tax cases was featured prominently in the authoritative Final Report of the Attorney General's Committee on Administrative Procedure (1941), here, which led to the APA. The article also introduces into the discussion Dobson v. Commissioner, 320 U.S. 489 (1943), here, reh. den., 321 U.S. 231 (1944), here, a tax case applying deference to Tax Court statutory interpretations. Dobson adds to the discussion because: (i) the Court treated the Tax Court as an agency rather than a court because the statute said the Tax Court was an agency and (ii) the statutory standard for review of Tax Court interpretations permitted reversal only if “not in accordance of law.” The Court interpreted the statutory standard “not in accordance with law” to require deference. APA § 706 has verbatim the same scope of review–”not in accordance with law”– for agency interpretations. In explaining § 706 as the proposal moved through Congress to enactment, the refrain was repeated often that it did not change existing law (which included deference), neither adding to nor lessening the existing scope of review. And, the authoritative Attorney General’s Manual on the Administrative Procedure Act (1947), here, said that § 706 restated rather than changed the current scope of review.

Based on this analysis of this history and the text of the APA, the article concludes that the APA permits deference. If the Court rejects deference or wishes to revise or clarify deference (similar to the way it did for Chevron deference’s lesser cousin, Auer deference, in Kisor v. Willkie, 589 U.S. ___, 139 S. Ct. 2400 (2019)), the Court should do it on some basis other than § 706.

Coca-Cola Tanks Again in the Last Round of Transfer Pricing Litigation in the Tax Court (11/9/23)

I have written before on Coca-Cola's massive transfer pricing case as the results dribbled out over the years (reverse chronological order).

• Tax Court (Judge Lauber) rejects Coca-Cola’s Untimely Motion for Reconsideration (12/3/21), here.
• Tax Court (Judge Lauber) Issues Significant Transfer Pricing Decision in Coca-Cola; Burden of Proof Issues (11/19/20; 11/25/20), here; and 
• More Coca-Cola - On Transfer Pricing and Blocked Income Regulation (11/23/20), here.  

Yesterday, the Tax Court rendered another opinion, here, apparently the last merits opinion before moving, if required, to fine-tuning the calculations required by its decisions on the merits. (The docket entries are here.)

Three key points:

1. Transfer pricing adjustments turn on valuations, with many larger taxpayers preferring to use some type of IRS-recognized safe harbor methodology to take the risk out of the potential for adverse results given the uncertainties involved in valuations.. There can be some tricky rules to qualify for certain real or imagined safe harbors, but at the end of the day transfer pricing cases are principally valuation cases.

The relevant comments from a Coca-Cola news release dated 11/9/23 around 7am Eastern. here, are

ATLANTA, November 09, 2023--(BUSINESS WIRE)--On Nov. 8, the U.S. Tax Court issued a supplemental opinion in The Coca-Cola Company & Subsidiaries v. Commissioner of Internal Revenue. The Coca-Cola Company disagrees with the actions of the IRS and the latest decision by the U.S. Tax Court.

While we disagree with the court’s interpretation of the facts and law in this case, we are pleased to move closer to a final resolution of the Tax Court case so that we can pursue an appeal, where we can assert our claims and vigorously defend the company’s position.

This includes our belief that it is unconstitutional to face retroactive tax liability based on the IRS’ use of a calculation methodology that was different from what was long agreed upon and approved in audits for more than a decade.

We do not expect the results in this recent supplemental decision to change the methodologies we have used to calculate the tax reserve we have taken or the potential aggregate incremental tax and interest liability we have disclosed related to the dispute with he IRS or our effective tax rate.

I do not know how much Coca-Cola has reserved any tax, penalties, or interest for the litigation or what percentage of the total claimed liabilities is reserved: at this stage of litigating the matter, that reserve number might be a useful indication of whether the corporation really believes there is some expected value to its claims.

Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706 (11/6/23; 11/8/23)

I susbstantially revised this blog entry because it was not my best writing; I have made it better (I hope), but do not change the trajectory of my original analysis.

As readers of this blog know, the Supreme Court accepted cert in Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451, here.) (“Loper Bright”) to consider the following question in the October 2023 term:

 Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

Chevron is common shorthand for Chevron deference, named after Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). Chevron deference as interpreted (it's all about interpretation) deploys a two step framework before deference may be invoked at Chevron Step Two. Chevron is a hot-button issue for those who fear and/or hate (admitting some possibility to deploy fear and hate at the same time) of the administrative state and libertarians and a broad ragtag group of fellow travelers which, when lumped together, I call deference deniers.

Since the grant of certiorari in Loper Bright, the Court has accepted certiorari in Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219, here ) where the question presented is the same as in Loper Bright. The Court took unusual steps in accelerating cert action on Relentless and even in accepting cert in a carbon copy case to Loper Bright. The speculation is that, given a recusal of one Justice (Jackson) in Loper Bright, accepting cert in Relentless for consideration of the same legal issue on the same relevant facts at the same time would permit the Supreme Court to have a full nine Justice opinion or opinions on the issue for cert. On October 27, 2023, the Court ordered that Amicus Briefs in Loper Bright will be considered in Relentless. (There may be some opportunity for persons who were not amicus in Loper Bright or their attorneys with prudence to file amicus briefs in Relentless, and with the change in Supreme Court rules to permit amicus brief without parties' consents or motion; As with the Amicus Briefs in Loper Bright, the real targets of the Amicus Briefs may not be Supreme Court Justices but rather some amorphous (at least hidden from view0 group with deep pockets to whom they can market themselves for the old-fashioned reason to ultimately, they hope, make money.)

I don’t speculate about what certiorari means other than the Court will consider the question presented unless the court finds a way not to consider the merits issue or narrowly focus on some unimportant issue within the scope of Chevron (a not uncommon dodge for the Supreme Court when a more direct solution would be to DIG the case when it does not want to or can't offer any wisdom that is wise (t least when it can discern that is all it has to offer). I cannot predict any outcome, except that, if the merits, if any, are reached, the pinion(s) may speak to the continuing existence of Chevron deference (perhaps a refinement or limitation as in Kisor.) 

I have just finished drafting an article currently titled Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706. I sent the draft article to a friend who graciously agreed to read it and offer suggestions.

My article explores the claims made by UVA Law Professor Aditya Bamzai in his article titled: The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here. As relevant to my article, Professor Bamzai’s claims, highly summarized, are that given the milieu of the Supreme Court cases prior to enactment of the APA in 1946, the state of deference at enactment of the APA was that the APA the in relevant part verbatim text of  706 cannot be read as authorizing a broad form of deference such as in its current iteration is called Chevron deference. Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). (I do not suggest that deference to agency statutory interpretations ever had material features other than those in Chevron—ambiguity in the statute and a reasonable agency interpretation within the scope of the ambiguity.)

Justice Thomas and Tax -- The Plot Sickens (10/29/23; 10/7/24)

Introduction: Today's topic is off-topic to tax procedure, although it does relate to trial of a tax case in problematic circumstances.

Justice Thomas’ most recently revealed conduct raising considerable controversy in ethics, legality (tax), and prudence is the alleged forgiveness in whole or part of a loan made to Justice Thomas by an alleged acquaintance (perhaps hanger-on) to acquire a luxury RV. Some alleged that, if the allegation is true, Justice Thomas had taxable income (lawyers call it cancellation of indebtedness (“COI”) income) or a nontaxable gift. Either characterization can create potential problems for Justice Thomas–if COI income, Justice Thomas might have tax reporting and paying obligations; if a gift, the “donor” would have tax reporting obligations.  I suggest in this post that the allegation it is both more subtle and potentially sinister than those claims.

From my days at DOJ Tax handling two cases, I believe that there is nuance that is missed in the claims discussed in the above paragraph. The two cases are Spartan Petroleum Company v. United States, 437 F. Supp. 733 (D.S.C. 1977) and Cooper v. United States, 1975 U.S. Dist. LEXIS 11633 (S.D. ALA 1975).

Together, those cases held correctly that 

(i) a cancellation of indebtedness is not treated as COI income if the cancellation is a medium to make a transfer with another tax character (in Spartan Petroleum, the cancellation of indebtedness was additional consideration for transfer of property; btw there was a Tax Management portfolio that wrongly recommended that shuffle); and 

(ii) following through on the Spartan Petroleum holding, a cancellation of indebtedness can be a means to benefit the debtor having some tax character other than COI income. Thus, the COI can represent a gift which is not taxable income to the donee (Thomas potentially) but is a reportable gift potentially subject to gift tax to the donor.  Gift tax status requires that the motive for the gift (here, if applicable, by COI) be detached and disinterested generosity which is the debtor’s (Thomas' burden to prove). If it is not detached and disinterested generosity, the teaching of Cooper is that it is taxable income, because the motive is likely expecting some benefit or advantage the debtor could provide. Cooper was a prominent Alabama politician in the Wallace governing circle and in a good position to benefit the Bank of Pineapple and its principals, one of whom by the way at the time had the highest grades ever recorded at University of Alabama and, at a very young age, had been General Stillwell’s top aide in China; and his bank held a large amount of interest free state deposits.)  I took the bank President's deposition in the Eglin Air Force prison (a country club prison); he delivered the goods. In other words, in that case the COI was income for influence–a bribe with an expected or hoped for benefit.

A Conceptual Analysis of Chevron Footnote 9’s Approach to (Possibly) Mitigating Chevron Deference (10/15/23; 2/6/24)

I am working on a paper addressing the issue of whether APA § 10(e) of the original Administrative Procedure Act in 1946 (now codified at 5 USC § 706, here). My principal contribution is to bring the tax authorities into the discussion. Tax authorities are important to the discussion but have been overlooked or misunderstood by those writing on the subject.

Today’s blog addresses the commotion about whether rigorous statutory interpretation is a cure, in whole or in part, to so-called "reflexive deference." This topic was originally in the drafts of the paper, but I took it out to slim the paper down and now offer the discussion here.

The cure championed by some (e.g., Justice Kavanaugh) is to deploy rigorous statutory interpretation at Chevron Step One to determine the best interpretation without ambiguity. (Remember that only at Chevron Step Two after determining ambiguity does Chevron deference apply.) This approach is the so-called Chevron Footnote 9 approach based on Chevron’s footnote 9 (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 n9  (1984) (case citations omitted)):

   n9  The judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear congressional intent. If a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect.

The notion is that more rigorous interpretation will shrink the scope of the ambiguity and will shrink (or tame) the scope of deference. Deference deniers view this as a positive good to at least partially emasculate Chevron deference.

This blog is inspired by a tax phenomenon at the heart of abusive tax shelters sold with “opinions” written by prominent lawyers and accountants that the key legal edifice (and components) supporting a bullshit tax shelter opinion would “more likely than not” prevail. That type of legal opinion was inspired by the fact-finding concept that preponderance of the evidence meant a finding that, on the evidence, the fact was more likely than not. The fact-finding concept was sometimes conceptualized as a finding that the fact was more than 50% likely based on the evidence. A 50% or lesser likelihood meant the party bearing the burden of persuasion lost on that fact issue. So, in theory, if the fact-finder found that the fact was 51% likely the party bearing the burden of persuasion on that issue wins. I hope at this point you have spotted the problem—what exactly is the difference between 50% and 51% likelihood? Can a fact-finder really perceive that fine a difference in a way meaningful to make a rational fact-finding? Isn’t this a context where there is a range rather than a finite percentage. See in a similar context in fact-finding, John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020), here.

Applying that theoretical concept to “law-finding,” what is the difference between a 51% and a 50% likelihood for a legal opinion. Can any rational or responsible law-finder—whether a judge in a case or a lawyer rendering a legal opinion--make that fine an analysis? Specifically, in the current context, is a judge’s or a lawyer’s belief that the likelihood of being the correct interpretation is 51% (proponent wins) or 50% (proponent loses) meaningful? Is that sliver of difference of 1% (or with finer tuning, .000001%) meaningful to anyone? See e.g., Daniel J. Hemel and Aaron L. Nielson, Chevron Step One-and-a-Half, 84 U. Chi. L. Rev. 757, 781-782 (2017) (using a similar spectrum analysis)