Regulations Interpreting Pre-1996 Code Provisions; Fixing Farhy (5/11/23; 5/12/23)

In Farhy v. Commissioner, 160 T.C. No. 6 (4/3/23), TN here and GS here, the Tax Court held that the Code did not give the IRS authority to assess § 6038(b)(1) or (2) penalties, here. Specifically, the Tax Court held that § 6201(a) did not authorize these penalties. I posted some concerns about the correctness of Farhy in a blog. Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (Federal Tax Procedure Blog 4/3/23; 4/23/23), here. Is there some possible self-help fix the IRS could use to pre-empt the Tax Court’s Farhy decision?

An interpretive regulation could fix the problem for the IRS. I noted such a fix for the Eleventh Circuit’s opinion in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021),  11^th Cir. here and GS here holding an interpretive regulation from the 1980s procedurally invalid for the foot-fault of failing to respond in the regulation to a comment which the Court second-guessed to be material to the rulemaking enterprise. The fix is for Treasury to adopt a replacement interpretive regulation and make it retroactive to the effective date of the regulation or retroactive to some point in between that would pick up all the syndicated shelters currently in the pipeline. Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22; 5/12/23), here. That proposed fix was anchored in the pre-1996 § 7805(a), which generally unquestionably allowed retroactivity for interpretive regulations and that authority remained for pre-1996 Code provisions.

The same fix can work for § 6201(a). The relevant statutory language is:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.

That text’s "including" clause should be sufficiently capacious to be read as including provisions not specifically enumerated. § 7701(c) (“The terms ‘includes’ and ‘including’ when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”) That avoids a dumb result -- Congress imposes a penalty treated generally as a tax without authority to assess which is just a formal recording of a liability Congress clearly meant to impose.

DC Circuit Denies Petition for Rehearing in Case Involving the Best Interpretation, Meaning no Deference (5/9/23)

The D.C. Circuit denied the petition for rehearing en banc in Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here and GS here, pet. reh. den. ___ F4th ___ (D.C. Cir. 5/2/23), DCCir here and GS here. In the panel decision (45 F.4^th 306), the question was “whether the Bureau [ATF] had the statutory authority to interpret ‘machine gun’ to include bump stocks;” the Court’s answer was: “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.” In other words, the panel appears to have resolved the case at Chevron Step One where there is no deference, not even getting to Step Two (although it could have potentially been resolved at Step Two by applying the agency best interpretation, where there is also no deference).

On the petition for rehearing en banc, the Court denied the petition without explanation by the full panel. Judge Wilkins wrote an opinion, joined by Judge Millett, concurring in denial of the petition. Judges Henderson and Walker wrote separate dissenting opinions. Judge Henderson’s opinion referred to her concurring in part and dissenting in part in the panel opinion. Judge Walker wrote a political screed with ample conservative/libertarian rhetoric but without, in my mind, serious consideration of how the country should interpret laws where the language of the statute, whatever it's original meaning, if sufficiently copious to cover the situation within the purpose of the statute. (There are huge debates about all of this, but I use examples in two contexts: (1) When the Declaration of Independence declared that all men are created equal, are or should we be locked into meaning of free white men with property?; or (2) when the Bible says eye for an eye, are we now locked into that concept as justice?)

Looking to a larger issue not directly addressed by the opinions concurring and dissenting from denial of the petition, I have addressed the key point that a best interpretation of statutory text is not in need of deference. Of course, if that best interpretation is determined at Chevron Step One, the interpretation is applied because there is no ambiguity in the statute that could permit deference, required to proceed to Step Two. Further, if that best interpretation is the agency interpretation determined at Step Two when competing interpretation(s) are considered, the agency interpretation is the best interpretation and not subject to real deference. Only where, at Step Two, the agency interpretation is the less persuasive interpretation to another interpretation is there any possibility of deference and then only when the Court applies the agency interpretation even though it thinks there is a better interpretation.

So, to put this in the expanded Chevron Steps where there is no deference to agency interpretations:

Deference--Real Deference--To Agency Less Persuasive Interpretations and APA Review of Agency Discretion (5/4/23)

Yesterday, I spent about 5 hours going through The Papers of Professor Carl McFarland at the UVA Law School Special Collections, here. Professor McFarland was a major player in shaping the Administrative Procedure Act (“APA”), enacted in 1946. What I hoped to find in the long, very long legislative and related history of the APA about (i) the consideration of deference and (ii) the distinction between legislative rules and interpretive rules (called interpretative) in the APA. I found nothing directly addressing those issues in Carl McFarland’s papers, but I did get have an insight from those materials that may help in the deference analysis. I will post that insight below. (As an aside, while at UVA law in 1966 or 1967, I played the role of Professor McFarland in the law school’s annual Libel Show roasting professors.)

While at the UVA Law Library, I recalled that some law professors uploaded to HeinOnline extensive history (statutory, legislative, and otherwise) of the APA. That collection is The Bremer-Kovacs Collection: Historic Documents Related to the Administrative Procedure Act of 1946 (HeinOnline), here. That collection requires a subscription to HeinOnLine, but it can be accessed at many law schools. This is an exhaustive collection; let me repeat that, exhaustive). For discussion of this collection, see Emily S. Bremer and Kathryn E. Kovacs, Editors, Introduction to The Bremer-Kovacs Collection: Historic Documents Related to the Administrative Procedure Act of 1946 (HeinOnline 2021), 106 Minnesota Law Review Headnotes 218 (2022), here. Yesterday, while at the UVA Law Library, I accessed a lot of that history and downloaded key documents in pdf format that I will review for the topics I mentioned in the opening paragraph.

Now to the insight. The insight is that it is clear from the legislative history and the APA itself, that the APA does not affect an agency’s exercise of discretion within the scope of the discretion. APA § 706(2) does permit review for abuse of discretion. But within the scope of discretion, there is no court review.

Relating discretion to deference, as I have noted many times, when the agency reasonable interpretation is better than other reasonable interpretations in the zone of the ambiguity in the statute, a court applying the agency interpretation is not deferring to a less persuasive agency interpretation. Only when a court determines the better interpretation within the ambiguity and nevertheless applies a lesser agency interpretation does it actually defer. In the latter case, real deference (both Chevron and pre-Chevron deference during the long history of deference) may be said to create a zone of deference (or discretion) on a spectrum from reasonable (real deference at Chevron Step Two) to unreasonable (no deference at Chevron Step Two). (Actually, that may be better conceptualized as a binary choice of agency reasonable but not the most persuasive (real deference) and unreasonable (no deference). Unreasonable may be equated to abuse of discretion in the words of § 706(2).

That is the insight I wanted to share. I will now get into a more technical discussion of key statutory and legislative history from the original APA as enacted to current § 706(2). I suspect most readers will not be interested in this, but here it is.

Tax Crimes Outline for UVA Law Tax Procedure Class (5/2/23)

On March 31, 2023, I taught Tax Crimes session for Jim Malone's Tax Procedure Class at UVA Law School. I prepared an outline that may be useful for others, so I link it here. The outline is from my Federal Tax Procedure Book published annually in early August. The outline is updated with major developments through about March 11, 2023. Keep in mind that the outline is an overview appropriate for one session in a semester class on tax procedure.  It is not definitive on Federal Tax Procedure. For more definitive discussion of tax crimes, I refer readers to Chapter 12: Criminal Penalties and the Investigation Function in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, as updated three times a year. I am the principal author of that Chapter and the updates.

Supreme Court Grants Cert to Consider Overruling or Clarifying Chevron (5/1/23)

In today’s Order List, here, the Supreme Court granted the petition writ of certiorari in  Loper Bright Enterprises v. Raimondo (SEC) (Dkt 22-451). The Court limited cert to the following issue (from the petition):

  2. 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.

I have written before on the Loper petition’s trajectory where I also link the docket entries on the Supreme Court website and on SCOTUSblog. See Petition for Writ of Certiorari in NonTax Case Raising Issue of Continued Viability of Chevron (Federal Tax Crimes Blog 3/19/23; 4/30/23)), here, and see no need to repeat or extend that discussion at this time.

Added 11:20 am: