7th Circuit Affirms Tax Court Determinations on Mixed Questions for Clear Error (5/2/24)

In Moore v. Commissioner, ___ F.4th ___ (7th Cir. 4/30/24), CA7 here and GS here, in a brief opinion, the Court affirmed the Tax Court’s holding/finding that the taxpayer had failed to prove key factual elements for the §41 tax credit for “qualified” research expenses. The Court holds (Slip op. 2-3): 

           The Tax Court found it impossible to answer the “was it qualified?” and “how much?” questions. The Moores call this a legal error, but it was a finding of fact under the approach used to differentiate fact from law in U.S. Bank, N.A. v. Village at Lakeridge, LLC, 583 U.S. 387, 395–96 (2018). (That is to say, the finding is case-specific rather than based on resolving a dispute about what a legal rule provides.) As a factual finding, it is reviewed for clear error, and we do not see any error at all, let alone a clear one.

The case is unexceptional but I thought readers might want more on the Supreme Court case cited, U.S. Bank, N.A. v. Village at Lakeridge, LLC, 583 U.S. 387, 138 S.Ct. 960 (2018) (SC here, SC U.S. Report Preliminary Print here, and GS here ), the Court determined the scope of review (de novo or clear error) for bankruptcy court determinations of nonstatutory insiders (i.e., person not in the “includes” (non-exclusive) specific definition in the statute). "Insider" is a legal definition that applies to specific facts. Was the bankruptcy court’s determination of insider status reviewable under the clear-error standard (for factual determinations) or the de novo standard (for legal conclusions)?

I provide here the Court’s Syllabus because I think is a pretty good summary:

          Held: The Ninth Circuit was right to review the Bankruptcy Court's determination for clear error (rather than de novo). At the heart of this case is a so-called “mixed question” of law and fact—whether the Bankruptcy Court's fndings of fact satisfy the legal test chosen for conferring nonstatutory insider status. U. S. Bank contends that the Bankruptcy Court's resolution of this mixed question must be reviewed de novo, while Lakeridge (joined by the Federal Government) argues for a clear-error standard.

          For all their differences, both parties rightly point to the same query: What is the nature of the mixed question here and which kind of court (bankruptcy or appellate) is better suited to resolve it? Mixed questions are not all alike. Some require courts to expound on the law, and should typically be reviewed de novo. Others immerse courts in case-specific factual issues, and should usually be reviewed with deference. In short, the standard of review for a mixed question depends on whether answering it entails primarily legal or factual work.

          Here, the Bankruptcy Court confronted the question whether the basic facts it had discovered (concerning Rabkin's relationships, motivations, etc.) were sufficient to make Rabkin a non-statutory insider. Using the transactional prong of the Ninth Circuit's legal test for identifying such insiders (whether the transaction was conducted at arm's length, i. e., as though the two parties were strangers) the mixed question became: Given all the basic facts found, was Rabkin's purchase of MBP's claim conducted as if the two were strangers to each other? That is about as factual sounding as any mixed question gets. Such an inquiry primarily belongs in the court that has presided over the presentation of evidence, that has heard all the witnesses, and that has both the closest and deepest understanding of the record—i. e., the bankruptcy court. One can arrive at the same point by asking how much legal work applying the arm's-length test requires. It is precious little—as shown by judicial opinions applying the familiar legal term without further elaboration. Appellate review of the arm's-length issue—even if conducted de novo—will not much clarify legal principles or provide guidance to other courts resolving other disputes. The issue is therefore one that primarily rests with a bankruptcy court, subject only to review for clear error. Pp. 393–399.

Those wanting the truly precedential part of the opinion are directed to pp. 393-399. For my discussion on Syllabuses (or is it Syllabi or even something else (see here)) or other court summaries, see Supreme Court Opinion Syllabus as Persuasive Authority? (Federal Tax Procedure Blog 2/8/21), here).

Finally, I note one other issue with respect to pdfs. Often the software that generates a pdf document from a word-processor document produces text behind the image of the letters (called an OCR process). For a long time I have been aware that some such software may get the image right but sometimes produce erroneous text behind the image. Thus, if one were to copy and paste from a document (such as the Supreme Court opinion here), the paste may not produce the text accurately.  Specifically, in the quote from the Syllabus, I found two errors—

• the image of the word case-specific had this text behind the image: "casespecifc"
•  the image of the word “sufficient” had this text behind the image: “suffcient”

And, I find that pdf generators for hyphenated words with the hyphen at the end of a line often conflate the words without the hyphen.

On my anecdotal checking, I find that most third party versions of opinions (such as LEXIS-NEXIS and TN') get the text correctly. I assume they work from the embedded text but have ways to catch and correct (maybe like catch and kill, prominently in the news) the issue. Oh, well, this just means that we must be extra-digilent.