Showing posts with label Statutory Interpretation. Show all posts
Showing posts with label Statutory Interpretation. Show all posts

Friday, December 6, 2013

Did Justice Scalia Smuggle Legislative History Into the Woods Opinion? (12/6/13)

Justice Scalia touts his disdain for legislative history, at least when he is noisy about it.  Others may have noted that Justice Scalia is prone to hyperbole.  He wrote the unanimous opinion in United States v. Woods, ___ U.S. ___ (2013), here, so in order to hold the unanimity, he was a little more muted about the subject, saying in fn 5:
We do not consider Woods’ arguments based on legislative history. Whether or not legislative history is ever relevant, it need not be consulted when, as here, the statutory text is unambiguous. Mohamad v. Palestinian Authority, 566 U. S. ___, ___, 132 S. Ct. 1702, 1709, 182 L. Ed. 2d 720 (2012). Nor do we evaluate the claim that application of the penalty to legal rather than factual misrepresentations is a recent innovation. An agency’s failure to assert a power, even if prolonged, cannot alter the plain meaning of a statute.
The question I address today is whether Justice Scalia smuggled some legislative history into his opinion and that smuggled history did affect his decision?  I think the answer to that question is yes.  Readers should know that my answer is an inference of a fact and not necessarily proof of a fact.  So, I state the basis for my inference.

After Justice Scalia states the facts and the procedural posture, he opens his legal analysis "with a brief explanation of the statutory scheme for dealing with partnership-related tax matters."  Then in very few words, he states the purpose for the TEFRA partnership rules for unified audits and litigation:
A partnership does not pay federal income taxes; instead, its taxable income and losses pass through to the partners. 26 U. S. C. § 701. A partnership must report its tax items on an information return, § 6031(a), and the partners must report their distributive shares of the partnership’s tax items on their own individual returns, §§ 702, 704. 
Before 1982, the IRS had no way of correcting errors on a partnership’s return in a single, unified proceeding. Instead, tax matters pertaining to all the members of a partnership were dealt with just like tax matters pertaining only to a single taxpayer: through deficiency proceedings at the individual-taxpayer level. See generally §§6211-6216 (2006 ed. and Supp. V). Deficiency proceedings require the IRS to issue a separate notice of deficiency to each taxpayer, §6212(a) (2006 ed.), who can file a petition in the Tax Court disputing the alleged deficiency before paying it, § 6213(a). Having to use deficiency proceedings for partnership-related tax matters led to duplicative proceedings and the potential for inconsistent treatment of partners in the same partnership. Congress addressed those difficulties by enacting the Tax Treatment of Partnership Items Act of 1982, as Title IV of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). 96 Stat. 648 (codified as amended at 26 U. S. C. §§ 6221-6232 (2006 ed. and Supp. V)). 
Under TEFRA, partnership-related tax matters are addressed in two stages. First, the IRS must initiate proceedings at the partnership level to adjust “partnership items,” those relevant to the partnership as a whole. §§ 6221, 6231(a)(3). It must issue an FPAA notifying the partners of any adjustments to partnership items, § 6223(a)(2), and the partners may seek judicial review of those adjustments, § 6226(a)-(b). Once the adjustments to partnership items have become final, the IRS may undertake further proceedings at the partner level to make any resulting “computational adjustments” in the tax liability of the individual partners. § 6231(a)(6). Most computational adjustments may be directly assessed against the partners, bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions. § 6230(a)(1), (c). Deficiency proceedings are still required, however, for certain computational adjustments that are attributable to “affected items,” that is, items that are affected by (but are not themselves) partnership items. §§ 6230(a)(2)(A)(i), 6231(a)(5).

Wednesday, December 5, 2012

Articles on Federal Courts Role in Making Tax Law (12/5/12)

Lederman, Leandra, What Do Courts Have to Do With It?: The Judiciary's Role in Making Federal Tax Law (October 31, 2012). National Tax Journal, Vol. 65, No. 4, December 2012; Indiana Legal Studies Research Paper No. 216. Available at SSRN:

Ms. Lederman is Professor of Tax Law at Indiana University Maurer School of Law.  Her bio page at that law  school is here.

Here is the Introduction to the Lederman article.
The Internal Revenue Code (Code) generally is the fi rst place to look when confronting a federal tax question, but it is important to recognize that much federal tax law is not statutory. The U.S. Department of the Treasury (Treasury) promulgates regulations, and the Internal Revenue Service (IRS) issues important guidance, such as Revenue Rulings, Revenue Procedures, and Notices (Hickman, 2009). Federal courts interpret all of these authorities. In order to understand and apply federal tax law, it is important to appreciate the role that federal trial courts, Courts of Appeals, and the U.S. Supreme Court play in developing the law. This essay provides an overview of federal tax litigation, discusses the deference courts give to guidance issued by the Treasury and IRS, and discusses when taxpayers have “standing” to challenge the tax laws in court. The essay also discusses cases in which Congress may step in to amend the Code following a court decision.
A related article is:

Matthew H. Friedman, Reviving National Muffler: Analyzing  the Effect of Mayo Foundation on Judicial Deference as Applied to General Authority Tax Guidance, 107 Northwestern U. School of Law Law Review Colloquy 115 (2012)

Here is the Introduction to the Friedman article:

The topic of judicial deference arises each time a court reviews the legitimacy of an opinion or regulation by an administrative agency to which Congress has delegated some rulemaking authority. Determining the appropriate deference standard is important because it sets limits on an agency’s quasi-legislative power and informs taxpayers and practitioners on the likelihood of challenging seemingly invalid administrative rulings. Noting the importance of the deference issue, Professor Kristin E. Hickman,  one of the foremost authorities on administrative law in the federal income tax context, wrote that “[d]rawing fine distinctions among deference standards may seem a purely academic exercise . . . [but] deference standards matter.”
For thirty-five years, the 1944 case of  Skidmore v. Swift & Co. presented the primary method for judicial review of administrative guidance created under Congress’s general grant of rulemaking authority.  In 1979, a new standard was created in what became known as the tax-specific deference standard of  National Muffler Dealers Association v. United States. Five years later, the Supreme Court held in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. that a separate and much more deferential standard should apply to final regulations drafted pursuant to a  general grant of authority. 
The  Chevron decision cast doubt upon the viability of both  Skidmore and  National Muffler since it was unclear whether the decision applied to all regulations promulgated pursuant to general grants of authority and whether it applied to tax-related guidance. This confusion persisted until the Court decided two cases in 2000 and 2001 that distinguished  between  Skidmore and  Chevron  deference.  Unfortunately, the Court’s distinction did not provide specific or uniform direction for the treatment of all general authority guidance and to this day the Court has failed to give clearer instruction. 
In early 2011, the Court took a step closer to addressing the treatment of non-regulation general authority guidance by considering final regulations in the tax context. In Mayo Foundation for Medical Education and Research v. United States, the Court conclusively answered the question concerning which standard (Chevron or National Muffler) applies to final Treasury regulations promulgated pursuant to the general grant of authority.  The Court concluded—without attempting to overturn or replace National Muffler—that all final regulations should be reviewed under Chevron. However, the court failed to address the still unsettled question of which standard to apply to guidance other than final regulations, which can come in many forms and accounts for the vast majority of guidance available to taxpayers. Presently, the default review standard is  Skidmore, but National Muffler provides a more balanced approach that can be applied to all forms of general authority regulations rather than just non-regulation guidance. 
This  Essay explores the various standards of deference the Supreme Court has applied to general authority guidance over the past sixty-eight years and concludes that the Court should revive National Muffler as the dominant standard in the tax context. Part I discusses the role that deference plays in deciding tax-related issues in court, specifically presenting the current application of final Treasury regulations for background.  Part II examines the path the Supreme Court followed in establishing and applying judicial deference from  Skidmore through  Mayo. Part III discusses the necessity of the  Mayo  decision, analyzes its holding, addresses the weaknesses of the existing standard for general authority guidance, and proposes a broad application of the former tax-specific standard from National Muffler. Part IV offers concluding remarks.

Saturday, September 29, 2012

Substantial / Gross Valuation or Basis Misstatement Majority Rule Case (9/29/12)

I write this blog to advise readers of an important decision -- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), here, which continues the majority trend holding that the significant / gross valuation or basis misstatement penalty can apply even if there is some basis other than valuation misstatement for knocking out the shelter -- such as lack economic substance or, in lay terms, just bullshit.

The taxpayer, of course, got into a bullshit tax shelter.  I won't go into it, but suffice it to say that it was bad at many levels and, of course, lacked economic substance (and was therefore bullshit in lay terms).  Bullshit shelters usually go by acronyms or initialisms; this was was called CARDS (I won't tell you what that stands for).  Here is the guts of the holding (footnotes omitted):
A. Gross Valuation Misstatement Penalty in I.R.C. § 6662
Gustashaw argues that the Tax Court erred in upholding the IRS's imposition of the 40% gross valuation misstatement penalties for 2000 through 2002. See I.R.C. § 6662(a)—(h). Specifically, Gustashaw contends that because the CARDS transaction lacked economic substance, there was no value or basis to misstate as to trigger the valuation misstatement penalties, and the penalties should not apply as a matter of law. Gustashaw also argues that Congress has penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A and 6663, and therefore, he should not be subject to gross valuation misstatement penalties under § 6662. 
The Internal Revenue Code establishes penalties for underpayment of tax. Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the portion of an underpayment of tax "attributable to," inter alia, negligence, any substantial understatement of income tax, or any substantial valuation misstatement. I.R.C. § 6662(a), (b)(1)—(3). Under the applicable regulations, only one penalty may apply to a particular underpayment of tax, even if the IRS determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-2(c).

Tuesday, September 18, 2012

The Scalia-Posner Spat Over Statutory Interpretation (9/18/12)

The Scalia-Posner spat is ratcheting up, with Justice Scalia allegedly accusing Judge Posner of the big lie -- Posner's assertion that Scalia used legislative history.  Fanning furor, Justice Scalia says appeals court judge lied (Reuters 9/17/12), here.  I suppose that, in Justice Scalia's different universe, such an accusation is as low as one can go.

At any rate, I previously blogged on Justice Scalia's new book, in collaboration with Bryan Garner, on Statutory Interpretation which is an important part of my Federal Tax Procedure class and book.   Review of Scalia Book on Statutory Interpretation (7/17/12), here.

I have nothing substantive to offer over this spat, but I think it does illustrate that there is something important -- if neither right nor wrong -- about the role of legislative history in statutory interpretation.


This is a good article by a scholar.  Eric Segall, The Scalia-Posner War and Why it Matters, here.  Excerpts:

Friday, September 14, 2012

Tax Court Applies Chevron Analysis to Validate Regulation (9/14/12)

In Gaughf Properties, LP v. Commissioner, 139 T.C. No. 7 (2012), here, the Tax Court (Judge Goeke) held that the taxpayers were subject to an extended period of time for a TEFRA partnership adjustment because they, as indirect partners not listed on the partnership return, had failed to "furnish" the IRS proper notice of their status as indirect partners.  See Section 6229(e), here. The Regulations stated that the taxpayer "furnish" the information by filing.  The taxpayer did not file the required information.  However, the taxpayer argued that taxpayers' status as indirect partners was otherwise known to the IRS from other sources and therefore that the IRS should not be allowed the extended period to assess.  The Tax Court rejected the taxpayers' claims, holding that the indirect partner (taxpayers here) must "furnish" the information in the manner prescribed in the Regulations.  Regs. Section 301.6223(c)-1T provides that the information is "furnished" by filing the information in a prescribed manner.  The Tax Court held that equating "furnishing" with "filing" was a proper exercise of the authority to interpret an ambiguous statutory term under Chevron.  The Court's Chevron analysis follows (some footnotes omitted):
Petitioner's final argument regarding section 6229(e) is that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, which incorporates section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, regarding the procedure for furnishing additional information for purposes of section 6229(e), is invalid. Petitioner argues that while section 6229(e) merely requires information identifying a partner to be "furnished" to the Commissioner, section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, restricts the plain meaning of section 6229(e) by requiring that identifying information be "filed" with the Commissioner. Petitioner also points out that section 6229(e) contains no "regulation-enabling language". We find that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. 
We first address petitioner's point regarding the lack of "regulation-enabling language" in section 6229(e). As the Supreme Court has noted, section 7805(a) provides the Commissioner with "explicit authorization to 'prescribe all needful rules and regulations for the enforcement' of the Internal Revenue Code." Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. ___, ___, 131 S. Ct. 704, 714 (2011). Section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, was issued pursuant to the authority section 7805 provides to the Commissioner. 52 Fed. Reg. 6779, 6780 (Mar. 5, 1987). Secondary authority for issuance of the regulation is found in section 6230(k), which provides: "The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subchapter"; i.e., subchapter C of chapter 63, which contains sections 6221 through 6234. Id. We thus find petitioner's argument on this point has no merit.

Thursday, September 13, 2012

Sixth Circuit Declines to Defer to Revenue Rulings (9/13/12)

A significant topic in tax procedure is the various IRS pronouncements, from Regulations on down (down in terms of authority), and their influence in the interpretation of the tax law.  I posted a blog a few days ago discussing a case in which the Second Circuit gave deference to an IRS interpretation of a regulation.  See 2d Circuit Defers to the IRS's Litigating Position (9/9/12), here.  The issue of deference is a big subject and will likely be the subject of many blogs going forward.

Today, I discuss the issue again as presented in a recent Sixth Circuit opinion, United States v. Quality Stores, Inc., ___ F.3d ___, 2012 U.S. App. LEXIS 18820 (6th Cir. 2012), here.  The substantive issue presented in the case was whether severance payments are subject to FICA taxes.  This is a bit of an esoteric issue, but for some taxpayers it involves a large amount of money.  In Quality Stores, a refund of over $1 million in employer and employee FICA taxes were involved.  The Sixth Circuit held that the FICA payments were not subject to FICA.  Basically, the court reviewed the statute and legislative history as supporting its conclusion despite the fact that the income paid on severance was subject to income tax withholding.  In so holding, the Sixth Circuit created a conflict with a previous holding in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008).

I won't bore the reader by boring into the substance  of the holding.  Suffice it to say that there was  no regulation on point, so the Sixth Circuit first reached its holding based upon the statute, the legislative history and the cases.  The Court gave this as its conclusion (footnote omitted):
Accordingly, we conclude, under the stipulated facts of this case, that the payments Quality Stores made to its employees pursuant to the Pre- and Post-Petition Plans qualify as SUB payments under I.R.C. § 3402(o). Because Congress has provided that SUB payments are not "wages" and are treated only as if they were "wages" for purposes of federal income tax withholding, such payments are not "wages" for purposes of FICA taxation.

Thursday, August 9, 2012

Second Circuit's Statutory Interpretation for Taxpayer Victory on Retrospective Interest Netting (8/9/12)

In  Exxon Mobil Corp. v. Commissioner, 689 F.3d 191 (2d Cir. 2012), here, the Second Circuit held that Exxon Mobil is entitled to retrospective interest netting which is now required under Section 6621(d) prospectively since the enactment of global interest netting in 1998.  The opinion was written by Judge Jose A. Cabranes.  His Wikipedia entry is here.

The Court introduced the concept as follows (footnotes omitted):
Under section 6621 of the Internal Revenue Code ("I.R.C."), interest is calculated at a higher rate for corporate tax underpayments than it is for corporate tax overpayments. In principle, therefore, a corporate taxpayer could owe the Treasury underpayment interest even if the amount by which the taxpayer had underpaid its taxes in one tax year (or set of tax years) was entirely offset by the amount by which it had overpaid in another tax year (or set of tax years). To remedy this apparent inequity, Congress amended section 6621 in 1998 to include a provision for "global interest netting," by which the interest rate differential is adjusted to yield a net interest rate of zero for periods of reciprocal indebtedness — that is, periods during which the taxpayer's overpayments in one set of tax years overlap and offset its equivalent underpayments in another set. See I.R.C. § 6621(d), 26 U.S.C. § 6621(d).
By noncodified contemporaneous legislation (called the "special rule"), Congress allowed the retrospective application of global interest netting.  The issue in Exxon Mobil was whether the taxpayer qualified for the special retrospective relief provision.

The narrow question the Court resolved was "whether retrospective global interest netting is permitted when the limitations period for either of the 'legs' of the period of overlapping indebtedness has not expired, or only when the period of limitations for both legs is open."  Since this is an issue that arises only under the retrospective relief provision that has no continuing significance, I will not get into the substantive issues.

I will develop in this blog entry the Court's process of statutory interpretation because the Court made some interesting analyses.  Here are the points I think worthy of development in this blog:

Saturday, July 21, 2012

Trust Fund Taxes, Including Collected State Sales Taxes, Are Not Dischargeable in Bankruptcy (7/21/12)

In In re: Calabrese, ___ F.3d ___, 2012 U.S. App. LEXIS 14897 (3d Cir. 2012), here, the Third Circuit held that state sales taxes that a seller collects from purchasers is a trust fund tax that is not dischargeable in bankruptcy.  The bankruptcy statute exempts from discharge "trust fund" taxes.  

The issue as posited by the Court was:
We must decide whether the sales taxes held by Calabrese are "trust fund" or "excise" taxes under 11 U.S.C. § 507(a)(8). Excise taxes receive priority, and are non-dischargeable, if they are less than three years old, as measured from the date of the bankruptcy petition. See 11 U.S.C. § 507(a)(8)(E) (priority); 11 U.S.C. § 523(a)(1)(A) ("A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for a tax or a customs duty . . . of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed . . . ."). Trust fund taxes are always prioritized and are never dischargeable irrespective of the age of the debt. See 11 U.S.C. §§ 507(a)(8)(C), 523(a)(1)(A). 
Three of our sister courts of appeals have considered the question presented here. In each case, the court determined that the statutory text of § 507(a)(8) does not resolve the dispute. See Shank v. Wash. State Dep't of Revenue, Excise Tax Div. (In re Shank), 792 F.2d 829, 832 (9th Cir. 1986); DeChiaro v. N.Y. State Tax Comm'n, 760 F.2d 432, 435 (2d Cir. 1985); Rosenow v. State of Ill., Dep't of Revenue (In re Rosenow), 715 F.2d 277, 279 (7th Cir. 1983). Proceeding to analyze the legislative history, all three concluded that a sales tax paid by a third party is a trust fund tax within the meaning of subsection (C), and not an excise tax under subsection (E).

Tuesday, July 17, 2012

Review of Scalia Book on Statutory Interpretation (7/17/12)

Antonin Scalia & Bryan A. Garner have a new book called Reading Law: The Interpretation of Legal Texts (Westlaw 2012).  The Westlaw URL for the book is here.  The book is principally about constitutional and statutory interpretation a process which is at the heart of the Tax Procedure course and many of the courses in law school.  In the opening chapter or the course book for Tax Procedure, I discuss some of the issues for statutory interpretation.

Stanley Fish, an online commentator for the Opinionator at the New York Times  reviews the book in a blog titled "Intention and the Canons of Legal Interpretation," here.  Fish starts with a timely discussion of Justice Roberts' decision sustaining the individual mandate in the recent NFIB v. Sibelius case, citing the Constitutional Doubt Canon #38 from the book --  “A statute should be interpreted in a way that avoids placing its constitutionality in doubt.”

Fish offers a very favorable review of the book, although noting that the book did not require the polemical thesis about textualism that Justice Scalia just cannot avoid.  Fish then nitipicks a bit and concludes:
Nothing I have said here should be read as a retreat from my judgment that “Reading Law” is a wonderful book. The falsity (as I take it to be) of the authors’ polemical thesis does not detract at all from the considerable accomplishment of laying bare the inner workings of legal interpretation. And since that thesis — that interpretation begins and ends with the text — is so often belied by the examples offered in support of it, we can safely put it aside and be grateful for the pleasure and illumination Scalia and Garner provide.
I have just added some further discussion about the book on Federal Tax Crimes Blog, IRS Data-Mining Program re Offshore Accounts; with a Diversion to the Real Golden Rule (9/1/12), here.  Since that discussion is buried in the main topic of that blog entry, I cut and past the relevant portions here.
Since I mention Judge Posner and Justice Scalia, I can't help but mention their recent tiff.  The opening round was fired by Justice Scalia and his writing pal, Bryan Garner.  The book they co-authored is Reading Law: The Interpretation of Legal Texts (Westlaw 2012).  The Westlaw URL for the book is here and the Amazon URL is here.   
Judge Posner fired the next round in Richard Posner, The Incoherence of Antonin Scalia (The New Republic 8/24/12), here.  For those interested, I recommend reviewing Judge Posner's article and don't think I am up to the task of even summarizing it.  That is not a negative comment.  Judge Posner has something to say; I find that generally he is worth listening to.
The has now rebuttal appeared in the form of someone perhaps serving as a surrogate for Judge Posner.  Ed Whelan, Richard A. Posner’s Badly Confused Attack on Scalia/Garner (National Review Online 8/31/02), here.  I also will not attempt a summary of it.  It is worth reading. 
Although there are sharp edges in the back and forth, I imagine that Judge Posner and Justice Scalia can not only survive he punches but welcome them in the intellectual fray thus joined.