Court of Federal Claims Rejects Defective § 6603 Strategy for Multiple Transferee Liabilities (11/21/22)

In Dillon Trust Company LLC v. United States, ___ Fed. Cl. ___, 2022 U.S. Claims LEXIS 2575 (11/10/22), FC here and GS here, the Government moved for partial dismissal for lack of jurisdiction and for partial summary judgment with respect to plaintiff’s interest-related claim. I focus here on the interest-related claim.

The background is an intermediary or Midco transaction by a family corporation with the assets stripped out of the corporation by direct or indirect transfer to shareholders without paying the large tax corporate liability generated by the corporation. In initially reporting the transaction, the corporation claims the benefit of a bullshit tax shelter to effectively zero out the gain and tax, but on audit and denial of bullshit tax shelter benefit, the gain is taxed to the corporation which has no assets (because the shareholders stripped them out directly or indirectly). So, the IRS has to chase the “transferees” – here the shareholders – to collect the payment through transferee liability under § 6901.  I cover these transactions in Federal Tax Procedure (2022 Practitioner Ed.), here, at pp. 745-746. In a footnote, I quote Alterman Trust v. Commissioner, T.C. Memo. 2015-231, at *2:

Courts, including this court, have been plagued by Midco cases. Rarely do these cases present themselves for a determination of the underlying liabilities. Instead, these cases are postured so that the courts are asked to determine whether someone other than the taxpayer should be on the hook for the taxpayer's liability. They are transferee liability cases, and so are these cases.

The corporate taxpayer involved was Humboldt Shelby Holding Corporation (“HSHC”) which was unable to pay the tax, the gross valuation misstatement penalty, and the interest on each. The corporate liabilities as of August 2014 were “a federal income tax deficiency of $25,617,887 and a gross valuation misstatement penalty of $10,247,155, plus interest, which remained unpaid.” The transferees the IRS targeted were certain Dillon family trusts (with the parties agreeing that the results would apply to all of the family trusts as direct or indirect transferees). 

Among other arguments in this refund suit, the trusts argue that they cannot be held for transferee liability for the gross valuation misstatement penalty “because they lacked knowledge of HSHC’s plan to carry out the tax shelter scheme that formed the basis of the I.R.C. § 6662 penalty.”  Good luck to them on that. 

But in this case, the  court only addressed interest issues. The interest issue arose from the trusts’ apparent desire to invoke § 6603 to prevent the running of interest during the period of the deposit. I cover § 6603 in Federal Tax Procedure (2022 Practitioner Ed.) pp. 268-272. The rules of § 6603 are not particularly complex, but the application of those rules in the Dillon Trust case was complex because of the machinations involved where the trusts, as putative persons liable for transferee liability, apparently thrusted about to achieve some purpose to avoid interest but did so in which appears to be a haphazard fashion. The result is that, although the IRS had the deposit money in a large amount and for a significant period, the taxpayer and the transferees achieved no interest benefit under § 6603 that might have been achieved had they structured the deposits/payments differently.

District Court Holds IRS Tax Shelter Notice Imposing Obligations Invalid as a Legislative Rule Without Notice-and-Comment But Limits Holding to Parties (11/20/22)

In GBX Associates, LLC v. United States (N.D. Ohio Case No. 1:22cv401 Dkt. # 21 Memo. Opinion & Order 11/14/22), CL here and GS here, the Court held consistent with Sixth Circuit (including lower court) opinions that IRS Notice 2017-10, entitled “Listing Notice- Syndicated Conservation Easement Transactions,” was invalid because it was a legislative rule adopted without notice-and-comment.  After reaching that conclusion, the court focused on the APA language in 5 USC § 706(2) that the court “hold unlawful and set aside agency action” found to be “not in accordance with law” or ” without observance of procedure required by law “ The question was whether the scope of the remedy could include not only the plaintiff a material (investment advisor) before the court but universal applying throughout the country to all similarly situated parties.  The relief could either be granted by a universal injunction commanding the IRS not to apply the Notice or by “vacatur” declaring the rule null and void which would cover IRS action against all parties similarly situated not before the court.  The latter is sometimes call universal or nationwide vacatur.

I think the opinion is quite good in discussing the issues.  In a nutshell, the issue is whether an invalid rule (here the Notice requirements) adopted without the notice-and-comment required for legislative rules, making it void ab initio, should allow or require piecemealing the remedy, requiring it to be litigated by various aggrieved persons throughout the country.  The Court said (Slip Op. p. 18, cleaned up):

As noted above, GBX asserts that the Notice 2017-10 should be in vacated in whole (and not just as to GBX itself) because, by its very nature, the “set aside” remedy of vacatur set forth in APA § 706(2) acts against the agency action itself—not the government actor. GBX asserts that, under established case law from the Third, Ninth, and D.C Circuit Courts of Appeals, the “ordinary result” upon a finding of unlawful agency action is that the [agency action] itself is vacated—not that its application to the individual petitioners is proscribed. Defendants strongly disagree, arguing the law on this issue is, in fact, unsettled and “hotly contested.” Defendants emphasize, in particular, that the Sixth Circuit has not expressly ruled on this issue and that at least one district court in this Circuit has rejected GBX’s argument and declined to order universal relief under § 706(2).

The Court in GBX exercised her discretion in concluding (Slip Op. p. 32): "The Court declares that Notice 2017-10 is unlawful and hereby sets that Notice aside as to Plaintiff GBX Associates, LLC only."

This litigant-only or universal application issue is presented in Texas v. United States, 40 F. 4th 205 (5^th Cir. 2022) (per curiam), GS here, a nontax case.  The Fifth Circuit opinion summarized its holding (at 212, emphasis supplied by JAT):

Tax Court in Reviewed Opinion Invalidates Notice Identifying Reportable Transactions (11/10/22)

In Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022) (reviewed opinion), TCPamphlet here,, TN here and GS here, the Court held that Notice 2017-10, 2017-4 I.R.B. 544 was invalid because the Notice is a legislative rule improperly issued by the IRS without notice and comment. As a result, the Court “set aside” the Notice and prohibited the imposition of § 6662A (here) accuracy-related penalties for understatements for reportable transactions identified in the Notice. The case turns upon the application of the APA requirement that legislative rules be promulgated as notice-and-comment regulations except for contemporaneous “good cause” statement or congressional exception to the notice-and-comment, neither of which the Court found to apply.

In high level overview, the question was whether the IRS must identify transactions subject to the penalty in a regulation (either Final or Temporary (interim final)) or could identify transactions in a Notice which is subregulatory guidance. The statute referred to transactions identified in regulations under § 6011. The regulations under 6011 defined reportable transaction as a transaction that is the same or substantially similar to one of the types of transactions that the IRS has determined to be tax avoidance transactions and identified by notice, regulation, or other form of published guidance. Reg. § 1.6011-4(b)(2).

The Court reasoned that the Notice which clearly was not a regulation did not meet the statutory command that the transaction be identified in a regulation. Although it included a lot more words and reasons, that is the guts of the holding. As a result, the Court invalidated the application of the penalty in the case and stated (p. 24 n. 22): “Although this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.” 

This holding is a big deal. Syndicated conservation easements as they have been reported in many cases are clearly the type of abusive transactions that Congress intended the penalty to apply once the IRS identified them. The Court held that the IRS improperly identified these transactions by subregulatory guidance rather than by regulation, a procedural footfault. A lot of people clearly abusing the system will escape penalties clearly meant to apply to them and that would have applied except that the Court held that  the IRS promulgated the rule in a procedurally incorrect way.

First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (11/9/22)

I am late posting on Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), 1^st Cir. here and GS here. So the principal point of this blog is to point to the excellent writings of others, which I provide below.

The basic holding of the case (as I understand it) is that, based on CIC and Direct Marketing, the Anti-Injunction Act, § 7421(a) (“AIA”)) does not apply to IRS actions to gather information as opposed to actions to assess and collect tax. As a result, under CIC, a taxpayer can have pre-enforcement review challenging the validity of the JDS and the resultant unlawful acquisition and retention of his financial information, on the notions that; (i) the APA § 702 contemplates pre-enforcement review of IRS information gathering activity (as opposed to assessing or collecting activity) and (ii) the ex parte John Doe Summons (“JDS”) is an information gathering function rather than a tax assessing or collecting function.

My only comment is that the underlying issue as to whether a taxpayer can get pre-enforcement review of the validity of a JDS is an important one.  The holding seems to portend a wide swath of pre-enforcement challenges in various other IRS information-gathering activities.  In a comment posted to a  PT Blog, I asked (cleaned up for typos):

Justice Gorsuch's Newest Rant on Chevron and the Administrative State (11/7/22; 11/8/22)

Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough, 143 S. Ct. 14 (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here; Supreme Court docket entries here.  

As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1153 (10th Cir. 2016), GS here, he rants alone, unable to attract any other Justices’ concurrence in his concurrence.  I will write more later today or tomorrow on his rantings; in the meantime, readers can read the rant (only 16 pages) without being distracted by my counter-rant.  I will say that my text search indicates that he does not repeat his Brizuela concurring rhetoric about elephant in the room. At least that is good, but he does have some other rhetorical sound bites that may play well with persons who hate the administrative state as much as he does.

When I write more, I will post it to this blog entry and note the date and time I added it.

Added 11/8/22 ___ pm 2:15 pm:

1. Justice Gorsuch makes clear that he does not like Chevron “deference” because, he believes, it allocates interpretive power to agencies that should belong to the courts. I think readers interested in this area should respectfully consider his arguments (sort of like Skidmore respect for arguments in non-majority opinions.). I do not deal in detail with the arguments because they are addressed in my article,  The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here. (Referred to in this blog entry as Report of the Death.)

2. I disagree with two major points in Justice Gorsuch’s argument:—

 (i) courts did not defer to agency interpretations before Chevron was elaborated after the decision in 1984 but instead only gave respectful consideration to agency interpretations a la some Skidmore-type respect to determine the best interpretation);  and

(ii) the APA § 706 allocated to the courts all interpretive power over ambiguous statutory text just as the Constitution requires from the sound bite in Marbury v. Madison.

Gorsuch Claims in Bittner Oral Argument that "nobody promulgates regulations anymore": True or False? (11/4/22)

This post discusses a claim that Justice Gorsuch made in oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.) The link for the typed transcript is here; the link for the audio is here.

The issue in Bittner is whether the FBAR nonwillful penalty of up to $10,000 applies per form (regardless of the number of foreign accounts not reported) or per account (for each account that should have been but was not reported on an FBAR for the year).

In the context of discussing guidance documents, Justice Gorsuch said (Tr. p. 64): "[N]obody promulgates regulations anymore. It's too troublesome."

That claim is demonstrably false. He may have meant that agencies disfavor and mostly do not use formal rulemaking (which does not require promulgation of regulations), although agencies regularly use informal rulemaking requiring promulgating notice and comment regulations. Here is the difference between the two as I explain Federal Tax Procedure (2022 Practitioner Ed.), SSRN here, at p. 57 n. 256.

   n256 The informal rulemaking process is described in 5 U.S.C. § 553, whereas the formal rulemaking process is described in § 556. David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Yale L.J. 276, 282 (2010) ("The first technique, so-called 'formal' rulemaking, involves onerous trial-type hearings and is rarely required unless a specific statute calls for rules to be 'made on the record after opportunity for an agency hearing.' Far more common is the second technique, variously known as 'informal,’ 'notice-and-comment,' or 'section 553' rulemaking.").  The formal rulemaking process is rarely used in agencies generally.  See Perez v. Mortgage Bankers Assn., 575 U. S. 92, 128 n5 (2015) (Thomas, concurring) (noting that (i) "almost all rulemaking is today accomplished through informal notice and comment," in contrast to the formal rulemaking process requiring "elaborate trial-like hearings in which proponents of particular rules would introduce evidence and bear the burden of proof in support of those proposed rules," citing 5 U. S. C. §556; and (ii) "formal rulemaking is the Yeti of administrative law" with "isolated sightings of it in the ratemaking context, but elsewhere it proves elusive.”). Informal rulemaking is permitted unless the authorizing statute mandates formal rulemaking.  United States v. Florida East Coast R. Co., 410 US 224, 236-238 (1973). 

I am not trying to pick on Justice Gorsuch, but he is an administrative law wannabe expert as shown by his ranting about Chevron and related confusion I address in my article The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here, at pp.  110-116 under the caption "b. Gorsuch's Imagined Elephant in the Room.").

Added 11/7/22 3:30 JAT Comment:

1. Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here.  As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142. 1153 (10th Cir. 2016), GS here, Justice Gorsuch could not get any other Judge (this time 8 others rather than 2) to agree with what he has to say. (Of course, any of the other Justices could have not joined his opinions for a host of reasons rather than his over the topic rhetoric and questionable claims about the history of deference.  I will post a separate blog entry on his dissent in Buffington.

3rd Circuit Holds that Collection Statute of Limitations Is Suspended through Supreme Court Finality (11/2/22; 11/3/22; 11/7/22)

Section 6330(e)(1) ( provides that certain levy actions and certain statutes of limitations (including collection) are suspended while Collection Due Process (“CDP”) “hearing and appeals therein are pending.”  Readers will recall that the taxpayer invokes the CDP hearing by making a timely request and then, if not satisfied, can petition the Tax Court for review.  The Tax Court will then review, and that taxpayer and the IRS have the standard appeals processes to the Court of Appeals and, by petition for writ of certiorari, to the Supreme Court.

In United States v. Weiss, 52 F.4th 546 (3rd Cir. 11/2/22), CA3 here, the Court held that, for statute of limitations suspension in CDP cases, “appeals therein” and “pending” mean not until all appeals processes (including Supreme Court, if invoked as it was in Weiss) are final.  That holding stated that way makes sense—even common sense. 

But, it was not so simple for the Third Circuit.  The authoring judge, Judge Phipps, seized the opportunity to elaborate in 15 pages not including the cover caption page -- bringing out the dictionaries and other interpretive tools to tackle the weighty issue of what “appeals therein” and “pending” mean.  Stating the standard pablum that you look to the meaning of statutory words at the time of enactment, the judge holds forth on that and finds some potential ambiguity that can be cleaned by going through dictionaries and maxims. 

For those interested in reading footnotes, I commend footnotes 2-4, covering most of pages 8-10, particularly n4 where he holds forth on the “autohyponym.”  That was a new word for me.  He explains in the footnote:

Referral to Procedurally Taxing Blog on Tax Court Delays (10/31/22)

I refer readers to It is Time To Take Remedial Steps To Improve The Timeliness of Tax Court Dispositions (Procedurally Taxing Blog 10/31/22), here.  The subject is concern that, at various key points in the litigation process in the Tax Court, there are bottlenecks that result in some cases being delayed beyond what seems appropriate, given the important role the Tax Court serves in our ubiquitous tax system. It is perhaps hyperbole to state the common phrase that justice delayed is justice denied. Our litigation system involves delays, but that does not justify unnecessarily long delays of the type the authors have observed in some Tax Court litigation.

The post is signed by several persons who observe and write on tax system, focusing on procedure.  They are:

Leslie Book
Keith Fogg
Steve Olsen
Nina Olson
Jack Townsend

I encourage readers having creative ideas on how to make the system more timely make comments on the PT blog entry linked above or perhaps even offering a submission to the PT Blog Team for a Guest Blog.

To me, the most shocking point made in the PT blog is that the Tax Court (really through such management as the Tax Court has) does not track these bottlenecks. I have worked on databases for over 30 years now. I believe that most, if  not all, of the key data to track the bottlenecks is already in the Tax Court’s database system. I project that Tax Court management could easily establish some type of computer routine to extract key management information on cases and judges that are bottlenecks in the system.

Finally, although I suspect that most readers of this blog already make the Procedurally Taxing Blog part of their regular reading on tax procedure.  If not, I highly recommend it. 

What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (10/21/22; 11/8/22)

Last week, I participated in a panel at the ABA Tax Section Fall Meeting in Dallas. The panel was offered by the ABA Tax Section Teaching Taxation Section. The program was titled “Classification of Tax Regulations and the APA.” The panel participants were Les Book (moderator), Kristin Hickman, Gil Rothenberg, and me. The program dealt in part with some issues that Professor Hickman and I have engaged in the past. On those issues, Hickman and I continue to engage without agreement. 

I say "without agreement," but in fact Hickman and I did agree (i) on the starting point that, at the enactment of the APA in 1946, the APA permitted both legislative rules (must be notice and comment regulations) and interpretive rules (including, although not required, notice and comment regulations such as Treasury used for interpretive rules adopted as regulations) and (ii) that for well after the APA, the category of interpretive notice and comment regulations was alive and well, without controversy. Our point of continuing disagreement is whether something has changed that original meaning of the APA, so that notice and comment regulations that do no more than interpret ambiguous statutory text no longer exist but are now legislative regulations. That disagreement is not the focus of this posting but may underly some of the analysis in this posting.

In the panel discussion, I repeated my recent claim that Chevron deference is inapplicable if the agency interpretation is the best interpretation. The corollary to this is that Chevron’s domain in an outcome determinative sense involves only deference to “not best” agency interpretations. We only touched on that issue lightly in the panel, but one panelist questioned whether "best interpretation" was a meaningful concept. (Added 10/25/22 11:00am:  On Chevron's domain as limited to not best interpretations, see e.g., Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005) (“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.”).)

I thought it might be helpful to say further what I mean by “best interpretation.”  The best (or most persuasive) interpretation is the interpretation which the court would apply based solely on interpretive tools in the absence of an agency interpretation or, if there is an agency interpretation, in the absence of Chevron deference. The court’s job in statutory interpretation is to determine and apply the best interpretation of the statute to the facts before the court. (BTW, it is important to note that courts cannot legislate, so courts’ exercise of interpreting a statute to determine the best interpretation is not legislative.  See Is Statutory Interpretation a Legislative Act When Agencies Do It But Not When Courts Do It? (Federal Tax Procedure Blog 4/8/22; 10/23/22), here.). 

If the agency interpretation is that best interpretation, the court applies that interpretation because it is the best interpretation and not because it is deferring to the agency interpretation. Of course, in determining the best, most persuasive interpretation, the court should consider respectfully the agency interpretation. Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (Skidmore respect is not deference (although frequently mislabeled as deference) and applies at Chevron Step One as well as in generally determining the most persuasive interpretation.) See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here. Deference—real deference--is only outcome determinative if the court invokes Chevron to apply a “not best” interpretation over the court’s own best interpretation.

That best interpretation concept is simple and, I think, irrefutably true. There will always be a “best interpretation” so defined because, in the absence of an agency interpretation, it is the interpretation the court would apply to decide the case. In deciding whether or not to apply Chevron deference to an agency interpretation, a court will have to know what the best interpretation is (i.e., what the court would do without deference to the agency interpretation). How else could a court determine whether an agency interpretation is “reasonable” or “permissible” even though not best (the requirement for Chevron deference)?

The Reasonable Standard—Parody, Statutory Interpretation, and Chevron (10/9/22)

Many readers of this blog will likely already have heard about the Onion’s Amicus Brief on the petition for certiorari in Novak v. City of Parma (Sup. Ct. No. 22-293), Supreme Court docket entries are here; Novak’s petition for certiorari is here; the Onion’s Amicus Brief is here. The Onion (Wikipedia here) is a satirical medium, often parodying serious newspapers.  The Novak case arises from Novak’s parody on Facebook of a local police department’s web page. For the parody, Novak was arrested, indicted, prosecuted but acquitted of disrupting public services. Novak then sued the City and two investigating officers. The Sixth Circuit held that the City and the investigating officers had qualified immunity from suit. Novak v. City of Parma, 33 F.4th 296 (6th Cir. 2022) 6th Cir. here and GS here. Novak petitioned for writ of certiorari. The questions presented in the petition are:

1. Whether an officer is entitled to qualified immunity for arresting an individual based solely on speech parodying the government, so long as no case has previously held the particular speech is protected.

2. Whether the Court should reconsider the doctrine of qualified immunity.

 These are important questions. 

 In defense of parody, The Onion filed its Amicus Brief in defense of parody.  The Brief is well written, serious, and, on its points, persuasive (I think).  Highly recommended. In part relevant to posting here, Onion’s Amicus Brief argues (pp. 10-12) for the “reasonable reader” standard—whether a reasonable reader would understand the offering to be parody without an express disclaimer. 

Beyond being an entertaining and hopefully persuasive argument, the reasonable reader test offers an opportunity to address briefly the reasonable concept in other legal contexts relevant to this blog; Often, when a case outcome is determined by some “reasonable” conduct, what is reasonable is left to the judgment call of the judge or jury without any clear definition without any clear guidance as to what reasonable means.

The Onion's reasonable reader construct caught my attention because I just addressed the standard in discussing statutory interpretation in the Working Draft for my Federal Tax Procedure Book. One interpretive strategy I describe is:  “much in vogue now, is often called “original public meaning” or sometimes just original or ordinary meaning that some imagined reasonable person (or reasonable audience) at the time of enactment would have attached to the text.”  The footnote to that statement in the Working Draft is: