Occam’s Razor and the Distinction Between Legislative and Interpretive Regulations (9/24/20)

I have previously said that the Administrative Procedure Act ("APA") distinction between legislative and interpretive regulations does not address deference.  I did, however, address both the APA and deference in my article, Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3400489.  But, I did not tie the two together as crisply as I should have. 

I recently realized, although they are different “regimes” – APA (including the legislative / interpretive regulation divide in the APA) and deference – they do address the same issue in the same way.  Indeed, the APA distinction between legislative and interpretive regulations was based on a similar distinction that applied to under pre-APA law for deference to agency interpretations and the related concept of retroactive application of agency interpretations (generally retroactivity the norm for interpretive regulations and generally prospectivity the norm for legislative regulations). 

Before and after the APA, the distinguishing difference between legislative and interpretive regulations is:  (i) the legislative regulation based on express authority to create the law (create a new obligation or right) is the law, with necessarily the force of law (example, § 1502 for consolidated return regulations); and (ii) the interpretive regulations based on express or implied authority to interpret otherwise ambiguous statutory text within the scope of the ambiguity, but does not add any new right or obligation within the scope of the statutory text (example § 162's away from home statutory text addressed in United States v. Correll, 389 U.S. 299 (1967)).  That was true before the APA, so when Congress used the APA used the legislative / interpretive concepts (called interpretative in the APA), that was the background that defined those terms in the APA and informed both Congress and original public readers of the APA as to their meanings.

What that means is that, if a regulations interpretation is entitled to deference, now called Chevron deference (as a reasonable interpretation within the scope of ambiguity in statutory text), the regulation is an interpretive regulation rather than a legislative regulation for both APA purposes and for deference.  Simply because a court defers to an agency regulations interpretation does not mean that the regulations interpretation has been magically transformed into a legislative regulation.  (Courts do sometimes state that deferring to a reasonable agency interpretation (say Chevron Step Two) gives the interpretation the force of law, a distinguishing characteristic of a legislative regulation; I do address that misunderstanding in some detail in the article, but bottom-line, force of law is a consequence of a legislative regulation after it is determined to be a legislative regulation rather than a test of whether the regulation is legislative to start with.)

As I reflect on it, sometimes the simplest explanation is the best explanation.  That is a variation of Occam’s Razor (with Occam variously spelled and sometimes called the law of parsimony).  See Wikipedia Enter, Occam’s Razor, here (noting that it is variously paraphrased by statements like "the simplest explanation is most likely the right one").

I will likely revise my article above to correct some errors, add some nuance, and incorporate this simpler explanation.

FTPB 2020 Update 04 - Correction on GATT Corporate Overpayment Interest (9/23/20)

The 2020 editions erroneously describe the regular corporate interest rate (2% above the federal rate) as the "GATT" rate.  The special reduced rate (.5% above the federal rate or 1.5% lower than the regular corporate overpayment rate) is the GATT rate.  The following are the corrections to paragraph III.B.2. subparagraphs a. and b.).  

a. General 1% Reduction.

For corporations, however, the overpayment interest rate is reduced by one percent (i.e., the rate is the short-term federal rate plus 2 percent rather than 3 percent).  § 6621(a)(1).  For the third quarter of 2020, this interest rate is 2%. 

b. Reduction for Corporate Overpayments Over $10,000.

There is a critical exception–for corporate overpayments exceeding $10,000–the short-term federal rate is only increased by 0.5 percentage points.  § 6621(a)(1) (flush language).  (This reduced interest rate is often referred to as the “GATT rate”).  Mathematically, the interest rate is 1.5% lower than the regular corporate rate discussed above.  For the third quarter of 2020, this interest rate is 0.5 %. 

As you can see, this low interest rate is a powerful incentive for corporations not to loan money to the Government via overpayment of taxes, because they can likely achieve a better return elsewhere.  (By the same token, of course, as noted above, the large corporate underpayment interest premium–the so-called “hot interest” in § 6621(c)–creates a powerful incentive to avoid being a debtor to the Government at least after the IRS makes the critical determinations of additional tax due and owing; in short, there are incentives for corporations to better manage the due tos and due froms in the tax area.)  Although S Corporations are normally not subject to tax, sometimes they can be; the court opinions conflict as to whether any overpayment by S Corporations will be subject to this reduced interest rate.  This reduction is also applied to any amounts due by the Government that are treated as a tax for purposes of calculating interest on the amounts due, such as, for example, interest due on wrongful levies.

Sunstein Blog and Article Concluding that Chevron Deference is Consistent with Original Public Meaning of the APA (9/19/20)

In my Federal Tax Procedure Book, I deal with administrative law issues, particularly the Administrative Procedure Act (“APA”) and deference.  I have also written articles on the intersection of the tax law with these subjects.  The most recent is Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (August 23, 2020), SSRN: https://ssrn.com/abstract=3400489.

I offer today an excellent blog posting -- Cass R. Sunstein, Chevron Is Not Inconsistent with the APA (Notice & Comment 9/16/20), here.  Sunstein (bio here) is a professor of law at Harvard Law School where he teaches administrative law and has a distinguished career in academia and government.  The linked blog entry is a summary of a key and somewhat startling conclusion he reached in another article published in recently, Cass R. Sunstein, Chevron As Law, 107 Geo. L.J. 1613 (2019), here, (the discussion is on pp. 1641, here, through 1657.

In Sunstein's blog, as well as in his article, Sunstein argues that the APA § 706 requirement that courts “shall decide all relevant questions of law” is not inconsistent with Chevron deference.  Sunstein apparently initially took the literal text of § 706 to mean that courts should decide interpretations of law de novo which eliminate deference to agency interpretations.  Of course, the APA was enacted in 1946, long before Chevron was decided in 1984 (Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984)).  But, as Sunstein claims in his blog (as do I in my article), deference to reasonable agency interpretations much like Chevron deference was a feature of the standard of review in the federal courts before the APA was enacted and § 706 did not affect that standard of review.  As a result, the original public meaning—a mantra for textualists—of § 706 accommodated and allowed deference, much like Chevron deference.  Hence, the conclusion is that the hyperbolic claims about § 706 as mandating de novo judicial interpretation without deference are just wrong. 

Based on his research (tracking my own) he says that there was robust authority for deference at the time of the APA.  He says:  

Nothing in the legislative history of the APA repudiates these decisions. I repeat: Nothing. One more time: Nothing. (In a whisper, a shout: Not a word. Nothing.) That’s stunning. I confess that it astonished me.

And, the trajectory of cases soon after the enactment of the APA carrying forward deference is evidence that no one understood § 706 to have anything to do with deference.

He concludes:

In short: Many people think that Chevron is inconsistent with the original public meaning of the APA. But an investigation of the context makes it exceedingly difficult to defend that view.

JAT Comment:  Exactly.

FTPB 2020 Update 03 – Central IRS Web Site for BBA Centralized Partnership Audit Regime (9/2/20)

The IRS has announced a new website “intended to be  one-stop location for anything BBA-related, including regulations and other guidance and instructions related to the Partnership Representative (PR), electing out of the centralized audit regime, Administrative Adjustment Requests (AARs) and what to expect during a BBA administrative proceeding.”  IR-2020-199 (9/1/20), here.  The web site, titled “BBA Centralized Partnership Audit Regime” is here.

As of now, the web site has categories for links for (i) Filing Requirements, (ii) BBA Partnership Audit, (iii) Regulations and Interim Guidance, and (iv) a handy chart comparing partnership procedures under TEFRA and BBA.

This web page will be a key resource for the “BBA Centralized Partnership Audit Regime.”

I will try to go through the linked items in advance of the 2021 editions of the Federal Tax Procedure Book.

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

 In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.

Citing History in Support of Statutory Meaning (8/30/20)

This is an interesting post on history of legislation in arguing for or explaining the legislation.  Eugene Volokh, TMH (Too Much History), a Form of TMI: Advice for Law Students and Young Lawyers (The Volokh Conspiracy 8/23/20), here.  Professor Volokh laments that, in arguing or just stating a position, writers often provide too much history rather than stating what the law (statute) is. 

An excerpt (longer):

One should generally resist this temptation. Judges are busy people, whose main goal is to figure out the law that is currently applicable to these facts, and then to apply it. The history is sometimes relevant to understanding current law, but often it's not. Give no more history than necessary to show the current law; and that's often zero history, especially if there's a solid binding precedent you can quote for the current rule.

My sense is that such TMH often stems from what I call the "data dump" impulse: You've done a lot of research, learned a lot (including the history of how the law developed), and now you feel like putting it all down on paper. That's fine—but once you write it down, go back over it in your editing passes, and delete everything that's not really necessary to proving and applying the current rule.

Of course, sometimes there's Not Enough History; sometimes understanding how the law developed helps explain what some ambiguous term means, and how it applies in this case. (Perhaps, for instance, you might think that the judge could be distracted by the Gertz principle, which he might already know; if so, you might note that Dun & Bradstreet limited Gertz to speech on matters of public concern.)

But even then, I suggest stating the current rule at the outset, which may help you see just what history you need to include to supplement the current precedent. And in my experience, TMH is much more common in law students' work than Not Enough History.

JAT Comments:

Updated Article: The Report of the Death of the Interpretive Regulation Is an Exaggeration (8/24/20)

I have updated my prior posting on SSRN of my article titled:  The Report of the Death of the Interpretive Regulation Is an Exaggeration.  I did make some significant changes.  The citation and the link in SSRN recommended format is

Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3400489. 

The significant revisions are:

• I provide more discussion to refute the notion that APA § 706 requires de novo review without  deference to agency interpretations.  (See pp. 74-76.)  APA § 706 provides:  “To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions,”
• I add some more discussion on the anomaly of the spurious notion that when agencies interpret ambiguous statutory text they are legislating but when courts interpret ambiguous statutory text they are not legislating.  (See pp. 59-60.)
• I significantly revised the opening discussion of the myth of tax exceptionalism.  (See pp. 8-11; see also p. 110.)  The argument is the same, but stated in a more logical way (I think).

I have made numerous other changes that I hope improve the article but the ones identified above are the significant changes.

FTPB 2020 Update 02 - Revised Editions of Federal Tax Procedure Book for Technical Corrections (8/14/20; 8/15/20)

As Revised 8/15/20

In the original editions of the Federal Tax Procedure Book the headings below the Chapter level in Chapters 16 and 17 were omitted.  In addition one heading in Chapter 18 was omitted.  In order to correct the Table of Contents and certain other very minor matters, I posted new editions on SSRN as of 8/15/20.  Please download the new editions for those corrections.  The content of the 8/15/20 editions is not materially changed from the 8/1/20 editions, but, because of how WordPerfect formats, the page numbers in the new editions may not exactly match those in the editions originally published on SSRN on 8/1/20.  The links to SSRN for download are on the page to the right titled Federal Tax Procedure Book, here.

The Cumulative List of Updates is on the page at the right, titled "Federal Tax Procedure Book Updates," here.  The blog entries for updates may be viewed on the Label titled FTPB 2020 Updates, here.

Peter Reilly on Real Estate Phantom Taxable Income Gaming the Audit Lottery (8/13/20)

Peter Reilly, a friend and frequent tax commenter, has this offering on his Forbes blog:  IRS Veteran Insists That IRS Is Missing Billions In Real Estate Gains (Forbes 8/11/20), here.  Basically, Peter deals with tools that the IRS has in its system that his informant asserts can locate large amounts of income that goes unreported through the phantom income that arises from real estate losses funded by nonrecourse debt.  I am not familiar with the IRS systems that could police the reporting of the income, but I do note (as does Peter) that there is a new IRS initiative for the partnership to report partner level basis.  See Notice 2020-43, here; see also Peter’s discussion on another blog Who Is IRS Aiming At In Recent Partnership Notice? (Your Tax Matters Partner 6/21/20), here.

Those who are partnership tax gurus will like Peter’s offerings and maybe even understand them.  As an aside, my practice over the recent years have not focused on partnership tax, so I am a bit long in the tooth on that.  (Except that I do cover the procedural aspects of the TEFRA and CPAR (often called BBA) regimes, and earlier in my private practice while substantially involved with real estate partnerships (and teaching Real Estate Taxation at UH Law School), I did have particular interest in partnership taxation originating from my handling of the appeal Diamond v. Commissioner, 492 F.2d 286 (7th Cir. 1974), here, a leading case in partnership taxation.  (The Diamond opinion was quite controversial, but in my mind just involved elemental tax principles correctly applied; but the real estate industry was quite powerful and managed to whittle away the results and essentially reverse through IRS administrative largesse, hence the carried interest notion, but I won't go off further on that rant here.)

Peter’s Forbes offering did cover some significant tax history related to Crane v. Commissioner, 331 U.S. 1, 14 n.37 (1947), here, and its tax infamous footnote 37. All tax students and practitioners should have at least a passing acquaintance with that footnote, said to be the most famous footnote in tax history.  Footnote 37 should also mitigate against the expression of apparent disdain for footnotes that Justice Scalia once made in oral argument (I cover Scalia’s statement in both editions of my book).  Footnote 37 said:

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.

That footnote spawned a myriad of offerings exploiting nonrecourse debt to generate deductions with the notion (or hope) that the taxpayer would not have to balance the books with so-called phantom taxable income at the end.  Those shelters proliferated particularly in the 1970s involving both real estate where lenders might make economic nonrecourse loans in the real world and in other contexts where the nonrecourse loan was basically phony (or magic).  The Supreme Court put an end to (or at least curbed somewhat) that magical thinking in Commissioner v. Tufts, 461 U.S. 300 (1983), here, requiring the taxpayer to include the amount of the nonrecourse debt in the amount realized part of the gain calculation upon foreclosure or deed in lieu of foreclosure, thus at least leaving the taxpayer with deferral and conversion shelter from playing the nonrecourse debt game.  

Chevron and Lenity (8/11/20)

Today, I discuss the related topics of Chevron deference and the rule of lenity.  Both topics deal with ambiguity in statutory text.  Chevron deference means that a court may apply some reasonable agency interpretation of statutory text even if the court is convinced that there is a better interpretation.  In other words, within the zone of ambiguity the interpretive tilt goes to the agency's interpretation.  In lenity, a criminal law concept, however, within the zone of ambiguity, the tilt goes to the defendant.

 I was drawn to this topic by a decision I read today, Gallardo v. Barr, 968 F.3d 1053 (9th Cir. 8/6/20), CA9 Slip Op. here; GS here.  The case involved the BIA’s interpretation of the term “aggravated felony” (and its subset, “obstruction of justice”) was subject to the rule of lenity.  The panel took the traditional view that the rule of lenity was not consistent with Chevron deference.  As thus formulated, the lenity issue would be a so-called Chevron Step Zero question (does the Chevron framework apply at all?) that could pre-empt the Chevron framework at the outset.  The panel sidestepped the question by applying the Chevron framework because a prior panel in an earlier appeal in the case had applied the Chevron framework.  (See Slip Op. 11-17.)  The Court offered this general discussion in a footnote (Slip Op. 14 n. 3, here)

   n3 Statutory ambiguity is a trigger for applying both the rule of lenity and Chevron deference. However, we apply the rule of lenity when a criminal statute is ambiguous so that "legislatures, not courts" define the scope of the statute. Crandon v. United States, 494 U.S. 152, 158 (1990). By contrast, we apply Chevron deference in construing ambiguity in other statutes because the lack of textual clarity is a signal that Congress expected an "agency to be able to speak with the force of law when it addresses [the textual] ambiguity." United States v. Mead Corp., 533 U.S. 218, 229 (2001). In other words, because lenity is a rule we apply to ensure that the legislature has the final say, and Chevron is a rule we apply to permit agencies to fill in the details of a statute, we do not typically apply both principles at the same time. See Whitman, 135 S. Ct. at 354 (Scalia, J., respecting the denial of certiorari) ("[O]nly the legislature may define crimes and fix punishments. Congress cannot, through ambiguity, effectively leave that function . . . to the administrative bureaucracy." (emphasis omitted)); see also Transcript of Oral Argument at 12, Esquivel-Quintana v. Lynch, 137 S. Ct. 1562 (2017) (Chief Justice Roberts stating that the rule of lenity and Chevron cannot "coexist" because, at least in that case, "[t]hey each point in the opposite direction based on the same predicate, which is a degree of ambiguity in the statutory provision"); William N. Eskridge, Jr. & Lauren E. Baer, The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations From Chevron to Hamdan, 96 Geo. L.J. 1083, 1115 (2008) (regarding "anti-deference" in the context of a criminal statute). However, some have discussed ways that the two rules may be harmonized. See Note, William T. Gillis, An Unstable Equilibrium: Evaluating the "Third Way" Between Chevron Deference and the Rule of Lenity, 12 N.Y.U. J.L. & Liberty 352 (2019).

 I offer the following (text only) (Those wanting the footnotes can get them with the text in pdf format here).