Tax Court Sticks to Its Farhy Holding that the § 6038(b) Penalty Is Not Assessable (11/19/24)

I have previously written on the saga where the Tax Court held that the IRS had no assessment authority for the § 6038(b) penalty and was reversed by the D.C. Court of Appeals. See --

• Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (4/3/23; 4/23/23), here (discussing Farhy v. Commissioner, 160 T.C. 399 (2023)) and
• DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (5/3/24; 5/4/24), here (discussing  Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024)).

In Mukhi v. Commissioner, 163 T.C. ___, No. 8 (11/18/24) (reviewed opinion), TN here* and GS [to come] the Tax Court reaffirmed its Farhy holding because the case is appealable to the Eighth Circuit,  permitting the Tax Court to reach its own decision without being bound by the precedent of the D.C. Circuit in its Farhy decision. Only Judge Nega dissented without opinion, presumably on the basis of the D.C. Circuit Farhy decision.

This is a notice only blog. I think the Tax Court decision in Mukhi and Farhy wrong on the merits for reasons I have written on before in the cited blogs. When I say the Tax Court is wrong on the merits, I am not speaking to whether or not is should have sustained a wrong decision on stare decisis. On the issue of stare decisis, the Tax Court said (Slip Op. 5):

          The Tax Court adheres to the doctrine of stare decisis and thus affords precedential weight to our prior reviewed and division opinions. See Analog Devices, Inc. & Subs. v. Commissioner, 147 T.C. 429, 443 (2016). Because of our nationwide jurisdiction, the Court takes seriously its obligation to facilitate uniformity in the tax law. See Bankers Union Life Ins. Co. v. Commissioner, 62 T.C. 661, 675 (1974). When one of our decisions is reversed by an appellate court, the Court will “thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, . . . follow the higher court.” Lawrence v. Commissioner, 27 T.C. 713, 716–17 (1957), rev’d per curiam on other grounds, 258 F.2d 562 (9th Cir. 1958). But if the Court  remains convinced that our original decision was right, the proper course is to “follow [our] own honest beliefs until the Supreme Court decides the point” and thus continue to apply our own precedent. Id. Our decision in Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), created “a narrow exception” to this approach. Lardas v. Commissioner, 99 T.C. 490, 494 (1992). In a given case, when a “squarely [o]n point” decision of the appellate court to which an appeal would lie contradicts our own precedent, we will follow the appellate court’s decision. See Golsen, 54 T.C. at 757. To do otherwise would be “futile and wasteful” given the inevitable reversal from the appellate court. See Lardas, 99 T.C.at 494–95.

* Note, those wanting to read the Tax Court Slip Opinion can retrieve it from the Tax Court docket entries here at #93. This is because the Tax Court does not provide permalinks to its opinions as do many Courts of Appeals and the Supreme Court. The Tax Court provides only temporary links which time out.

Do General Authority Congressional Delegations of Authority to Prescribe Regulations to Carry Out the Provisions of the Statute Qualify for Loper Bright Deference? (11/12/24)

In Schaffner v. Monsanto Corp., 113 F.4th 364 (3rd Cir. 2024), CA3 here and GS here, the Court dealt with EPA pre-emption over state law labeling requirements. I won’t dive into the weeds on the substantive issue, but I focus on the Loper Bright issue of delegation of authority to the EPA to interpret—"fill up the details.” (See Slip Op. 27 n. 9, 113 F.4^th, at 381 n. 9):

Our analysis proceeds in three steps. First, in Part IV(A), we examine "EPA regulations that give content to FIFRA's misbranding standards."n9
   n9 The Supreme Court has recently overruled its decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), holding that "[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority." Loper Bright Enters. v. Raimondo, ___ U.S. ___, 144 S. Ct. 2244, 2273, 219 L.Ed.2d 832 (2024). Prior to Loper Bright, courts might have owed deference to the EPA's interpretation of the statutory term "misbranding," but no more. Nonetheless, while Loper Bright requires courts, not agencies, to determine the meaning of statutory terms such as "misbranding," we do not read the decision to undermine the EPA's authority to promulgate the regulations that implement FIFRA. As the Court explained in Loper Bright, while courts alone must ascertain a statute's meaning, "the statute's meaning may well be that the agency is authorized to exercise a degree of discretion." Id. at 2263. And one way for statutes to express that meaning is when they "empower an agency to prescribe rules to `fill up the details' of a statutory scheme." Id. (quoting Wayman v. Southard, 23 U.S. (10 Wheat.) 1, 43, 6 L.Ed. 253 (1825) ). FIFRA is such a statute: it expressly authorizes the EPA Administrator "to prescribe regulations to carry out the provisions" of the statute. 7 U.S.C. § 136w(a)(1). We therefore conclude that Loper Bright does not undermine the validity of the EPA regulations that govern pesticide labeling and that we consider in analyzing preemption under FIFRA in this opinion.

I focus on the enabling statute for Loper Bright agency authority to “fill up the details.” The statute quoted in part in the footnote excerpt above is 7 U.S.C. § 136w(a)(1), here, is in full:

(a)In general
(1)Regulations. The Administrator is authorized, in accordance with the procedure described in paragraph (2), to prescribe regulations to carry out the provisions of this subchapter. Such regulations shall take into account the difference in concept and usage between various classes of pesticides, including public health pesticides, and differences in environmental risk and the appropriate data for evaluating such risk between agricultural, nonagricultural, and public health pesticides.

 In (a)(2), the EPA-specific procedure for the regulations is in addition to the procedures in the APA for notice and comment regulations; (a)(2) is not relevant to the balance of the discussion. (For the balance of this discussion, all  references to regulations will be to notice and comment regulations.)

It strikes me that the authorization in (a)(1) is parallel to the authorization in § 7805(a), here, which I also quote and bold-face the relevant language:

(a)Authorization. Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Perhaps the key difference is that § 7805(a) authorizes “rules and regulations” and 7 U.S.C. § 136w(a)(1) authorizes only “regulations.” In both cases, at least in terms of historical deference, regulations are required. So, the question raised—and by no means yet definitively answered—is whether § 7805(a) authorizes Treasury to “fill up the details” in the sense intended by Loper Bright. (For present purposes, I will call such authority to "fill up the details" as conferring deference entitlement to regulations issued under such authority and will call those regulations Loper Bright deference.)

Court Awards Attorneys Fees Under § 7430 Based on $1 Qualified Offer (11/6/24)

I have previously written about the saga of Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 3/3/22) and Mann Construction, Inc. v. United States, 651 F.Supp.3d 871 (E.D. Mich. 1/18/23). Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (Federal Tax Procedure Blog 3/3/22), here, and On Remand from 6th Circuit, District Court Orders Vacatur of Listed Transaction Notice (Federal Tax Procedure Blog 1/19/23), here.

We now have perhaps the last chapter with the district court dismissing the case as moot and awarding attorneys’ fees against the Government under § 7430. Mann Construction, Inc. v. United States, ___ F.Supp.3d ___ (E.D. Mich. 1/1/24), CL here and GS here [to come]. Cutting to the chase, the court awarded Mann Construction attorneys’ fees because Mann Construction made a $1 qualified offer under § 7430(c)(4)(E)(i). In order for attorneys’ fees to be awarded under § 7430, the party seeking to recover attorneys’ fees must be the “prevailing party,” The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million). Prevailing party is defined to exclude positions as to which the government was "substantially justified."  The Government was likely substantially justified in the positions it took in the litigation. But an exception to the “substantially justified” exception applies if the party has made a “qualified offer,” meaning an offer that "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  § 7430(c)(4)(E).  In this case, where the result was an up or down result, a minimal offer can meet the qualified offer standard. Mann Construction made an offer of $1, identifying the offer as a qualified offer. So the Court awarded “$220,482.50 in attorneys’ fees and $1,355.90 in costs.

The court specifically rejected a requirement that “a qualified offer to be reasonably calculated to justify serious consideration by the IRS to avoid tax-litigants gaming the qualified offer rule with nominal offers like Plaintiffs’ $1 offer.” (Slip Op. 11.) The Court said (Slip Op. 11):

The statute’s definition requires nothing else for qualified offers—not a minimum amount nor a good-faith reasonableness requirement—full stop, end of inquiry. See BASR P’ship v. United States, 130 Fed. Cl. 286, 305 (2017), aff’d, 915 F.3d 771 (Fed. Cir. 2019) (awarding attorneys’ fees under § 7430 when plaintiff made $1 qualified offer and had $0 of tax liability because “$1 is more than $0” and the statute’s definition of qualified offer “does not require any minimum amount” or good-faith reasonableness requirement); see also Tanzin v. Tanvir, 592 U.S. 43, 47 (2020) (“When a statute includes an explicit definition, [courts] must follow that definition.”).

For my discussion of the cited BASR case, see Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (Federal Tax Procedure Blog 2/11/17), here.

As with the case discussed in the prior blog, the lesson is that, in a case where the ultimate result is up or down (with the court having no place to go in between), the $1 minimal qualified offer is the way to go. Of course, if the court can reach a result in between, the minimal $1 offer will fail where a more nuanced higher offer might have worked (in a manner somewhat like baseball arbitration).

Third Circuit Denies Post-Loper Bright Petition for Rehearing in Case Applying Auer/Kisor Deference (11/6/24)

In United States v. Chandler, 104 F.4th 445 (3rd Cir. 6/11/24), CA3 here and GS here, the Court sustained a sentence based in part on the application of Auer/Kisor deference to the Guidelines Commentary. (See Slip Op. 7, 17-19.) I refer to his panel decision as Chandler I. Chandler I preceded Loper Bright Enters. v. Raimondo, ___ U.S. ___, 144 S. Ct. 2244 (2024), which rejected Chevron deference (as well as, any similar deference that preceded Chevron). But Loper Bright did not address a deference subclass for agency subregulatory interpretations of legislative regulations (such as Guidelines Commentary on Guidelines). See Fourth Circuit Applies Auer/Kisor Deference to Include in Guidelines "Loss" the Commentary Inclusion of "Intended Loss" (Federal Tax Procedure Blog 8/24/24), here; and More on United States v. Boler (Federal Tax Procedure Blog 8/25/24), here.

On petition for rehearing in Chandler, the Court entered a document titled “Sur Petition for Rehearing,” denying the panel rehearing and en banc rehearing but with dissents by Judges Bibas and Matey. United States v. Chandler, 114 F.4th 240 (3rd Cir. 9/22/24), CA3 here and GS here. I refer to this denial of rehearing as Chandler II. Judge Bibas argued that, even if Auer/Kisor deference were otherwise applicable to Guidelines Commentary, deference only applied when the interpretive toolkit was otherwise empty, but that lenity was in the toolkit and applied to preempt ambiguity for Auer/Kisor deference. Judge Bibas said that applying Auer/Kisor deference without first applying lenity, “put us on the wrong side of a circuit split. At least three circuits hold that lenity trumps deference.” (Slip Op. 2-3; note the page numbers are for the pdf because the pages are not numbered.) Judge Matey dissented because he felt that the ordinary meaning of the statutory term was discernible without deference (sort of a Chevron Footnote 9 approach). Neither dissenting Judge reasoned that the Auer/Kisor deference applied in Chandler I (the pre-Loper Bright panel opinion) did not survive Loper Bright.

So, as of now, at least so far as I am aware, we still do not have a definitive ruling on whether Auer/Kisor deference survives Loper Bright, but the courts seem to be deciding cases as if it does survive Loper Bright. Most immediately, that means that the Sentencing Guidelines Commentary interpreting the Guidelines may qualify for deference at least when lenity doesn’t apply. (That sets aside the issue of whether lenity might apply to avoid getting to Auer/Kisor deference for Guidelines Commentary; and conceptually the ambiguity invoking lenity is the same as the ambiguity required for Auer/Kisor deference, lenity might always apply.)

Exxon Mobil Wins A Substantial Refund Case on Interest on Production Payments (11/5/24)

I write on Exxon Mobil Corp. v. United States (N.D. TX No. 3:22-CV-0515-N Findings of Fact and Conclusions of Law 10/31/24), CL here & GS here [to come]. For those interested, the CL docket entries are here.  Exxon Mobil (sometimes referred to as ExxonMobil in the opinion) prevails in this tax refund suit. The Court held that certain payments by an Exxon Mobil affiliate on its arrangement with an entity of the State of Qatar were interest payments by treating a production payment as a debt under § 636(a). For details of the parties’ arguments, see the Pretrial Order on CL, here. (Note that per CL docket entries, the briefs were generally sealed for some reason (I did not bother to check on the reason).)

I won’t get into the merits of the interest issue decided. On those merits, I am reminded of Justice Frankfurter’s complaint about Supreme Court review of the Tax Court’s oil and gas cases that those cases make distinctions “which hardly can be held in the mind longer than it takes to state them.” Burton-Sutton Oil Co. v. Commissioner, 328 US 25, 38 (1946) (dissenting).)

Procedural issues are:

1. Expert Witnesses. The Court says in the second paragraph (Slip op. 1-2):

          As a general matter the Court found ExxonMobil’s witnesses – both lay and expert – to be credible and helpful. The Court found Defendant United States of America’s (“United States”) expert to be credible but not helpful. That is to say, the Court believes Dr. Wright truthfully testified as to her opinions and that she is well-qualified to offer those opinions. The problem is the subject matter of her opinions – she was asked to offer opinions regarding oil and gas accounting from a business perspective, rather than opining [*2] on the correct tax treatment or the economic reality of the transaction. For that reason, the Court discounts her testimony.

Post Loper Bright Approval of Agency Best Interpretations (12/3/24)

I have previously blogged on my anecdotal analysis of large data sets of cases supposedly applying Chevron deference but really not so because the agency interpretation supposedly deferred to was the best interpretation. In other words, although those cases seemed to apply deference, they really did not. e.g., Chevron Deference: Much Ado About Not Much (Federal Tax Procedure Blog 8/15/21), here; Is Chevron on Life Support; Does It Matter? (Federal Tax Procedure Blog 4/2/22; 4/3/22), here; and Chevron Step Two Reasonableness and Agency Best Interpretations in Courts of Appeals (Federal Tax Procedure Blog 2/9/23), here. I further noted that, observing that phenomenon, a prominent appellate judge said: “It would probably be too cynical to suggest that the courts are just accepting agency interpretations with which they agree and rejecting those they disfavor, but in some cases that almost seems to be what is happening.” Jon O. Newman, On Reasonableness: The Many Meanings of Law’s Most Ubiquitous Concept, 21 J. App. Prac. & Process 1, 83 (2021), here. One of my key points in discussing the phenomena was that the demise of deference, which we now have with Loper Bright, might not produce materially different outcomes.

The post-Loper Bright opinion in Diaz-Arellano v. U.S. Attorney General, ___ F.4th ___ (11th Cir. 2024), CA11 here and GS here, illustrates. In that case, the interpretive issue involved cancellation of removal of an alien for “exceptional and extremely unusual hardship” including a child defined as “an unmarried person under twenty-one years of age.” The question was whether the child’s age status must be met at time of application or at time of the hearing (which often can take many months after application, resulting in the child aging out during the process).

The Diaz-Arrelano majority noted that, in briefing the Government argued that Chevron required differing to the agency interpretation (at hearing) and at oral argument the Government added the argument that the agency interpretation was the best interpretation requiring no deference. Briefing and oral argument preceded Loper Bright. The Diaz-Arrelano opinion was rendered after Loper Bright.  The panel majority noted the Loper Bright demise of deference requiring it to review de novo without deference, but held that the Government interpretation was the best interpretation of the statute. In other words, best interpretations neither need nor require deference to prevail, which is what Loper Bright means. The result is that many pre-Loper Bright cases appeared to apply deference were really masking approval of best interpretations, meaning that the demise of deference will not materially affect outcomes.

 The  panel majority noted (p. 8 n.5 (carrying over to p. 9)):

    n5 The only other circuits to have addressed this issue in published opinions agree that an alien’s child must be under the age of twenty-one as of the final adjudication of the alien’s application for cancellation of removal, though both relied on Chevron. See Mendez-Garcia v. Lynch, 840 F.3d 655, 663–64 (9th Cir. 2016); Rangel-Fuentes v. Garland, 99 F.4th 1191, 1194–97 (10th Cir.), vacated and panel reh’g granted, No. 23-9511, 2024 WL 3405079 (10th Cir. July 10, 2024) (reconsidering in light of Loper Bright).

SSRN Paper: Loper Bright Is the Law But Poor Statutory Interpretation (10/28/24)

I have posted to SSRN the following paper: Loper Bright Is the Law But Poor Statutory Interpretation, available at SSRN here. The Abstract is:

While teaching law, I sometimes claimed that tax cases are too important to have the Supreme Court decide them. I had a list of tax cases to back up that claim. I have now expanded my list beyond tax cases to one administrative law case.

In Loper Bright Ent. v. Raimondo, 603 U.S. ___, 144 S. Ct. 2244 (2024), the Court pronounced that APA § 706, properly interpreted, requires that court review agency statutory interpretations de novo without deference. The claim rests on the opening words of § 706 coupled with a claim that, at the time of enactment of the APA, the courts did not defer to agency interpretations. Both claims are false, resting on poor scholarship of the history and law relevant to Congress’ meaning of § 706 at its enactment in 1946. One key is the Court’s perceived need to address the state of deference upon enactment of the APA. If the words of § 706 command de novo review, then what difference does it make what the state of deference was upon enactment of the APA?

In this article, I show that § 706, properly interpreted requires deference, because as enacted in 1946:

(i) the words of the APA, including the requirement in § 706(2)(A) that agency action be “held unlawful and set aside” only if “not in accordance with law,” a standard the Supreme Court held required deference in Dobson v. Commissioner, 320 U.S. 489 (1943) , and

(ii) the unquestioned understanding that § 706, upon enactment, applied the then-current state of review, which included deference.

Loper Bright failed to correctly assess the meaning of § 706. Loper Bright is the law, but, at a minimum, poor scholarship.

JAT Interview on Tax Law Institute on Federal Tax Procedure Book 10/5/24 (1020/24)

On October 5, 2024, I did a telephone interview, here, for the Federal Tax Law Institute, here. focused on my Federal Tax Procedure Book (Student and Practitioner Editions), see here.  The interview begins about 10:00 minutes into the recording.

Caveat, prior to the beginning of the interview, the speaker introduces my credentials, but states erroneously that I was with KPMG. I was never with KPMG but did represent one of the KPMG partners in the large criminal case in the Southern District of New York arising out of KPMG’s promotion of several varieties of tax shelters. Unfortunately, I was not online when he made that statement so could not correct real-time.

Also, we begin the interview sometime around 10 minutes. It turned out to be a telephone recording. I had some confusion about the particular video conference tool they used, so we defaulted to telephone interview.

One of the key points I make in the interview is that I welcome comments from readers of either edition of the book as to matters that might need corrected or improved. One of the students in the Federal Tax Law Institute started email correspondence about corrections or improvements. So, for those reading this blog, I encourage that type of input to make the next editions better.

Treasury Promulgates Syndicated Easement Listed Transaction Regulations (10/13/24)

The IRS long identified certain syndicated conservation easements as potentially abusive tax shelters. One prong of that attack Notice 2017-10 designating such transactions as “listed transactions” which carried certain reporting requirements with heavy potential penalties. Courts declared that designating a transaction as a “listed transaction” must be by notice and comment regulation rather than Notice or Revenue Ruling. E.g., Mann Constr., Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), here; and Green Rock LLC v. IRS, 104 F. 4th 220 (11th Cir. 2024), here. The statutory path the courts followed to justify the holding is a feasible one but another feasible interpretation would have sustained the IRS use of Notices. See Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (Federal Tax Procedure Blog 3/3/22); here, and Eleventh Circuit Invalidates IRS Designation of Listed Transaction by Notice; Designation Must be by Notice and Comment Regulation (Federal Tax Procedure Blog 6/16/24), here.

The IRS promulgated final regulations treating certain syndicated conservation easement transactions as listed transactions. Reg. § 1.6011-9, titled “Syndicated conservation easement listed transactions,” effective 10/8/24, TN here. The regulation grandfathers prior disclosures under Notice 2017-10. Reg § 1.6011-9(g). The regulations incorporate provisions fleshing out the addition § 170(h)(7)(A) in 2022 which limits the charitable deduction if the amount of the deduction exceeds 2.5  times the sum of each partner's relevant basis in such partnership or S Corporation.

I offer here only a general notice of the regulation. Those interested can parse the regulations for the details.

What was the State of Deference at the Enactment of the APA? (10/7/24)

I am presently writing an article I hope to publish to SSRN later this week. In that article, I include a discussion of Skidmore v. Swift & Co., 323 U.S. 134 (1944) which may have taken on new life as a result of the demise of deference from Loper Bright Ent. v. Raimondo, 603 U.S. ___, 144 S. Ct. 2244 (2024).

One key claim I make in the article is that Loper Bright is wrong in claiming that the cases in the 1940s “cabined” “deferential review to fact-bound determinations.” (144 S.Ct., at 2249.) The reason that the claim is important to the result is that Loper Bright needs to present the state of the law at the time the APA was enacted as not sanctioning deference to agency interpretations of ambiguous statutory text. During the consideration of the APA in 1945 and 1946, the consistent statements of the meaning of APA § 706 [§ 10(e) of the original APA before codification] was that § 706 restated existing law and made no change to the existing scope of judicial review of agency action. For a survey of those consistent statements, see John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN 12/14/23 as updated on 10/6/24), here. In fact, the law is clear that deference was the state of the law at the time, as shown by Skidmore itself when read carefully.

Loper Bright gives new emphasis to Skidmore in the statutory interpretation universe, and at least as presented in Loper Bright, Skidmore has no relationship to the Loper Bright claim of no deference at the time the APA was enacted. But, as I present in my new yet-unfinished article, Skidmore confirms that Loper Bright just made up that claim of no deference.