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.

Excellent Article on IRS CI Special Agent and Cryptocurrency (10/2/24)

I post today on an excellent article—Geraldine Brooks, The Cyber Sleuth (WAPO 10/1/24), here. This is one article in a WAPO series on “Who is Government?” where seven writers are said to “go in search of the essential public servant.” The articles in the series with author of each article are:

•  The Canary: Michael Lewis on the Department of Labor
• The Sentinel: Casey Cep on the Department of Veterans Affairs
• The Searchers: Dave Eggers on NASA’s Jet Propulsion Lab
• The Number: John Lanchester on the Bureau of Labor Statistics
• The Cyber Sleuth: Geraldine Brooks on the Internal Revenue Service
• The Equalizer: Sarah Vowell on the National Archives
• The Rookie: W. Kamau Bell on the Department of Justice

Each article in the series (so far) is outstanding. It is appropriate that Michael Lewis starts with the first installment because of his book, The Fifth Risk, which has been described as “a love letter to federal workers -- and a dig at Trump’s ‘willful ignorance’.” See WAPO book review here. Lewis tells a great story of the bureaucracy—the deep state, if you will—and how much the bureaucrats do for the country, keeping the country on an even keel in turbulent times (particularly the first (and hopefully the only) Trump administration where chaos reigned as Trump haphazardly filled the ranks of political appointees to the agencies).

The Cyber Sleuth installment deals with Jarod Koopman, an IRS “Cyber Sleuth.” Koopman is an example of IRS employees and government employees generally who bring dedication and unique skill to the mission of the IRS, an agency that Congress chronically underfunds seemingly to hamper the IRS’s ability to do the tasks Congress assigned it to do. The article says:

Until last year, the staff who work inside had watched their budget get cut for a decade. Their staffing numbers had reached lows not seen since the 1970s, even as the U.S. population swelled and the quantity of tax returns soared. There was no money to update failing technology, or even the software that ran it. The result was a pileup of paper returns that colonized corridors and cafeterias, and an American public vexed by poor service.

That, of course, was the goal: anti-tax activist Grover Norquist’s famous shrink-it-till-you-can-sink-it strategy. So the civil servants who had been valiantly struggling to serve more people with fewer resources found themselves unappreciated — even despised.

And perhaps most despised are the 3 percent of IRS personnel involved in criminal investigation, who have become piñatas for the agency’s critics. Fox News’s Brian Kilmeade characterized agents such as Koopman as dangerous threats who could “hunt down and kill middle-class taxpayers,” while Rep. Lauren Boebert (R-Colo.) accused them of “committing armed robbery on Americans.” Republicans even attached a rider to a spending bill limiting the number of bullets the IRS can buy. “A weapon is rarely discharged by one of our agents,” says a frustrated Werfel. “But you can’t send an agent into a criminal enterprise unarmed, so they have to train, and there’s a minimum inventory required for that.” 

First Circuit Holds that JDS for Crypto Records Is Not Entitled to Pre-Enforcement Review (10/1/24)

In Harper v. Werfel, __ 4th ___ (1st Cir. 2024), CA1 here and GS here, the Court rejected Harper’s claim that the documents gathered by the IRS John Doe summons (“JDS”) to Coinbase should be eliminated from its files because of alleged deficiencies in the JDS process.

I blogged on a prior appeal where the First Circuit held that the Anti-Injunction Act (“AIA”), § 7421(a), did not apply to prevent the pre-enforcement suit under the Administrative Procedure Act (“APA”) because the activity in question was “information gathering” rather than tax collecting and assessing. First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (Federal Tax Procedure Blog 11/9/22), here. The prior appeal was styled Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), CA1 here and GS here. (Rettig was the former IRS Commissioner; Werfel is the current IRS Commissioner.) The Solicitor General did not authorize petition for certiorari in Harper v. Rettig, so the case was remanded to the district court for further consideration consistent with Harper v. Rettig. Harper v. Rettig thus appeared to be a big win in the line of cases allowing pre-enforcement review beginning with CIC Services, LLC v. IRS, 593 U.S. 209 (2021).

On remand, the district court reached the same result—dismissal—on different grounds as follows:

• The Court rejected Harper’s Fourth and Fifth Amendment claims on the basis that, by becoming a Coinbase customer, Harper (i) had no reasonable expectation of privacy or protectable interest with respect to Coinbase’s records (not his records) (the third party doctrine) and (ii) the JDS did not deprive Harper of due process. (Slip Op. 11-35  In the latter holding, the Court cited prominently S.E.C. v. Jerry T. O'Brien, Inc., 467 U.S. 735 (1984) which held “the Due Process Clause of the Fifth Amendment . . . is [not] offended when a federal administrative agency, without notifying a person under investigation, uses its subpoena power to gather evidence adverse to him.” (Slip Op. 29-30.) Readers should recall that the JDS is required in the first instance because the IRS does not know the identity of the account holder, so any requirement of due process of advance notice would judicially eliminate the JDS.

Comments Please (9/26/24)

I have eliminated the past comment tool (Disqus) which proved to be so daunting to readers of the blog who tried to make comments. I have returned to the comment tool provided by Blogger/Blogspot which is the blog tool that I have used since the inception of the blog. The Blogger/Blogspot comment tool seems to be better than it formerly was when I moved to Disqus. In any event, it is much easier to post comments, so I urge those wanting to comment and engage in discussions of the issues presented in the blogs to do so. Comments can provide a useful learning experience for those commenting and those reading the comments and discussion.

I urge readers to review the page to the right titled Guides to Use and Posting of Comments (9/26/24), here. As noted on that page, I moderate the comments, meaning that I read the comments prior to approving them to appear publicly on the particular blog entry. I plan to approve comments liberally, weeding out only comments that are not appropriate under the Guides to Use.

Thank you,

Jack Townsend 

Court Cannot Determine on Motion to Dismiss Malpractice and Related Claims from Bullshit Tax Shelter that the Statute of Limitations from 1997 Was Not Tolled (9/24/24)

In Cáceres v. Sidley Austin LLP (N. D. GA No 1:23-cv-00844 Dkt # 35 Opinion & Order dated 9/17/24), TN here and CL here, the Court denied the motion to dismiss filed by Sidley Austin (“Sidley,” the giant law firm, here). The Cáceres engaged R.J. Ruble, then a partner at the predecessor firm of Brown & Wood, to opine about a 1997 Midco transaction, an abusive tax shelter transaction in which the Cáceres sought to avoid the double tax upon sale of their corporate business. For an explanation of the Midco transaction, see FTP Practitioner Edition pp. 797-798 and Student Edition p. 537; and for Federal Tax Procedure Blog discussions of Midco transactions, here. Basically, tax shelter promoters use a variety of abusive techniques to avoid the built-in corporate level gain and then the sellers and the promoters share the tax thus illegally evaded, leaving the IRS without the tax. Usually, the promoters use a bullshit tax shelter to try to shield the corporate level tax, and when that tax shelter is denied, there is no money to pay the tax, requiring the IRS to seek the tax from third party such as the Cáceres.

At the motion to dismiss stage, the well-pled pleadings are analyzed to see if they pled sufficiently that, if the allegations and claims are true, a case had been stated. (This is before any factual development by discovery and cannot consider facts outside the complaint that a party may know; it is just a test of the sufficiency of the complaint.) The issue on the motion to dismiss was whether on the facts pled the statute of limitations barred the suit. The underlying transactions (including the legal opinion) were in 1997; this particular suit was brought in state court in 2023 and removed to federal court in 2023. Various claims in the complaint had statutes of limitations that were much shorter than the 20+ years that intervened from the 1997 accrual of the actions claim in the complaint. The question was whether, on the facts pled and claims made, the relevant statutes of limitations were tolled because of Sidley’s actions in hiding its alleged misconduct. The Court held that, on the facts pled, it could not determine that the statute of limitations had not tolled, so the case survived the motion to dismiss.

Perhaps the key fact was the IRS commencement in 2018 of a transferee liability suit under § 6901 against the plaintiffs as shareholders wrongfully sharing the corporate-level tax illegally avoided. See United States v. Henco Holding Corp., 985 F. 3d 1290 (11^th Cir. 2021), here. (Of course, significant audit commotion would have likely preceded for years the filing of the transferee liability suit, but the issue was whether on the facts pled,  the plaintiffs had been fairly put on notice as to the causes of action at a time outside the limitations period.) As described by the Court, the Cáceres alleged (Slip Op. 14-15)

11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (9/4/24)

In United States v. Schwarzbaum, ___ F.4th ___ (11th Cir. 2024), 11Cir here and GS here, the Court:

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

The unanimous opinion is quite long (53 pages) and offers a lot of interesting discussion of the history of the FBAR penalties. Those relatively new to the subject, can learn from reading the opinion closely. Those who are veterans to the subject can probably skim through the opinion and understand the holdings.

JAT Comments:

9th Circuit 3-Judge Panel Has Three Different Interpretations Illustrating the Stupidity of Loper Bright's Rejection of Deference (9/3/24; 9/7/24)

In Brown v. Commissioner, ___ F.4th ___ (9th Cir. 2024), CA9 here & GS here, the Court rejected Brown’s claim that his offer in compromise had been statutorily deemed accepted under § 7122(f) because, he claimed, the IRS had not rejected the offer within 24-months of the date of the offer. Brown’s claim would have permitted him to settle $50 million+ tax liability for a bare fraction.

 Section 7122(f) provides:

(f) Deemed acceptance of offer not rejected within certain period
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

The Tax Court held that, under the facts, the offer had been rejected within the 24-month period. The Court of Appeals, in a 3-way split opinion (more below) held that Brown loses on the issue, with two judges reaching the result by different interpretations of the law and the dissenting judge reaching a contrary result (Brown wins) on a different interpretation. In other words, all the judges differed in their interpretations of the applicable law, but 2 interpretations favored the IRS and one favored Brown. Brown loses.

Has Auer Time Passed? (8/20/24)

A question raised by the demise of deference pronounced in Loper Bright Enterprises v. Raimondo, 603 U. S. ____, 144 S. Ct. 2244 (2024) is the continuing viability or application of Auer/Kisor deference. Recall that Auer/Kisor deference applied Chevron-type deference framework to agency subregulatory guidance interpreting ambiguity in agency regulations. Loper Bright did not speak to the continuing viability of Auer/Kisor deference. The Loper Bright opinion of the Court cited Kisor for other propositions, but did not speak to whether Auer/Kisor was viable after Loper Bright.

Although Loper Bright did not speak directly to the continuing viability of Auer/Kisor deference, I think that the inevitable logic of Loper Bright pronounces the demise of Auer/Kisor deference. Of course, because the Supreme Court did not expressly overrule Auer/Kisor deference, some pundits and courts may still pay homage to it until and unless the Supreme Court speaks to its continuing viability. See e.g., 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.

However, a confident lower court reading Loper Bright as I do might be willing to step out on that issue by holding that Loper Bright is inconsistent with Auer/Kisor deference. Or, alternatively, as happened in Coplan, a Court of Appeals might signal in an opinion that there is a major conceptual problem that the Supreme Court should address. See Is It Too Much to Ask that the Defraud Conspiracy Crime Require Fraud? (Federal Tax Crimes Blog 8/3/24; 8/6/24), discussing United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. den. 571 U.S. 819 (2013).

Now, I will state why I think Auer/Kisor deference is not consistent with the demise of Chevron deference pronounced in Loper Bright.

Tax Court Applies the Best Interpretation as Required by Loper Bright Rejection of Chevron Deference (8/27/24)

In Varian Medical Systems, Inc. v. Commissioner, 163 T.C. ___, No. 4 (2024), JAT GD here [see note below at *] and GS here, a reviewed opinion with no dissents, the Tax Court fired its first round of application of the demise of Chevron deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024). For discussion of Loper Bright, see The Supreme Court Pronounces the Demise of Deference (6/29/24; 7/26/24), here (with linked revisions through 8/27/24 for discussion in Federal Tax Procedure Book (2024 Practitioner Ed.).
 
The issue in Varian Medical involved esoteric (to me) Code sections related to taxation of U.S. taxpayers doing business through foreign corporations. I don’t propose to get into the nitty gritty of that (probably could not do it with clarity anyway), but in summary the situation was:

A statute imposed U.S. tax on certain accumulated foreign earnings with an effective date. The statute purportedly had an unintended benefit arising from the interface with another Code provision. As I understand it, the unintended benefit was to allow the U.S. taxpayer both a credit and a deduction for foreign taxes deemed paid. Congress closed the purportedly unintended benefit (the deduction side) but with an effective date that did not go back to the effective date of the original statute. Could the IRS by interpretation (including an interpretation adopted in regulations) move the purportedly correcting amendment effective date back to the date of the original statute?

As stated, the result may have been a no-brainer even without the demise of Chevron. Facially, from the statute, the later “correcting” legislation only was effective from its stated effective date rather than the earlier effective date. Fair interpretation of the statute just couldn’t get that far even with Chevron. As thus stated, the issue could have been resolved at Chevron Step One. To be sure, it is probably fair to say that Congress did not intend both a credit and a deduction related to the same expense (in a broad sense), but Congress did clearly state its intent as to the two statutes' effective dates.
 
The Court addressed the deference and interpretation issues as follows (Slip Op. 28-32, cleaned up somewhat; sorry for the long quote but as this is a first application of Loper Bright, this is important):