Regulations Interpreting Pre-1996 Code Provisions; Fixing Farhy (5/11/23; 5/12/23)

In Farhy v. Commissioner, 160 T.C. No. 6 (4/3/23), TN here and GS here, the Tax Court held that the Code did not give the IRS authority to assess § 6038(b)(1) or (2) penalties, here. Specifically, the Tax Court held that § 6201(a) did not authorize these penalties. I posted some concerns about the correctness of Farhy in a blog. Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (Federal Tax Procedure Blog 4/3/23; 4/23/23), here. Is there some possible self-help fix the IRS could use to pre-empt the Tax Court’s Farhy decision?

An interpretive regulation could fix the problem for the IRS. I noted such a fix for the Eleventh Circuit’s opinion in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021),  11^th Cir. here and GS here holding an interpretive regulation from the 1980s procedurally invalid for the foot-fault of failing to respond in the regulation to a comment which the Court second-guessed to be material to the rulemaking enterprise. The fix is for Treasury to adopt a replacement interpretive regulation and make it retroactive to the effective date of the regulation or retroactive to some point in between that would pick up all the syndicated shelters currently in the pipeline. Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22; 5/12/23), here. That proposed fix was anchored in the pre-1996 § 7805(a), which generally unquestionably allowed retroactivity for interpretive regulations and that authority remained for pre-1996 Code provisions.

The same fix can work for § 6201(a). The relevant statutory language is:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.

That text’s "including" clause should be sufficiently capacious to be read as including provisions not specifically enumerated. § 7701(c) (“The terms ‘includes’ and ‘including’ when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”) That avoids a dumb result -- Congress imposes a penalty treated generally as a tax without authority to assess which is just a formal recording of a liability Congress clearly meant to impose.

DC Circuit Denies Petition for Rehearing in Case Involving the Best Interpretation, Meaning no Deference (5/9/23)

The D.C. Circuit denied the petition for rehearing en banc in Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here and GS here, pet. reh. den. ___ F4th ___ (D.C. Cir. 5/2/23), DCCir here and GS here. In the panel decision (45 F.4^th 306), the question was “whether the Bureau [ATF] had the statutory authority to interpret ‘machine gun’ to include bump stocks;” the Court’s answer was: “Employing the traditional tools of statutory interpretation, we find that the disputed rule is consistent with the best interpretation of “machine gun” under the governing statutes.” In other words, the panel appears to have resolved the case at Chevron Step One where there is no deference, not even getting to Step Two (although it could have potentially been resolved at Step Two by applying the agency best interpretation, where there is also no deference).

On the petition for rehearing en banc, the Court denied the petition without explanation by the full panel. Judge Wilkins wrote an opinion, joined by Judge Millett, concurring in denial of the petition. Judges Henderson and Walker wrote separate dissenting opinions. Judge Henderson’s opinion referred to her concurring in part and dissenting in part in the panel opinion. Judge Walker wrote a political screed with ample conservative/libertarian rhetoric but without, in my mind, serious consideration of how the country should interpret laws where the language of the statute, whatever it's original meaning, if sufficiently copious to cover the situation within the purpose of the statute. (There are huge debates about all of this, but I use examples in two contexts: (1) When the Declaration of Independence declared that all men are created equal, are or should we be locked into meaning of free white men with property?; or (2) when the Bible says eye for an eye, are we now locked into that concept as justice?)

Looking to a larger issue not directly addressed by the opinions concurring and dissenting from denial of the petition, I have addressed the key point that a best interpretation of statutory text is not in need of deference. Of course, if that best interpretation is determined at Chevron Step One, the interpretation is applied because there is no ambiguity in the statute that could permit deference, required to proceed to Step Two. Further, if that best interpretation is the agency interpretation determined at Step Two when competing interpretation(s) are considered, the agency interpretation is the best interpretation and not subject to real deference. Only where, at Step Two, the agency interpretation is the less persuasive interpretation to another interpretation is there any possibility of deference and then only when the Court applies the agency interpretation even though it thinks there is a better interpretation.

So, to put this in the expanded Chevron Steps where there is no deference to agency interpretations:

Deference--Real Deference--To Agency Less Persuasive Interpretations and APA Review of Agency Discretion (5/4/23)

Yesterday, I spent about 5 hours going through The Papers of Professor Carl McFarland at the UVA Law School Special Collections, here. Professor McFarland was a major player in shaping the Administrative Procedure Act (“APA”), enacted in 1946. What I hoped to find in the long, very long legislative and related history of the APA about (i) the consideration of deference and (ii) the distinction between legislative rules and interpretive rules (called interpretative) in the APA. I found nothing directly addressing those issues in Carl McFarland’s papers, but I did get have an insight from those materials that may help in the deference analysis. I will post that insight below. (As an aside, while at UVA law in 1966 or 1967, I played the role of Professor McFarland in the law school’s annual Libel Show roasting professors.)

While at the UVA Law Library, I recalled that some law professors uploaded to HeinOnline extensive history (statutory, legislative, and otherwise) of the APA. That collection is The Bremer-Kovacs Collection: Historic Documents Related to the Administrative Procedure Act of 1946 (HeinOnline), here. That collection requires a subscription to HeinOnLine, but it can be accessed at many law schools. This is an exhaustive collection; let me repeat that, exhaustive). For discussion of this collection, see Emily S. Bremer and Kathryn E. Kovacs, Editors, Introduction to The Bremer-Kovacs Collection: Historic Documents Related to the Administrative Procedure Act of 1946 (HeinOnline 2021), 106 Minnesota Law Review Headnotes 218 (2022), here. Yesterday, while at the UVA Law Library, I accessed a lot of that history and downloaded key documents in pdf format that I will review for the topics I mentioned in the opening paragraph.

Now to the insight. The insight is that it is clear from the legislative history and the APA itself, that the APA does not affect an agency’s exercise of discretion within the scope of the discretion. APA § 706(2) does permit review for abuse of discretion. But within the scope of discretion, there is no court review.

Relating discretion to deference, as I have noted many times, when the agency reasonable interpretation is better than other reasonable interpretations in the zone of the ambiguity in the statute, a court applying the agency interpretation is not deferring to a less persuasive agency interpretation. Only when a court determines the better interpretation within the ambiguity and nevertheless applies a lesser agency interpretation does it actually defer. In the latter case, real deference (both Chevron and pre-Chevron deference during the long history of deference) may be said to create a zone of deference (or discretion) on a spectrum from reasonable (real deference at Chevron Step Two) to unreasonable (no deference at Chevron Step Two). (Actually, that may be better conceptualized as a binary choice of agency reasonable but not the most persuasive (real deference) and unreasonable (no deference). Unreasonable may be equated to abuse of discretion in the words of § 706(2).

That is the insight I wanted to share. I will now get into a more technical discussion of key statutory and legislative history from the original APA as enacted to current § 706(2). I suspect most readers will not be interested in this, but here it is.

Tax Crimes Outline for UVA Law Tax Procedure Class (5/2/23)

On March 31, 2023, I taught Tax Crimes session for Jim Malone's Tax Procedure Class at UVA Law School. I prepared an outline that may be useful for others, so I link it here. The outline is from my Federal Tax Procedure Book published annually in early August. The outline is updated with major developments through about March 11, 2023. Keep in mind that the outline is an overview appropriate for one session in a semester class on tax procedure.  It is not definitive on Federal Tax Procedure. For more definitive discussion of tax crimes, I refer readers to Chapter 12: Criminal Penalties and the Investigation Function in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, as updated three times a year. I am the principal author of that Chapter and the updates.

Supreme Court Grants Cert to Consider Overruling or Clarifying Chevron (5/1/23)

In today’s Order List, here, the Supreme Court granted the petition writ of certiorari in  Loper Bright Enterprises v. Raimondo (SEC) (Dkt 22-451). The Court limited cert to the following issue (from the petition):

  2. Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

I have written before on the Loper petition’s trajectory where I also link the docket entries on the Supreme Court website and on SCOTUSblog. See Petition for Writ of Certiorari in NonTax Case Raising Issue of Continued Viability of Chevron (Federal Tax Crimes Blog 3/19/23; 4/30/23)), here, and see no need to repeat or extend that discussion at this time.

Added 11:20 am:

NJ Fed District Court Finds No Jurisdiction to Recognize Claim of Universal Vacatur of Notice 2007-83 for 6th Circuit Decision (4/29/23)

In OOM Inc., et al. v. United States (D. N.J. Dkt 22-2762 Opinion & Order dtd 4/24/23 Not for Publication), CL here and GS here, the court granted the Government’s Motion to dismiss the First Amended Complaint (“FAC”), here, seeking “a declaratory judgment ordering, among other things, that the reporting requirement was vacated by the Sixth Circuit [in Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2021)] and that they are entitled to rescission or refund of the assessed penalties.”

The basis for the FAC is the claim that Mann Construction was what is sometimes referred to as a universal or nationwide vacatur, vacating Notice 2007-83 upon which plaintiffs’ § 6707A penalty was based. As I have discussed before, the concept of the universal vacatur of administrative action is a hot-button issue now. Accordingly, some courts vacated administrative action take different approaches—

(i)          vacatur for the parties in the action,

(ii)        if a district court opinion, vacatur affecting all persons in the district including parties and nonparties in the case,

(iii)      if a circuit court opinion, vacatur affecting all persons in the district including parties and nonparties in the case, and

(iv)       if a district or circuit court opinion, applying nationwide, including parties and nonparties.

The OOM Inc. plaintiffs asserted that Mann Construction effected vacatur under (iv).

The problem was that penalties are treated as taxes, subject to the usual predicates applicable to tax refunds and other types of tax relief. For example, to the extent that the OOM Inc. plaintiffs were seeking a refund of the penalties, they had not met the predicates for a refund suit. To the extent that they were seeking to obliterate the unpaid assessments, they ran squarely into § 7421(a). To the extent they were seeking a declaratory judgment, they ran squarely into 28 U.S.C. § 2201(a).

A Federal Tax Procedure Blog Entry Revised to Style of Hemingway (4/22/23)

I asked two different AI platforms—Google’s BARD and ChatGPT-- to revise a past blog entry in the style of Ernest Hemingway. The Blog Entry is Petition for Writ of Certiorari in NonTax Case Raising Issue of Continued Viability of Chevron (Federal Tax Procedure Blog 3/19/23; 4/17/23), here. (you can click to read; I excluded the text in red from the text I requested the tools to revise to Hemingway style).

GOOGLE BARD

Sure, here is the text you provided in the style of Ernest Hemingway:

The Supreme Court will soon consider whether to overturn Chevron deference, a legal doctrine that allows courts to defer to the interpretations of federal agencies when a statute is ambiguous. The case, Loper Bright Enterprises, Inc. v. Raimondo, involves a dispute over whether the National Marine Fisheries Service (NMFS) has the authority to require domestic vessels to pay the salaries of the monitors they must carry to ensure compliance with regulations.

The petitioners argue that the statute is unambiguous and does not grant NMFS this authority. They also argue that Chevron deference is an unconstitutional delegation of legislative power to the executive branch. The government, on the other hand, argues that the statute is ambiguous and that Chevron deference is a well-established and important legal doctrine.

The outcome of this case could have a significant impact on the balance of power between the executive and legislative branches. If the Court overturns Chevron deference, it will be a major victory for those who believe that the executive branch has too much power. However, if the Court upholds Chevron deference, it will be a victory for those who believe that the executive branch needs to be able to act quickly and effectively in order to carry out its responsibilities.

Here is a more concise version of the text you provided in the style of Ernest Hemingway:

Payments v. Deposits and Below-the-Line Stipulations in a Stipulated Tax Court Decision Document (4/19/23)

In Hill v. Commissioner, ___ F.4^th ___ (11^th Cir. 4/10/23), CA11 Slip Op. here and GS here, the Court held that the taxpayer’s remittance of $10,263,750 to the IRS was a deposit that accrued interest at the lower interest rate for deposits rather than the higher overpayment rate.

Payments v. Deposits Background

In reaching its decision, the Court provided this background introduction (Slip Op. 18-20, cleaned up, particularly to eliminate parallel citations):

C. Payments and Deposits

As further background, it helps to understand why taxpayers, like Hill, will expressly designate a remittance as a "deposit," as opposed to a payment. Whether the taxpayer makes a deposit or a payment can affect whether the taxpayer can challenge the amount of a deficiency.

Generally, when a taxpayer makes an undesignated remittance, the IRS treats that remittance as a payment and applies it "against any outstanding liability for taxes, penalties[,] or interest." See Rev. Proc. 2005-18 § 4.01(2), 2005-13 I.R.B. 798, 799.n4 "If an undesignated remittance is made in the full amount of a proposed liability," it "will be treated as a payment of tax, a notice of deficiency will not be mailed[,] and the taxpayer will not have the right to petition the Tax Court for a redetermination of the deficiency." Id. § 4.03, 2005-13 I.R.B. at 800.

   n4 Throughout their briefs, both parties cited and relied upon Revenue Procedure 2005–18. No party raised a deference issue under Chevron, U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984), and thus we do not address Chevron.

By contrast, a taxpayer who makes a "deposit" can challenge an alleged deficiency in the Tax Court without accruing underpayment interest on the disputed tax, up to the amount of the deposit. See I.R.C. §§ 6601(a), 6603(a)-(b), 6213(a). The Supreme Court has recognized that "the taxpayer will often desire treatment of the remittance as a deposit—even if this means forfeiting the right to interest on an overpayment—in order to preserve jurisdiction in the Tax Court, which depends on the existence of a deficiency," which "would be wiped out" if the remittance were treated as a payment. Baral v. United States, 528 U.S. 431, 439 n.2 (2000).

Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (4/3/23; 4/23/23)

In Farhy v. Commissioner, 160 T.C. No. 6 (4/3/23), TN here and GS here, the Tax Court held in a CDP case that collection efforts for the § 6038(b) penalties for initial and continuation failure to file Forms 5471 were not authorized because there was no assessment authority for § 6038(b) penalties. Section 6038(b) is here. Assessments are required for IRS collection actions such as liens and levies, thus the collection action failed.

My comments:

1. I find the Farhy holding odd; indeed. I think it is wrong. The statute is clear that Congress intended the § 6038(b) penalties to apply. The penalty for the initial failure seems to be automatically imposed by the statute's literal terms without any action by the IRS. § 6038(b) (“If any person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), [the Form 5471] such person shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists.”) There is no authority—and the Tax Court in Farhy cites none—for the proposition that Congress intended to exclude the § 6038(b) penalty from usual IRS collection tools. Instead, at best, the Tax Court finds a footfault in the interlocking statutory provisions.

2. The Code treats penalties as taxes, and 6201(a), here, authorizes “assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.”  (Emphasis supplied by JAT.) “Including” at least suggests that, so long as the tax (penalty) is imposed by Title 26, assessment authority can include more than the types of liabilities specifically listed. More importantly, it would not facially exclude the § 6038(b) penalties and should be capacious enough to cover the § 6038(b) penalties, particularly because there is no reason Congress intended otherwise.

3. An Assessment is simply a recording on the IRS books that a taxpayer owes a liability. In Hibbs v. Winn, 542 U.S. 88, 100 (2004), here, the Supreme Court described assessments (cleaned up):

          As used in the Internal Revenue Code (IRC), the term “assessment” involves a recording of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The “assessment” is essentially a bookkeeping notation. Section 6201(a) authorizes the Secretary of the Treasury “to make . . . assessments of all taxes . . . imposed by this title.” An assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” §6203. n2 See also M. Saltzman, IRS Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal Revenue Service signs “summary list” of assessment to record amount of tax liability, “the official act of assessment has occurred for purposes of the Code”).
   n. 2 Section 301.6203-1 of the Treasury Regulations states that an assessment is accomplished by the “assessment officer signing the summary record of assessment,” which, “through supporting records,” provides “identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.” 26 C.F.R. §301.6203-1 (2003).

If the statute says a delinquent filer is subject to the penalty, it makes no sense that the IRS can’t record the liability on its books—easily meeting the definition of an assessment. And, what logic is it that the IRS cannot record on its books a clear liability such as § 6038(b)?

Overlap Between Chevron Deference and Skidmore Respect; Chevron Deference Masking Skidmore Respect (3/25/23)

 I have argued in various postings on this blog that:

1. Chevron means that, for ambiguous statutory text, the court may apply reasonable agency regulations interpretations. (Please note that in this opening statement I do not call Chevron a deference regime.) Further, reasonable agency interpretations include (i) interpretations that are the better interpretation of the statute (by definition a reasonable interpretation) and (ii) interpretations that are not the better interpretation of the statute but still reasonable (whatever that means). Finally, based on my anecdotal but I think representative review of the cases where courts of appeals invoke Chevron to apply the reasonable agency interpretation but do not declare which of the subcategories the agency reasonable interpretation falls into, most of the time the court is at category (i) which is not deference. If that is right (I think it is), courts are not deferring to the agency interpretation in subcategory (i). Chevron deference applies only in subcategory (ii).

a. Chevron deference generally applies only to regulations promulgated with notice and comment. For this discussion, I assume that the Chevron-qualified notice and comment regulations were properly promulgated (i.e., no foot-faults in the procedures to promulgate notice and comment regulations).

2. Skidmore is not deference, because it does not permit a court to adopt an agency interpretation that is not the better of the possible reasonable interpretations. Rather, Skidmore only requires consideration of the agency interpretation in determining the better interpretation of the statute. Skidmore does not require or even permit the court to defer to an agency interpretation that is not persuasive as the better reading of the statute. Skidmore is not even weak deference, as often claimed. Hence careful judges and scholars avoid referring to Skidmore as a deference authority. Even Justices when discussing Skidmore recently have noted that Skidmore is not deference. See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here, where I quote the Justices’ discussion in oral argument in Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019), with a link to the transcript of and local page citations to the oral argument.

a. Skidmore respect generally applies only to subregulatory agency interpretations not entitled to Chevron deference. (I use the term subregulatory guidance as agency guidance other than in a procedurally properly promulgated notice and comment regulation.) However, logically, Skidmore respect can apply at Chevron Step One if the agency interpretation is determined the better interpretation, thus pre-empting Chevron Step Two which is the only step in the Chevron Framework where a court can defer to an agency interpretation. (Caveat: my anecdotal reading of the cases and inferences therefrom is that courts rarely invoke Skidmore at Chevron Step One but probably do some type of Skidmore-type analysis without naming it at Step Two where they determine the agency regulation interpretation is reasonable and thus seem to defer (of course, the better interpretation is reasonable and needs no deference; I’ll come back to this later.)

b. I noted that Skidmore can apply at Chevron Step One. It may also apply before the Chevron Framework is invoked--i.e. before Step One. If the agency interpretation is the better interpretation of the statute, it might even resolve ambiguity which is the predicate to the Chevron Framework. 

I now extend those arguments.