Section 7805(a) - Legislative or Interpretive and Problem of Retroactivity (4/2/20)

In my article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 2/28/20, here), I argued that interpretive regulations for agencies generally and for the IRS under § 7805(a) remain viable despite some claims to the contrary.  Today, I summarize a key facet of my argument in the article – that § 7805(a) authorizes only interpretive regulations (rather than legislative regulations as some scholars argue) and that the limitations on retroactivity in § 7805(b) are properly viewed as limitations on the general rule of retroactivity for interpretive regulations rather than grants of authority to promulgate retroactive legislative regulations.  Since I provide copious citations in the article, I will not lard up this blog post with citations except as necessary.  (Variations on this theme have been addressed in prior blogs, particularly, Treasury Regulations and the APA Categories of Legislative and Interpretive Regulations (Federal Tax Procedure Blog 1/12/19; 1/19/19), here, and Legislative Rules And Chevron Deference An Oxymoron? (Federal Tax Procedure Blog 1/31/20; 2/10/20), here, but I recommend that readers sort through this blog before going to those other offerings.)

Section 7805, here, is a familiar Code Section.  It is titled:  Rules and regulations.  It’s first subsection is:

(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.

Note that the authorization is for “rules and regulations.”  I focus here just on regulations (although I will sometimes use the term rules, which is an APA category that may include both regulations and subregulatory guidance (such as in the case of the IRS, Revenue Rulings).

The antecedents of the current § 7805(a) trace back to the dawn of the modern income tax (stated by scholars as 1917, 1918 or 1921, with some antecedents ever further back in general administrative law). Section 7805(a) is often referred to as a “general authority” provision in contrast to specific authority in a Code section to promulgate regulations to either define (interpret) a term in the statutory text (interpretive regulations) or to prescribe the law (a legislative regulation).  Most Treasury regulations are general authority regulations issued under § 7805(a).  (There is some fuzziness here because some would argue that a specific authority statutory direction to define a statutory term makes the regulations legislative in character rather than interpretive, even though all the statute does is direct the IRS to interpret the statutory term; but let’s not get hung up on that because that would mean that the specific authority regulations are all legislative rather than interpretive and would not affect the dividing line between § 7805(a) general authority regulations and specific authority regulations.)

The question I address here is whether regulations issued under general authority statutes such as § 7805(a) (or even under inherent authority derived from Congress’ assigning administrative authority to the agency) are interpretive or legislative in character.  I focus here on § 7805(a) for Treasury Regulations, but the issue is presented for other agency general authority regulations.

In the current context, § 7805 had a pretty clear meaning for most of its statutory life.  The meaning was that § 7805(a) authorized the Treasury (IRS) to prescribe guidance in the form of “rules and regulations” which did not create new law but interpreted ambiguous text in existing statutes.  The understanding was that § 7805(a) authorized interpretive regulations and did not authorize legislative regulations.

I think most judges and scholars were comfortable with understanding at least until Chevron and more likely until later cases interpreting Chevron.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and then principally United States v. Mead Corp., 533 U.S. 218 (2001).  Then some new ways of viewing § 7805(a) crept into the academic discourse.  Section 7805(a), so the new notion goes, is a grant of authority to the IRS to create legislative regulations (legislative rules must be regulations).  A key feature of legislative regulations is that they create the law just as if they were statutes and are not interpretations of the law (statutes).  Because legislative regulations are the law (and not interpretations of the law), they are said to have the force of law.  Thus, morphing that traditional modeling of the legislative regulations to deference concepts under Chevron and its progeny, the new notion is that § 7805(a) regulations, within the scope of the authority granted, are the law.  Why?  Because, once you say that § 7805 regulations have the force of law, you say that they are the law just like statutes and not interpretations of the law (statutes).

Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Crimes Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/22/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

Legislative Adjudicatory "Rulemaking?" (3/14/20; 3/16/20)

I write today on a wrinkle that I recently discovered relating to an argument that I made in an article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 1/25/20), posted on SSRN, here.  In that article, I stated (p. 104) that

The APA confers no legislative rulemaking authority on agency adjudicatory bodies, whether courts or the BIA or any other agency tribunal. Under the APA, the exercise of delegated legislative authority requires the regulations process of Notice in the Federal Register, receipt and consideration of Comments from the affected or interested public, publication in final in the Federal Register with a reasoned explanation of the comments and the decisions made, and an effective date 30 days after publication in final. BIA opinions are not subject to Notice and Comment, are not published in the Federal Register, and are not prospective only (e.g., at a minimum, they can apply the interpretations in the case); this suggests that BIA opinions are interpretive rather than legislative in character at least for APA purposes.

I made that statement in the context of critiquing then Judge Gorsuch’s opinions (panel and concurring) in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016), here.  Judge Gorsuch treated the Board of Immigration Appeals decision as legislative adjudicatory rulemaking.  Perhaps adjudicatory rulemaking is an oxymoron but hang with me for now.

My statement was not nuanced.  I learned that from recently reading the following draft article:  Kristin E. Hickman and Aaron Nielson, Narrowing Chevron’s Domain (February 28, 2020). 70 Duke Law Journal (2021, Forthcoming) (SSRN here) which focused my attention on SEC v. Chenery Corp., 332 U.S. 194 (1947) (often referred to as Chenery II), here.  Professors Hickman and Nielson explain Chenery II as follows (pp. 13-14, here, footnotes omitted):

Agencies can deliberately create policy through either rulemaking or adjudication. This surprising reality was blessed by the Supreme Court in 1947, in a foundational case known as Chenery II. There, following the agency’s decision on remand from Chenery [I] (which held that nothing in the common law, which is all the agency had cited, prohibited the corporate [*14] transactions at issue), the Court allowed the Securities and Exchange Commission (“SEC”) to delineate what was and was not lawful for corporate reorganizations case-by-case through adjudication, rather than through rulemaking. The Court, over Justice Jackson’s dissent, explained that although rulemaking has important advantages and should be preferred, an agency may announce policy in a common-law fashion through adjudication. Thus, the Court explained that there is “a very definite place for the case-by-case evolution of statutory standards. And the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.” The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.” And because adjudication is retroactive (indeed, that is a key dividing line between rulemaking and adjudication), it follows that agencies can make policy through adjudication, and policies so developed are then applied against individual parties based on past conduct. The Court has often reiterated this principle.

There is a lot to unpack there.  The framework that I use is the APA distinction between legislative rulemaking which generally must be prospective and interpretive rulemaking which generally may be retroactive to the date of the enactment of the ambiguous statutory text.  In my article, I develop that distinction, using tax examples–(i) consolidated return regulations for legislative rulemaking and (ii) the away from home sleep or rest regulation approved in  United States v. Correll, 389 U.S. 299 (1967), here, for interpretive rulemaking.  If we overlay that framework (at least by analogy) to the adjudication context, I submit that legislative rulemaking (or its equivalent by adjudication) must be by notice and comment regulation under the APA and that adjudication, with retroactive effect, can only be by interpretation of the existing ambiguous statutory text.

I don’t think that is the thrust of Professors Hickman and Nielson’s draft article, but there may be some semantical issues involved.  The key quote from above is: “The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.”  (bold-face supplied by JAT.) The semantics, using the APA categories, is that interpretive regulations may, in some non-APA sense, be “lawmaking” if given Chevron deference.  But, as I argue at length in my article, that is not the sense that the APA uses in distinguishing between legislative and interpretive rulemaking, with prospectivity required for legislative rulemaking and retroactivity allowed for interpretive rulemaking.

Guedes Cert Denial on Bump Stock as Machinegun, Justice Gorsuch's Cryptic Statement and My Digression (3/2/20; 3/5/20)

The Supreme Court this morning denied certiorari in Guedes v. Bureau of ATF, 920 F.3d 1, 7 (D.C. Cir. 2019), here, cert. den. 589 U.S. ___, ___ S. Ct. ___ (3/2/20), here.  Guedes is not a tax case, but a case involving the definition of "machinegun" (under the National Firearms Act, 26 U.S.C. 5845(b)), the statutory term with the definition adopted under interpretive authority granted in IRC § 7805(a), through § 7801(a)(2)(A) which delegates authority to the Code’s tax provisions governing firearms to the Attorney General and a parallel delegation to the Attorney General in the Gun Control Act (18 U.S.C. § 926(a)).  In adopting the new regulation defining the statutory word machinegun to include “bump stocks,” the Attorney General said that the definition was an interpretation, albeit a new one including bump stocks, of the governing statutory text–machingun and said that the definition was consistent with plain meaning of the text (Chevron Step One) but if not, then Chevron deference would apply (Chevron Step Two).  (There is nuance on the Chevron Step Two analysis, see the next paragraph.)  On appeal to the D.C. Circuit, the Government relied only on the plain meaning and did not rely upon Chevron deference.  (There is also nuance there, see the next paragraph.)

In this regard, Chevron deference is meaningful only at Step Two and then only if the agency adopted interpretation is not persuasive to the court but otherwise within the zone of reasonable interpretations.  See generally Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN: https://ssrn.com/abstract=3400489. In other words, if the statutory text is ambiguous at Step One and the court agrees with the agency reasonable interpretation at Step Two, there is no Chevron deference.  Chevron deference applies only at Step Two where the court’s interpretation is different than the agency’s reasonable interpretation and the court adopts, by deference (known as Chevron deference), the agency reasonable interpretation.  So, the government’s argument could prevail at either Chevron Step One (no ambiguity) or Chevron Step Two (ambiguity but agency definition is persuasive among reasonable interpretations).  (I develop the limited scope of Chevron deference in the article by positing five categories of statutory interpretation, see the article breakdown on the categories and relevance to Chevron, with only the Fifth Category relevant to Chevron beginning on p. 65, here; in this regard, others have noted Chevron's limited scope, e.g., Nicholas R. Bednar & Kristin E. Hickman, Chevron's Inevitability, 85 Geo. Wash. L. Rev. 1392, 1398 (2017) ("Rhetoric notwithstanding, Chevron alone does not truly drive the outcome in most of the cases in which courts apply it.").

Taking that as the background, the D.C. Circuit opinion is confusing, to say the least.  For a fuller discussion of Guedes, I refer readers to my article on p. 97, here.  For present purposes, the D.C. Circuit treated the regulations interpretation as a legislative rule and accorded it Chevron deference although neither party requested Chevron deference for the interpretation.  I have noted in my article that regulations interpretations of statutory text are interpretive rules, whether promulgated with notice and comment or not.  Moreover, if indeed the rule in question were legislative, then it is tested under Chevron only as to the scope of the authority delegated, otherwise the regulation is the law and not an interpretation of the law.  The law in Guedes is not the regulation, but the statutory term machinegun.

Baldwin Cert Denied with Justice Thomas' Rant on Chevron and My Rant on His Rant (2/24/20; 2/27/20)

Today, the Supreme Court denied the taxpayer’s petition for certiorari in Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), cert. denied (U.S. Feb. 24, 2020) (No. 19-402), here.  For my prior discussion of the issue see Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (Federal Tax Procedure Blog 10/30/19), here.

The issues presented in the cert petition were:

(1) Should Brand X be overruled?
(2) What, if any, deference should a federal agency’s statutory construction receive when it contradicts a court’s precedent and disregards traditional tools of statutory interpretation, such as the common-law presumption canon?

The petition limited its focus to Brand X deference permitting an agency to adopt an interpretation of an ambiguous statute, at least in some cases, inconsistent with a prior judicial interpretation.  See National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967, 984 (2005).

Justice Thomas, the author of Brand X, filed a dissent to the denial of certiorari.  His dissent is with the denial and is linked above.  Justice Thomas confesses that he was wrong in the Brand X opinion, saying:

Although I authored Brand X, “it is never too late to ‘surrende[r] former views to a better considered position.’” South Dakota v. Wayfair, Inc., 585 U. S. ___, ___ (2018) (THOMAS, J., concurring) (slip op., at 1) (quoting McGrath v. Kristensen, 340 U. S. 162, 178 (1950) (Jackson, J., concurring)). Brand X appears to be inconsistent with the Constitution, the Administrative Procedure Act (APA), and traditional tools of statutory 7interpretation. Because I would revisit Brand X, I respectfully dissent from the denial of certiorari.

Setting aside Justice Thomas' complaint about Brand X, Justice Thomas starts his dissent with skepticism about Chevron, the foundation for Brand X.  Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 844 (1984).  Justice Thomas asserts: “Chevron is in serious tension with the Constitution, the APA, and over 100 years of judicial decisions.”

In my opinion, Justice Thomas is wrong. I have written at length about the history of Chevron.  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN: https://ssrn.com/abstract=3400489. See particularly par. III.B. of the article, captioned “Deference to Agency Interpretations Before Chevron” and beginning on p. 68, here.

District Court Teaches Confusing Summary Judgment Lesson (2/19/20)

In United States v. Feldman, 2020 U.S. Dist. LEXIS 24162 (E.D. Mich 2/12/20), CL here (and docket entries here) in a collection suit, the Court denied the United States’ motion for summary judgment, starting the exegesis as follows (Slip Op. 1-2):

And the IRS says that every reasonable jury would agree with it and [*2]  so this Court should grant it summary judgment. But the Court believes that there is a genuine dispute over how much income Feldman received in 2001 and 2002, and thus a genuine dispute over whether the IRS has reasonably determined the amount of tax owed. Accordingly, as explained below, the Court will deny the IRS' motion for summary judgment.

The Court wanders around a bit in its discussion, and in the course of starting the wandering with the following comment (Slip Op.):

“Unfortunately, the parties in this case have put little effort into figuring out the proper summary-judgment burdens.”

So the Court sets about to instruct the parties.  Unfortunately, at least as I see it, the Court gets the analysis for the most significant issue wrong, in part because it does not understand the facts and the law of how stock transactions are reported in brokerage accounts.

I will try to summarize the key facts for purposes of this blog’s discussion. I note that I have not studied in detail the underlying submissions by the parties, but I spot checked a couple of the documents and incorporate them as background in this discussion.

I think the relevant facts are:

(i) Feldman did not file returns for 2001 and 2002;

(ii) the IRS assessed tax for those years based, according to the court, on a list of “seven payments from brokerage firms to Feldman;” The brokerage firms issued Forms 1099-B for stock transactions in Feldman’s account(s).  On Forms 1099-B a brokerage (or other financial) firm lists sales proceeds for stock (or other financial assets) sold in the client’s account(s).  Apparently, the list referred to was the IRS computer generated list of the amounts the brokerage firm reported as sales proceeds on the Forms 1099-B issued to Feldman for transactions in his account. Basically, the transactions would have been sales of stock (or other financial assets) where the sales proceeds were deposited into the taxpayer’s account with the brokerage firm.

(iii) the brokerage firm did not distribute to Feldman all of the proceeds it received and reported on Forms 1099-B.  Rather, because Feldman had written bad checks to the brokerage firm, the brokerage firm reduced any amounts ultimately paid to the taxpayer by the amount of its claim for bad check amounts.  There may have been some other offsets as well.  So, in sum, the amounts reported on the Forms 1099-B would have exceeded the amounts the brokerage firm actually distributed to the Feldman.

The relevant facts may be illustrated in a simple example: (i) brokerage firm sells stock from taxpayer’s account for $1,000 and receives that amount into the taxpayer’s account with the brokerage firm; (ii) brokerage firm collects from that $1,000 an amount of $200 for a bad check (or any other amount the taxpayer owes the brokerage firm); (iii) brokerage firm pays the taxpayer the net of $800.  In these facts, the Form 1099-B reports $1,000 proceeds (payments received by the brokerage firm on sale) and does not report the actual cash payment to the taxpayer of $800.  On his tax return, the taxpayer’s gain should be reported as follows: (i) amount realized $1,000 proceeds; (ii) less the taxpayer’s basis in the stock sold (the example does not quantify the basis and, in the years involved, basis was not a reporting item on Form 1099-B); and (iii) producing the taxable gain on the sale of the stock.

GAO Report on Virtual Currency Guidance (2/13/20)

The Government Accountability Office (“GAO”) issued a report titled:  Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance (2/20), here.  The Report is addressed "to the Ranking Member, Committee on Ways and Means, House of Representatives.”  The ranking member is the minority ranking member, Kevin Brady (R.-TX).  (I suspect that all members of Congress have received complaints about the IRS initiatives against virtual currencies, so favored by crooks and tax cheats, but also suspect that Republican members are more sympathetic to the complaints from people whose real or hidden agenda is not to pay tax).

At any rate, the Report summarily describes virtual currencies, including cryptocurrencies such as Bitcoin, generally, estimates the size of the market, the regulation by agencies (such as CFTC, FinCEN and SEC), the tax treatment of virtual currency and the IRS’s compliance efforts for virtual currencies, including sharing of information with other agencies.

I focus here on what the Report says about IRS guidance for tax reporting requirements for virtual currency transactions.  The guidance includes principally Notice 2014-21 (including public comments), Revenue Ruling 2019-24 and Frequently Asked Questions (FAQs) released in October 2019.  The principal guidance is Notice 2014-21 which the GAO Report describes as follows (p. 8 n. 15):

According to IRS Notice 2014-21, a taxpayer generally realizes a capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. Capital gains may be subject to lower tax rates than ordinary gains. Capital gains and losses are classified as long-term or short-term. Generally, if a taxpayer holds the asset for more than one year before disposing of it, the capital gain or loss is long-term. If a taxpayer holds it one year or less, the capital gain or loss is short-term. For more information, see IRS Publication 544, Sales and Other Dispositions of Assets.

The Report has a section titled: “IRS’s 2019 Virtual Currency Guidance Answers Some Taxpayer Concerns, but Presents Additional Challenges for Taxpayers.”  See pp. 18-20.  This sections reports concerns and complaints about the published guidance.

The Report then has a section titled: “IRS Did Not Include That the 2019 FAQs Are Not Legally Binding.” See pp. 20-21.  Since I focus the rest of this blog to that portion of the report, I will just excerpt it in full here (some footnotes omitted):

Altera Petition for Certiorari (2/12/20; 2/13/20)

Readers of this blog will know that the Altera drama has been the topic of many of my thoughts. See Altera Corp. v. Commissioner, 145 T.C. 91 (2015), rev’d 926 F.3d 1061(9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019), cert. pending (2/10/20).  Just search on the word Altera and pull up all blog entries mentioning Altera.  And, if you followed the citation to the end, you see that Altera just filed a petition for certiorari.  That petition is here.

The petition states the questions presented as:

1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq.  

2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 

3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that the agency has offered a “permissible” interpretation of the statute in litigation.

I think there is less to those issues than presented by Altera in it’s petition.  I will think about it more and present my ideas when I have time to think them through and articulate them.  At the inception o my thought process, I do think that there are some conceptual threshold issues that the petition just assumes away.  I will deal with that in later comments.

In the meantime, I do note that Chevron was a key basis for the Ninth Circuit decision, the petition does not make a frontal assault the concept of Chevron deference.  Rather, based on the questions presented, Altera attacks on procedural regularity grounds (even if the interpretation in the regulation is a reasonable interpretation of the statute, the regulation failed procedural regularity).

Added 2/13/20 11:00 am: