Second Circuit Affirms the Tax Court in Holding Limited Partners Must Really Be Limited Partners (9/17/26)

In Soroban Capital Partners LP v. Commissioner, ___ F.4th ___ (2d Cir. 9/17/26), CA2 here, CL here, and GS [to come], the Panel (Judges Calebresi, Chin , and Merriam, with opinion by Chin) affirmed the Tax Court’s decision holding that persons nominated as limited partners who exercised managerial control did not qualify for the limited partner exception to the Medicare tax. Specifically, the opinion states its holding (Slip Op. 30):

We hold that "limited partner," as used in § 1402(a)(13), means a partner who, in addition to having limited liability, does not run, manage, or control the partnership's business.10 We arrive at this conclusion based on three sources that provide guidance as to the meaning of the term as used here: (1) the text of the statute and its ordinary meaning in 1977, when § 1402(a)(13) was enacted; (2) the statute's surrounding text and structure; and (3) the statute's legislative history and historical context.

This is a major opinion simply because the scam it shoots down was so egregious. I don’t feel that I can add anything meaningful to the substantive opinion. To the extent readers may be interested in my opinion, I think it is correct. I will make some comments that, like many of my blogs, will address picky issues in the opinion.

JAT Comments:

Tax Court Deploys Interpretive Tools to Resolve Complex Transaction/Scheme to Exploit Statutory Glitch (9/17/26)

In Sysco Corp. v. Commissioner, T.C. Memo. 2026-84, TC here at # 108 dtd 9/14/26 & GS here, the Court rejects Sysco’s attempts to avoid the result of prior T.C. decisions resolving the issue in Sysco. Varian Medical Systems, Inc. & Subs. v. Commissioner (Varian I), 163 T.C. 76 (2024) (reviewed), and Varian Medical Systems, Inc. & Subs. v. Commissioner (Varian II), No. 8435- 23, 166 T.C. (Apr. 8, 2026).

In this blog, I do not address the substantive issue that the parties fussed about. Rather, I address the tools of statutory interpretation the Court claimed to deploy in resolving the interpretive issue.

My basic theory of statutory interpretation is that it is in many ways similar to factfinding—it is lawfinding. In factfinding, relevant evidence generally should be considered for what it is worth. See FRE 401 and 402. So, too, in statutory interpretation relevant evidence as to the meaning of the statutory text should be considered for what it is worth. My main beef in the current statutory interpretation milieu is the notion that interpreters should categorically reject legislative history (other than statutory history). 

Let’s walk through how the court deploys the tools of statutory interpretation:

1. the Court “begin[s] with the [statutory] text.” (*7.) I fully agree with that and cannot imagine anyone who would disagree. Indeed, on this point, I agree with Justice Kagan’s famous statement that “We’re all textualists now.)

2. Immediately after stating the obvious starting point (#1), the Court jumps into quicksand: “when the statute does not define a term, “we ask what that term’s ‘ordinary, contemporary, common meaning’ was when Congress enacted” the relevant text. The court correctly cites cases that do stand for the proposition and, I suppose, the proposition is correct, provided that there is more nuance. How does one determine the statutory term’s “ordinary, contemporary, common meaning” relevant to its meaning in a complex tax statute?

Tax Court on Murky Facts Affirms Deficiency on Net Amount Taxpayer Retained from Flow of Funds (9/15/26)

In Tunkl v. Commissioner, T.C. Memo. 2026-83, Tunkl was an art dealer for the wealthy (at least some of the wealthy). He managed to arrange a flow of funds from one other wealthy art dealer, initially to finance his acquisition for a particular painting but not actually used for the painting. The precise nature of that flow of funds is murky because people in such wealthy circles in art may not fully document flows of funds, but when the smoke cleared Tunkl ended up with $16.5 million net. The IRS determined a deficiency for tax on that amount. (I did not read closely enough to determine whether the deficiency asserted the tax to Tunkl directly or through his subchapter S corporation; the bottom-line is that the deficiency was Tunkl’s in either event.)

In getting past the murkiness in the facts, the Court concluded (*10).

          Finally, and most importantly, Mr. Tunkl has been permitted to keep the entire amount he received from Mr. Mnuchin. Mr. Tunkl repaid only $2.5 million of the total $44 million owed to Mr. Mnuchin. Pursuant to the Addendum, the $16.5 million owed from the Picasso painting deal was severed from the Note into its own smaller note. Mr. Tunkl has provided no evidence demonstrating that the $2.5 million was partial repayment of this smaller note. Therefore, Mr. Tunkl has failed to demonstrate that he was not permitted to keep the entire $16.5 million.

JAT Comments:

1. It seems to me that taxing the net benefit to Tunkl is the right answer. My only thought/concern was that, given the murkiness in the facts, it is at least possible that the income may not have arisen in 2018 the year for which the notice of deficiency was issued. I suppose, however, that if Tunkl had fought the timing battle, he may have still lost for the tax via the mitigation provisions of the Code, but possibly might have achieved an interest benefit if a later year were the proper year.

D.C. District Court Case Dismisses Refund Suit Where IRS Made an Allegedly Erroneous Refund and Transfers the Government's Erroneous Refund Suit to Another Venue (9/15/26)

In Fuentes v. United States (D. D.C. 9/4/26), CL here and GS here, Fuentes was a foreign resident with no U.S. residence at all relevant times. He brought a refund suit in the Western District of Texas. After finding proper venue in the D.C. District Court, the refund suit was moved to the D.C. District Court. At some point, the IRS refunded the tax that was the basis of the refund suit. The United States then moved by counterclaim to seek recovery of the refunds allegedly erroneously made. Fuentes then moved to dismiss his refund suit. The Government moved to transfer the erroneous refund suit to the Western District of Texas finding that, although the Government could have brought the erroneous in other venues, the Western District of Texas was the most appropriate venue (see point # 4 below).

I point out some aspects of the opinion I found interesting:

1. The amount sought in the refund suit was for penalties paid after the IRS assessed the Form 3520 penalties.

2. As noted, the IRS refunded the tax in issue. The Government argued that the reason the refund was erroneous is that the refund case had been referred to DOJ which should have legally prohibited the IRS from making the refund. This is because the original referral gave DOJ exclusive authority to settle the liability. § 7122(a). Of course, the issue of whether the refund was erroneous will be litigated in the transferred venue.

3. Fuentes argued that the IRS, presumably intentionally, made the refund and its determination should mean that the refund and its predicate abatement were not erroneous, invoking the standard notion that the client (DOJ’s client, the IRS) should control this type of decision and that the IRS’s decision should be given collateral estoppel effect making the refund and abatement issue “prudentially moot.” (Slip Op. 7 & 14-15.) The Court rejected those arguments.

ChatGPT on Picking Evidence in Statutory (and Constitutional) Interpretation (9/13/26)

Today, I was reworking the part of my 2027 Working Draft for my Federal Tax Procedure Editions on the problem of cherry-picking or selecting evidence used in constitutional and statutory interpretation. The issue is presented anecdotally by conservative judges trotting out Judge Leventhal’s famous remark that using legislative history is like looking over the crowd and picking your friends. There is a similar phenomenon with so-called “law office history” deployed to support arguments made by advocates and judges in their opinions. Even broader, the same phenomenon is presented for the entire body of law that advocates and judges deploy—such as cases, scholarly treatises, law review articles, etc. The risk is always present that we as lawyers (or judges) pick our friends rather than make a neutral assessment of the evidence.

Continuing my experimentation with AI, I asked ChatGPT Plus about the issue and got what I think are pretty good responses. I presented the issue in two prompts (the second asking for more than the first) noted below in red. The bold face was from the original responses. I checked the citations to the two Supreme Court cases and they are correct (i.e., no hallucinations). I will use the responses in re-working my discussion in the Federal Tax Procedure Editions (not verbatim but to inspire how I state the concepts in my own words which I hope are at least as good as ChatGPT's).

As an introduction, I use the term "law office history." That term commonly describes the phenomenon of lawyers and judges evaluating history as a process of cherry-picking to support arguments. Of course, selecting the evidence is what we all do when making arguments or taking positions; lawyers do that in briefs and oral arguments; judges do that in opinions; we all do that in our daily discourse. Even when a person--say a judge--sees his or her duty to make an objective or fair assessment of the evidence, personal prejudices or preferences may influence the evidence used. I wanted to explore what that may mean.

One caveat: The same phenomenon occurs in factfinding where a judge selects from a body of factual evidence the evidence that he or she finds persuasive to determine facts relevant to the outcome of the case. I don't think factfinding is materially different from lawfinding--selecting among the relevant evidence to reach the outcome.

Prompt #1

Please write a short discussion of the features of "law office history" and "legislative history" that permit a judge or lawyer to cherry pick (or as one judge called it to look over a crowd and pick your friends).

Response to Prompt #1

Here is a short version in a law-review style that emphasizes the structural similarity between the two problems:

Law-Office History and Legislative History

Both “law-office history” and legislative history present a similar danger: they often supply the interpreter with a large and heterogeneous body of material from which supporting evidence can be selected without any obvious neutral rule for determining what evidence should receive the greatest weight. Alfred H. Kelly coined “law-office history” to describe the lawyerly practice of selecting historical data favorable to a position while failing adequately to confront contrary evidence or evaluate its significance in historical context. The problem is partly inherent in advocacy. The historical record is usually extensive, incomplete, and capable of supporting competing narratives; choices must be made about the relevant period, the appropriate level of generality, which practices are representative, and which sources deserve weight. Those choices can permit the advocate—or judge—to begin with a desired conclusion and assemble a plausible historical narrative supporting it.

Legislative history presents much the same problem, perhaps in an even more concentrated form. A statute may generate committee reports, sponsor statements, floor debates, hearing testimony, rejected amendments, conference materials, and statements by legislators who supported or opposed the final bill. These materials may point in different directions, and statements by particular legislators do not necessarily represent the understanding of the legislative body that enacted the statute. Moreover, participants aware that courts consult legislative history may have incentives to place favorable statements in the record. The resulting abundance of potentially conflicting material makes selective quotation unusually easy. The Supreme Court has accordingly repeated Judge Harold Leventhal's famous description of using legislative history as akin to “looking over a crowd and picking out your friends.” Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546, 568 (2005).

Judge Holmes Decides on Burden of Proof (Persuasion) (9/3/26)

In Risan v. Commissioner, T.C. Memo. 2026-78, TC here at #93, TN here, and GS here [to come], Judge Holmes decided significant factual issues on burden of proof. The key reason I thought this case interesting is that Tax Court Judges often, after noising about burden of proof, will just hold that, in effect, burden of proof is irrelevant to the outcome because the Judge in the particular case has resolved those factual issues by a preponderance of the evidence. That is simply to say that, in the normal case where the preponderance of the evidence standard applies, burden of proof is relevant only if the Judge is in factual equipoise unable to determine whether or not a critical fact is more likely than not. In that state of equipoise, the party with the burden of persuasion loses.

Judge Holmes sets up the discussion at the beginning of the Opinion section (starting at *17, footnote omitted):

          We begin with a number of issues for which Mr. Risan presented no evidence or argument, or about which he included only an underdeveloped argument in his brief. Taxpayers usually bear the burden of proof in cases before us. Rule 142(a). The Code does sometimes shift this burden to the Commissioner. See § 7491(a). But when neither party presented evidence in these cases, we simply find that Mr. Risan did not comply with the Code’s recordkeeping requirements and did not cooperate with the Commissioner’s reasonable requests for information. This means that, for a great many issues, we find against Mr. Risan and for the Commissioner.

 Other JAT comments:

1. Judge Holmes also addressed the statute of limitations. Judge Holmes found (i) there was a 25% omission in the years involved invoking the six-year statute of limitations and (ii) for some of the years during the six-year period, the taxpayer timely signed consents to extend. Judge Holmes said that, although the taxpayer testified that he did not sign the forms, visual review of the forms permitted him to “find it more likely than not that he did sign them.” (*19.) Although Judge Holmes did not say it directly, that finding means that it is more like than not that the taxpayer testified untruthfully (whether or not the taxpayer intended to deceive is a different issue).

Townsend ABA Tax Lawyer Article Titled Loper Bright Flip Flops on Chevron Deference: A Tax Lawyer's Perspective (8/28/26)

I have posted to SSRN my recent article in the ABA Tax Lawyer: John A. Townsend, Loper Bright Flip Flops on Chevron Deference: A Tax Lawyer's Perspective, 79 Tax Law. 323 (2026). The SSRN citation and link is: Townsend, John A, Loper Bright Flip Flops on Chevron Deference: A Tax Lawyer's Perspective (January 01, 2026), SSRN at: https://ssrn.com/abstract=7360440 [Note: I have slightly changed the SSRN "suggested citation" to eliminate duplicating my name (don't know why that happens) and shortened the reference to SSRN.]

One of the themes I develop in the article is that Chevron was not about deferring to an agency interpretation that was not the best interpretation. Rather, Chevron was about “deferring” to an agency interpretation when the court found the statute ambiguous, meaning that the court was in equipoise as to the best interpretation. Loper Bright flogged the false notion that Chevron permitted/required courts to defer to the agency "not best" interpretation over the competing "best" interpretation. Courts, particularly judges of Federalist Society bent, also flog that false notion ad nauseum. E.g., yesterday, I read Piedra v. Blanche, ___ F.4^th ___ (4^th Cir. 8/24/26), CA4 here and GS here, which starts off (Slip Op. 3):

For decades, Chevron deference restricted courts from exercising their duty "to say what the law is." Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803). Newly freed from that restraint, courts now exercise their independent judgment about the best meaning of statutes.

To repeat, Chevron required courts to apply the best interpretation at Step One; if, after rigorous interpretation (Chevron footnote 9) the statute was still ambiguous, only then did courts “default” in equipoise to the agency interpretation. But that default was not applying the "not best" interpretation. Of course, I flog my criticism of Loper Bright in the article, pp. 339-341.

So, after Loper Bright, the problem for which Chevron applied a default rule still exists when a court, being honest with itself, cannot determine whether the agency interpretation or the (or any) competing interpretation is the best—a state of ambiguity (or equipoise). In the article, I develop this issue in a footnote (p. 346 n. 87 emphasis supplied):

CFC Adopts U.S. Interpretation of U.S.-Canada Tax Treaty Over Canadian Interpretation (8/27/26)

In The South Saskatchewan Comm. Fdn., Inc. v. United States, ___ Fed. Cl. ___  (8/25/26) (“South Saskatchewan”), CFC here, TN here, and GS here [to come], the Court rejected a Canadian charity’s attempt to apply an exemption in the United States-Canada Convention with Respect to Taxes on Income and on Capital (including a key Protocol). I found South Saskatchewan interesting because of the CFC’s application of interpretive techniques to resolve the treaty dispute between the parties in a situation where the Canadian tax authority and the U.S. did not agree on the interpretation as applied to the facts.

South Saskatchewan starts with the goal of treaty interpretation being to effectuate the shared understanding of the parties to the treaty. This is the contract model of interpretation. But, in this case, Canada’s understanding of the treaty is not the U.S.’s understanding. I infer that, assuming Canada’s current interpretation was taken in good faith, Canada did not have a shared understanding with the U.S. What does a court do when it cannot discern a shared understanding?

South Saskatchewan says (Slip Op. 6) after citing Loper Bright:

The meaning of both U.S. and Canadian laws, as well as that of the Tax Treaty, is susceptible to being construed, interpreted, and applied using traditional methods of statutory interpretation.

I am not sure how traditional methods of statutory interpretation flange with the goal of interpreting treaties to apply the shared understanding of the parties. Since, for U.S. purposes, the treaty is the law of the land and the treaty is text, I guess it is close enough to written law (statutes) that the interpretive model for statutes can apply. Maybe.

The Court adopts the U.S. interpretation based on a textualist reading of the Treaty Protocol. The Court finds helpful “extrinsic evidence” in the “legislative history” [caveat, legislative history is my term not the Court’s] of the Senate’s ratification of the Protocol. This legislative history is (i) the Treasury Technical Explanation accompanying the submission of the Protocol to the Senate for approval and (ii) the Joint Committee on Taxation (“JCT”) Report which “reflects the contemporaneous understanding of the Senate that ratified the Fifth Protocol.” (Slip Op. 9.) Both documents informed the Senate of the meaning of the Protocol.

Recommended Article on Constitutional Interpretation Applicable to Statutory Interpretation and Loper Bright (8/22/26)

Yesterday and today, I have been thinking about an article that implicates some of the interpretive issues I have been writing on post-Loper Bright. The article is: John O. McGinnis & Mike Rappaport, Originalism’s Better Meaning (Law & Liberty 8/13/26), here. Although developed in the context of constitutional interpretation and originalism, the article makes some points that seem to me applicable to statutory interpretation more broadly than the originalism spin.

First, the authors define the difference between interpretation and construction:

Interpretation is the process of determining the meaning of a constitutional provision. Construction begins only when that meaning is deemed indeterminate—that is, when it is thought to run out—and the decision must be made on grounds other than the provision’s original meaning.

I would restate that for statutory interpretation as follows (with changes in bold):

Statutory interpretation is the process of determining the meaning of a statutory provision. Statutory construction begins only when that meaning is deemed indeterminate—that is, when it is thought to run out—and the decision must be made on grounds other than the provision’s meaning as determined by statutory interpretation.

In these constructs, Chevron deference was construction rather than interpretation because it applied only when the meaning could not be determined and applied as a default rule to resolve cases before the courts without regard to the indeterminate meaning of the statute.

One interesting construct the authors deploy in the article is the “51-49 rule” which permits the “best” interpretation to be determined by the preponderance of the evidence standard (applying fact-finding concepts to a state of statutory interpretive ambiguity). In this construct, interpretation of a constitution (or statute) requires a confidence level for an interpretation to be at least 51%. The construction zone is between 50.9999% and 49.0001% where some default rule is required to resolve cases.

(Caveat: I don’t think that is a realistic range in statutory interpretation (or fact-finding for that matter); can anyone meaningfully distinguish between an interpretation that is 49.9% and one that is 50.1%?; but let’s just accept that construct for now; for my discussion of such ranges in valuation context, see John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020).)

First Circuit Holds that the Time Period to File Petition in § 6213(a) is NonJurisdictional But Mandatory, Hence No Equitable Tolling (8/19/26; 8/20/26)

In Kyick Holdings, LLC v. Commissioner, ___ F.4th ___ (1st Cir. 2026), CA1 here and GS here [to come], the Court held that

1. The IRS properly sent the notice to the taxpayer’s last known address. This is the less exciting holding, but I will address it below in my Comment #2.

2. Section 6213(a)’s timely filing requirements are not jurisdictional. (Caution on this label “jurisdictional” though, as I note below.)

3. As a matter of statutory interpretation § 6213(a)’s timely filing requirements are “mandatory,” meaning that the periods to file the petition is not subject to equitable tolling. This latter holding has the same practical effect as would have applied if the Court had agreed with the consensus holdings in the Courts of Appeals that § 6213(a)’s time periods were jurisdictional.

The key holdings for purposes of this blog are ## 2 & 3, although they are not outcome-determinative in terms of the holdings of other Circuit Courts of Appeals. That is because regardless of whether a Court bases its outcome on jurisdiction or a mandatory analysis, the result is the same in denying the availability of equitable tolling.

For that reason, I worry whether courts futzing around with “jurisdiction” in this context is meaningful. Courts could just go to the heart of the disposition that the time periods are mandatory. In many cases, courts are just writing at length about jurisdiction which has some esoterica when mandatory should do.

Added 8/20/26 3:25pm: For a different outcome see Maniktala v. Commissioner, ___ F.4th ___ (8th Cir. 8/11/26), CA8 here and GS here, allowing equitable estoppel for time deadlines in § 6213(a) based on holdings that (i) § 6213(a) is nonjurisdictional (consistent with Kyick) but (ii) the § 6213(a) deadlines are not mandatory (inconsistent with Kyick). It appears that there is a clear conflict in the Circuits on the statutory interpretation issue which is often a substantial basis for granting a petition for writ of certorari. I should note that, in effect, Maniktala seems to be based on the Eighth Circuit's application of the default rule allowing equitable estoppel in a case where the court cannot determine the statutory meaning (in interpretive equipoise), whereas Kyick is based on an interpretation of the statute where it could it could determine the statutory meaning. Although an agency interpretation that might have qualified for Chevron deference (i.e., a Treasury interpretive regulation) is not in issue, this split does highlight one of the central fanciful notions of Loper Bright that courts can always interpret statutes to reach the best interpretation without the need for default rules for decision.

Other JAT Comments: