Wednesday, September 22, 2021

IRS Enjoined from Enforcing Tax Shelter Notice Requirement for Material Advisor for Microcaptive Transactions (9/22/21)

In CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, the Court held that the Anti-Injunction Act (§ 7421(a)) did not preclude a contest by a “material advisor” of IRS  Notice 2016–66 requirement to report micro-captive transactions.  See Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.  Accordingly, the Supreme Court remanded the case to the Court of Appeals which remanded it to the district court. 

In CIC Services, LLC v. IRS (E.D. Tenn. No. 3:17-cv-110 9/21/21), CL here, the district court held that the Notice was a legislative rule that required promulgation by notice and comment regulation.  Based on that holding, the court found the requirements for an injunction were met and that the injunction should be applied with respect to CIC.  I suppose that means, practically, that the IRS cannot impose penalties for any failure by CIC to comply with the requirements of the Notice  (Note, however, that the opinion says that “CIC also notes that, to date, it has complied with the Notice’s requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year.”).

This is a major win for the tax shelter industry but probably not the last word in this saga.

Without getting into the nitty-gritty on the application of the APA’s legislative/interpretive distinction (upon which turns the notice and comment regulation requirement), I suppose that the going forward solution for the IRS would be to use the immediate effect Temporary Regulation, with "good cause statement," process with contemporaneous Proposed Regulations for the notice and comment process.  The APA requirement for good cause is “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B).  Potentially abusive tax shelters should be sufficient for immediate effect under this provision. 

I am not sure that the court correctly determined that the Notice was a legislative rule requiring notice and comment (or good cause statement).  Because the court made the legislative determination with sound bites rather than detailed analysis, I won’t address that here.  I suppose the Government will appeal to the Sixth Circuit on an expedited basis because of the injunction.

The CourtListener (CL) docket entries for the case are here.

JAT Comments (added 9/22/21 2:30pm:

Monday, September 20, 2021

Revised Federal Tax Procedure (2021 Student Ed.) with Links (9/20/21)

I have posted a revised version of Federal Tax Procedure (2021 Student Ed.) on SSRN, here  The principal revision is to provide links to the cases cited, the Code sections cited, and links for the table of contents and cross references in the text, so that it is more user-friendly for students.

I will not prepare a similar revision for the 2021 Practitioner Edition, but will incorporate that feature in both 2022 Editions which I expect to publish in early August 2022.

Saturday, September 18, 2021

Court Sustains Almost $350 Million Jeopardy Assessment Arising from Sham / Bullshit Tax Shelter (9/18/21)

In Kalkhoven v. United States, 2021 U.S. Dist. LEXIS 175844 (E.D. Cal. 9/15/21), CL here, the Court sustained the IRS’s jeopardy assessment against Kevin Kalkhoven, a venture capitalist (Wikipedia, here).   Section 6861 allows the IRS to assess tax, such as income tax, which is otherwise subject to the prohibition on assessment in § 6213(a).  Students will recall that § 6213(a), the central feature of the deficiency notice preassessment litigation system, prohibits assessment before the issuance of a notice of deficiency and, if the taxpayer petitions the Tax Court for redetermination, until the Tax Court decision becomes final.  The delay in assessment, particularly if a Tax Court petition is filed, can be substantial.  And, when the tax liability relates to a TEFRA partnership, as here, further delays are encountered if the partnership litigates as it did here.

Section 6861 allows a jeopardy assessment to permit immediate assessment where the IRS determines that the collection of the as yet unassessed tax is in jeopardy.  The IRS determined that collection of tax was in jeopardy because of the large amount of tax to be assessed in the future because of Kalkhoven’s investment in the Son-of-Boss sham (aka, in my words, bullshit) tax shelter in BCP Trading and Investments, LLC v. Commissioner, 991 F.3d 1253 (D.C. Cir. 2021).  He had also invested in another such shelter, Woodside Partners v. Commissioner, docket no. 5685-16 (expected to generate a $25 million tax for Kalkhoven).

As a result of expected tax liabilities from these “investments,” the IRS made jeopardy assessments, under § 6861, totaling almost $350 million  (Gov’t response, Dkt # 22, p. 1.)  The IRS followed the procedure in § 7429 for appropriate approvals.  Kalkhoven invoked his right for expedited internal review in Appeals and then, upon obtaining no relief, for expedited judicial review in the district court.  The Court rejected his claim to relief, thereby sustaining the IRS’s jeopardy assessment.  The opinion is short (12 pages), so I recommend it, particularly for tax procedure students.  

Sustaining the jeopardy assessment is not a determination that the taxpayer actually owes tax in the amount assessed; it is just a determination that, on the facts known to the IRS, it is reasonable to believe that tax is due and collection is in jeopardy.  For more on the jeopardy assessment process, see the discussion on my 2021 Federal Tax Procedure Book (Practitioner Edition), here.

For further background, readers might want to review the docket entries in the case (CourtListener here, which permits some of the key documents to be viewed or downloaded).


Wednesday, September 8, 2021

On Complexity and Algorithms in Tax Administration (9/8/21)

The Procedurally Taxing Blog has a good post this morning, Bob Probasco (Guest Blogger), Complications from Extensions and Unprocessible Returns (Procedurally Taxing Blog 9/8/21), here.  It delves into the interaction of  (i) the Beard test for a valid return (Beard v. Commissioner, 82 T.C. 766 (1984), affd. 793 F.2d 139 (6th Cir. 1986)), (ii) the differences between a Beard-valid return and a processible return, and (iii) the arcana of interest computations based on those differences and the interaction of § 7508A disaster relief.  Bob does a great job weaving through that stuff, so I won’t even try to summarize it here (too great a risk of showing my ignorance).  Rather, I found Bob’s conclusion in this dance through tax arcana should resonate with students of the tax law and tax procedure:

Two Final Thoughts

            First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

            Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpretation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate. 

 JAT Comments:

Wednesday, September 1, 2021

“Deference” to Judicial Opinions (with War Story) (9/1/21)

Yesterday, I posted Draft Article on Interpretive Regulations and Chevron Deference (Federal Tax Procedure 8/31/21), here, where I solicited review assistance for a draft article.  One of the major topics of the article is judicial deference to agency interpretations, now called Chevron deference.  In the draft article, I differentiated between judicial deference to agency interpretations and judicial deference to opinions of other judges or courts.  I state in the article:  “Care must also be taken when using the term deference because it is employed in other contexts to serve a similar, but not the same, function whereby judges defer or give special respect to (i) other specialized courts for legal interpretations in their areas of expertise” or (ii) to particular judges.  I then offered this footnote with a “war story” (fn 279 in the current draft article):

The footnote (3 paragraphs) is:

   n279 A good example is deference or special respect sometimes accorded Tax Court interpretations in specialized areas of tax law, despite the usual interpretation of § 7482 to require de novo review.  See Amandeep S. Grewal, The Un-Precedented Tax Court, 101 Iowa L. Rev. 2065, 2096 (2016) (Tax Court “even sometimes receives special deference from the appellate courts,” collecting in footnote 211 examples of cases where. because of Tax Court’s special expertise, the courts of appeals give “respect” or even defer to Tax Court legal interpretations); Leandra Lederman, (Un)Appealing Deference to the Tax Court, 63 Duke L.J. 1833 (2014) (collecting authority related to deference or something like it to Tax Court review and concluding that courts of appeals should give de novo review to Tax Court legal interpretations without deference); and Andre L. Smith, Deferential Review of the United States Tax Court: The Chevron Doctrine, 37 Va. Tax Rev. 75 (2017) (arguing for Chevron deference or something like it for Tax Court legal interpretations).

            Another example from personal experience that intersected with then Judge Stevens who later, as Justice Stevens, authored the Chevron opinion.  While with the Department of Justice Tax Division Appellate Section, I handled the appeal in Standard Oil Co. (Indiana) v. Commissioner, 465 F.2d 246 (7th Cir. 1972).  The issue involved an esoteric oil and gas tax concept termed “economic interest.”  Judge Stevens said in the opinion (p. 251, n. 15):  “We give special deference to the views of the Fifth Circuit which has considered the issue on several occasions.” I think that there was an understanding at the time such as Judge Stevens articulated that the Fifth Circuit had special expertise in the area of oil and gas taxation deserving of what he called deference.  I am not suggesting that then Judge Stevens meant deference in exactly the way he later deployed the term deference in Chevron or courts used the term deference to agency interpretations pre- and post-Chevron, but I do think Judge Stevens meant something stronger than Skidmore-type deference (or persuasion).  On what Skidmore means, if anything, see p. 75, n. 307.).

            Yet other examples are where the Supreme Court or other courts give some special consideration, even “hints of deference,” given a lower court’s or even a specific judge’s expertise.  Aaron-Andrew P. Bruhl, Following Lower-Court Precedent, 81 U. Chi. L. Rev. 851, 868-869 (2014).

Other Comments (Personal War Story Off-Topic):

Old Lawyer; New Trick (9/1/21)

The old saw is that you can’t teach an old dog new tricks.  Extending that saying to lawyers (distinguishable from dogs in the lovability category), you can’t teach old lawyers new tricks. 

I am an old lawyer and am happy to say that I learned a new trick that I will implement in my publications in the future (most importantly, the 2022 Editions of the Federal Tax Procedure Book to be published in August 2022).  The new trick is to automatically generate in my word processing documents (WordPerfect) links to the Table of Contents items (permitting the reader to jump from the Table of Contents to the item) and cross-reference items (also permitting the reader to jump to the cross-referenced page and footnote).  Those links not only show up in the WordPerfect document but, when WP’s print to pdf function is used, are available in the pdf document as well.

I don’t know how long that capability has been in WP, but I just found it. So, old dog, new trick.  I will put that functionality in the 2021 Federal Tax Procedure Book (Student Edition) and put a revised version on SSRN.  When I do that, I will also provide links to Cornell’s Legal Information Institute Code Sections and to some of the key cases (on Google Scholar).   That will take some time to check to make the links where necessary and check them.  When I get that done, I will post a blog entry.  I hope I can get that done by the end of next week.

 I will not do that for the 2021 Practitioner Edition but will have the links in the 2022 Editions.

Tuesday, August 31, 2021

Draft Article on Interpretive Regulations and Chevron Deference (8/31/21)

About two years ago, I posted on SSRN here an article titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  I posted one revision in August 2020.  I am now on my second and last revision.  I have substantially revised the content, for, I think, the better.  Before posting that new revision, however, I solicit and would welcome comments on the article from those willing to undertake the adventure.  Any reader willing to do so should please email me at for a pdf version of the draft article.  (The pdf version has links to help get around the pdf document (cross-references, etc.) and even to certain key documents on the web (such as the Attorney General’s Manual on the APA in 1947)).

The subject matter generally is Professor Kristin Hickman’s claim that APA category of interpretive tax regulations no longer exists.  The relevant APA categories are legislative or interpretive.  Professor Hickman's claim is that all tax notice and comment regulations are legislative rather than interpretive.  Since tax is not exceptional, that claim means that interpretive regulations no longer exist in the APA universe outside tax.  The article contests Professor Hickman’s claim.  The article deals with general administrative law and APA concepts but focuses on the tax setting for regulations that have traditionally been considered interpretive.  The article deals also with Chevron deference.

The article is 113 pages (excluding opening pages and table of contents) with 457 footnotes.  (The devil is in the footnotes, so to speak.)  I attach a copy of the cover page and table of contents here to offer an idea of the scope of the article.

Of course, any help that is offered will be acknowledged with the permission of the commenter.

Finally, for what it is worth, I did the MS Word reading ease check to test my draft article against some others (arbitrarily chosen).  Here are the results I got:

Saturday, August 28, 2021

Chevron and Interpreting Through Agency Adjudications (8/28/21; 9/3/21)

I am updating an article I wrote earlier and realize that the working draft has some digressions in the footnotes are best eliminated from that article.  However, some of those digressions are, I think, worthy of being recorded somewhere, so I will post them as blog entries.

 The context for the digression was the statement in the body of the draft update to the article that, beyond interpreting in rulemaking, agencies interpret in adjudicatory proceedings.  The interpretation process in agency rulemaking is much the same as for adjudicatory proceedings.  They both can involve interpretation of ambiguous statutory text within the scope of the ambiguity.  Courts test those interpretations in either context for reasonableness and overturn them if the interpretations are not reasonable.  In the agency rulemaking process, that review is under the Chevron Framework.  So too, courts test reasonableness in agency adjudicatory proceedings under the Chevron framework.  Thus, in both types of interpretation—rulemaking and adjudication—the same test applies as Chevron is currently applied.

In Kristin E. Hickman and Aaron Nielson, Narrowing Chevron's Domain, 70 Duke L. J. 931 (2021), the authors argue for constricting Chevron to apply only in rulemaking and not in adjudication.  A key component of the argument is that through agency adjudicatory interpretations, agencies are legislating rather than interpreting.  Professor Hickman makes the same argument for interpretations in regulations (such as Temporary and Final Treasury Regulations) which may have an effective date before the Final Regulations after Notice and Comment are issued.  My article critiques the latter claim.  But I want to address the claim in the adjudication context because, in my opinion, agencies do not engage in legislative rulemaking in adjudications.  That is a point I address in text and footnotes that I have deleted from the article.

So here is my digression now deleted from the article.  I attach a pdf of the article with the footnotes here.

            One other predicate matter.  Besides interpreting ambiguous statutory text by rulemaking, agencies can interpret ambiguous statutory text in adjudicatory proceedings.n1  For example, the Board of Immigration Appeals ("BIA"), a Department of Justice adjudicatory body, is "the highest administrative body for interpreting and applying immigration laws." n2  By delegation from the Attorney General, n3 the BIA resolves "appeals from certain decisions rendered by Immigration Judges and by district directors of the Department of Homeland Security (DHS) in a wide variety of proceedings in which the Government of the United States is one party and the other party is an alien, a citizen, or a business firm." n4

             This adjudicatory administrative process functions like a court proceeding, resolving disputes between parties by interpreting and applying the law.n5 Although not rulemaking, adjudicating presents the legislative/interpretive distinction; if, in adjudications, agencies were to attempt to create law outside the interpretive space allowed by the ambiguous text, the agency would be improperly legislating which requires legislative rulemaking with Notice and Comment and Prospectivity.n6  I recognize that some authorities assert that adjudications interpretations can be legislative in character and on that basis question retroactive effect.n7 I disagree, but need not address the issue because this article deals with legislative rulemaking via the Notice and Comment process as to which the law is relatively clear.


Tuesday, August 24, 2021

Musing on Citation of Obvious Propositions and Footnotes (8/24/21)

I am working on a legal article tonight.  The issue I am concerned with is whether I need to support everything I say with some citation, usually in a footnote.

In the conventions of legal scholarship, almost every point we make in a brief must have a citation, often in footnotes.  Really?

When I was at DOJ Tax Appellate, I suggested (probably in a bullshit session) that we have a convention to use a citation which I call “O.P.” which stood for obvious proposition.  Why should we have to cite something for the observations that are obvious? For example, if we have to say that the sun rises in the East, do we really have to cite something for the proposition?  Could we not just say:  "The sun rises in the East.  O.P."?

My suggestion was not formally presented or formally rejected by the powers that be in the Appellate Section.  

In some sense, the concept may be implemented by some scholars and judges in writing.  They just state the proposition and move on.  Nevertheless, in my writings, I continue to struggle with the issue of whether I need to cite authority for such obvious propositions.

My problem, since I am a prolific footnote writer (aka abuser), is that, if I have to cite such authority, I would do so in a footnote.  As we all know from reading footnotes (particularly my footnotes), footnotes are terrible temptations to wander and distract.

Now, what does this have to do with Federal Tax Procedure?  Not much except to say that I have some 4600 footnotes in my Federal Tax Procedure (2021 Practitioner Ed.).  Some of those footnotes, perhaps many, deal with obvious propositions that just logically extend from the information in the text.  I do that because I think that more specific citation than O.P. might be helpful to practitioners even though, in many cases, the proposition is obvious from the discussion in the text.  (I don't have a citation for that last statement.)

Other Resources for Tax Procedure (8/24/21)

I recently advised that I have made available on SSRN, the 2021 editions of my Federal Tax Procedure Book.  2021 Federal Tax Procedure Editions Now Available for Download on SSRN (Federal Tax Procedure Blog 8/8/21), here.  I post here some other resources that are available for persons interested in federal tax procedure.

The definitive work is Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters), here (Disclosure, I am the principal author of Chapter 12, titled Criminal Penalties and the Investigation Function).  I assume that most persons interested in tax procedure are aware of this resource, often referred to as just Saltzman (with no disrespect for Les Book who now manages and contributes to the resource).

The American Bar Association Tax Section offers two books that readers may find useful, one a general book on tax procedure and the other a specialized book on Tax Court litigation.

  • Effectively Representing Your Client Before the IRS, 8th Edition, Edited by Christine S Speidel and Patrick W Thomas, here.  The Table of Contents is here.
  • Litigating a Case in Tax Court, By Sean Murphy Akins, Kandyce Lyndsey Korotky, and David M Sams, here.  This book is Chapter 7 of Effectively Representing Your Client Before the IRS.  The book is accompanied by a routinely updated website that provides many sample pleadings and related documents. The Table of Contents for the book is here; an excerpt from the book is here. 

I have added the two ABA Books to the Federal Tax Procedure Links in the right-hand column of the blog.