Friday, September 13, 2019

Does Failure to Assert Graev 6751(b) Issue in Claim for Refund Foreclose Asserting in Refund Suit? (9/13/19)

For some reasons, although I had this case in my database, I had not reported on it.  Ginsburg v. United States, 123 A.F.T.R.2d 2019-553 (M.D. Fla. 3/11/2019), here, on appeal to the Eleventh Circuit (No. 19-11836-J).  The Procedurally Taxing Blog has a good write up, so I won't re-do the ground covered there.  See Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty (Procedurally Taxing Blog 5/6/19).  I do, however, offer some musings.

The issue relates to the requirement that the IRS meet a production burden under § 7491(c) with respect to the written manager approval under § 6751(b).  The issue is sometimes referred to as the Graev issue because of the cases that first prominently raised the issue is a very public way in the first opinion in Graev v. Commissioner, 147 T.C. 460 (2016).  Although the issue was rejected in that opinion, it was later reversed in Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion), based on Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). There has been a lot of litigation about the Graev issue, usually in the Tax Court.  Sometimes, where the IRS can show the proper written approval but had not, consistent with prior Tax Court precedent, introduced the evidence at trial, the Tax Court will permit the IRS to open the record to introduce the approval, and that ends that.  Sometimes the Tax Court will not open the record and, because the IRS had the production burden it did not meet, that ends that as well.

The setting here for the issue is a refund claim.  We all know the general rule that the taxpayer must state the grounds for entitlement to a refund in the refund claim and failure to do so precludes the taxpayer from asserting the grounds in an ensuing refund suit.  Ginsburg did not include the Graev issue in his claim for refund.  The timing of the claim for refund with respect to the Graev issue timeline is not clear from the district court opinion, but I infer that the claim for refund was made and denied before the Chai decision which started the taxpayer wins on the Graev issue.  It might be helpful to look at the time line:

Graev v. Commissioner, 147 T.C. 460 (2016) (holding that the relevant § 6751(b) date is the assessment date not the assertion of the penalties in the notice of deficiency or some predicate act)
IRS denies Ginsburg claim for refund which did not raise the Graev issue.
Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (holding that the Tax Court was wrong in Graev and that the written approval must exist prior to the notice of deficiency or even some predicate action)
Graev . Commissioner, 149 T.C. 485 (2017) (Supplemental Opinion, reviewed, adopting Chai).

Friday, August 30, 2019

Altera Petition for Rehearing and DOJ Tax Response in opposition in Altera Case (8/31/19)

I previously discussed the decision in Altera Corp. & Subsidiaries v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), here, where the reconstituted Ninth Circuit panel held that the taxpayer must include stock option costs in its qualified cost sharing arrangement ("QCSA") calculations of costs.  See Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19; 7/2/19), here.

Altera filed a petition for rehearing en banc.  See Steve Dixon, Petition for Rehearing En Banc Filed in Altera (Miller & Chevalier Tax Appellate Blog 7/24/19), here (which has a link to obtain a copy of the petition).  As in the panel consideration, several amici curiae have submitted briefs.  The Court ordered the Government to respond, and DOJ Tax has now filed its response opposing rehearing en banc.  See DOJ Tax brief in opposition, here.

I do not link the amicus briefs which, I suppose, may not be all in yet.  I have not yet read them and, if I do, and think any are significant I will add to this blog entry.

The Government's Response Brief is quite good, in my opinion.  It clearly and succinctly steps through the bases touched in the majority panel opinion.  (See my blog above and, of course, the opinion linked above).  Basically, in summary:

1.  Applying the Chevron Framework (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), here), the regulation requiring inclusion of stock option costs is a reasonable interpretation under Chevron's Step Two within the scope of the statutory ambiguity getting the issue past Step One.

2.  The regulation was procedurally regular under the State Farm test.  Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm, 463 U.S. 29, 41-45 (1983), here. The State Farm test is based on 5 USC 706(c)(2)(A), here, which, surprisingly, DOJ Tax does not cite in its Response.

That's it folks.  Except for the commotion in the case (prominent corporate taxpayer with lots of money at stake and other nonparty corporate taxpayers with lots of money at stake), lots of heat with some light (I think particularly in the majority panel opinion and the DOJ Response linked above, and the fact that the Tax Court in a unanimous reviewed opinion slipped off the rails), there does not appear to me to be enough real substance to the petition to warrant rehearing en banc or petition for certiorari in the case as it stands now.  Just my opinion (and nobody has paid me or would pay me to render it or cares that I have rendered it.)

Thursday, August 29, 2019

CIC Servs Petition for Rehearing En Banc Petition Denied with Hyperbolic Concurring and Dissenting Opinions (8/29/19; 8/31/19)

I have written earlier about the constricted pre-enforcement litigation opportunities for IRS guidance.  See Pre-Enforcement Litigation of IRS Guidance (Federal Tax Crimes Blog 8/6/19), here.  In that posting, I cite CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), here, (holding pre-enforcement procedural challenge to an IRS Notice was barred).

In CIC Servs. v. IRS, ___ F.3d ___, 2019 U.S. App. LEXIS 26007 (6th Cir. 2019), here, the Sixth Circuit denied petition for rehearing en banc.  Denials for petitions for rehearing en banc are frequent and usually unexceptional, but, in my judgment, this denial is exceptional because of the concurring and dissenting opinions on the denial.  The principal concurring and dissenting opinions (by Judges Clay, concurring, and Thapar, dissenting) are noteworthy, not because they are particularly enlightening to those who have followed the issue but because they are populated with so much hyperbole.  I will leave it to readers to parse the opinions if they choose.

I am trying to imagine what exactly caused this burst of hyperbole.  I gather that Judge Thapar, who was on President Trump's list of possible Supreme Court nominees, started the ball rolling by writing a dissenting opinion using the narrow legal issue as an attack on the administrative state.  Hyperbole in attacks on the administrative state are much used by judges with strong conservative/libertarian bents.  Readers of Judge Thapar's dissent who have followed this area of the law will recognize his overture to Justice Gorsuch, in an equally hyperbolic opinion, citing an "elephant in the room" in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149 (10th Cir. 2016), here (which was a concurring opinion to the panel opinion Justice Gorsuch wrote because he could not get another judge to agree with the hyperbole in the concurring opinion). Sixth Circuit Judge Nalbandian had already stated the case in his panel dissent with less hyperbole.  So, why did Judge Thapar enter the fray on a denial for petition for rehearing en banc?  Maybe he saw the denial as an opportunity to rail against the administrative state for his own personal satisfaction.  Maybe.  But, maybe also, he saw the dissent as an opportunity to further endear himself with the audience that could elevate him to the Supreme Court (most prominently, the Federalist Society through whom President Trump vets judicial nominations and those in sway of the Federalist Society, including President Trump and those who help him select judicial nominees).  See Fred Barnes, See Reshaping the Judiciary (Washington Examiner 5/31/19), here.  The opinion will certainly resonate with that audience.  And, assuming President Trump fails to obtain re-election, Thapar's only hope for a Supreme Court position will be an opening in the next year or so.  (Senate Leader McConnell has already said that, for a Trump nominee, he will reject the rule he created whole cloth to deny Merrick Garland a seat on the Supreme Court because nominated in the election cycle; and, of course, McConnell is a big supporter of Thapar.)  After next year, I suspect, there is no hope for Thapar to be a Supreme Court Justice.  So, its now or never, and he must remind that audience that he is their man (as if they did not already know that).

Judge Thapar's opinion drew the concurring opinion of Judge Clay, who opens with this zinger by calling Judge Thapar's dissent the "latest attempt to inflict death by distorted originalism on the modern administrative state."

Finally the concurring opinion by Judge Sutton, seems to be merely a plea or suggestion, without hyperbole, to the Supreme Court to take cert and smooth the rough edges in the law.

Addendum 8/31/19 11:45 am:

Monday, August 26, 2019

FTP2019 Update - Innocent Spouse Relief Judicial Review (8/26/19)

I offer the Second Federal Tax Procedure Editions Update.  The Second Update is here.  A separate pdf with a table of contents showing cumulative updates is here.  (The cumulative update as of the date of the blog is linked here.  For the most recent version of the cumulative update (including updates after the date of this blog), see the link on the page to the right, titled "2019 Federal Tax Procedure Book & Updates," here.)

For a blog search that picks up all Updates through the tag FTP 2019 Updates, click here.  This search will first be sorted by relevance, but a reverse chronological presentation can be linked at the top.  The results will show all Update blogs.  (As of today's posting, there will be only one, but as others are added, the search will pick them all up.)

This Update replaces the following section with discussion of the litigation forums for innocent spouse relief.

Ch. 14. Collection Procedures.
XVI. Innocent Spouse Relief.
B. Joint Liability Relief.
7. Judicial Review.

Practitioner Ed., pp 796-797

Student Ed., p. 543

FTP2019 Update - On Funds Movement Reports (CTR, CMIR and SAR) (8/26/19)

As I explain on the page (at the right) titled 2019 Federal Tax Procedure Book & Updates, here, I will post updates, corrections, changes to the FTP Book Editions by blog entry rather than via a cumulative supplement.

The first Update is linked here.  A separate pdf with a table of contents showing all updates is here.  (Please note that, since this posting is the first Update, the only Update on the pdf is this one; I will generate a new cumulative update pdf as new postings are made; the most recent pdf with cumulative updates will be posted on the page to the right, titled "2019 Federal Tax Procedure Book & Updates," here.)

For a blog search that picks up all Updates through the tag FTP 2019 Updates, click here.  This search will first be sorted by relevance, but a reverse chronological presentation can be linked at the top.  The results will show all Update blogs.  (As of today's posting, there will be only one, but as others are added, the search will pick them all up.)

This update replaces the following section with discussion of Currency Transaction Report ("CTR"), Currency or Monetary Instrument Report ("CMIR") and "Suspicious Activity Report ("SAR").

Ch. 5. Returns
II. The Return.
A. Return Filing Requirement
2. Information Returns or Reports.
b. Commonly Encountered Information Returns.
(4) Currency Transaction Reports.

Practitioner Ed., pp. 157-158
Student Ed., pp. 107--108

Sunday, August 18, 2019

Amazon Wins Transfer Pricing Dispute on Regulations Interpretation (8/18/19)

In, Inc. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here, a transfer pricing case, the Court held that, under the applicable regulations (but superseded for later years as noted in footnote 1 discussed below) did not require that residual business assets (like workforce in place, going concern value) be included in the required buy-in for a cost sharing agreement between related parties because they were not independently transferable assets.

Here is the Court's summary (not part of the opinion):
The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement. 
In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. 
At issue is the correct method for valuing the pre-existing intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation (sic), the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets.
I won't get into the weeds on the opinion because it appears to be an unexceptional application of standard rules of interpretation of the regulation (a similar exercise to interpreting the text of a statute).  The IRS's interpretation of its own regulation was not entitled to Auer deference, which is now substantially constrained by the decision in Kisor v. Willkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here].

The important point on the substance of the IRS position is that the IRS changed the regulation.  In footnote 1 (Slip Op. p. 6]:
   n1 This case is governed by regulations promulgated in 1994 and 1995. In 2009, more than three years after the tax years at issue here, the Department of Treasury issued temporary regulations broadening the scope of contributions for which compensation must be made as part of the buy-in payment. See 74 Fed. Reg. 340 (Jan. 5, 2009). In 2017, Congress amended the definition of “intangible property” in 26 U.S.C. § 936(h)(3)(B) (which is incorporated by reference in 26 U.S.C. § 482). Tax Cuts and Jobs Act of 2017, Pub. L. 115-97, § 14221(a), 131 Stat. 2054, 2218 (2017). If this case were governed by the 2009 regulations or by the 2017 statutory amendment, there is no doubt the Commissioner’s position would be correct.
So, except for the dollars involved (bit, as is the way with Amazon), the case would be unexceptional.

Wednesday, August 14, 2019

Procedurally Taxing Offering and Discussion of IRS Graphic on Tax Litigation (8/14/19)

Students and Practitioners reading this blog (and the Federal Tax Procedure Book) will know that I recommend the Procedurally Taxing Blog, here.

There is a new offering today that has graphics with important data on tax litigation.  Keith Fogg, Statistics on Cases in Litigation from ABA Tax Section Meeting in May (ProcedurallyTaxing 8/14/19), here.  The actual graphic is linked on the PT blog with Keith's brief discussion of the graphics, but here is a link to the graphic.

Monday, August 12, 2019

2019 Federal Tax Procedure Book Editions Available (8/12/19)

The 2019 editions of the Tax Procedure Book (Student Edition and Practitioner Edition) are available for download on SSRN as of 8/12/18.  The SSRN postings are linked on the page on the right of my Federal Tax Procedure Blog titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

As always in posting the annual editions (and, indeed in posting entries on the FTP Blog), I encourage readers to make comments.  Comments can range from the substantive to any other that can make the next editions of the FTP Book better.  Corrections of grammar and syntax would be appreciated because I do not have a proof reader for the book, and I am a poor proof reader of my own work.

Comments on the blog entries can be made below the entries.  Comments on the FTP Book Editions may be made on the Page titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

Thank you.

Friday, August 9, 2019

IRS Release on Passport Denial and Revocation for Seriously Delinquent Tax Debt (8/9/19)

The IRS released IR-2019-141 (8/8/19), here, titled: "Individuals with significant tax debt should act promptly to avoid revocation of passports."  The release has very useful information and should be read by all persons with significant tax debts who travel internationally.  For example, taxpayers who have had their passport application denied because of the IRS's certification can apply for prompt processing "to resolve their tax issues and expedite reversal of their certification to State [Department]."

Here is the discussion of the passport denial or revocation procedure from the 2019 Federal Tax Procedure Book pending publication on SSRN (footnotes omitted):

XIII. Denial or Revocation of Passport for Seriously Delinquent Tax Debt.

Section 7345 and 22 U.S.C. § 2714a, added in 2015, require that, upon the IRS certification transmitted to the Secretary of State (through the Secretary of the Treasury) that an individual has “a seriously delinquent tax debt,” the Secretary of State “shall not issue a passport” to the individual and, if a passport has already been issued, "may revoke" the individual's passport.   A “seriously delinquent tax debt” is an assessed tax debt greater than $50,000 (as adjusted for inflation, $52,000)  if a notice of  tax lien has been filed with CDP rights exhausted or lapsed or a levy under § 6331 has been made.  Once certified, paying the account below the threshold amount will not result in decertification.

Exceptions are made for debts that are being paid “in a timely manner” pursuant to agreement with the IRS or which are subject to either a CDP hearing or an election for innocent spouse relief under § 6015.  The Secretary of State may approve exceptions to these requirements in “emergency circumstances” or for “humanitarian reasons” or may limit the passport only for return to the U.S.

The IRS must “contemporaneously notify an individual of any certification under subsection (a).”  The notice of the certification must include notice of the certification and of the right to bring a civil action in the district court or Tax Court to contest whether the certification was erroneous. The certification must be reversed if the certification was erroneous, the tax debt is fully satisfied, or the tax debt ceases to be a seriously delinquent tax debt as defined. This judicial remedy is the sole remedy for improper certification or failure to reverse a certification; the taxpayer may request IRS administrative relief but does not have an Appeals Office review of any action or nonaction pursuant to the request.

The required earlier notices of tax liens and notices of levy must include notice of § 6345's authority to deny or revoke passports.

Apart from a seriously delinquent tax debt certification, the Secretary of State may deny a passport for failure to provide a valid Social Security Number.

The certification will not prevent return travel to the U.S., although the passport may be confiscated upon re-entry.

Since the provision is relatively new, the procedures were not implemented immediately.  Persons interested in the implementation should check for more recent IRS actions or pronouncements and practitioner or scholarly comment.  The IRS has a website that indicates that certifications to the State Department began in February, 2018.

[Note:  the FTP 2019 edition pending  publication on SSRN said that the amount of the seriously delinquent tax debt as adjusted for inflation was $53,000.  It is $52,000; I have changed that above and in the working draft  for the FTP 2020 edition.]

Thursday, August 8, 2019

District Court Invalidates Interpretive Regulation at Chevron Step One (8/8/19; 3/11/19)

In Mayo Clinic v. United States (D. Minn. No. 16-cv-03113 Opinion and Order dated 8/6/19), here, the Court invalidated an IRS "interpretive" regulation which interprets the statutory text "educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on."

As an interpretation of the statutory text (an interpretive regulation), the Court applied the Chevron framework.  As I understand the Court's reasoning, it stopped at Chevron Step One, finding that, based upon statutory interpretation in the statutory text in question, the regulations interpretation was not within the scope of ambiguity in the statutory text.

The Court stopped the Chevron inquiry at Step one because Congress "intended not to include' the regulations tests--"primary-function" and "merely-incidental"--in the scope of the statutory text. (Slip Op. 2.)   On that interpretation, the statutory text was not "silent or ambiguous."

Basically, as I understand the reasoning, the Court discerned some intent of Congress (certainly not a stated intent) because it inferred that Congress knew how to articulate in the statute a test such as the regulations' tests and did not do so.  Therefore, the Court reasoned, Congress must have intended that the tests not apply.  Of course, the Court has discussion of other statutes, some related, where Congress in the statutory text specifically articulated some such tests.  The Court found those persuasive that, if Congress meant that Treasury was to have interpretive authority of that nature, Congress would have put it in the statutory text or at least put some ambiguity in the statutory.  Its absence in the statutory text means that the tests were not intended by Congress to be within the scope of ambiguity of the statutory text and therefore the interpretation fails at Chevron Step One.  The Court never reaches Chevron Step Two to determine whether the interpretation was reasonable.  (I guess one could say that an interpretation is not reasonable if it is not within the scope of the ambiguity in the statutory text.)

I don't think the Court's reasoning is compelling.  The conclusion may be right.  I just don't think the reasoning articulated by the Court compels the conclusion that the statutory text does not offer sufficient ambiguity to permit the interpretation adopted by the IRS.

I suspect that there will be an appeal to the Eighth Circuit Court of Appeals.  I won't try to predict an outcome there.

Tuesday, August 6, 2019

Pre-Enforcement Litigation of IRS Guidance (8/6/19)

I just finished today my 2019 editions (Practitioner and Student) of my Federal Tax Procedure Book.  I have submitted those editions to SSRN and expect that they will be published there in the next few days.  I will post the SSRN links on this blog for download and on the page titled 2018 Federal Tax Procedure Book & Supplements, here, in the right hand column.

In the meantime, I offer the following which is new to the 2019 editions.  I offer some (but not all of the footnotes).

Litigating IRS Interpretations in Guidance Documents.

For most agency guidance, particularly guidance in a binding format such as legislative regulations, affected parties have an opportunity to raise procedural challenges in court under the APA upon promulgation of the guidance and before the agency attempts to enforce the guidance against the affected parties. n371  The statute of limitations for such review is the general six-year statute of limitations in 28 U.S.C. § 2401(a).  However, for Treasury guidance documents, such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions which have historically channeled tax litigation, including challenges to agency guidance, into post-enforcement litigation venues such as deficiency, refund or collection suits.  Those post-enforcement venues have their own statutes of limitations triggered by the enforcement being challenged (e.g., a deficiency notice, denial of a claim for refund, or collection action).  Accordingly, historically, IRS guidance has not been allowed for pre-enforcement procedural challenges to agency guidance. n375 If § 2401(a) were applicable, post-enforcement review would not be adequate for APA procedural challenges in tax litigation because, in most cases, the six-year statute would have expired before IRS enforcement action made the case ripe for the traditional tax challenge venues.  As a result, the general six-year statute of statute of limitations in § 2401(a) has not barred procedural challenges to IRS guidance in post-enforcement cases outside the six-year period in § 2401(a).

  n371 See Altera Corp. v. Commissioner, 926 F.3d 1061, 1075 n. 6 (9th Cir. 2018); see generally Kristin E. Hickman & Gerald Kerska, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683 (2017) (referred to in the footnotes in this section as Hickman & Kerska, supra.
  n375 See generally Hickman & Kerska, supra.  As noted in the article, there have been cracks in this pre-enforcement prohibition scheme, citing Chamber of Commerce v. IRS, No. 1:16-cv-944-LY, 2017 WL 4682050 (W.D. Tex. Oct. 6, 2017), where the IRS appeal to the Fifth Circuit was withdrawn as moot.  But see CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019) (holding pre-enforcement procedural challenge to an IRS Notice was barred).
In Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2018), the taxpayer challenged in a straight-forward Tax Court deficiency redetermination case a regulations interpretation of § 482.  The challenge was well after six years from the date the regulation was adopted.  The Ninth Circuit panel on the reargument in Altera asked the parties to brief the issue of whether § 2401(a) was a potential bar to the suit, because Altera was raising procedural challenges. DOJ Tax responded that § 2401(a) 's six-year statute of limitations did not apply from the date of the regulation and that, rather, the statutes of limitation normally applying to post-enforcement tax litigation applied.  Under this position, Altera Corp’s challenge to the regulation in a deficiency redetermination proceeding in the Tax Court was clearly timely.  In any event, DOJ Tax argued that the Commissioner had waived the statute of limitations defense.  In the final opinion, the Court relegated the issue to a footnote (p. 1075, n. 6), concluding that the Commissioner had waived the statute of limitations defense by not asserting it.  The Court seems to have skirted the issue of whether there was a defense that could be waived.  It is not at all clear that, given the well-established methods for contesting the validity of regulations in post-enforcement proceedings (such as deficiency proceedings in the Tax Court and refund suits), a pre-enforcement post promulgation review is available for tax regulations because of § 7421(a), the Anti Injunction Act and related statutes and concepts pushing litigation to the standard post-enforcement procedures.  One could argue that the Court could not have gotten to waiver without a defense in the first place and there could be a defense in the first place only if the taxpayer had a post-promulgation, pre-enforcement right to contest the regulation, thus invoking the six-year statute that could be waived.  Under that way of thinking, the Court decided the issue.  But, I don’t think that is what the Court intended to do, because it concludes “Therefore, we need not address it.”  The “it,” I think, is whether § 2401 applied in the first place, which would have required that there be some post-promulgation, pre-enforcement remedy.  For a succinct discussion of the issue, see Kristin Hickman, Altera Meets Chamber Of Commerce (Tax Prof Blog 10/17/17) and for more detail see Alan Horwitz, Supplemental Briefing Completed in Altera (Tax Appellate Blog 10/10/18) (with links to the supplemental briefing in Altera and a Government Statute of Limitations Letter Brief).  Now, tax procedure students should thank me for relegating this to a footnote, and a long one at that, which even practitioners are unlikely to encounter.
Finally, in Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019), prompt APA review was allowed but not in a context where the aggrieved parties (States of Montana and New Jersey) had  traditional post-enforcement review.

Saturday, August 3, 2019

Restitution Based Assessment--Some Issues of Interest (8/3/19; 8/7/19)

Readers of this blog will likely be interested in a recent post on Procedurally Taxing Blog:  Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).  Highly recommended.  The context is the relationship between restitution as ordered by the court in a criminal case and the restitution based assessment that the IRS is mandated to make, particularly as related to interest on the restitution.

After some emailing with Keith, I thought I would add some related material and comments that readers of this blog might find interesting or useful.

1.  The amount of the restitution can include an interest factor from the date of the loss through the date of the restitution order by judgment in the criminal case.  The DOJ Criminal Tax Manual thus says:  "Prosecutors should seek prejudgment Title 26 interest in restitution in order to
fully compensate the IRS."  DOJ CTM 44.00 RESTITUTION IN CRIMINAL TAX CASES (last edited January 2019), here.

The U.S. Attorneys Manual (now called Justice Manual after renaming in 2018) had a template in the Tax Resource Manual that would include interest under 6601 and/or 6621 in the restitution order as of the date of sentencing.

The Tax Resource Manual seems to have dropped off the current Manual (called the Justice Manual), although the prior Tax Resource Manual is still available per the links above.  (Perhaps it will be added back later.)  So, diligent US Attorneys should be aware of it.  And, of course, DOJ Tax CES attorneys should be aware of the CTM provision.  And, since the IRS makes the calculations, the IRS agents should be aware of as well.  (By contrast, interest is not included on tax loss for Sentencing Guidelines purposes except in the case of evasion of payment, when interest was included in the amount the defendant sought to evade.)

My understanding, though, is that courts sometimes (perhaps even often) do not include interest in restitution.  (See discussion of recent case in paragraph 3 below.)

2.  I have just updated the text and a footnote in the working draft of my Federal Tax Procedure Book (will be published on SSRN by mid-August 2019) dealing with some of the nuance.  Here is a cut and paste of the text and the key text amd footnote:

Court Invalidates IRS Attempt by Rev Proc to Change Legislative Regulation (8/5/19)

In Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Montana 2019), here, the court held that the IRS's use of a Revenue Procedure to revoke a requirement of a legislative regulation, issued with notice and comment, was invalid.

Section 6033(a)(1) requires tax exempt entities to file a return “stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.”  The IRS long ago adopted notice and comment regulations requiring the tax-exempt entity to identify on Schedule B of Form 990 persons contributing more than $5,000 during the taxable year.  26 C.F.R. § 1.6033-2(a)(2)(ii)(f).

Rev. Proc. 2018-38 eliminated the IRS’s previous requirement contained at 26 C.F.R. § 1.6033 that exempt organizations report donor information.

Two states, Montana and New Jersey sued to have the Rev. Proc. declared procedurally invalid for lack of adoption with notice and comment.  Each of the states claimed that they were injured by the change because they could use the Form B disclosures for their own tax administration purposes and were allowed to access that IRS information under the requirements for the IRS to share tax return information with the states.

The district court held that the states met the predicate requirements (such as standing) so that it could reach the merits of the states' claims.  (I won't discuss those predicate requirements, but they are interesting reading.)

On the merits of the states' claims, the court held, in effect, that the regulations requirement that the tax-exempt entities report donor information on Schedule B of Form 990 was a "legislative" rule which could be changed only by another legislative rule which would require that it be adopted by notice and comment regulation rather than in subregulatory guidance such as a Rev. Proc.  This is a straight-forward application of the APA distinction between legislative and interpretive rules. [for an errata correction I made to this sentence, see note at bottom of this blog]

JAT Comments.

Thursday, July 11, 2019

More on Litigation and IRS Raising Civil Fraud New Matter (7/11/19)

My last post involved the IRS raising the civil fraud penalty as new matter by amended answer and prevailing. IRS Raises Fraud In Tax Court Amended Answer and Prevails (Federal Tax Procedure Blog 7/9/19), here.  The key point of the blog entry was the danger of unspotted issues after an audit and the risks of petitioning the Tax Court for redetermination. 

First, on that issue, I offer the relevant portion of the working draft of my Federal Tax Procedure Book will be published on SSRN in early August 2019 (footnotes omitted):
New Matters [In the Tax Court]
The IRS can raise new issues in its answer that seek to increase the amount of the deficiency on a basis not asserted in the notice of deficiency or to justify the deficiency asserted (or part thereof) on some basis not asserted in the notice of deficiency.  Jurisdictionally, the Tax Court case is a case to redetermine the correct amount of tax liability for the year(s) involved, thus permitting it to determine a higher deficiency amount or an overpayment.  § 6214(a) & 6512(b). So the IRS can seek additional taxes and penalties not previously asserted.  The statute of limitations will be open because, to reprise what we learned earlier, the statute is suspended during the period the Tax Court case is pending.  §§ 6213(a) and 6503(a).   This is one of the dangers in proceeding in the Tax Court where the IRS has not previously spotted an issue.  Since the statute of limitations is suspended upon issuance of the notice of deficiency (§ 6503(a)), all new matters may be raised, assuming that the statute of limitations did not bar the notice of deficiency in the first place. 
The IRS's ability to raise new issues after its original answer is, however, limited by rules of fairness.  If the IRS does assert new matters after filing its original answer, it will formally do so by moving to amend the original answer.  The Tax Court rules, like the Federal Rules of Civil Procedure applicable in district courts and the Court of Federal Claims' Rules, permit amended pleadings, usually requiring the approval of the Court which is liberally granted to promote justice on the underlying merits. New issues cannot be inserted too late in the process so as to deny the taxpayer the effective opportunity to respond.  And, as to “new matters,” the IRS bears the burden of persuasion.  (Of course, if the new matter is the civil fraud penalty not asserted in the notice of deficienty, the IRS would have the burden of persuasion anyway to prove civil fraud by clear and convincing evidence, so asserting civil fraud as a new matter has no affect on the burden of persuasion.) 
The IRS is allowed to raise a new theory or ground in support of an issue raised in the notice of deficiency without the theory or ground being a new matter.  Depending upon how much variance the new theory or ground has with the notice of deficiency, the variance might be considered a new matter subject to the foregoing new issues discussion.  Certainly, if it is raised so late that the taxpayer cannot fairly respond with evidence addressing the new issue, the Court should deny the IRS’s attempt to assert the new issue. 
If the IRS asserts an affirmative defense (such as estoppel), it will be deemed denied and the taxpayer need not file a responsive pleading, which is usually called a “reply.”  If, however, the IRS raises “new matter” either in an answer or an amended answer, the taxpayer should file a reply providing the IRS notice as to the taxpayer's position on the new matter.  This is frequently done via a simple denial of the various matters pled with respect to the new matter. 
I think it would be helpful to illustrate the new matter issue.  Recall that § 6662 provides a 20% substantial understatement penalty that is then increased to 40% if the understatement is attributable to a gross valuation misstatement.  If the notice of deficiency asserted the 20% penalty but, in its answer, the IRS asserts the 40% penalty, the IRS will have the burden of proof on the increase in the penalty.  That seems to be the straight-forward reading of the rule shifting the burden of proof to the IRS.  But, let’s focus on one issue raised in this setting.  The taxpayer can avoid the accuracy related penalties if there was reasonable cause for the position on the return.  This is like an affirmative defense to the penalty.  Thus, as to the 20% penalty asserted in the notice and contested in the petition, the taxpayer bears the burden of proving reasonable cause even after the IRS meets its production burden under §7491(c); as to the increased 40% penalty, however, the IRS bears the burden of proof, including establishing absence of reasonable cause. 
Finally, an even worse case for the taxpayer who improvidently petitions for redetermination is that the IRS can raise as new matter a civil fraud penalty.  Say in the above example, the notice of deficiency asserted either the 20% or 40% accuracy related penalty in § 6662 and then in the answer (or amended answer), the IRS asserts the 75% civil fraud penalty in § 6663.  Note in this regard that, if the IRS raises the civil fraud penalty as a new matter, its burden of proof is not affected because, as to civil fraud, the IRS bears the burden of persuasion by clear and convincing evidence anyway, just as it the civil fraud penalty had been asserted in the notice of deficiency.  So,  if the IRS prevails, the taxpayer will be even worse off for having filed a petition for redetermination.  Thus, taxpayers and practitioners should think carefully about unspotted potential issues before filing a petition for redetermination in the Tax Court.
Now let's work this a little more.  This IRS favorable result works because the statute of limitations is still open in Tax Court proceedings.

Wednesday, July 10, 2019

Tax Court Sustains § 6701 Penalty Against Preparer (7/10/19)

In Kapp v. Commissioner, T.C. Memo. 2019-84, here, the Tax Court sustained § 6701 penalties of $3,218,000 (after certain IRS concessions per slip op., at 114-115).

Section 6701 imposes a penalty on any person who (1) aids, assists, procures, or advises with respect to the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) knows (or has reason to believe) that the document will be used in connection with any material matter arising under the internal revenue laws, and (3) knows that the document would result in an understatement of another person's tax liability.   The penalty is $1,000 (increased to $10,000 for corporate returns) for each false document for each taxpayer for each tax period affected by the document (but no more than one penalty per period).  This penalty is the civil penalty analog to the tax crime of aiding and assisting, § 7206(2).

Kapp was a return preparer with a specialized client base as follows:  "(1) 75% were deep sea mariners, (2) 18% were tugboat mariners, (3) 5% were offshore mariners, (4) 1% were offshore oil rig workers, and (5) 1% were marine ferry drivers."

Basically, on many returns he prepared, Kapp deducted claimed miscellaneous itemized deductions for unreimbursed employee business meals and incidental expenses, computed by using the full Federal per diem rates for the meals and incidental expenses (M&IE rate) referenced in Rev. Proc. 96-28, 1996-1 C.B. 686, superseding Rev. Proc. 94-77, 1994-2 C.B. 825, multiplied by the number of days traveling for work.

The problem was that the employer paid the meal expenses.  In Tax Court litigation for two of his clients (although he did not represent them in the Tax Court), the Tax Court held that the taxpayers could not deduct the per diem for meal expenses that the employer rather than they incurred.  Kapp read those decisions shortly after they were issue in September 2000.

Kapp then "began advising his tugboat mariner clients and some of his other mariner clients that they were allowed to claim meals expense deductions even if meals were provided by their employers."  (Slip op., at pp. 20-21.) Kapp set up a website advertising the ability to obtain large income tax returns, falsely stating "that he successfully sued the IRS in the Tax Court and won “his cases”.  (Slip op., at pp. 21-22.)  He also published articles and documents with the same claims.  (Slip op. pp. 23-29.)

Kapp then prepared returns for his large base of clients claiming the meal expense without questioning whether the employer paid the meal expenses (as was industry practice).

The IRS objected on audit.  Throughout the audit, Kapp argued that the Tax Court opinions were favorable to his position.  (Slip Op. at pp. 42-51.) He was wrong on that point.  Not just wrong, but clearly wrong.  And he kept it up.

DOj then filed a suit for injunction and prevailed. (Slip op., pp. at pp. 55-61.)

After the injunction, the Tax Court rendered opinions for two of Kapp's petitioners denying their claimed per diem deduction for meals paid for by the employer.

The IRS then issued its § 6701 penalty assessment against Kapp.

The Tax Court's "Opinion" section (beginning on Slip Op., at p. 75) then decides the following key issues (I omit some issues, such as some evidentiary issues, I don't deem important for most readers, although they were certainly important for Kapp):

Taxpayer Advocate Service Issues Tax System Roadmap (7/10/19)

The Taxpayer Advocate Service (TAS) has issued a "Roadmap" -- also called a "subway map" -- for the taxpayer's journey through the tax system.

The TAS page for the roadmap is here.  On that page, the roadmap itself in pdf format may be viewed and downloaded and a short video introduction may be viewed.  I include below a jpg format version of the roadmap, principally for overview.  The pdf version is better for study.

The roadmap explains:
The map below illustrates, at a very high level, the stages of a taxpayer’s journey, from getting answers to tax law questions, all the way through audits, appeals, collection, and litigation. It shows the complexity of tax administration, with its connections and overlaps and repetitions between stages. As you can see from its numerous twists and turns, the road to  compliance isn’t always easy to navigate. But we hope this map helps taxpayers find their way. A project of the Taxpayer Advocate Service.
The graphic is very good.

The caveat is that, I think, most nonpractitioners may not spend a whole lot of time working their way through this roadmap of our complex tax system.  (In my own brief visual overview of the roadmap, I am reminded of a maze or a bowl of spaghetti or some such commotion.)  I suppose that those nonpractitioners (including taxpayers qua taxpayers) who get caught up in IRS tax enforcement might want to take the time to work through the maze.

I think the roadmap will be helpful for practitioners who want to check their knowledge about the processes or to study the process.  Like many such summary overviews, the graphic lacks nuance, but still that should not take away from its educational use for practitioners and even taxpayers with the stamina to work through it.

One question that must be asked is whether all the complexity hinted at via the roadmap is necessary.  That is a good question.  I don't have an easy answer, except that those of us who have practiced in the system understand the reason for the complexity (each component of the roadmap).  Whether the complexity is necessary is a different question.

Tuesday, July 9, 2019

IRS Raises Fraud In Tax Court Amended Answer and Prevails (7/9/19)

In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business.  There were some other issues.  The numbers are large.  I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):
After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009. 
See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.

The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):
The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard. 
Many of the critical documents in the record reflect “effective as of” dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti’s request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit’s evidence. 
The “effective as of” dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court’s comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent’s proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit’s briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties’ briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.
Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.

General Lesson

The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency.  This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.

Beyond the General Lesson

There is more in the details as lessons to trial counsel.  As noted above, the Court found that the "Petitioners Wegbreit’s briefs misstate the record and are unreliable."  Presumably those briefs were submitted by their trial counsel.

Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination).  Let's go back to the opinion.

Sunday, July 7, 2019

Even More on Skidmore (Including Equipoise as to Interpretation)(7/7/19)

I have discussed so-called Skidmore deference on several occasions on this Federal Tax Procedure Blog.  I list the principal discussions at the end of this blog.  As traditionally formulated, Skidmore tells a court that an agency interpretation of law not entitled to Chevron deference can prevail if the interpretation is persuasive.  In Chevron parlance, Skidmore would involve Chevron-like steps as follows:  Step One would require that that the statutory text be ambiguous within the scope of the agency interpretation.  That would mean that the agency interpretation must be reasonable within the scope of the ambiguity but there must be other reasonable interpretations (otherwise the statutory text would not be ambiguous).  Then at Step Two, the agency interpretation of the ambiguous statutory text would apply if it is "persuasive."  But, if the interpretation is persuasive, then no deference is needed to apply it over any other reasonable interpretation that is not persuasive.  For this reason, many believe that calling Skidmore a deference concept is an oxymoron.  (See the quote from a recent article at the end of this blog.)

Now, this model of competing reasonable interpretations does raise an interesting issue.  In the fact-finding model, where there are competing interpretations of the facts and none prevail over the others, the fact-finder is said to be in a state of equipoise.  In the state of equipoise, under the preponderance of the evidence standard (more likely than not), the party bearing the burden of persuasion loses.  Of course, most observers of triers of fact (juries or judges) feel that the state of equipoise is rare, so that the assignment of the burden of persuasion is rarely outcome determinative.  But, obviously, assigning a winner or loser based on equipoise is outcome determinative when there is a state of equipoise, however rare.

The question I ask is whether the state of equipoise is a useful model in the deference context.  Let's assume that the court determines that an agency interpretation is reasonable but is at least one other reasonable interpretation and that none of the interpretations are more "persuasive" than the other.  This would mean that the court is in a state of equipoise as to the most persuasive interpretation.  Of course, if the agency made that interpretive choice in a Chevron-entitled regulation, Chevron would compel that the agency interpretation prevail.  But assume that the agency adopts the interpretation of the ambiguous statutory text in subregulatory guidance not entitled to Chevron deference.

What happens?

Well, if, after applying all available tools of statutory interpretation, the court really is in equipoise as to the most persuasive interpretation, I suppose the court could use the time-honored tie-breaker--flip a coin or some other arbitrary factor to reach a decision.  Or alternatively, the Court could default in equipoise to the reasonable agency interpretation.  I have not seen any court articulate such a default tie-breaker rule, however. Perhaps there has just been no need to default to such a tie-breaker because, like the fact-finding analog, equipoise is rare.

Justice Gorsuch asserts such positions of equipoise in interpretation are rare, perhaps nonexistent.  A good judge, he asserts, applying available interpretive tools should be able to determine that one interpretation is more persuasive than others, without a condition of equipoise between or among the interpretations.  In Kisor v. Willkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], Justice Gorsuch in concurring in the judgment (but not accepting the plurality analysis) addressed equipoise as to a regulations interpretation as a basis for Auer deference, saying (Slip Op. 9-10 and 139 S.Ct., at pp. 2429-30, one footnote omitted):
To be sure, JUSTICE KAGAN paints a very different picture of Auer, asking us to imagine it riding to the rescue only in cases where the scales of justice are evenly balanced between two equally persuasive readings. But that's a fantasy: "If nature knows of such equipoise in legal arguments, the courts at least do not." n31 In the real world the judge uses his traditional interpretive toolkit, full of canons and tie-breaking rules, to reach a decision about the best and fairest reading of the law. Of course, there are close cases and reasonable judges will sometimes disagree. But every day, in courts throughout this country, judges manage with these traditional tools to reach conclusions about the meaning of statutes, rules of procedure, contracts, and the Constitution. Yet when it comes to interpreting federal regulations, Auer displaces this process and requires judges instead to treat the agency's interpretation as controlling even when it is "not . . . the best one."
   n31 Scalia, Judicial Deference to Administrative Interpretations of Law, 1989 Duke L. J. 511, 520. 
I think the following from Justice Scalia's remarks captured in the article (a must read in this area, here) gives a fuller description of his meaning (521):

Saturday, July 6, 2019

Auer Deference and Treasury and IRS Policy Statement on the Tax Regulatory Process (7/6/19)

In the  revised working draft for my Federal Tax Procedure editions (Student and Practitioner) which I will publish in final in August 2019, I have revised the section titled "Deference to Subregulatory Interpretations."  This is generally called Auer deference, after Auer v. Robbins, 519 U.S. 452 (1997).  (Auer deference seems to overlap what was formerly called Seminole Rock deference, after Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945).)

Auer deference may be stated as deference to agency interpretations of agency regulations.  As I analyze it, the agency regulations being interpreted may be legislative regulations which are the law but, like statutes, can be ambiguous and thus subject to reasonable agency interpretation.  The agency regulations more commonly may be Chevron-entitled interpretive regulations that are ambiguous and thus subject to agency interpretation.  In either event, the agency interpretation appears in subregulatory guidance not entitled to Chevron deference.

Kisor v. Willkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], approved a restricted version of Auer deference.  The plurality opinion written by Justice Kagan (concurred in by Justices Ginsburg, Breyer and Sotomayor), had a robust support for Auer deference as restricted.  See e.g., Cass R. Sunstein, Justice Kagan’s Powerful Defense of the Administrative State (BloombergOpinion 6/28/19).  Keep in mind that the plurality portion was written and concurred in by the two administrative law experts on the Court (Justices Kagan and Breyer).  [For earlier discussion on Kisor, see Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/26/19; 7/2/19), here.]

Kisor approved Auer deference to subregulatory interpretations of regulations but reined in its application.  Under Kisor, Auer deference for subregulatory interpretations (or more generally interpretations not entitled to Chevron deference) may draw deference and thus be the law.

In a tax context, however, the recent Treasury and IRS Policy Statement on the Tax Regulatory Process (3/5/19), here, informed the public that, as a policy matter, regardless of whether subregulatory interpretations might qualify for Chevron or Auer deference, the Treasury and the IRS (and presumable DOJ Tax) would not assert either Chevron or Auer deference for subregulatory interpretations.

This is odd.  Can Treasury and the IRS do that in light of the Supreme Court approval of Auer?  Well, of course, in one sense Treasury and the IRS certainly can avoid asserting deference.  The question is whether, if Chevron deference or Auer deference is otherwise applicable, a court can ignore either form of deference?

Here is the relevant portion of my current working draft on that issue (footnotes omitted):

Thursday, July 4, 2019

D.C. Circuit Holds Equitable Tolling May Apply to Time Limit in Whistleblower Case (7/4/19)

In Myers v. Commissioner, ___ F.3d ___, 2019 U.S. App. LEXIS 19757 (D.C. Cir. 2019), here, the Court applied the jurisdictional/nonjurisdictional distinction to determine that the time period in § 7623(b)(4) to petition the Tax Court with respect to an IRS whistleblower determination is nonjurisdictional, thus allowing the potential for equitable tolling of the time period.  The Court of Appeals remanded the case to the Tax Court to determine whether equitable tolling applied.  (See also Carlton Smith (Guest Blogger), D.C. Circuit Holds Tax Court Whistleblower Award Filing Deadline Not Jurisdictional and Subject to Equitable tolling (Procedurally Taxing 7/3/19), here.

Based on Myers, I have just revised the section of my tax Federal Tax Procedure book working draft and offer it here.  (I remind readers that the next updated version of the book will by in early August.)  Here is the revised discussion of equitable tolling (without footnotes, although I do offer the text and footnotes in a pdf available here, but do caution readers that the quote has been "cleaned up" which I note in the footnote in the pdf version):

VII. Smoothing the Harsh Effects of Statutes of Limitation.

* * * *

C.  General Equitable Principles (Herein of Jurisdictional/Nonjurisdictional).

The Code’s time limits (often called statutes of limitations) are classified for some purposes as either jurisdictional or nonjurisdictional.  This issue is presented for time limits throughout federal law, including applications of time limit in the Code. In the tax context, this distinction has been in issue most importantly where there are time limits for a taxpayer to obtain court review of IRS action (such as the 90-day period to petition for redetermination of a notice of deficiency or the periods for filing claims or suits for refund).  The question is how rigid the time limits are.  If the time limits are rigid time limits that must be met without exception, they are called jurisdictional because failure to meet the time limit will deprive a court of “jurisdiction” to consider the dispute between the taxpayer and the IRS.  By contrast, if a time limit is nonjurisdictional, it may not be quite so rigid, and may permit relief by way of “tolling” or suspending the time limit in certain cases.  Ultimately, the question the distinction is based upon the court’s interpretation of the time limit (both the text and the context) as evidencing Congress’s choice that the time limit to be rigid or, alternatively, to permit some tolling or suspension of the time limit based on traditional equitable considerations.

In a tax case in 2019, The D.C. Circuit explained:
The Supreme Court in recent years has pressed a stricter distinction between truly jurisdictional rules, which govern a court's adjudicatory authority, and nonjurisdictional claim-processing rules, which do not.  Key to our present decision, the Court has made plain that most time bars are nonjurisdictional; they are quintessential claim-processing rules which seek to promote the orderly progress of litigation, but do not deprive a court of authority to hear a case.  Therefore, although the Congress is free to attach the jurisdictional label to a rule that we would prefer to call a claim-processing rule, we treat a time bar as jurisdictional only if Congress has clearly stated as much.  The Supreme Court has explained that this clear statement requirement is satisfied only if the statute expressly refers to subject-matter jurisdiction or speaks in jurisdictional terms. It is not enough, for instance, that a statute uses mandatory language.
The issue of jurisdictional/nonjurisdictional as to when the Code’s time limits must be met or might be tolled or suspended based on equitable considerations is not fully fleshed out.  As noted in the quote above, the Supreme Court “in recent years” began pressing a stricter distinction; that process of pressing the distinction generally has resulted in many time limits throughout the law to be nonjurisdictional so that rigid compliance is not required.  As with much of federal law, most of the time limits in the Code were adopted at a time before the jurisdictional/nonjurisdictional distinction became prominent, so Congress did not make its “intent” clear as to whether the time limit is to be rigid or not.  The courts thus have to consider closely the text and context, the statutory language and its context in the tax system involving millions of taxpayers where, at least in some cases, not imposing rigid time limits could impose its own inequities and impose unacceptable administrative burdens on the IRS.

Wednesday, June 26, 2019

Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (6/26/19; 7/2/19)

In Kisor v. Willkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], the Supreme Court decided to retain Auer deference, at least for now.  I offer some preliminary thoughts on the opinions in Kisor and may revise them as I think further and consider others comments.

Although perhaps oversimplifying for analysis, I think Auer deference functions like Chevron deference but one step removed from the statutory text.
  • Chevron deference applies to some reasonable agency interpretations of ambiguous statutory text.
  • Auer deference applies to reasonable agency subregulatory interpretations of  ambiguous agency regulations (which for this purpose may be either (i) ambiguous legislative regulations (e.g., in a tax context, ambiguous consolidated return regulations) or (ii) ambiguous interpretive regulations entitled to Chevron deference (e.g., in a tax context, say ambiguous “away from home” interpretive regulations entitled to deference as in Correll)).
In Kisor, while re-affirming Auer deference, the opinions were fractured as to what Auer continues to mean and whether it may be on life support.  All we can say for sure is that Auer lives (for now, although its precise application may be muddled and Kisor clearly restricts Auer’s application over what some of the prior less restrained applications suggested).

I don't want to get into the Justices competing views of Auer deference.  The pundits will be doing that for some time now.

I do want to get into what, if anything, Kisor says about the legislative / interpretive issue that I have fulminated about recently.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure Blog 6/21/19), here; and Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/23/19), here.

Just to restate the issue.  Some, a considerable consensus in the scholarly community, claim that the interpretive regulation is no longer viable, having been conflated into legislative rules by judicial opinions after the adoption of the APA.  I reject that notion.  I do note as an important pushback Justice Breyer's comment in the Kisor oral argument:  “there are hundreds of thousands, possibly millions of interpretive regulations.”   Justice Breyer is, of course, an administrative law expert (he and Justice Kagan are the administrative law experts on the Court), and he thinks that interpretive regulations are still viable.  (Significantly, at oral argument, no Justice challenged the notion that interpretive regulations were a viable APA category.)

The Kisor opinions, as I said, were fractured, with some key points not gathering a majority. The Justices in the plurality for the Court opinion which I discuss herein were Justices Kagan (author), Ginsburg, Breyer and Sotomayor.  Remember  that Justices Kagan and Breyer are the Court's administrative law experts, so from the perspective I focus on (the APA distinction between legislative and interpretive regulations), Justice Kagan's opinion concurred in by Justice Breyer are most important to the legislative /interpretive issue.

Sunday, June 23, 2019

Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (6/23/19; 7/2/19)

The immediately preceding blog reported my new article posted on SSRN titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure 6/21/19), here.  One of the threads in the claim that the APA category of interpretive regulations is no longer viable is the notion that Chevron deference, when applied to interpretations in agency rule (regulations in specific), gives the interpretation the force of law, supposedly the hallmark of a legislative rule (which must be by notice and comment regulation) rather than an interpretive rule.  I argue in the article that "force of law" is a slippery concept, but in this context is the consequence of a regulation being legislative and not a test that a regulation is legislative.

I address in this blog a new development that, I think, refutes the notion that Chevron deference for agency interpretations is relevant to the issue of whether rules (including regulations) are legislative or interpretive.

I noted in the article that, on March 27, 2019, during oral argument in Kisor v. Willkie (Sup. Ct. No. 18-15), Justice Breyer, an administrative law expert (along with Justice Kagan), said: “there are hundreds of thousands, possibly millions of interpretive regulations.”  I noted in the footnote (p. 5 n. 14) that Justice Breyer was formerly a professor of administrative law at Harvard Law School and is the lead author on a leading administrative law book which continues with his name as a nominal author. Stephen G. Breyer, et al., Administrative Law and Regulatory Policy (8th ed. 2017 Walters Kluwer), co-authored with four other recognized administrative law experts, Richard B. Stewart, Cass R. Sunstein, Adrian Vermeule, and Michael E. Herz.  (Justice Kagan also taught administrative law at Harvard Law School.)

Justice Breyer is at it again, this time refuting the notion that Chevron sounded the death knell of the interpretive regulation.

In PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., 588  U.S. ___, ___ S.Ct. ___, 2019 U.S. LEXIS 4181 (2019), here, decided June 20, 2019, the issue was judicial reviewability of final orders of the Federal Communication Commission (FCC).  The FCC had issued a final Order interpreting the prohibition on "unsolicited advertisement" as used in the Telephone Consumer Protection Act of 1991, 47 U. S. C. §227(b)(1)(C).  The statute gave courts of appeals “exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity of” certain “final orders of the Federal Communication Commission.” 28 U. S. C. §2342(1).  That "exclusive review" was required in a proceeding brought within 60 days after the entry of the order.  The issue was whether a district court, in an application of the law long after the FCC adopted the Order, precluded the district court from considering the merits of the interpretation in the Order.

Justice Breyer for the majority felt that the issue turned upon preliminary issues not yet addressed by the courts--whether Order was (p. 5, cleaned up)
  • "the equivalent of a legislative rule, which is issued by an agency pursuant to statutory authority and has the force and effect of law."
  • "the equivalent of an interpretive rule, which simply advises the public of the agency’s construction of the statutes and rules which it administers and lacks the force and effect of law?"
Note the phrasing of "equivalent of."

Friday, June 21, 2019

Article on the Continued Viability of the APA Category of Interpretive Regulations (6/21/19)

I have posted on SSRN my article titled "The Report of the Death of the Interpretive Regulation Is an Exaggeration."  Here is the SSRN preferred citation with link to the Abstract page:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN:  The article may be downloaded at that site.

The following is a brief summary of the SSRN abstract which is linked above:
There is a notion that the Administrative Procedure Act (APA) categories of legislative regulations and interpretive regulations have been conflated into the legislative regulation category so that the interpretive regulation category is now extinct.  The APA does not make the interpretive regulation category extinct, but the notion is based on judicial developments that in effect amend the APA to effectively legislate the category out of the statute.  (OK, that is argumentative.) That notion has considerable traction in the administrative law scholarly community, as I note in the article.  A consequence of this notion, if viable, is that Treasury (and presumably other agency) regulations that go into effect without notice and comment (e.g., Treasury Temporary Regulations) are illegal, and that interpretations in regulations that do no more than interpret the statute cannot have retroactive effect.  I push back on that notion.  With the considerable traction in the scholarly community, I may be wrong.  But, I feel compelled to state my case.
Any feedback from readers will be appreciated.

A subset of the article dealing with the Altera case was presented in Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19), here.

Friday, June 14, 2019

Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:
"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."
The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):
"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 
* *  * *

Friday, June 7, 2019

Ninth Circuit Reverses Unanimous Tax Court in Altera (6/7/19; 6/20/19; 7/2/19)

I have blogged on the Ninth Circuit's prior opinion reversing the unanimous Tax Court in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (reviewed opinion), here. Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here. That opinion was reversed because it was rendered after one of the panelist died.  Ninth Circuit Withdraws Altera Opinions (8/7/18; 8/13/18), here.  Another judge was substituted for the deceased judge and oral argument was heard by the reconstituted panel.

The Ninth Circuit reconstituted panel, with all members apparently still alive, issued its opinion reversing the unanimous Tax Court.  Altera Corp. v. Commissioner, ___ F.3d ___, 2019 U.S. App. LEXIS 17143 (9th Cir. 2019), here.

Altera has been quite a saga, including the strange concept of a dead judge joining a majority opinion.  At the outset, it might be worth doing a tally of the judges on the merits.  In just the win-lose category.  There are two judges giving the win to the IRS, but they are the most important judges -- two of the three judges on the reconstituted panel.  All the other judges (other than the deceased Ninth Circuit judge who apparently voted before his death) who voted on merits held against the IRS.  Those judges are the dissenting judge on the reconstituted panel and all of the judges (15 in number) who voted on the reviewed opinion in the Tax Court.  So, just counting heads, two judges thought the IRS should win; 16 thought the IRS should lose.  (And this is not counting the dead judge's vote for the original panel opinion, which, if counted, would have been 3 for the IRS and 16 for the taxpayer.)  For those with the time to review an anecdote from my earlier appellate career at DOJ Tax for a Government appeal, like Altera, from a reviewed Tax Court opinion with most of the judges voting for the taxpayer, see Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here.

Now to the current opinions from the reconstituted panel with living panel members.  The split is as it was in the withdrawn opinion.  Judge Thomas was for the IRS; Judge O'Malley from the Federal Circuit (by designation for the original and reconstituted panel) was for the taxpayer.  The swing judge was Judge Graber from the Ninth Circuit, designated to the panel to replace the deceased Judge Reinhardt.  Like Judge Reinhardt, the swing judge voted with Thomas whose opinion thereby became the majority just as with the withdrawn opinion.

I am focusing here only on the new panel majority and dissenting opinions.  I make no attempt to compare the differences between the withdrawn opinions and reconstituted panel current opinions; I just assume that, in broad strokes, the positions are the same (with some interim tweaking) since the same judges wrote the panel majority and dissenting opinions. (Readers interested in the withdrawn panel majority and dissenting opinions can look at my prior blog or Google any other comment on them.)  Readers interested in a discussion of the differences between the withdrawn and the current opinions might watch the Miller & Chevalier Tax Appellate Blog, here, because, in a quick posting on the blog on Friday, there the author said:  "Although it borrows heavily from the withdrawn opinion (indeed, much of the language remains similar if not the same), there are some notable differences between today’s opinion and the withdrawn opinion. We will post some observations after a more careful comparison."  Steve Dixon, Ninth Circuit Again Upholds Cost-Sharing Regulation in Altera (Tax Appellate Blog 6/7/19), here.

In broad outline, the panel majority opinion holds:

1.  Chevron Analysis.

   a.  Chevron Step One. Section 482 is ambiguous on the issue presented (whether the qualified cost sharing arrangement ("QCSA") must include employee stock option costs in allocating income from the intangible ).  Accordingly, Chevron Step One is passed.

   b.  Chevron Step Two.  The regulations' requirement that employee stock option costs be included in the QCSA costs is reasonable and therefore the interpretation that the court applies, by Chevron deference, in Chevron Step Two.

2.  State Farm Analysis.  The promulgation of the regulation requirement met the reasoned decisionmaking requirement and was not procedurally defective.

Friday, April 19, 2019

Draft of Article on Interpretive Regulations (4/19/19)

I post here for download my article titled "The Report of the Death of the Interpretive Regulation Is an Exaggeration."  Here is a summary of the article:
In this article, I discuss the claim of the demise of the APA category of interpretive tax regulations for APA purposes, a claim that, when extended, is that there are no longer any interpretive regulations for any agencies for APA purposes.  Instead, so the claim goes, the regulations that have historically been considered interpretive because all they do is reasonably interpret ambiguous statutory text, are now legislative regulations under the APA.  My understanding is that the claim has considerable traction in the academic community. 
By contrast, in the recent oral argument in Kisor v. Willkie (Sup. Ct. No. 18-15), transcript p. 10, here), Justice Breyer, an administrative law scholar (taught administrative law at Harvard Law School), said “there are hundreds of thousands, possibly millions of interpretive regulations.” 
So which is it?  Are there interpretive regulations as a legitimate APA category? 
I claim that, as the title suggests, interpretive regulations are a viable APA category.  I argue that: (i) the APA original public meaning of the interpretive regulation category remains viable; (ii) there have been no material developments after enactment of the APA (including American Mining Congress and Chevron) that changed the original public meaning; (iii) in particular, the concept of deference (both pre- and post-Chevron) never had any role in the APA distinction between legislative and interpretive regulations; (iv) deference (currently in its Chevron iteration) applies to legislative regulations only in determining the scope of the delegation of legislative authority (an interpretive exercise) and has no application to the arbitrary or capricious / State Farm, a different test for procedural regularity (including failure to make reasoned decisionmaking, by extreme example stating a basis for the interpretation that the moon is made of green cheese); and (v) that other distractions along the way are not relevant to the APA’s distinction between legislative and interpretive regulations. 
To be sure, I suppose that Congress could have framed the APA so that all regulations were treated and tested as legislative regulations.  That is not the choice Congress made.  My claim is that, regardless of one’s interpretive bent or judicial philosophy, Congress’ clearly expressed intent in the original public meaning of the legislative / interpretive distinction should control. 
The article is a revision of a draft of the article that I presented in conjunction with a panel discussion on Altera and the intersection of tax law and administrative law at the Virginia Tax Study Group on April 12.

I hope that some readers will download the article, read it, and offer me their comments.  I plan on posting the article to SSRN in the near future, but would like comments before doing so.  Please offer any comments whether as to substance, presentation, grammar, etc.

The title of the article takes off from the famous quote (much misquoted) from Mark Twain (Samuel Clemens) that  “The report of my death was an exaggeration.”  See Wikiquotes entry on Mark Twain, here.

Sunday, March 17, 2019

Treasury and IRS Policy Statement on Tax Regulatory Process (3/17/19)

Treasury and the IRS have issued a joint Policy Statement on the Tax Regulatory Process (3/5/19), here.

I am in the midst of finalizing an article titled:  The Report of the Death of the Interpretive Regulation Is an Exaggeration.  I have just included a discussion of this new policy.  I thought I would offer my discussion although framed in the context of the article.  Here is a cut and paste of the discussion.  This discussion in the article has only a few short(er) footnotes, so I omit the footnotes.

I offer this short introduction so that readers will have some context offered by the article. 

In the article, I argue that the Administrative Procedure Act ("APA") permits two types of regulations (those published as regulations in the Federal Register) -- (i)  legislative regulations and (ii) interpretive regulations.  The distinction between the two categories is: 
(i) a legislative regulation is promulgated pursuant to express statutory authority to set the law where the regulation functions like a statute because, within the scope of the delegation, the regulation is the law.  The classic tax example of a legislative regulation is the consolidated return rules promulgated by regulation under § 1502. 
(ii) an interpretive regulation is promulgated as an interpretation of a statute Congress enacted (in the case of tax, generally in the Internal Revenue Code (Title 26)).  There is no classic tax example of an interpretive regulation; I use the example of the away from home regulation addressed in United States v. Correll, 389 U.S. 299 (1967), here.  
As Kenneth Culp Davis, the leading authority on administrative law said shortly after enactment of the APA:  "According to the theory, legislative rules are the product of a power to create new law, and interpretative rules are the product of interpretation of previously existing law."

Basically, as the Courts have said, legislative regulations are the law (and thus, in the jargon, have the "force of law"), whereas interpretive regulations simply interpret to law (and do not have the force of law, even if courts give the agency interpretation deference under the Chevron framework).

The distinction between legislative and interpretive regulations has a lot of nuance which I develop in the article.  Indeed, I develop that nuance in  the article, perhaps at too great a length in the article (which I post on SSRN after I offer for comments in a conference in April 2019)  Still, the foregoing is the essence of the argument.

With the foregoing, readers with some background in administrative law and the APA specifically should be able to understand the general concepts in the new Policy Statement and my comments below.

IV. New Treasury and IRS Policy Statement on the Tax Regulatory Process.

On March 5, 2019, Treasury issued a document titled Policy Statement on the Tax Regulatory Process.  In this Policy Statement, Treasury announces policies based principally upon “sound regulatory policy.” I attach that Policy Statement as Appendix B to this article.  The Policy Statement was issued after this article was substantially drafted.  I referred to the Policy Statement in appropriate places in the article, but I thought separate discussion of the Policy Statement would be helpful to readers because it overlaps with some of the themes developed in the article.

I offer the key points as separate bullet points with Comments after each bullet point (and caution that I have “cleaned up” some of the quotes):

“The APA generally requires notice and comment for legislative rules. The APA exempts interpretive rules from notice-and-comment requirements. Nonetheless, as a matter of sound regulatory policy, the Treasury Department and the IRS will continue to adhere to their longstanding practice of using the notice-and-comment process for interpretive tax rules published in the Code of Federal Regulations.”

Comments:  This statement is consistent with long-standing practice to promulgate interpretive regulations with Notice and Comment and confirms that the practice, which will continue, is based on “sound regulatory policy,” rather than the legal mandate of the APA.  As respects the key issue in this article–the continuing viability of interpretive regulations–this Policy Statement confirms the IRS position that interpretive regulations remain a viable APA approved category.