Friday, July 3, 2020

Federal Circuit Holds that Refund Suit for Overpayment Interest is in the Federal Circuit.(7/4/20; 7/6/20)

In Bank of America v. United States, ___ F.3d ___ (Fed. Cir. 7/2/20), here,  the Federal Circuit rejected the District Court for the Western District of North Carolina’s claim of jurisdiction over the taxpayer’s claim for refund of overpayment interest.  OK, you might ask, what was the trajectory from the W.D. N.C. to the Federal Circuit?  There is a story there but I am not going to dive into it.  Those wanting to know my previous ruminations on that trajectory can read the opinion and might review:  Pfizer Suit for Overpayment Interest Transferred to CFC for Tucker Act Jurisdiction (Federal Tax Procedure Blog 9/12/19; 9/25/19), here.  Added 7/6/20 12:00 pm:  For an excellent discussion on the merits, see Bob Probasco, The Tide Keeps Going Out, Carrying Overpayment Interest Suits Away from District Courts (Procedurally Taxing Blog 7/6/20), here.

Just to summarize the holding, the Court of Appeals for the Federal Circuit held that jurisdiction was properly in the Court of Federal Claims at the trial level rather that some taxpayer preferred forum choice of the district court in North Carolina (to avoid unfavorable precedent in the Federal Circuit).  In many cases involving tax issues, forum choices work in the favor of the taxpayer, but not this one.  The opinion is short, so I recommend that readers actually read it and even savor it.

I do note for those who are fans of the litigation and appeals process, the opinion does offer some lessons about what not to do.  Most importantly, what not to do is to irritate the Court of Appeals (or, really, any court for that matter).  I infer that Counsel for Bank of America did not avoid irritating the Court of Appeals.  A key excerpt is:
Thus, the District Court concluded, with minimal additional analysis, that it had jurisdiction over the Merrill Lynch overpayment interest claims, including those exceeding $10,000. See id. at *4. n3
   n3 Although asked repeatedly to explain the lack of analysis in the District Court’s Order, counsel for Bank of America failed to provide any explanation. See Oral Arg. at 18:43–21:05,
Appellate advocacy 101 which I learned while with DOJ Tax Appellate Section back in the old days was to answer the Court’s questions even when the answer may not be good for the client (in my case then, the United States/IRS).

Also, I just note briefly the Court’s excursion into legislative history.  Consider the Court’s introduction into that subject at p. 11 n6 (a footnote to the heading dealing with legislative history) which, in effect, pays homage to the notion that legislative history may not be relevant where the statutory text is not ambiguous.  Who knows what ambiguous means and, in any event, why would any rational court reject relevant and potentially persuasive legislative history as to either ambiguity or what the statutory text means?  But courts nowadays are driven by ideology rather than the persuasiveness for what statutory text means, so the courts have to make a passing and generally negative reference to legislative history.  Shame on them.

Wednesday, July 1, 2020

District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (7/1/20)

In United States v. Bittner (E.D. Tex. Dkt.4:19-cv-415 Dkt Entry 75 Order Dtd 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

Highly Recommended Article on Chevron and History of Deference (7/1/20; 7/3/20)

Readers of this blog will already know that I have been interested in the interface of administrative law and tax, and as subsets, interface of the Administrative Procedure Act (“APA”) and tax and the interface of Chevron deference and tax.  I have written an article posted on SSRN.  The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN 6/20/19, as revised 1/25/20), here.  In that article, I argue against the notion, apparently current among scholars, that the Treasury interpretive regulation is no more.  I discuss what I think are the relevant facets of administrative law, the APA and Chevron.

One of the principal arguments I make is that Chevron did not create deference ex nihilo, but simply refined and regularized deference that already existed.  Justice Scalia said of Chevron that it was “a stable background rule against which Congress can legislate.”  City of Arlington v. FCC, 569 U.S. 290, 296 (2013).  In the article, I go through some of the history of deference prior to Chevron that shows that the Supreme Court often explicitly deferred to reasonable agency interpretations, noting some prominent tax examples of such deference.

For readers interested in the subject, I recommend a new article that dives deeper into the history of deference. Craig Green, Chevron Debates and the Constitutional Transformation of Administrative Law, 88 Geo. Wash. L. Rev. 654 (2020), here.  The summary of the article at the beginning is:
             Chevron v. NRDC is under attack. Chevron deference to agencies’ statutory interpretation is a pillar of modern government that judges and bureaucrats have used almost every day for thirty years. Until recently, most observers dismissed efforts to overrule Chevron as impossible or absurd, yet one of Justice Anthony Kennedy’s last acts on the Supreme Court suggested that Chevron deference might violate the separation of powers. 
            Constitutional threats to Chevron are surprisingly recent and grave. In 2015, Justice Clarence Thomas was the first judge in history to write that Chevron is unconstitutional. Anti-Chevron critiques by Justices Neil Gorsuch and Brett Kavanaugh were featured elements of their Supreme Court nominations. Justice Samuel Alito joined an opinion in 2019 that condemned all administrative deference. And even though Chief Justice John Roberts’s concerns have been more nuanced, his ambivalence may be decisive. A landmark ruling seems imminent—one way or the other—and now is the time to analyze relevant arguments and consequences. 
            This Article examines the history and merit of Chevron’s constitutional critiques. Reagan-era conservatives like Antonin Scalia used to celebrate Chevron as compatible with the separation of powers, and the Supreme Court viewed administrative deference as a perfectly ordinary practice for almost two hundred years. That historical evidence supports normative arguments that Chevron is consistent with basic structures of constitutional law. Overturning Chevron would be the most radical decision in modern history about constitutional structure, upsetting hundreds of precedents, thousands of statutory provisions, and countless agency decisions. Such a ruling would transform constitutional law itself, as judges apply newly aggressive theories to destroy established tools of democratic self-governance.
JAT Comments:

Friday, June 26, 2020

IRS Offers to Settle Abusive Syndicated Conservation Easement Shelters Pending in Tax Court (6/26/20)

In IR-2020-13, here, the IRS announces that it will offer to settle Conservation Easement Syndication shelters of the BS genre that are currently pending in the Tax Court.  The settlement offer will be made by mail in each pending case.  The announcement says that the following will be the key terms.
  • The deduction for the contributed easement is disallowed in full.
  • All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
  • "Investor" partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.
  • Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.
Keep in mind that these are not all the terms but only the key terms.  And, I suppose, as presented, they may only be summaries of the key terms so that the actual key terms summarized may present different nuances than one can derive from the summaries.  As I learn more details or obtain more documents or links that may be helpful, I will do update revisions to this blog entry.

One of the key points regarding the offer, it will be made only in those cases pending before the Tax Court.  Cases in the IRS administrative pipeline are not within the scope of the offer as stated.  (Query, will Appeals make the same offer because, once a case gets to Appeals, the same incentive to clear the cases will be presented, because the next step will be litigation in the Tax Court?)

Peter Reilly has a good early discussion of the offer:  IRS Victory In Easement Case Prompts An Offer Not To Be Refused (Forbes 6/25/20), here.  Highly recommended.  And, from knowing Peter and his special interested in the abusive Syndicated Conservation Easement Shelters, he is likely to have more posts as the settlement offer plays out.

In email correspondence with Peter, I offered the following off-the-cuff (meaning not fully considered) comments.  I offer those off-the-cuff comments (modified and expanded but again without detail thought) just for early consideration, but if I have time to try to refine them, I will do so here.

1. The key excerpt, I think, is this:
The IRS realizes that some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution.  When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.
2. The penultimate paragraph says that taxpayers not excepting should not expect better terms.  But, as suggested by the above quote, what about those taxpayers who really do have better cases than the very bad cases (i.e., their documents meet the technical requirements of the regulation and their valuation is not grossly inflated as much as the more abusive ones)?  They will have better litigating hazards and the IRS should be willing to settle on a litigating hazards of their cases rather than insisting that one size fits all.

Wednesday, June 24, 2020

Fourth Circuit Calls Out a Bullshit Tax Evasion/Avoidance Gambit (6/24/20)

In Est. of Kechijian v. Commissioner, ___ F.3d ___ (4th Cir. 6/23/20), here, the Court affirmed the Tax Court’s holding that the bullshit transaction to avoid tax on ordinary income -- $41.2 million of such income -- did not work and that the 20% accuracy related penalty applied.  This particular bullshit transaction was different from other similar genre transactions I have discussed, in the sense that it appears to have been a one-off rather than mass-marketed (although, I am sure components were packaged by various promoters into other bullshit deals).

I won't get into the twists and turns to gerrymander the result the taxpayers and their advisors went through to hide what really happened.  However, I did find the following (Slip Op. 15-16) particularly on point:
            Surprisingly, petitioners double down on their position in this appeal. They candidly acknowledge that the only reason they executed the Surrender Transactions was to enable UMLIC S-Corp. to avoid withholding and remitting approximately $33 million in state and federal payroll and income taxes. Petitioners maintain that this course of action was necessary to ensure UMLIC S-Corp.’s continued viability as a going concern. This is  [*16] because, according to petitioners, UMLIC S-Corp. did not have enough cash on hand to cover its tax withholding obligations, an assertion that the Tax Court found to be unsupported by the evidence at trial. See Austin, T.C. Memo. 2017-69, at *40 n.13. But even if that were true, it does nothing to change the fact that the sole purpose for the Surrender Transactions was the avoidance of tax obligations, both those of UMLIC S-Corp. and, by extension, those of petitioners. Under our case law, that is enough to satisfy the first prong of the economic substance test. See Friedman v. Comm’r, 869 F.2d 785, 792 (4th Cir. 1989) (noting that the first prong “requires a showing that the only purpose for entering into the transaction was the tax consequences”).
On the penalty issue and reasonable cause, the following is also noteworthy after finding that the taxpayers had done nothing to determine their correct liability (Slip Op. 19):
            Petitioners’ argument that the tax law issues in this case are novel does nothing to change our conclusion. For one thing, we have never recognized novelty as a stand-alone defense to the imposition of accuracy-related penalties. See Baxter, 910 F.3d at 168. More importantly, there is nothing novel about the legal issues presented by or doctrines applied in this case. That the law prohibits a taxpayer from avoiding tax liability by means of a sham transaction is a rule almost as old as the federal income tax system. See, e.g., Gregory v. Helvering, 293 U.S. 465, 468–70 (1935); see also Baxter, 910 F.3d at 168 (rejecting a similar novelty argument on the grounds that “it [is] well-established that transactions lacking economic substance must be disregarded for tax purposes”). There is no reason that petitioners, sophisticated businessmen who were clearly cognizant of the tax consequences of their actions, could have reasonably expected that the Surrender Transactions would be exempted from this longstanding rule. See Treas. Reg. § 1.6664-4(b)(1) (noting that “the experience, knowledge, and education of the taxpayer” is relevant in assessing accuracy-related penalty defenses).
 Well, as Vincent Laguardia Gambini said here:  “Everything That Guy Just Said Is Bullshit.”

Gambini made that assessment of the opposing argument in a trial before a jury.  I am not sure that would be a good argument in an appellate court as was involved in the case above.  But that is the gist of the Court's holding.  (Actually, without getting into the details, I did make a similar argument in a prominent case when I was with DOJ Tax Appellate Section where, rather than filing an amicus brief, a prominent tax lawyer who had exposed clients if the Government won the appeal, wrote a law review article in the premier tax publication, NYU's Tax Law Review, after all the briefs had been submitted.  At oral argument, I advised the Seventh Circuit of the article publication and said that the argument in the article was bullshit (actually, I said that the article was just wrong and that Government could respond to all of the arguments in the article if the court of appeals wanted the Government to do so).  The Government won the case without further ado.

Textualism's Malleability -- Picking Your Friends (6/24/20)

Yesterday, in a Zoom session with a Houston tax group, the Wednesday Tax Forum (which meets on Tuesday), George Connelly, here, discussed § 6751(b), here, which requires supervisor approval before the initial determination of IRS penalty claims.  Since the IRS frequently asserts penalties, this requirement has been a frequent topic in litigation, at least after it surfaced a few years ago.  Basically, the ground covered by § 6751(b) has shifted dramatically and the aftershocks continue to alter the understanding of the requirement, now in more nuanced ways than before.

I do not plan to discuss § 6751(b) in this blog. For those interested in more on § 6751(b), George’s article, titled I.R.C. Section 6751(b) – What You Need to Know, may be viewed and downloaded here.

I do want to address one of the issues that I raised in the Zoom session – that is how the Tax Court which, like other courts, has moved into or at least toward the textualist camp for statutory interpretation (see Jonathan H. Choi, An Empirical Study of Statutory Interpretation in Tax Law, 95 N.Y.U. Law Rev. 363 (2020), here), abandons textualism for § 6751(b) because the text is nonsense, and applies a purposivist reading to get to the result they think Congress must have intended (whether Congress actually intended the result or not).  (There’s that notion, purportedly anathema to textualists, that Congress’ intent, real or imagined, means anything.)

In my prior prior posting, Supreme Court Case on Statutory Interpretation (Federal Tax Procedure Blog 6/16/20), here, I discussed the theme of textualism in Bostock v. Clayton County, 590 U.S. ___, ___ S.Ct. ___ (6/16/20), here.

I just read a more robust discussion of Bostock’s themes of textualism.  Anita S. Krishnakumar, Three Lessons About Textualism from the Title VII Case, by Anita S. Krishnakumar (Notice & Comment 6/24/20), here.  In the article, Professor Krishnakumar (bio here) discusses three key topics / lessons from Bostock that are counter to the oft-repeated claims of textualism:

1. Textualism does not necessarily lead to a single correct reading of a statute.
2. Textualists care about practical consequences and other extratextual considerations.
3. Textualism often involves some speculation about legislative intent or purpose.

Professor Krishknakumar concludes:
In the end, the Court’s trio of textualist opinions in Bostock have much to teach us about what textualism means on the modern Court. And while textualists can certainly celebrate that all three opinions “flew a textualist flag” as Justice Alito put it, they also should take note that textual analysis did not produce a single clear-cut reading of the statute—and that all three opinions took into account extratextual considerations as well.
Which is to say that, well, textualism is malleable.  In that sense, could it be that textualism suffers the same argument against that textualists (at least some of them) assert for legislative history:  It is like "looking over a crowd and picking out your friends."  See Brett M. Kavanaugh, Book Review: Fixing Statutory Interpretation, 119 Harv. L. Rev. 2118, 2149 (2016), here (in fn. 157, citing "Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 568 (2005) (quoting Patricia M. Wald, Some Observations on the Use of Legislative History in the 1981 Supreme Court Term, 68 IOWA L. REV. 195, 214 (1983), in turn borrowing Judge Leventhal's 'memorable phrase'").  Indeed, reading through Bostock, somehow, one might get the Humpty-Dumptian feeling that, with competing dictionaries and definitions, a word " means just what I choose it to mean—neither more nor less."  That is the textualist notion even when textualists reach different definitions.

Monday, June 22, 2020

Altera Cert Denied (6/22/20)

The Supreme Court denied certiorari in Altera Corp. v. Commissioner, 145 T.C. 91 (2015), which the Ninth Circuit reversed 926 F.3d 1061 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019), cert. den. ___ U.S. ___, ___ S.Ct. ___ (2020), here.  I have discussed or mentioned the petition for certiorari in several blogs.  The most recent (with links to the key blogs) is:  Altera Reply Brief on Petition for Certiorari (Federal Tax Procedure 6/7/20; 6/11/20), here (noting inter alia that the petition and reply brief indulge in considerable hyperbole).

The traditional mantra is that a denial of certiorari is not an affirmance on the merits.  All it does is to let the Circuit Court opinion stand without any inference that the Circuit Court opinion is approved.

The key point is that the Ninth Circuit is now binding authority in the Ninth Circuit and its lower courts (including the Tax Court for cases appealable to the Ninth Circuit).  In the Ninth Circuit’s analysis, the Tax Court slipped off the rails in Altera.  The question now is what the Tax Court does with the next case appealable to another Circuit.  Does the Tax Court stick to its guns or does it conform its holding as it did in Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion), after being corrected by the Second Circuit?  And, then, more importantly, what the next few Circuits to consider the matter do.

The major issues raised in the Altera petition and the proceedings below involved the Administrative Procedure Act (“APA”), including Chevron which is not directly an APA issue but related to it in some ways.  The Supreme Court had already granted a petition for certiorari in a case involving the interface of tax administration and the APA.  CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den. ___ F.3d ___ (6th Cir. 2019), cert. granted ___ U.S. ___, ___ S.Ct. ___ (Dkt. No. 19-930, May 4, 2020).  See Certiorari Granted in CIC Servs on AIA Application to Pre-enforcement Guidance Challenges (Federal Tax Procedure Blog 5/12/20), here.  Maybe granting cert in CIC sated the Supreme Court’s appetite for the interface of tax administration and the APA.

Sunday, June 21, 2020

UT Law Dean Farnsworth on English and Volokh Conspiracy Guest Blogs (6/22/20; 6/26/20)

Earlier this month, I received an email from Bryan A. Garner, the legal writing guru.  Garner recommends three books by Ward Farnsworth, dean of the University of Texas School of Law, here.  Bryan A. Garner,  An important trilogy (LawProse Lesson #334), here. These are not your normal law books, but rather--as you might suspect from Garner's interest--books on the skills of writing and argument.  (Those interested in the subject of writing might check out Garner's web page here; and some of his books, including The Elements of Legal Style -2nd Edition (Oxford U. Press 2002), here (taking off from the iconic William Strunk JR. and E.B. White, The Elements of Style, originally published in 1918 and periodically updated and republished thereafter (see Wikipedia page here)).

The Farnsworth books Garner recommends are:
● Farnsworth’s Classical English Rhetoric (2010).
● Farnsworth’s Classical English Metaphor (2016).
● Farnsworth’s Classical English Style (2020).
Garner says:
       They’re all stylishly published by David Godine, the literary publishing house in Boston. They’re bold and they’re innovative, and they’re brimming with examples. In fact, there are more examples than explanatory text. That’s a hallmark of Farnsworth’s approach. It’s quite a feat. 
          Buy them. Read them. You’ll learn.
In addition to alerting readers of the book, I just found out that Dean Farnsworth will be guest-blogging on The Volokh Conspiracy this week on the most recent book, Classical English Style.  See Eugene Volokh, Dean Ward Farnsworth (U Texas Law) Guest-Blogging About Legal Writing (The Volokh Conspiracy), here.

I will post below links to the installments this week by Dean Farnsworth here rather than doing a separate blog entry on each one.  I look forward to learning and sharing.  (BTW, I have ordered each of the three books but because of other book commitments will likely not get to them until July; I won't announce when I have finished any or all the books; perhaps it will show in my writing.  (But, hard to teach an old dog new tricks.)

The Volokh Conspiracy Farnsworth Postings:
  • What Did Lincoln Know About Language That We Don't? (6/22/20) here.  (On modern English as built on Old English and French and how Abraham Lincoln played the best resonances of both influences in constructing his iconic statements.)
  • What Did Churchill Know About Language That We Don't? (6/23/20), here. ("Churchill also made great use of the reverse pattern: starting with simple words, then using language more complex to create a feeling of ascension." [Illustrated with the What is Our Policy speech.])
  • What Did Holmes Know About Language That We Don't (6/24/20), here. (Holmes as master of contrast, setting up the Latinate word and ending in a burst of shorter more pungent Saxon words.)
  • Holmes and the Art of the Skewer (6/25/20), here.  (Holmes again using an examplewhere "The higher and more pompous idea is put in words that came into English from Latin * * * *. The hard truth that follows is put mostly in older and simpler words.")
  • Rhetoric, Polarities, and Trump (6/26/20), here. ("[R]hetorical force requires two things, not one. The two things might be plain and fancy words, long and short sentences, high or rich substance and low or simple style (or vice versa), the concrete and the abstract, the formal and the informal, or other pairs. If you want your writing to cook, learn how to play with those polarities.")
Readers may also be interested in another Garner article, How to regain the joy of reading (ABA Journal 11/1/14), here.  Excerpts, including one involving Dean Farnsworth:

Friday, June 19, 2020

Distinction Between APA arbitrary and capricious review and Chevron Interpretive Reasonableness Review (6/19/20; 6/24/20)

In DHS v. Regents of the University of California, ___ U.S. ___, ___ S.Ct. ___ (6/18/20), Sup. Ct. here, the Court held that the DHS rescission of DACA was procedurally defective (arbitrary and capricious) for failure to satisfy the reasoned decisionmaking requirement of the APA, as interpreted.  (Also often referred to as the State Farm standard.)  DHS v. Regents has created quite a stir in the national political discussion (most of the stir being rhetoric).

I have not dealt much with the State Farm standard on this blog.  But,  I have noted, for example, that failure to satisfy the arbitrary and capricious/ State Farm standard is Altera’s principal argument on petition for certiorari in Altera Corp. v. Commissioner, 145 T.C. 91 (2015), rev’d 926 F.3d 1061 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019), petition for cert. pending, No. 19-1009 (filed 2/10/20).  See Altera Reply Brief on Petition for Certiorari (Federal Tax Procedure Blog 6/7/20; 6/11/20), here.

I won’t get further into either DHS v. Regents or Altera today (except as an aside at the end), but I did pick up a new case, that  makes a nice (and correct) distinction between Chevron review for interpretive regulations and arbitrary and capricious review applicable to both legislative and interpretive regulations.  The case is:  Natural Resources Defense Council, Inc. v. U.S. EPA, ___ F.3d ___ (2d Cir. 2020), here.  The relevant excerpt is (Slip Op. pp. 17-20) (cleaned up). I bold face parts that I think require particular attention):
II. Legal Standard 
            "We evaluate challenges to an agency's interpretation of a statute that it administers within the two-step Chevron deference framework." Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 507 (2d Cir. 2017).  At Chevron Step One, we ask "whether Congress has directly spoken to the precise question at issue." If Congress's directive is unambiguous, both the agency and the courts are bound by that mandate. If, instead, "the statute if silent or ambiguous with respect to the specific issue," the analysis proceeds to Chevron Step Two. At that step, "the question for the court is whether the agency's answer is based on a permissible construction of the statute."  
            In evaluating reasonableness at Chevron Step Two, "we will accord deference to the agency's interpretation of the statute so long as it is supported by a reasoned explanation, and `so long as the construction is a reasonable policy choice for the agency to make.'" Catskill Mountains, 846 F.3d at 507. Because "a statute's ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps," the agency's interpretation must only be reasonable, and need not be the sole permissible or even most reasonable interpretation of the statute.

Tuesday, June 16, 2020

Supreme Court Case on Statutory Interpretation (6/16/20; 6/24/20)

In Bostock v. Clayton County, 590 U.S. ___, ___ S.Ct. ___ (6/16/20), here, the Supreme Court Justices took up a public intramural debate that I describe as “what is it about sex that you don’t understand?”  That’s a bit flip.  The debate the Justices engaged in was about the prohibition in Title VII of the Civil Rights Act of 1964 against discrimination “because of * * * sex.”  (There are some other prohibited categories such as race, color, religion, etc., but the one in issue in Bostock was “sex.”)  Essentially, debate was among three conservative justices of the Court—Gorsuch for the majority of six with dissents by Alito and Kavanaugh.  Justice Gorsuch’s opinion attracted both Chief Justice Roberts and the liberal Justices (Ginsburg, Breyer, Sotomayor and Kagan, so I suspect that his opinion reflects some of their influence as well, but the opinion is very much Gorsuch in style).  The dissenting opinions are, in my view, hyperbolic, perhaps reflecting some disappointment that the conservative compadre, Justice Gorsuch, didn’t see the case as they did.

Bostock was not a tax case.  I discuss it on the Federal Tax Procedure Blog because it offers insight into an issue I do discuss in the Federal Tax Procedure book–statutory interpretation.  (See Practitioner Edition  pp. 9-14; and Student Edition pp. 6-9; since I have substantially revised that discussion, I offer for download here the discussion as revised to today from the working draft of the 2020 editions that will be published in August 2020.)  As I note, there are two key approach categories to statutory interpretation – textualism and purposivism.  Those are broad categories with much blending in between, but proponents of these approaches to statutory interpretation claim that their use of their preferred approach makes them more faithful agents to Congress which enacted the statute.  Generally, politically conservative judges are textualists, and politically liberal judges are purposivists (at least relative to each other, with some crossover from time to time).  Influenced by Justice Scalia, even politically liberal judges have trended toward textualism–e.g., Justice Kagan famously proclaimed in 2015 that “we’re all textualists now.”  That claim was hyperbolic but not much, as purposivist judges drifted toward the textualist camp.  But even textualist judges have a broad field to play in between pure textualism and textualism bordering on purposivism.

In Bostock, all of the judges authoring the opinions are political conservatives firmly in the textualist camp.  Hence, to see them fight about statutory interpretation is noteworthy.  I won’t try here to sort out the dynamics of what exactly happened.  I just state it in overview.

Justice Gorsuch for the majority concluded that the statutory word “sex” was broad enough to cover the type of discrimination in issue–discrimination against homosexuals or transgender.  Justices Alito and Kavanaugh, in separate opinions, concluded that the word sex was not used that way in the statute because there was no expectation, at the time of enactment, that the word was so used.  There is much subtlety in those broad statements of position which I just won’t get into here.  Rather, I offer some comments that are relevant to my discussion of the statutory interpretation issue in the Federal Tax Procedure book editions.

1.  The opinions agree that the touchstone of statutory interpretation is the “ordinary public meaning” (sometimes called original public meaning, particularly in constitutional interpretation; but imported to statutory interpretation because constitutional interpretation is really statutory (perhaps super-statutory) interpretation).  (See Gorsuch Slip op. 4; Alito Slip Op. 23 (stating issues as "How would the terms of a statute have been understood by ordinary people at the time of enactment?"); and Kavanaugh ("The ordinary meaning that counts is the ordinary public meaning at the time of enactment."); on treating constitutional and statutory interpretation the same, see Evan D. Bernick, Envisioning Administrative Procedure Act Originalism, 70 Admin. L. Rev. 807, 834 (2018).  What does ordinary or original public meaning mean?  The competing Justices have different views on that but the standard is the same.  At least as formulated, the ordinary or original public meaning is the meaning some hypothesized reader or hearer of the statutory text at the time of enactment would have ascribed to the text.  That is the be contrasted with the meaning that the drafters or speakers of the text (Congress) intended the text to mean.  I discuss some of the subtleties in that approach in the attached revised version (see particularly footnote 44.)

Monday, June 8, 2020

Publication in ABA Tax Lawyer Townsend Burden of Proof Article (6/8/20)

The ABA Tax Lawyer publication has published my article:  John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020).  I have posted the article as published to SSRN where it can be reviewed or downloaded in pdf format.  The suggested citation on SSRN is:  Townsend, John A., Burden of Proof in Tax Cases: Valuation and Ranges — An Update (2020). 73 Tax Lawyer 389, 2020. Available at SSRN:

I had posted an earlier blog entry of the posting of an earlier draft to SSRN.  See Townsend Article on Burden of Proof and Valuation in Tax Cases (Federal Tax Procedure Blog 12/9/19), here.  The final as published has substantial changes, so I recommend that the final published article be used rather than the earlier draft.

The SSRN Abstract is.


In this Article, the author discusses the difficulty in many valuation cases of determining a definite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in Cede & Co. v. Technicolor, Inc., a frequently cited opinion by the Delaware Court of Chancery, a forum for significant litigation involving corporate valuations:
[I]t is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. . . . [V]aluation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts’ opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.
Corporate valuations for estate tax are just one context of tax litigation, but there are many other contexts. A prominent example for some time now has been transfer pricing.

Saturday, June 6, 2020

Altera Reply Brief on Petition for Certiorari (6/7/20; 6/11/20)

I have previously written on the Altera Corporation petition for certiorari from the decision in Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019).  Altera Petition for Certiorari (Federal Tax Procedure Blog 2/12/20; 2/13/20), here; see also Excellent Blog Postings on the State of the Altera Petition for Certiorari (Federal Tax Procedure Blog 5/22/20), here.  The Supreme Court docket page is here; the SCOTUSBlog case docket page is here.  

Altera Corporation has now filed its Reply Brief for Petitioners, here.  Professor Christopher Walker, an observer of the intersection between tax and administrative law (and counsel for an amici supporting Altera's petition), has posted notice of the Reply Brief and excerpted the introduction:  Altera v. IRS: Major Tax and Administrative Law Cert Petition Before the Supreme Court (Notice & Comment 6/5/20), here; see also Susan C. Morse and Stephen E. Shay (Guest Bloggers), In Altera Reply Brief, Taxpayer Doubles Down on Flawed Argument That the Government Changed Its Tune (Procedurally Taxing Blog 6/11/20), here, cross posted at Notice and Comment here.  [The latter citation was added 6/11/20.]

Like the petition and amici submissions in support of the petition, the Reply Brief indulges in considerable hyperbole.  For example, the Reply Brief (p. 5) claims that the Government does not dispute the importance of the case and simply argues the merits.  I think that claim is exaggerated.

To be sure, significant tax revenue is at issue and if that is all that makes a case important for certiorari purposes, the Government could have / should have acquiesced in certiorari.  Cf. Alan Horwitz, Government Acquiesces in Beard Petition for Certiorari (Tax Appellate Blog 7/29/11), here.  Dollars at issue do not make a case important for certiorari purposes, otherwise the next time a tax protester claims that his wages are not income, he could claim importance on petition for certiorari.  (Well, a tax protester would do that anyway, but Altera and its amici are not tax protesters, at least not often characterized that way.)

The administrative law principles are really not at issue either (in my opinion).  They are fairly settled unless Altera were asking for Chevron to be overruled.  At best, Altera's argument is that the Ninth Circuit improperly applied those principles.  The Morse and Shay posting linked above addresses Altera's claim that the process was procedurally flawed under the arbitrary and capricious standard in § 706/State Farm, and assert that the process was not procedurally flawed.  But the Ninth Circuit articulated the right scope of review on that issue, so that Altera's claim is just that the Ninth Circuit made a mistake in application of the arbitrary and capricious standard.  The Supreme Court is generally not a court to correct errors in the Courts of Appeals, but to take cases of true systemic importance to issue new guidance or perhaps affirm old guidance for the proper application in the courts in the future. For example, if the Ninth Circuit had erroneously stated the standard it was applying in a way that would be precedential in the Ninth Circuit and perhaps influential in other Circuits (including their lower courts, which include the Tax Court), there might be some systemic importance to the Supreme Court addressing the issue to insure that the inferior courts can know and properly articulate the correct standard.  But if the Ninth Circuit articulated the correct standard (as it certainly did) and, at worst, only made a mistake in its application, that does not seem to me to be worthy of the Court's attention at this time. [The redlined text was added 6/11/20.]

Thursday, June 4, 2020

It's All About Interpretation (6/4/20)

I have written often on statutory interpretation (including subsets related to deference to agency interpretation).  Statutory interpretation is a related topic to constitutional interpretation.  For example, originalism has its principal application to constitutional interpretation, but the originalist interpretive strategy can apply equally to statutory interpretation.  And, interpretation applies equally to biblical interpretation.  As my favorite Hebrew Bible scholar, James Kugel, says, it is all about interpretation.  Kugel says that it is not about what the original author(s) (or redactors in the current lingo) meant, it is how it is interpreted at the critical moment in time – in the case of the Bible when the Jewish community decided that the text was canonical for them (long after, in most cases, it was written (or finally redacted)).  (His principal anecdote proving his point is the Hebrew Bible book Song of Songs (Song of Solomon in the Christian New Testament).  That process of going from original writing through the redaction and community adoption process took a long time, often hundreds of years.  And then, once canonical, it is about how the community of faith interprets it over time to meet the community needs.  (Great midrash about how the text can expand or change in interpretation over time, a process that can equally apply with constitutional and statutory interpretation.)

There was no (or little) lapse of time between writing and adoption of the constitution and statutes, where the two are roughly contemporaneous (although both get reinterpreted over the years to meet the needs of the community).  At any rate, I thought this offering, here, from John Sexton, a prominent legal scholar and force of nature, talking about his seminar at NYU might be interesting to readers of this blog.  The reading list for Sexton's course is here,

Disclosure:  I am a long-time Brooklyn Dodgers fan.  And a long-time John Sexton fan (he interviews John Sexton).  And when those two flow together in an interview with Bill Moyers to talk about the confluence of baseball, particularly baseball through the Brooklyn Dodgers, and religion, particularly with sacred texts such as the Bible and the Constitution, well that is irresistible .

This comes up as I am considering offering a course at my Church on Sexton's book, Baseball as a Road to God, here.

BTW, it strikes me that there is a further parallel at least for statutory interpretation.  The analog with Chevron deference is that the religious community, in whatever form, often "defers" to interpretations offered by their rabbis, priests, pastors, shamans or whatever, rather than making its own individual interpretations de novo (as a lawyer would say) or sola scriptura as Martin Luther might say.  The analog is imperfect, but, I think, worth considering.

Monday, June 1, 2020

District Court Applies Tax Exception to Declaratory Judgment Jurisdiction (6/1/20)

In Rivero v. Fidelity Investments, Inc. (E.D. Tex. 5/19/20, Memorandum Opinion & Order Dtd 5/19/10), GS here, the Court held that the tax exception to its declaratory judgment jurisdiction precluded a declaratory judgment that an IRS Form permitting transfer of title to a financial account was not necessary.  In summary, the plaintiff had a financial account in a joint tenancy with right of survivorship (JTWROS) with a nonresident non-citizen, Medrano.  (The relationship between Rivero and Medrano is not given.)  Medrano died.  Rivero sought to have the financial institution (Fidelity) transfer the JTWROS account to her sole name, because she was the sole owner as the survivor.  Fidelity requested that she provide a Form 5173, Transfer Certificate Filing Requirements for the Estates of Nonresidents not Citizens of the United States, here.  The transfer certificate requirement is a back stop to insure that nonresident non-citizen estate tax, if any, is paid.  Basically, the Court said that, in order to declare that the transfer certificate was not needed for Fidelity to transfer title, it would have to determine that no estate tax was due.  And that ran afoul of the tax exception to the declaratory judgment statute.
The opinion does not state whether the account, although titled JTWROS, was beneficially owned by Rivero before Medrano's death because she was the source of the assets in the account.  If she owned the assets, then presumably Fidelity could effect the transfer to her sole name without potential liability.  Note in this regard that such right of survivorship titling is often use as a method to transfer ownership at death and, at least as between the parties, does not transfer ownership until the owner dies.  If that were the case, then there would be no estate tax due with respect to the asset because Medrano had an expectancy at best.  

I wonder, therefore, whether Rivero could have brought a proceeding in the state court to declare the pre-death ownership of the asset.  Of course, that might not be an adversarial proceeding and the IRS might not be bound to accept the determination.  But that proceeding might give Fidelity enough cover that it might agree to transfer without further ado.  Or Rivero might still try to work through the IRS to show that there is no estate tax due and obtain an appropriate transfer certificate.

Still another possibility, I suppose, would be for Rivero just to withdraw the assets which, I suppose, her joint tenancy may have given her the power to do (subject to any state law requirement precluding that upon the death of the other tenant).

Tax Court Administrative Orders on Trials in Pandemic Times (6/1/20)

Readers of this blog will be interested in two orders of the Tax Court issued last week:
  • Administrative Order No. 2020-02 on Remote Court Proceedings During COVID-19 Pandemic, here.  The order attaches sample Notice of Setting Case for Trial and Standing Pretrial Order (with Pretrial Memorandum Form) for regular cases as small cases and a Getting Ready for Trial Checklist.  The order says:
Given the ongoing uncertainties and the Court’s desire to continue essential operations, on May 29, 2020, the Court adopted procedures for conducting Court proceedings remotely. These procedures will be in effect until further notice. Sample orders and notices incorporating these procedures are attached to this Administrative Order and will be posted on the Court’s website under “Forms”. 
Public access to the Court’s remote proceedings will be made available via realtime  audio with dial-in information for each session posted on the Court website. 
This Order is effective immediately and shall continue in effect until terminated by this Court.
  • Administrative Order No. 2020-03 on Limited Entry of Appearance Procedures, Effective June 1, 2020, here.
Bob Probasco, here, of the Texas A&M Law School has an excellent Guest Blogger posting -- Significant Changes For Tax Litigation (Procedurally Taxing Blog 6/1/20), here.  So I won’t re-create the wheel here.  Bob does ask readers of the PT posting to offer their observations and questions.  So I encourage readers to watch the comments to Bob's posting and any replies that Bob or other readers may make to those comments.

Bob also noted in the posting:  
Another press release the same day informed us that on June 1st the court will resume accepting requests for copies of documents from non-parties.  But the process will be more flexible than before; requests can be made by phone and received by email.  You won’t have to – because you can’t – visit the court building in person.
I suspect that this "innovation" will survive the Pandemic--at least the email request or perhaps an internet form to make the request and any payment required.

A Detour:  I note that the order has a quote around Forms at the end of the sentence and places the period outside the endquote.  The secret Tax Court style manual, as it was explained to me, should have required that period (consistent with the American practice) to be placed inside the endquote.  See Updates on the Tax Court's Continued Love Affair with Periods Outside Quotations (1/4/20; 2/29/20), here.  Perhaps the style manual applies only to decisions and the like and not to administrative orders.  Or perhaps the explanation I received is incorrect.  At any rate, does the Tax Court really need to keep its style manual secret?

Sunday, May 31, 2020

Really, Skidmore "Deference?" (5/31/20; 6/3/20)

Today, I discuss an interpretation "strategy"--that might not be the right word, but bear with me--commonly called Skidmore deference, named for the interpretive process described in Skidmore v. Swift & Co., 323 U.S. 134 (1944), here.  I provide links at the end of this blog to the pages in the current (2019) editions of my Federal Tax Procedure book (both editions)  and to key offerings from this blog that readers might want to read to pursue my thoughts on Skidmore, along with others thoughts cited therein.  These offer background and some overlap on what I discuss today.

I start with my definition of deference.  This is in the context of Chevron, but applies equally to Skidmore:
Deference is a court applying a reasonable agency interpretation of ambiguous statutory text despite the court’s belief that there is a more reasonable interpretation of the ambiguous statutory text.
This is my definition.  I don't think that it is controversial in the context of Chevron.  (Nothing in my definition is original to me; the core concept has been expressed frequently and, so far as I am aware, unanimously (at least extrapolating from the small but, I think, representative cases I have read over the years).)

Chevron requires that a court apply a reasonable agency interpretation despite believing that there is a more reasonable interpretation which the court would apply if Chevron did not command deference.  That deference is outcome determinative as to the interpretation in issue.  

But does Skidmore demand deference in this sense?  Answering that question requires that we actually read Skidmore, Skidmore v. Swift & Co., 323 U.S. 134 (1944), here.  Since Skidmore is the law, we should always start with the law.  (As Justice Frankfurter is reported to have said, the cardinal rules for statutory interpretation are :  “(1) Read the statute; (2) read the statute; (3) read the statute!”  Henry J. Friendly, Mr. Justice Frankfurter and the Reading of Statutes, in Benchmarks 196, 202 (1967) (quoting Justice Frankfurter); so, where the case is the law, then read the case, read the case, read the case.)  The Court said in Skidmore (p. 140):
We consider that the rulings, interpretations and opinions of the Administrator under this Act, while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.

Wednesday, May 27, 2020

Suspensions of Statute of Limitations Make Collection Suit Timely (5/27/20)

In United States v. Weiss (E.D. Penn Dkt. 19-502 Order dated 5/21/20), here [GS here], the Court denied the taxpayer’s statute of limitations defense in a collection suit where the Government seeks judgment on the assessment.  The issue was whether the Government timely filed its suit to obtain judgment on assessments based on delinquent returns filed on October 10, 1994.  The assessments were made later in October 1994.  Those assessments triggered the 10-year collection statute of limitations under § 6502(a)(1).  The Government brought the collection suit on February 5, 2019, over 14 years after the collection statute would have normally expired on in October 2004.  The devil, of course, is in the word "normally."  The IRS cannot unilaterally extend or suspend the statute of limitations, but the taxpayer can take actions that will do so.  The trajectory of those actions are what caused the collection suit to be timely.

In my view, there is nothing particularly surprising in the way the Court pieced together the events causing the suspensions to apply over the years.  Although not surprising, the trajectory is a good lesson particularly for students trying to understand how suspensions work.  Indeed, I used to teach these in my class, with examples, and then, on the exam, would have a fact pattern starting with a notice of deficiency through the Tax Court proceeding and appeal (including a petition for certiorari) and ask the students to answer the earliest date the IRS could assess and the latest date the IRS could assess.  For each answer I wanted a specific date and then the relevant Code section(s), with any further explanation the student desired.  Usually the Code section(s) would be sufficient to tell me that they had the basis for the answer.

So, this case reminded me of my teaching and examinations.  For students of tax procedure the case is a good read.  I won’t summarize it because it is fairly short and well written.  I will say that the key legal issue is whether a petition for certiorari is an appeal that is within the suspension period for appeals under § 6330(e)(1), here.  So, I offer the facts from the opinion (these are just the facts, with references to Code and Regulations sections, usually in footnotes, omitted).  I invite readers to perform their own analysis of the statute suspensions (Note that I am including in the block quote below only the facts I think pertinent for the analysis and am using the cleaned up technique to eliminate discussion not relevant to the fact trajectory):

Friday, May 22, 2020

Excellent Blog Postings on the State of the Altera Petition for Certiorari (5/22/20)

Readers of this blog may be interested in an excellent cross-posting by Professors Susan Morse (Texas) and Stephen Shay on the state of play and their views on Altera.  See Pending Cert Petition in Altera: Tax Law in an Administrative Law Wrapper (Procedurally Taxing Blog 5/22/20), here and Pending cert petition in Altera: tax law in an administrative law wrapper, by Susan C. Morse and Stephen E. Shay (Notice & Comment 5/22/20), here.  I highly recommend the offerings (reading either of them is obviously sufficient).  The authors contributed to an amicus brief opposing certiorari, so they summarize their view of the case.

JAT Comments:

1. The petition for cert and the S.G.’s brief in opp may be viewed, along with amicus briefs, at the SCOTUSblog site here.  Altera's reply, if any, has not been filed yet.

2. I posted a comment on the Procedurally Taxing Blog posting.  My comment, beside saying that the posting was excellent, was in the form of questions on perhaps side issues that piqued my interest after reading the offering.  Readers can see my comments here.

Saturday, May 16, 2020

Article On Justice Scalia's Modest Success and/or Failure to Persuade Other Judges to Reject Legislative History in Statutory Interpretation (5/16/20)

Readers of this blog may be interested in a recent Draft of a Law Review article recently posted to SSRN.  Stuart Minor Benjamin and Kristen Renberg, The Paradoxical Impact of Scalia's Campaign Against Legislative History 157 (SSRN 2020), for publication in Cornell Law Review, Vol. 105, No. 4, 2020, here; see also the SSRN Abstract, here,; and a summary of the article in Stuart Benjamin, In His Advocacy Against Legislative History, Did Scalia Get Half a Loaf, or None at All? (The Volokh Conspiracy 5/15/20), here.

Here is the SSRN Abstract:
Beginning in 1985, Judge and then Justice Antonin Scalia advocated forcefully against the use of legislative history in statutory interpretation. Justice Scalia’s position, in line with his textualism, was that legislative history was irrelevant and judges should not invoke it. Reactions to his attacks among Justices and prominent circuit judges had an ideological quality, with greater support from ideological conservatives. In this Article, we consider the role that political party and timing of judicial nomination played in circuit judges’ use of legislative history. Specifically, we hypothesize that Republican circuit judges were more likely to respond to the attacks on legislative history than their Democratic counterparts, and that judges who joined the bench during or after these attacks were more likely to be influenced than their counterparts who were appointed before the attacks. Utilizing a dataset containing all published federal appellate court majority opinions between 1965 and 2011 (more than 240,000 opinions), we find that, for both hypotheses, the judges whom we would expect to be more influenced by the attacks on legislative history were in fact less likely than their counterparts to cite statements from floor debates or committee hearings, traditionally regarded as among the least reliable forms of legislative history. But they were more likely than their counterparts to cite committee reports, traditionally regarded as the most reliable form of legislative history. The attacks on legislative history thus seem to have had the effect of pushing judges who might be expected to be influenced to (re)examine their treatment of legislative history but not (as Scalia had advocated) to ignore it. Instead, they adopted what had been the consensus approach for most of the twentieth century. Scalia influenced, but he did not persuade.
And here is the Conclusion from the Article (pp. 158-159, footnotes omitted):

Thursday, May 14, 2020

Tax Court Sustains Key Conservation Easement Regulation But Wobbles on Legislative/Interpretive Regulation Issue (5/14/20; 5/26/20)

In Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. ___, No. 10 (2020) (reviewed opinion), here, the Tax Court upheld the Treasury Regulation’s interpretation of § 170(h)(5)’s requirement that the easement be “protected in perpetuity.”  The Court first held (Slip Op. 9-25) that the promulgation process was not procedurally defective, it was not arbitrary or capricious.  The Court next held (Slip Op. 26-33) that the interpretation met Chevron’s Step Two test that it reasonably interpret the ambiguous statutory text and was therefore entitled to deference.

In reaching its conclusions, the majority opinion treated the regulation as a legislative regulation.  I think the Court was wrong in doing so and will summarize my reasons.  But, I think that if the Court had properly treated the interpretation as an interpretive regulation, it would have gone through the same process–i.e., it would have found the promulgation of the interpretive regulation to be procedurally proper and it would have found the interpretation a reasonable interpretation of the statute under Chevron Step Two.

So, my quibble over the proper characterization of the regulation interpretation of the “protected in perpetuity” statutory requirement would not, if correct, reach a different result.

What the Court did not find and could not find was an express congressional delegation of legislative rulemaking authority such as, in the quintessential tax example, the delegation of authority in § 1502 to promulgate consolidated return regulations that are the law.  Section 1502 is a delegation to the IRS to make the law and not just to interpret the text of § 1502.

Rather, all the Tax Court could find was (i) ambiguity in the statutory term “protected in perpetuity” and (ii) a regulation fleshing out details of that statutory text in a way the Court found reasonable in Chevron Step Two (although presenting the Chevron analysis as arbitrary and capricious review).  In this respect, the regulation interpretation of “protected in perpetuity” is like one of the classic interpretive regulations approved by the Supreme Court in United States v. Correll, 389 U.S. 299 (1967) where the regulation interpreted the statutory term “away from home” for business expense deduction to require sleep or rest.

The Court’s reasoning, after positing glittering generalities about the difference between legislative and interpretive regulations was (Slip Op. 17):
Because the regulation imposes a requirement not explicitly set forth in the statute, it is appropriately treated as a legislative rule.

Wednesday, May 13, 2020

Tenth Circuit Wobbles on Legislative / Interpretive Distinction (5/13/20)

In Aposhian v. Barr, 374 F. Supp. 3d 1145 (D. Utah 2019), here, the Court consider a challenge to the bump-stock rule similar to the challenge rejected in Guedes v. Bureau of ATF, 920 F.3d 1 (D.C. Cir. 2019), cert. den. 589 U. S. ____ (2020), ___ S.Ct. ___ (2020).  In part relevant to what I want to discuss, the district court said (pp. 1150-1151, footnote omitted and emphasis supplied):
Mr. Aposhian argues that the Final Rule was issued in excess of statutory jurisdiction because the NFA does not vest the Attorney General or the ATF with rulemaking authority. In response, the defendants argue, and the court agrees, that the Final Rule does no more than interpret undefined statutory terms. Although the Attorney General and ATF promulgated their interpretations through the more laborious, formal notice-and-comment process, the use of that procedure does not alter the Final Rule's interpretive character. And Mr. Aposhian does not dispute that the ATF, under the direction of the Attorney General, is empowered to interpret and administer both the NFA and the GCA. See Pl.'s Mot. for Prelim. Inj. (ECF No. 10 at 6); 18 U.S.C. § 926(a); 26 U.S.C. § 7801(a)(2); Guedes v. ATF, 356 F.Supp.3d 109, 129 n.3 (D.D.C. 2019) (rejecting challenges to the Final Rule's interpretations and the ATF's interpretive authority, noting the "ATF's clear authority to interpret and administer" the relevant statutes).
I think the district court was correct in its understanding that using the notice and comment procedure for interpretative rulemaking (as opposed to legislative rulemaking) does not transform an interpretive rule into a legislative rule.

Aposhian has been affirmed on appeal.  Aposhian v. Barr, ___ F.3d ___ (10th Cir. 5/7/20), here.  But in a way that seems to reject the reasoning of the district court that I discuss above.  Here is where I think the Court of Appeals wobbles in its analysis (Slip Op. pp. 12-15):
Initially, the applicability of Chevron depends on what kind of rule the Final Rule represents. There is a "central distinction" under the APA between legislative rules and interpretive rules. Chrysler Corp. v. Brown, 441 U.S. 281, 301 (1979); see 5 U.S.C. § 553(b), (d). Legislative rules generally receive Chevron deference, whereas interpretive rules "enjoy no Chevron status as a class." United States v. Mead Corp., 533 U.S. 218, 232 (2001). 
A legislative rule is one that "is promulgated pursuant to a direct delegation of legislative power by Congress and . . . changes existing law, policy, or practice." Rocky Mountain Helicopters, Inc. v. F.A.A., 971 F.2d 544, 546 (10th Cir. 1992). A legislative rule affects individual rights and obligations, and, if it is "the product of certain procedural requisites," it has the force and effect of law. Chrysler Corp., 441 U.S. at 301-02. An interpretive rule, on the other hand, "attempts to clarify an existing rule but does not change existing law, policy, or practice." Rocky Mountain Helicopters, 971 F.2d at 546-47. An interpretive rule simply "`advise[s] the public of the agency's construction of the statute and rules which it administers.'" Sorenson Commc'ns, Inc. v. F.C.C., 567 F.3d 1215, 1222 (10th Cir. 2009) (quoting Shalala v. Guernsey Mem. Hosp., 514 U.S. 87, 99 (1995)). 
The government contends—and the district court found—that the Final Rule is merely interpretive. See Aple. Br. at 37-38; Aplt. App. at 176. But "[t]he agency's own label for its action is not dispositive." Sorenson, 567 F.3d at 1223. Instead, "[t]he court must rely upon the reasoning set forth in the administrative record and disregard post hoc rationalizations of counsel." Id. at 1221. Here, "[a]ll pertinent indicia of agency intent confirm that the [Final] Rule is a legislative rule." Guedes v. Bur. of Alcohol, Tobacco, Firearms & Explosives, 920 F.3d 1, 18 (D.C. Cir. 2019) (reviewing the Final Rule under the Chevron framework).

Tuesday, May 12, 2020

Certiorari Granted in CIC Servs on AIA Application to Pre-enforcement Guidance Challenges (5/12/20)

I have previous written on CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den.  936 F.3d 501 (6th Cir. 2019).  See CIC Servs Petition for Rehearing En Banc Petition Denied with Hyperbolic Concurring and Dissenting Opinions (Federal Tax Procedure Blog 8/29/19; 8/31/19), here.  The Supreme Court granted certiorari in May 4, 2020 to consider the following issue ((See SCOTUSBLOG page on the case, here):
Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.
I have not spent a lot of time on this blog addressing the Anti-Injunction Act (“AIA”), § 7421(a), or the parallel tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201, which generally is interpreted coterminously with the AIA.  With this acceptance of certiorari, the AIA will likely be a large topic of interest in the near future, although a decision will not likely appear until 2021.

For the time being , I cut and paste some excerpts from the current working draft of my Federal Tax Procedure Book (footnotes omitted, but the footnotes are offered in a pdf version here):

Excerpts from Working Draft of Federal Tax Procedure Book, for August 2020 Publication.

a. Litigating IRS Interpretations and Other Guidance.

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.  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 (both regulations and subregulatory), such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions (discussed below starting on p. ?) 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, litigation challenging IRS agency guidance has not been allowed for pre-enforcement procedural challenges. 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).

Notwithstanding the foregoing, in 2020, the Supreme Court accepted certiorari in CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den.  936 F.3d 501 (6th Cir. 2019) to address the following question:
Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.
The IRS “regulatory mandate” in question was Notice 2016-66 designating section 831(b) micro-captive transactions” as transactions of interest, thereby imposing a reporting requirement on all such transactions and their advisors. The Notice was not issued with notice and comment.  CIC sought to challenge the Notice in advance of any actual enforcement against CIC. There will undoubtedly be more learning on this subject in the next edition of this Book.

Thursday, May 7, 2020

Tax Court Conflates Standards for Testing Interpretive and Legislative Regulations (5/7/20; 5/11/20)

In Whirlpool Financial Corp. v. Commissioner, 154 T.C. ___ No. 9 (2020), here, the Tax Court (Judge Lauber) held that income from a foreign manufacturing and sales structure was foreign base company sales income (FBCSI) under § 954(d).  Whirlpool’s tax shenanigans to avoid that result failed.  I won’t get into the details of the underlying tax issues.  I focus here on the Court’s explanation of how it applied Chevron to approve a regulation interpretation that was important to the result.

The Court discusses the Chevron analysis at Slip Op. pp. 54-62.  The regulation in question interpreted § 954(d)(2).  Although the Court did not state whether the regulations were interpretive or legislative regulations, it seemed to treat the regulations as interpretive regulations, testing the regulations under “the familiar two-step test of Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).”  (Slip Op. p. 54.)  As I have noted before, Chevron applies to an interpretive regulation, ultimately testing the reasonableness of an agency interpretation of ambiguous statutory text.  The questions are (i) is the interpretation within the scope of the statutory ambiguity and (ii) is the interpretation reasonable (sometimes called permissible).  By contrast, legislative regulations (such as the consolidated return regulations) are the law within the scope of the delegation and are not interpretations of the law, so testing a legislative regulation for reasonableness of the interpretation is an oxymoron.  Rather, legislative regulations are tested under the arbitrary, capricious or manifestly contrary to the statute standard under 5 U.S.C. § 706(2)(A); and Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983), focusing on the procedural regularity of the regulations promulgation process.  Questions I sometimes ask to those I engage on the subject are:  Do courts defer to statutes (deference being meaningful only to interpretations of statutes)? Since legislative regulations within the scope of the authority granted are the law just as if they were statutes and are not interpretations of the law, how exactly does a court defer to the legislative regulation?

As other courts have misread Chevron and subsequent cases, the Court conflated the two standards.  But, they are not the same standard, and the two standards do not apply to the same type of regulation.  I cite readers to my article, John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN 1/25/20), here.  (Caveat, the main theme of the article and the points I make in this blog are rejected by many, if not most, scholars addressing the issue, as I note in setting up the discussion in the article; if error there be in my view, I still stick with it.)

These are the parts of Judge Lauber’s opinion that I think improperly conflate (or at least confuse) the two standards:

Thursday, April 30, 2020

Are Discussions with Lawyer Colleagues Waivers of the Work Product Privilege? (4/30/20)

Today, I discuss a facet of the work-product doctrine, often called the work product privilege.  I address waiver for opinion work product in the setting for discussions among lawyers (or others for whom the privilege might apply) who have not been retained in the engagement to develop and refine legal issues and theories.

The specific context that this came up was for a legal email discussion group maintain by an attorney organization to discuss particular tax contexts and issues.  The discussion group contains a large number of lawyers (I think it is limited to lawyers), and so far as I am aware, the list of lawyers (as it may change from time to time) is not made available to the members of the group.  So participants invariably do not know some or even many in the group.  There is a prohibition on Government attorneys being members.  Of course, members may from time to time become Government attorneys and have the prior discussions available to them, but that’s a rabbit trail I won’t go down right now.  Suffice it to say that there is the expectation that the discussions in the group are not available to the IRS or DOJ.

The clients' identities are not disclosed in the discussions. I have no way of knowing, but assume that the attorneys anonymize any facts that are disclosed in order to set up and move the discussion forward.  For purposes of this discussion, let’s assume that the facts are so anonymized.

The issue I present is whether the discussions that, from each participating attorney’s perspective disclose anonymized facts and seek only legal discussion, thereby constitute a waiver of the work product privilege.  Yesterday, there was a discussion on an attorney mail group regarding whether the discussions in emails to the group constituted a waiver of the work-product privilege.

The issue is whether the IRS or DOJ could in a tax investigation (including grand jury investigation) or tax litigation discover the group email discussions on the basis of waiver of the work product privilege and thereby prejudice the client (taxpayer).  For example, the first interrogatory and/or request for production in tax litigation from the Government would be to identify all discussions by the attorney relating to the client’s facts and produce all documents relating to those discussions.  Similarly, the Government could use its investigative compulsory process to demand access to the discussions and documents related to the discussions.

I had never thought about the issue before (that I can recall).  In a more general sense, I had never thought that discussing anonymized facts with fellow practitioners was a waiver of the work product privilege as to the anonymized facts and the legal and practice discussions that the anonymized facts generate.  The settings presenting the issues can be myriad, including a lunch with a fellow practitioner, a small discussion group of practitioners (many larger cities have such groups), or larger groups (such as at CLE events or, in the present case, an email discussion group.  (I should note that perhaps, if the “waiver” were viable in this context, it might also apply to Government attorney discussions with fellow Government attorneys who are not involved in the particular litigation.)

Having now thought about the issue and done some poking around on the issue, I am just going to offer some non-definitive thoughts on the issue.

I first offer the generic discussion from the current working draft of my Federal Tax Procedure Book (for publication in August 2020) (footnotes omitted, but those wanting footnotes can get the pdf with footnotes here):

f. Work Product Doctrine.

Monday, April 27, 2020

8th Circuit Rejects Wells Fargo Bullshit Tax Shelter (4/27/20)

In Wells Fargo & Company v. United States, ___ F.3d ___ (8th Cir. 2020), here, the Eight Circuit rejected the taxpayer’s claim of entitlement for bullshit tax shelter benefits and claim that it should not be subject to the negligence penalty for claiming the supposed benefits of the bullshit tax shelter.

On the merits of the bullshit tax shelter, I just observe that it had a common characteristic for such nonsense - considerable complexity that served both to create a superstructure designed in part to hide the sham nature of the transaction.  The Eighth Circuit said (Slip Op. 4):
Turning to the facts of this case, we note that STARS is a sophisticated financial transaction with a fairly complex structure. See Wells Fargo & Co. v. United States (Wells Fargo I), 143 F. Supp. 3d 827, 831 (D. Minn. 2015) (“The STARS transaction was extraordinarily complicated—so complicated, in fact, that it almost defies comprehension by anyone (including a federal judge) who is not an expert in structured finance.”); Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 48 (D. Mass. 2013) (noting that STARS was “surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant”).
In my Federal Tax Procedure Book, I describe characteristics of abusive tax shelters as follows (footnotes omitted):
Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. 
Moving to the penalty issue, the bottom line holdings are:

1.  The negligence penalty in § 6662 applies to conduct including “any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.”  § 6662(c).  The regulations flesh this out by providing a “reasonable-basis” defense if the taxpayer’s return reporting position was “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. §§ 1.6662-3(b)(1), (3).  The issue was whether, in order to invoke the defense, the taxpayer must have actually based the return reporting position on authorities recognized by the regulation or whether, in the absence of such actual reliance, the taxpayer can ex post facto assert that the authorities render the position reasonable.  The majority held that actual reliance was required.  The majority based its holding on a de novo interpretation of the regulation text, which it found unambiguous on the issue, without any deference to the IRS’s interpretation of the regulation.

2.  The Court held that § 6751(b)’s written supervisor approval requirement did not apply because the Government asserted the penalty as a setoff in a refund suit in which no assessment was made (perhaps because beyond the statute of limitations).

JAT Comments:

1.  Professor Leslie Book has an excellent discussion of the case:  Leslie Book, In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities (Procedurally Taxing Blog 4/27/20), here.

2.  For those who like dancing on the head of pins, one might focus on the difference in deference aspect of the interpretive strategies by the majority and the dissenting judge.  The majority held that the regulation was not ambiguous as to whether actual reliance on the authorities was required, so that the majority made the de novo interpretation of the reliance requirement.  The dissent apparently thought the regulation was ambiguous and, since the IRS was interpreting the regulation to require actual reliance, performed an Auer analysis (a la Kisor) to (i) determine that Auer deference did not apply and (ii) the best interpretation of the ambiguous regulation was that actual reliance was not required.

3.  I have to wonder why, for such a blatantly sham transaction, the Government did not assert the civil fraud penalty as an offset.

4.   Of course, often bullshit tax shelter promoters will provide or arrange for an opinion that will, so the taxpayers are promoted or otherwise belief, will also shelter them from penalties if the underlying bullshit tax shelter fails.  Those opinions are often, let's say, result oriented and lacking in intellectual and research rigor.  Nevertheless taxpayers anticipate that they may be able to rely on the opinions to avoid penalties.  To do that, of course, they have to produce the opinions and subject them to the scrutiny of the IRS and the courts (and to the public if they litigate the issue).  For  bullshit tax shelters, those opinions are also bullshit.  And might well only succeed in avoiding the criminal penalty, but will not withstand analysis for the civil penalties.  Hence, although Wells Fargo certainly had at least one law or accounting firm opinion, it did not rely on the supposed authorities cited.