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. 180 (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.

Yet, that is exactly what the regulation in Correll did.  The sleep or rest interpretation of the statutory away from home requirement was not in or compelled by the statute.  Rather, it was just one possible interpretation among several, perhaps many, that Treasury could have adopted.  The very concept of ambiguity is that the statute does not answer the question, and if that is all that is required for a legislative regulation, then all Chevron Step Two cases involve legislative regulations.  I think that is nonsense.  Remember in this regard that Justice Breyer, an administrative law expert, said at oral argument in Kisor that “there are hundreds of thousands, possibly millions of interpretive regulations.”  That statement could not be true if an interpretation in a notice and comment regulation makes the regulation a legislative regulation.  (Note the red-lined revision was made on 5/26/20.)

Related notions are nonsense as well.  For example, a legislative regulation is the law and not an interpretation of the law.  So, carrying that concept further, how exactly do you defer to an interpretation that is the law?  Specifically, in the context of the consolidated return regulations, which Congress has said are the law (just as if they were statutes, subject of course to § 706(2)(A) arbitrary or capricious/State Farm review for procedural irregularity in promulgation), how does a court defer to the consolidated return regulations?  What ambiguous statutory text does the consolidated return regulations “interpret?”  You need statutory ambiguity for deference.

Now, I do address one of the reasons the courts, such as the Tax Court in this case, force what is no more than an interpretation of ambiguous statutory text into the mold of the legislative regulation is to do the arbitrary or capricious testing.  The Court thus in applying that test designates that section of the opinion “Procedural Requirements for Legislative Rules.”  Those same procedural requirements apply to interpretive rules appearing in notice and comment regulations.  The agency (here Treasury) must give reasoned decisionmaking for the regulations, whether they are legislative or interpretive.  If Treasury does not, the regulation is invalid.

And what exactly is the result if an interpretive regulation were declared invalid?  Only that the court can make the interpretation of the ambiguous statutory text.  If it is a legislative regulation, however, then only the agency can supply the rule.  If Congress really delegated the legislative authority to Treasury to make the law, how can courts usurp that authority by making up an interpretation after declaring the agency interpretation procedurally defective or even unreasonable.  Proof of that proposition: If the  IRS did not adopt consolidated return regulations or did so in a procedurally defective or unreasonable manner, could the courts then create the law for consolidated returns?  Of course not. The point is that courts can get into the mix of imposing their own interpretation under the Chevron framework only for interpretive rules, in this case interpretive regulations.

I have dealt with this issue at length in my article (as well as prior blogs), so I will just direct readers to the article: John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 1/25/20), posted on SSRN, here.

JAT Comments:

1.  Added 5/15/20 11:00 am:  The Procedurally Taxing Blog has a very good discussion of the case:  Monte Jackel (Guest Blogger), Conservation Easement Donation and the Validity of Tax Regulations (Procedurally Taxing Blog 5/15/20), here.  I commented on the blog here.

2.  Added 5/15/20 11:00 am:  Here is one of my comments on Jackel's post, as I have modified it for inclusion here:

The Tax Court made a similar analysis of the legislative/interpretive distinction in Altera where it declared the regulation legislative and then proceeded in its analysis, but with a different outcome (at least until reversed on appeal).  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). I think the Tax Court erred in Altera in its characterization of the § 482 regulation as legislative.  On appeal, the Ninth Circuit just ignored the Tax Court's characterization except, in the majority opinion, in describing the Tax Court's opinion.  In other words, making that distinction was not required for the Ninth Circuit's opinion, so it just ignored it.  And, in the Solicitor General's brief in opp in Altera filed just yesterday (5/14/20), here, the words legislative rule or regulation and interpretive rule or regulation are not mentioned.  So, in terms of outcome in real cases, courts may futz about the issue (as did the Tax Court in Altera and Oakbrook), but I suspect that it is real nothingburger. (Sort of like a court waxing on for pages about burden of proof issues and then finding the facts by a preponderance of the evidence, in which case the predicate discussion of burden of proof does not contribute to the outcome in the case; even so, if courts are going to futz about non-outcome determinative issues, they should get the futzing right.)  In that sense, Judge Lauber's conclusion that the regulation was legislative was a form of dicta, although he apparently thought it was important and even necessary for his bottom line conclusions that there was no procedural irregularity (not arbitrary and capricious) and the interpretation was reasonable under Chevron Step Two.  Now, precisely what is dicta is a subject too broad for this blog.  See Michael Abramowicz & Maxwell Stearns, Defining Dicta, 57 Stan. L. Rev. 953 (2005), here.  A more accessible (aka much shorter) discussion is  Judith M. Stinson, Teaching the Holding/Dictum Distinction, 19 Perspectives: Teaching Legal Res. & Writing 192 (2011), here.  Professor Stinson's less nuanced distinction is (footnotes omitted): "There is no universal agreement on the definitions for these terms, but most typically 'holding' is  defined as that portion of a legal opinion that is 'necessary to the result.' Dictum, on the other hand, is anything that is not a holding."  (Does it matter if the judge thought the legal analysis and conclusion necessary for the result but, in fact, it is not necessary?  Is the legislative regulation analysis precedent even though, in hindsight, not necessary to the holding or is it just some type of persuasive authority based on the reputation and gravitas of the judge (Judge Lauber has the highest)? If a holding rather than dicta (and precedent), that would make burden of proof discussions holdings rather than dicta in cases even where the judge moots the issue by finding by a preponderance.) (For some more nuance on dicta, see comment #4 below added on 5/18/20.)

3.  Addendum 5/17/20 5 :00 pm:  The opinion in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. ___, No. 10 (2020), discussed above, deals with the first level of deference – deference to a regulation’s interpretation of ambiguous statutory text.  The ultimate resolution of the case required at least consideration of a second level of deference– deference to ambiguous regulations text.  This is called Auer deference and has been the subject of many entries on this blog.  More importantly, Auer deference was approved (with some restrictions in Kisor v. Wilkie, 588 U.S. ___, 139 S. Ct. 2400 (2019).  See Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (6/26/19; 7/2/19), here.  So, in a companion memorandum opinion, Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, here, the Tax Court weighed in on that second level, because there was some ambiguity in the regulations text.  (See Slip Op. 20-29.)    In making that second level determination of ambiguity and need for interpretation, the Court said (Slip Op. 25): “In construing this regulation, we see no need to rely on Auer deference because the 'traditional tools of construction' lead us to hold that the Commissioner’s construction of the regulation is correct even if we look at the question de novo.”  In other words, there is no deference needed and therefore none given if the court’s own best, de novo interpretation of the ambiguous regulations text is the same as agency’s (here Treasury’s).  For those want to apply that concept to the first level of ambiguity in statutory text and the limited role of deference, I offer this breakdown of categories from my article linked above (footnotes omitted):

For analysis, I break down the process to show that there are many judicial interpretations, probably most judicial interpretations, of a statute administered by an agency that do not implicate deference to an agency interpretation.  Consider these categories:
1. If the statute is unambiguous, the statute controls without either the court or the agency interpreting it further.  No deference there.
2. If the statute is ambiguous and the agency has not interpreted the statute, the court interprets it.  No deference there.
3. If the statute is ambiguous, the agency has interpreted it, and the court believes the agency interpretation is the best interpretation, that interpretation applies. Since the court reached that same interpretation, the court did not defer to the agency interpretation.  No deference there.  (This Third Category fits what is called Skidmore deference but which is no deference at all because the court is persuaded as to the interpretation it applies; I discuss Skidmore below beginning on p. 72.)
4. If the agency has interpreted the statute and the court believes a different and better interpretation applies, and the court applies its own interpretation rather then the agency interpretation because the court believes the agency interpretation is unreasonable, it does not defer.  No deference there.
5. If, in the same circumstances as the Fourth category except that the agency interpretation is reasonable but not the most reasonable interpretation (in the court’s mind), and the court applies the agency interpretation, then the court has deferred to the agency interpretation.  Deference there.  (This Fifth Category is what is now called Chevron deference but, as we shall note, similar deference was accorded prior to Chevron as shown in the tax cases such as National Muffler; discussed beginning at p. 75.)

 In other words, the key deference filters of ambiguity and reasonable interpretation can, for judges whose interpretation preferences are anti-Chevron (or anti-Auer), can apply to assure that deference is avoided and hence substantially mitigate any evil they may perceive in Chevron (or Auer).

4.  Addendum 5/18/20 10:00 am:  I discussed dicta above.  Over the weekend, I got an email from Bryan Garner a noted author on related topics promoting the book he edited and co-authored, The Law of Judicial Precedent (Thomson Reuters 2016), here.  I will look at the book when next I am at UVA Law School Library after the pandemic permits such outings.  In the meantime, I found the following article which offers some useful nuance on dicta:  Paul J. Watford, Richard C. Chen and Marco Basile:  Book Review: Crafting Precedent: The Law of Judicial Precedent, 131Harv. L. Rev. 543 (2017), here.  I quote relevant parts here (pp.  575-576, bold-face supplied):

[T]he treatise makes clear that broad statements and dicta have a significant role to play in developing the law. That is particularly true of judicial dicta — meaning statements that were not strictly necessary to the result but were the product of apparent consideration n105 — as [*576] opposed to obiter dicta, which are “peripheral, off-the-cuff judicial remark[s]” (p. 62). Lower courts generally treat the judicial dicta of higher courts as entitled to substantial weight, up to and including treating them as effectively binding (pp. 69–70). Some circuit courts do the same for judicial dicta in their own decisions (pp. 63–64), and even those courts that don’t would likely afford such statements persuasive value (pp. 64–65). Thus, when an authoring court resolves more than it needs to, the impact on future courts might be good (useful guidance) or bad (confusion or rigidity), but the choice is not without consequence. n106
   n105 The treatise defines judicial dictum as “an opinion by a court on a question that is directly involved, briefed, and argued by counsel, and even passed on by the court, but that is not essential to the decision and therefore not binding even if it may later be accorded some weight” (p. 62) (quoting Dictum, BLACK’S LAW DICTIONARY, supra note 20).
   n106 The treatise suggests that obiter dicta are “seldom considered precedential,” though they are “sometimes persuasive” (p. 62). But even obiter dicta of a higher court may be difficult to ignore in practice, since the line between obiter and judicial dicta is no less vexing than the line between holding and dictum. * *  * *

Off Topic Addendum: On a rant point I posted on earlier about the Tax Court’s seemingly inconsistent use of periods inside or outside end quotation marks, my anecdotal checks indicated that Judge Lauber appeared to use the period outside the quote less than other judges.  See Updates on the Tax Court's Continued Love Affair with Periods Outside Quotations (Federal Tax Procedure Blog 1/4/20; 2/29/20), here.  I noted that, apparently, the Tax Court has a style manual that permits such differences, where, by contrast, the Supreme Court Style Manual compels the period inside the end quote.  In his majority opinion in Oakbrook Land Holdings, LLC, Judge Lauber continues with 86 periods inside the endquote and 0 outside.  And the other judges similar only deploy periods only: 133 inside the endquote and 0 outside. So, in the aggregate, all opinions in the case deploy the period inside the quote 219 times and deploy the period outside the endquote 0 times.