Thursday, September 24, 2020

Occam’s Razor and the Distinction Between Legislative and Interpretive Regulations (9/24/20)

I have previously said that the Administrative Procedure Act ("APA") distinction between legislative and interpretive regulations does not address deference.  I did, however, address both the APA and deference in my article, Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (August 23, 2020). Available at SSRN:  But, I did not tie the two together as crisply as I should have. 

I recently realized, although they are different “regimes” – APA (including the legislative / interpretive regulation divide in the APA) and deference – they do address the same issue in the same way.  Indeed, the APA distinction between legislative and interpretive regulations was based on a similar distinction that applied to under pre-APA law for deference to agency interpretations and the related concept of retroactive application of agency interpretations (generally retroactivity the norm for interpretive regulations and generally prospectivity the norm for legislative regulations). 

Before and after the APA, the distinguishing difference between legislative and interpretive regulations is:  (i) the legislative regulation based on express authority to create the law (create a new obligation or right) is the law, with necessarily the force of law (example, § 1502 for consolidated return regulations); and (ii) the interpretive regulations based on express or implied authority to interpret otherwise ambiguous statutory text within the scope of the ambiguity, but does not add any new right or obligation within the scope of the statutory text (example § 162's away from home statutory text addressed in United States v. Correll, 389 U.S. 299 (1967)).  That was true before the APA, so when Congress used the APA used the legislative / interpretive concepts (called interpretative in the APA), that was the background that defined those terms in the APA and informed both Congress and original public readers of the APA as to their meanings.

What that means is that, if a regulations interpretation is entitled to deference, now called Chevron deference (as a reasonable interpretation within the scope of ambiguity in statutory text), the regulation is an interpretive regulation rather than a legislative regulation for both APA purposes and for deference.  Simply because a court defers to an agency regulations interpretation does not mean that the regulations interpretation has been magically transformed into a legislative regulation.  (Courts do sometimes state that deferring to a reasonable agency interpretation (say Chevron Step Two) gives the interpretation the force of law, a distinguishing characteristic of a legislative regulation; I do address that misunderstanding in some detail in the article, but bottom-line, force of law is a consequence of a legislative regulation after it is determined to be a legislative regulation rather than a test of whether the regulation is legislative to start with.)

As I reflect on it, sometimes the simplest explanation is the best explanation.  That is a variation of Occam’s Razor (with Occam variously spelled and sometimes called the law of parsimony).  See Wikipedia Enter, Occam’s Razor, here (noting that it is variously paraphrased by statements like "the simplest explanation is most likely the right one").

I will likely revise my article above to correct some errors, add some nuance, and incorporate this simpler explanation.

Wednesday, September 23, 2020

FTPB 2020 Update 04 - Correction on GATT Corporate Overpayment Interest (9/23/20)

The 2020 editions erroneously describe the regular corporate interest rate (2% above the federal rate) as the "GATT" rate.  The special reduced rate (.5% above the federal rate or 1.5% lower than the regular corporate overpayment rate) is the GATT rate.  The following are the corrections to paragraph III.B.2. subparagraphs a. and b.).  

a. General 1% Reduction.

For corporations, however, the overpayment interest rate is reduced by one percent (i.e., the rate is the short-term federal rate plus 2 percent rather than 3 percent).  § 6621(a)(1).  For the third quarter of 2020, this interest rate is 2%. 

b. Reduction for Corporate Overpayments Over $10,000.

There is a critical exception–for corporate overpayments exceeding $10,000–the short-term federal rate is only increased by 0.5 percentage points.  § 6621(a)(1) (flush language).  (This reduced interest rate is often referred to as the “GATT rate”).  Mathematically, the interest rate is 1.5% lower than the regular corporate rate discussed above.  For the third quarter of 2020, this interest rate is 0.5 %. 

As you can see, this low interest rate is a powerful incentive for corporations not to loan money to the Government via overpayment of taxes, because they can likely achieve a better return elsewhere.  (By the same token, of course, as noted above, the large corporate underpayment interest premium–the so-called “hot interest” in § 6621(c)–creates a powerful incentive to avoid being a debtor to the Government at least after the IRS makes the critical determinations of additional tax due and owing; in short, there are incentives for corporations to better manage the due tos and due froms in the tax area.)  Although S Corporations are normally not subject to tax, sometimes they can be; the court opinions conflict as to whether any overpayment by S Corporations will be subject to this reduced interest rate.  This reduction is also applied to any amounts due by the Government that are treated as a tax for purposes of calculating interest on the amounts due, such as, for example, interest due on wrongful levies.

Saturday, September 19, 2020

Sunstein Blog and Article Concluding that Chevron Deference is Consistent with Original Public Meaning of the APA (9/19/20)

In my Federal Tax Procedure Book, I deal with administrative law issues, particularly the Administrative Procedure Act (“APA”) and deference.  I have also written articles on the intersection of the tax law with these subjects.  The most recent is Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (August 23, 2020), SSRN:

I offer today an excellent blog posting -- Cass R. Sunstein, Chevron Is Not Inconsistent with the APA (Notice & Comment 9/16/20), here.  Sunstein (bio here) is a professor of law at Harvard Law School where he teaches administrative law and has a distinguished career in academia and government.  The linked blog entry is a summary of a key and somewhat startling conclusion he reached in another article published in recently, Cass R. Sunstein, Chevron As Law, 107 Geo. L.J. 1613 (2019), here, (the discussion is on pp. 1641, here, through 1657.

In Sunstein's blog, as well as in his article, Sunstein argues that the APA § 706 requirement that courts “shall decide all relevant questions of law” is not inconsistent with Chevron deference.  Sunstein apparently initially took the literal text of § 706 to mean that courts should decide interpretations of law de novo which eliminate deference to agency interpretations.  Of course, the APA was enacted in 1946, long before Chevron was decided in 1984 (Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984)).  But, as Sunstein claims in his blog (as do I in my article), deference to reasonable agency interpretations much like Chevron deference was a feature of the standard of review in the federal courts before the APA was enacted and § 706 did not affect that standard of review.  As a result, the original public meaning—a mantra for textualists—of § 706 accommodated and allowed deference, much like Chevron deference.  Hence, the conclusion is that the hyperbolic claims about § 706 as mandating de novo judicial interpretation without deference are just wrong. 

Based on his research (tracking my own) he says that there was robust authority for deference at the time of the APA.  He says:  

Nothing in the legislative history of the APA repudiates these decisions. I repeat: Nothing. One more time: Nothing. (In a whisper, a shout: Not a word. Nothing.) That’s stunning. I confess that it astonished me.

And, the trajectory of cases soon after the enactment of the APA carrying forward deference is evidence that no one understood § 706 to have anything to do with deference.

He concludes:

In short: Many people think that Chevron is inconsistent with the original public meaning of the APA. But an investigation of the context makes it exceedingly difficult to defend that view.

JAT Comment:  Exactly.

Wednesday, September 2, 2020

FTPB 2020 Update 03 – Central IRS Web Site for BBA Centralized Partnership Audit Regime (9/2/20)

The IRS has announced a new website “intended to be  one-stop location for anything BBA-related, including regulations and other guidance and instructions related to the Partnership Representative (PR), electing out of the centralized audit regime, Administrative Adjustment Requests (AARs) and what to expect during a BBA administrative proceeding.”  IR-2020-199 (9/1/20), here.  The web site, titled “BBA Centralized Partnership Audit Regime” is here.

As of now, the web site has categories for links for (i) Filing Requirements, (ii) BBA Partnership Audit, (iii) Regulations and Interim Guidance, and (iv) a handy chart comparing partnership procedures under TEFRA and BBA.

This web page will be a key resource for the “BBA Centralized Partnership Audit Regime.”

I will try to go through the linked items in advance of the 2021 editions of the Federal Tax Procedure Book.

Tuesday, September 1, 2020

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

 In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.