Notice of Intent to Update and Correct Federal Tax Procedure Book Practitioner and Student Editions (11/24/23)

I have been pointed to and discovered myself some errors in the August 2023 editions of the Federal Tax Procedure that I feel need to be corrected by an interim edition before the next scheduled publication in August 2024. Some are minor issues that most readers could identify and mentally correct in context. Others (although thankfully not many) are errors in substance that escaped my attention and therefore, the opportunity to correct. Others are purely stylistic-for example, all case citations were italicized (earlier editions underlined case citations); I changed that in the 2023 working draft for the 2023 editions; for some reason unknown to me, WordPerfect's publish to pdf routine eliminated the italicizing for the cases. (That routine had the benefit of producing a bookmarked Table of Contents.) Adobe Acrobat's print drive will preserve the original formatting (including italics for cases), so that is print process I will use for the revision/update. (Although it will not produce a bookmark table of contents; oh well.)

The revision/update versions will be "red-lined" to show changes in the 2023 editions since I published the originals in August 2023. Those changes will be both correction of errors as noted above, plus new matters I added after the August 2023 editions. (I tend to stay reasonably up to date for new matters and corrections throughout the year, so most material new matters since August 2023 will be in the revised editions.)

I hope to get the revised editions out by the end of the year so that it can be available for academic periods starting in January 2024. I am not sure what to call it. Perhaps mimicking software updates, I will call the editions 2023.1 editions.

I apologize for this inconvenience to readers.

Failure to File Penalty When Return Not Filed-What is Reasonable Cause to Avoid the Penalty? (11/24/23)

In Lee v. United States, 84 F.4^th 1271, (11^th Cir. 8/24/23) (GS here), the Court held that reliance upon a return preparer to e-file a tax return is not reasonable cause for the failure to file penalty. This is a logical and probably necessary holding from Boyle’s bright line holding for those penalties applying for failure to file and pay by mail. United States v. Boyle, 469 U.S. 241 (1985), here.

Lee serves as a reminder that taxpayers assume the risk of their preparer’s failure to file (whether in hard copy format or by e-file). Of course the taxpayer has to sign the hard copy manually and should be able to know at least whether that essential act was done in time. So, if signing the return occurs in time, the taxpayer should simply mail the return in one of the § 7502 guaranteed timely mailed, timely filed way.

In this regard, readers may want to review Judge Lagoa’s “specially concurring” opinion warning of the risks in this process for manually mailed and efiled returns.

I posit one hypothetical as a possible reasonable cause defense for failure to file timely. Assume an individual taxpayer with an extended filing date of 10/15/XX. He engages with a competent preparer to whom he timely delivers all documents and data required to prepare the return and offer it to the taxpayer for filing and mailing in early October. The expectation is that the taxpayer will do the guaranteed timely mailing-timely filing method under § 7502. During the preparation phase, the taxpayer and the preparer correspond as necessary to make sure the preparer has the information sufficiently to prepare the return competently and timely and is progressing in a timely manner to meet the early October time to deliver to the client for filing. On October 13/XX, the taxpayer goes to the preparer’s office to sign, physically signs, and takes possession of the return, bringing a properly addressed envelope with a postage-paid envelope for one of the guaranteed timely mailing -timely filing methods. The taxpayer finds at the preparers office that for some reason the return has not been prepared and the underlying documents and data are in such a mess that the mess cannot be resolved in time to file the return timely. Would that be reasonable cause? Surely this is a different case than Boyle where the problem resulted from the adviser giving incorrect legal advice as to the filing date so that, apparently no attempt was made to prepare a return in time for timely filing. Also, assume that the failure to file penalty is $1,000,000. Would you take the case on a contingency fee?

Of course, taxpayers who can prove that they reasonably relied upon the preparer under state law have a likely cause of action under state law. But pursuing that right might be expensive, timely, and perhaps fruitless.

Submitted - Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706 (11/18/23)

Yesterday, I submitted my article for publication (hopefully). The article is titled Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706.

Here is the abstract I submitted with the article (always subject to change prior to publication).  I provide links to the key documents cited for blog readers' convenience through quick web connection.

Abstract

The Supreme Court granted two petitions for writ of certiorari to address in the October 2023 Term whether Chevron deference should be overruled or clarified. Chevron is shorthand for deference articulated in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). [The two Supreme Court cases are Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451), here, and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219), here.

The key features of Chevron deference are: (i) ambiguity (or silence sometimes treated as ambiguity) in the statute and (ii) agency reasonable interpretation within the scope of the statutory ambiguity. Deference with those features has been used in statutory interpretation judicial review since well before Chevron and the APA.

One of the issues on cert is whether the APA Scope of Review provision (5 U.S.C. § 706), here, precludes, requires, or permits deference. Some in the legal community (including judges, but none so far in opinions of their respective courts) argue that the APA, properly interpreted, precludes deference. The most prominent argument that § 706 precludes deference is by UVA Law Professor Aditya Bamzai in The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here. Using some of Professor Bamzai’s claims, I address whether § 706 precludes deference. This article does not address other bases (such as constitutional) against deference.

This article asserts that § 706 permits deference. Since so much has already been written on that issue, this article focuses on new discussion of the tax background largely ignored in the competing claims on § 706 and deference. By tracing the relevant tax history prior to the APA’s enactment in 1946, the article shows the claim that § 706 precludes deference is a misreading of the history. The article argues that deference with the characteristics of Chevron deference preceded the APA. Further, contrary to Professor Bamzai’s claim, such deference in tax cases was featured prominently in the authoritative Final Report of the Attorney General's Committee on Administrative Procedure (1941), here, which led to the APA. The article also introduces into the discussion Dobson v. Commissioner, 320 U.S. 489 (1943), here, reh. den., 321 U.S. 231 (1944), here, a tax case applying deference to Tax Court statutory interpretations. Dobson adds to the discussion because: (i) the Court treated the Tax Court as an agency rather than a court because the statute said the Tax Court was an agency and (ii) the statutory standard for review of Tax Court interpretations permitted reversal only if “not in accordance of law.” The Court interpreted the statutory standard “not in accordance with law” to require deference. APA § 706 has verbatim the same scope of review–”not in accordance with law”– for agency interpretations. In explaining § 706 as the proposal moved through Congress to enactment, the refrain was repeated often that it did not change existing law (which included deference), neither adding to nor lessening the existing scope of review. And, the authoritative Attorney General’s Manual on the Administrative Procedure Act (1947), here, said that § 706 restated rather than changed the current scope of review.

Based on this analysis of this history and the text of the APA, the article concludes that the APA permits deference. If the Court rejects deference or wishes to revise or clarify deference (similar to the way it did for Chevron deference’s lesser cousin, Auer deference, in Kisor v. Willkie, 589 U.S. ___, 139 S. Ct. 2400 (2019)), the Court should do it on some basis other than § 706.

Coca-Cola Tanks Again in the Last Round of Transfer Pricing Litigation in the Tax Court (11/9/23)

I have written before on Coca-Cola's massive transfer pricing case as the results dribbled out over the years (reverse chronological order).

• Tax Court (Judge Lauber) rejects Coca-Cola’s Untimely Motion for Reconsideration (12/3/21), here.
• Tax Court (Judge Lauber) Issues Significant Transfer Pricing Decision in Coca-Cola; Burden of Proof Issues (11/19/20; 11/25/20), here; and 
• More Coca-Cola - On Transfer Pricing and Blocked Income Regulation (11/23/20), here.  

Yesterday, the Tax Court rendered another opinion, here, apparently the last merits opinion before moving, if required, to fine-tuning the calculations required by its decisions on the merits. (The docket entries are here.)

Three key points:

1. Transfer pricing adjustments turn on valuations, with many larger taxpayers preferring to use some type of IRS-recognized safe harbor methodology to take the risk out of the potential for adverse results given the uncertainties involved in valuations.. There can be some tricky rules to qualify for certain real or imagined safe harbors, but at the end of the day transfer pricing cases are principally valuation cases.

The relevant comments from a Coca-Cola news release dated 11/9/23 around 7am Eastern. here, are

ATLANTA, November 09, 2023--(BUSINESS WIRE)--On Nov. 8, the U.S. Tax Court issued a supplemental opinion in The Coca-Cola Company & Subsidiaries v. Commissioner of Internal Revenue. The Coca-Cola Company disagrees with the actions of the IRS and the latest decision by the U.S. Tax Court.

While we disagree with the court’s interpretation of the facts and law in this case, we are pleased to move closer to a final resolution of the Tax Court case so that we can pursue an appeal, where we can assert our claims and vigorously defend the company’s position.

This includes our belief that it is unconstitutional to face retroactive tax liability based on the IRS’ use of a calculation methodology that was different from what was long agreed upon and approved in audits for more than a decade.

We do not expect the results in this recent supplemental decision to change the methodologies we have used to calculate the tax reserve we have taken or the potential aggregate incremental tax and interest liability we have disclosed related to the dispute with he IRS or our effective tax rate.

I do not know how much Coca-Cola has reserved any tax, penalties, or interest for the litigation or what percentage of the total claimed liabilities is reserved: at this stage of litigating the matter, that reserve number might be a useful indication of whether the corporation really believes there is some expected value to its claims.

Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706 (11/6/23; 11/8/23)

I susbstantially revised this blog entry because it was not my best writing; I have made it better (I hope), but do not change the trajectory of my original analysis.

As readers of this blog know, the Supreme Court accepted cert in Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451, here.) (“Loper Bright”) to consider the following question in the October 2023 term:

 Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

Chevron is common shorthand for Chevron deference, named after Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). Chevron deference as interpreted (it's all about interpretation) deploys a two step framework before deference may be invoked at Chevron Step Two. Chevron is a hot-button issue for those who fear and/or hate (admitting some possibility to deploy fear and hate at the same time) of the administrative state and libertarians and a broad ragtag group of fellow travelers which, when lumped together, I call deference deniers.

Since the grant of certiorari in Loper Bright, the Court has accepted certiorari in Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219, here ) where the question presented is the same as in Loper Bright. The Court took unusual steps in accelerating cert action on Relentless and even in accepting cert in a carbon copy case to Loper Bright. The speculation is that, given a recusal of one Justice (Jackson) in Loper Bright, accepting cert in Relentless for consideration of the same legal issue on the same relevant facts at the same time would permit the Supreme Court to have a full nine Justice opinion or opinions on the issue for cert. On October 27, 2023, the Court ordered that Amicus Briefs in Loper Bright will be considered in Relentless. (There may be some opportunity for persons who were not amicus in Loper Bright or their attorneys with prudence to file amicus briefs in Relentless, and with the change in Supreme Court rules to permit amicus brief without parties' consents or motion; As with the Amicus Briefs in Loper Bright, the real targets of the Amicus Briefs may not be Supreme Court Justices but rather some amorphous (at least hidden from view0 group with deep pockets to whom they can market themselves for the old-fashioned reason to ultimately, they hope, make money.)

I don’t speculate about what certiorari means other than the Court will consider the question presented unless the court finds a way not to consider the merits issue or narrowly focus on some unimportant issue within the scope of Chevron (a not uncommon dodge for the Supreme Court when a more direct solution would be to DIG the case when it does not want to or can't offer any wisdom that is wise (t least when it can discern that is all it has to offer). I cannot predict any outcome, except that, if the merits, if any, are reached, the pinion(s) may speak to the continuing existence of Chevron deference (perhaps a refinement or limitation as in Kisor.) 

I have just finished drafting an article currently titled Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706. I sent the draft article to a friend who graciously agreed to read it and offer suggestions.

My article explores the claims made by UVA Law Professor Aditya Bamzai in his article titled: The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here. As relevant to my article, Professor Bamzai’s claims, highly summarized, are that given the milieu of the Supreme Court cases prior to enactment of the APA in 1946, the state of deference at enactment of the APA was that the APA the in relevant part verbatim text of  706 cannot be read as authorizing a broad form of deference such as in its current iteration is called Chevron deference. Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). (I do not suggest that deference to agency statutory interpretations ever had material features other than those in Chevron—ambiguity in the statute and a reasonable agency interpretation within the scope of the ambiguity.)