D.C. Circuit Affirms Tax Court's Holdings on Written Supervisor Approval, Qualified Amended Return, and Statute of Limitations on UBS JDS (4/25/24)

In Lamprecht v. Commissioner, ___ F.4th ___ (D.C. Cir. 4/23/24), D.C. Cir. here and GS here [to come], the Court affirmed the Tax Court in Lamprecht v. Commissioner, T.C. Memo. 2022-91, here. See Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (Federal Tax Procedure Blog 9/1/22), here. In so doing, the Court (Judge Walker) steps through the arguments and the resolution in a crisp straightforward opinion.

The background discussed in the opinion is that the IRS issued a John Doe Summons to UBS in 2008 (which essentially set off the IRS and DOJ foreign account initiative). UBS did not immediately reply with full and complete response. As a result, the civil statute of limitations for persons within the scope of the summons (U.S. person account holders) was suspended and did not pick up until the summons was resolved. Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.

The opinion holds in the Court’s outline format:

I. The IRS Complied with 26 U.S.C. § 6751(b)(1)

A. It Doesn’t Matter When (or Whether) a Supervised
Tax Examiner Signs the Approval Required by
§ 6751(b)(1)’

B. The IRS May Use a Form 5345-D to Comply with
§ 6751(b)(1)

C. The Tax Court’s Refusal to Exclude the Forms 5345-D
from Evidence Was Not an Abuse of Discretion

II. The Lamprechts’ Corrected Returns Did Not Protect
Them from Penalties [QAR Issue]

A. The [UBS] Summons Was Legal

B. The Summons Relates to a Benefit Claimed on the
Lamprechts’ Original Tax Returns

III. The Penalty Assessments Were Not Too Late

A. The [UBS] Summons Was Not Resolved in August 2009

B. The [UBS] Summons Was Legal (Again)

 JAT Notes:

Seventh Circuit Rejects Strict Irreparable Injury Requirement for § 7402(a) Injunctive Relief for Government (4/25/24)

In United States v. Olson, ___ F.4th ___ (7th Cir. 4/11/24), CA7 here and GS here, the Court discussed the “irreparable injury” requirement for equitable injunctive relief for the Government under § 7402(a). The opinion is short and crisply states the analysis, so I will just copy and paste the core discussion:

          The United States filed this suit seeking both a money judgment and an injunction compelling the Olsons to deposit withholding taxes into a bank using an approved payroll service. See 26 U.S.C. §§6302, 6157; 26 C.F.R. §§31.6302-1, 31.6302(c)-3. The proposed injunction also would require the Olsons to pay their taxes ahead of private creditors, permit the IRS to inspect their books. and records, and notify the IRS if they start another business.

          The district court ordered the Olsons to pay more than $300,000. But the court denied the motion for an injunction, relying on language in United States v. Benson, 561 F.3d 718, 724 (7th Cir. 2009). See 2023 U.S. Dist. LEXIS 8472 (N.D. Ind. Jan. 17, 2023). The United States sought reconsideration, observing that this portion of Benson interpreted 26 U.S.C. §7408(b), which deals with tax shelters, while the request in this case rests on 26 U.S.C. §7402(a), which reads:

          The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

          Under this statute an injunction may issue if “necessary or appropriate for the enforcement of the internal revenue laws.”

          The district court understood §7402(a) to call for consideration of the traditional factors, under which a plaintiff seeking a permanent injunction “must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). Cf. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) (similar factors for preliminary injunction). As the district judge saw matters, the United States has not established irreparable harm because it will not become insolvent if the Olsons do not pay their taxes. 2023 U.S. Dist. LEXIS 40549 *7 (N.D. Ind. Mar. 9, 2023). The court added that the United States does not face irreparable injury, because it can get future money judgments against the Olsons if they persist in not paying taxes.

          By the district court's lights, no court ever would order relief under §7402(a), because the national government's solvency does not depend on tax payments from any one person or business, even the largest. Yet judges should not interpret statutes in a way that makes them ineffectual. Nor should a court be sanguine that the IRS can collect from the Olsons just because it has a money judgment. They have not paid in the past and assert inability to pay in the future. The sort of relief the United States seeks in this case creates a mechanism for payment: the use of a payroll service that will turn over with-holding taxes (at least) whether or not the Olsons cooperate. Ability to audit the Olsons' books without the need for subpoena-enforcement proceedings also will assist in tax assessment and collection.

          Application of the traditional factors is straightforward. (1) The United States suffers irreparable harm in the sense that it is unlikely to collect future taxes unless some intermediary such as a payroll processor superintends how the business's income is distributed. (2) Money damages are inadequate because the Olsons assert both inability and unwillingness to pay. (3) The balance of hardships favors relief (the Olsons' belief that they are entitled to prefer other uses of money amounts to little more than disagreement with the tax laws). And (4) the public interest calls for ensuring that the Olsons have the same costs (taxes as well as wages) as their competitors. The district court's contrary decision on these factors is an abuse of discretion.

Court Affirms FBAR Willful Penalty Despite Apparently Accepting NonFiler's Claim of Innocent Ignorance in the Face of Damning Facts (4/24/24; 4/25/24)

In United States v. Vettel, ___ F. Supp. 3d ___ (D. Neb. 4/11/24), CL here and GS here [to come], the Court held, after bench trial, that David Vettel was liable for the willful FBAR penalty. The Court reasoned that, although the Court apparently accepted Vettel’s testimony that he did not know of any tax liability related to the offshore accounts or of the FBAR filing requirement, he had enough objective indications that he was reckless and, therefore, willful for purposes of the FBAR penalty.

I say that the Court “apparently accepted Vettel’s testimony,” Given that reckless conduct alone would suffice for liability, the Court did not have to accept his testimony of ignorance. Indeed, that is the way the Government couched its post-trial brief. See brief here.

The Government’s recitation (brief pp. 13-34) of the objective indications of at least recklessness are damning indeed and certainly permit an inference that Vettel knew of at least his tax reporting obligation and likely also FBAR reporting obligation and intended to evade them. Thus, the brief says (p. 18) “Vettel admits that it is ‘not logical’ to believe that foreign income he earned is not taxable anywhere.” Further, the brief says (p. 18) in preparing his 2012 return, Vettel’s accountant asked questions about foreign income, causing Vettel to disclose a Turkish account but not the Swiss BSI account, resulting in an incomplete FBAR being filed. Also, David Vettel hid the BSI account from his wife, Crystal. (Opinion pp. 8-9.) There are many more facts at least objectively showing Vettel was willful under the FBAR standard and certainly capable of casting doubt on Vettel's claims of innocent ignorance.

I note that David Vettel, with his wife Crystal Vettel, had a Tax Court case, Docket Number 16988-19 (Dawson here). That case was resolved by stipulated decision on 11/12/20, although Dawson does not have a link to any document (even the stipulated decision that I thought should have a link).

Tax Court Rejects Another 2000 era Bullshit Tax Shelter and Imposes Accuracy Related Penalty (4/22/24)

In PICCIRC, LLC v. Commissioner, T.C. Memo. 2024-50, GS Dkt 4308-12, here, at #75 4/22/24 and GS here, the Court (Judge Gale) rejected the petitioner’s claim for artificial tax benefits (fantasy exorbitant basis) in a contrived sale of distressed Brazilian trade receivables. In other words, yet another variant of a bullshit tax shelter common in the early 2000s; the underlying transaction here was in 2002 and reported on the 2002 partnership return. The facts found make the result inevitable. The Court found a basis of “at the most, $300,164,” whereas the reporting position was that the basis was “$23,075,495.” (Slip Op. 12.)

I note this case because the partnership used the standard shield of the tax professional opinion letters that incentivized taxpayers blessed with significant income to play the audit lottery, which they hoped was cost-free with liability if caught only for tax and interest but no penalty (civil or criminal). Under the scenario without a penalty if caught, it still made sense to play the audit lottery because the upside if not caught was the avoided/evaded tax less the transaction costs (including legal opinions).

One opinion from Proskauer Rose, LLP, a player in the tax shelter arena at the time, opined “that the transaction had the requisite economic substance and business purposes to be respected under the authorities discussed in the opinion letter.” (Slip Op. 5.) Proskauer Rose charged $100,000 for issuing the opinion. (Id.)

The other opinion was from BDO, opining “that no penalty should apply to the transaction pursuant to section 6662(b)(2) or (3).” (Slip op. 5.) The opinion does not state what BDO charged for the opinion. The Code sections cited are for “substantial understatement” penalty at §§ 6662(b) and (d) and the “substantial valuation understatement penalty at §§ 6662(b)(3) and (f) and (h).

Both opinion letters, in the final analysis, were worth nothing despite the market at the time pricing them at substantial amounts (e.g., $100,000 to Proskauer Rose). Even so, the opinion letters arguably prevented a potential criminal charge or civil fraud penalty, so maybe in the final analysis, this partnership and its flow-through partners got something for their money.

Out-of-Time Deficiency Case Declaring NOD Invalid but with ASED Statute Still Open (4/17/24)

In my Federal Tax Procedure book, I note that there may be some procedural foot-fault in the IRS issuance of a notice of deficiency (“NOD”), such as failure to send to the last known address. If the NOD is invalid, any resulting assessment is invalid. I note that a traditional way to challenge the NOD for failure to send to the last known address is by filing an out-of-time petition for redetermination with the Tax Court. If the Tax Court then dismisses for lack of jurisdiction of an untimely petition it may base the decision on the invalidity of the NOD which invalidates the assessment requiring a valid NOD; that will invalidate the assessment. I caution that this gambit might be a pyrrhic victory if the IRS can still issue a new deficiency for which the statute of limitations is still open when the Tax Court dismisses.  (See the Federal Tax Procedure book 2023.2 Practitioner Edition pp. 515-516.)

Phillips v. Commissioner, T.C. Memo 2024-44, TA here & GS here [to come], is such a case. In Phillips which the Court says is a deficiency case (see p. 1; for more explanation see my note # 1 below explaining how a CDP case morphed into a separate deficiency case), the petition for redetermination of the deficiency was out of time. The Court found the NOD and resulting assessment to have been invalid for failing the last known address requirement. In getting to the holding of invalidity, the Court offers good discussion of the application of the Regulations on last known address including the IRS access to USPS change of address information as a licensee, the IRS’s processes for insuring last known address, and the IRS’s failure to meet the Regulations’ requirements in this case. I will not further address the merits of the Tax Court’s last known address resolution.

I focus instead on the Phillips opinion’s closing shot (p. 15 n. 10):

Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for 2014 that is properly mailed to petitioner’s last known address.

Tax Court Judge Lauber Denies Petitioner Motion for Summary Judgment Rejecting Fraud Penalties in Allegedly Abusive SCE Case; Some Background (4/14/24)

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #140 4/10/24), TA here and TC Dkt here*, a syndicated conservation easement (“SCE”) case, the Court (Judge Lauber) denied the petitioner’s motion for partial summary judgment. 

* This is an order and not an opinion of the Court. Hence there is no direct access to the Court’s order. Access through the Court (as opposed to a third party provider) is by using the Court website to access the docket entries for Case # 24703-21 and going to the particular docket entry (in this case entry 140 dated 4/10/24). Here there is a third party provider, Tax Analysts on its public site sponsored by Deloitte. I take this opportunity to state my appreciation to Tax Analysts and Deloitte for providing this service.

Judge Lauber opens (slip op. 1):

On February 16, 2024, petitioner filed a Motion for Partial Summary Judgment seeking a ruling that the civil fraud penalty, as a matter of law, does not apply because respondent has not alleged facts showing that NDLA “intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” Memorandum in Support of Motion for Partial Summary Judgment at 7 (quoting Parks v. Commissioner, 94 T.C. 654, 661 (1990)). In essence, petitioner contends that respondent cannot carry his burden of proving fraud by clear and convincing evidence because NDLA disclosed on its tax return the facts relating to the conservation easement transaction. Finding that there exist genuine disputes of material fact regarding the possible application of the fraud penalty, we will deny the Motion.

Judge Lauber starts the discussion of the facts as follows:

Sixty West, LLC (Sixty West), was a promoter of syndicated conservation easement transactions.n3 In March 2016 Reserve at Welsh, LLC (Welsh), an entity controlled by Sixty West, purchased 3,324 acres of land in Jefferson Davis Parish, Louisiana (Parent Tract). Sixty West allegedly purchased the Parent Tract for use in multiple syndicated transactions that would generate large charitable contribution tax deductions for investors. The total purchase price for the Parent Tract was $9,888,008, or $2,975 per acre.
   n3 “Promoter” is a loaded term in the syndicated conservation easement space because of the penalty imposed on “promoters” by section 6700(a). In this Order we use the term “promoter” in its ordinary sense, making no determination as to whether Sixty West was a “promoter” within the meaning of section 6700(a), a question that is not before us.

Judge Lauber’s recitation of the rest of the relevant facts then follows a recognizable pattern for those who have watched abusive SCE cases. Setting aside technical foot-faults, the core common pattern is the substantial overvaluations of the donated easements. Based upon the appraisal  of a frequent appraiser in abusive SCE cases (Claud Clark III), NDLA claimed a donation of $115,391,000 for a portion of the property originally purchased. (Order slip op. 2.) That contribution claim was based upon a “’before value’ of the property of $116,303,000, or $471,4561 per acre. Subtracting from the sum an “after value” of $912,000, Mr. Clark asserted that the easement was worth $115,391,000.’” (Slip op. 2-8.)

Timely disclosure Forms were filed as follows (Slip op. 30):

Litigation is About Persuasion Which Requires Credibility (4/12/24; 4/23/24)

I write on the tax saga of Burt Kroner. The underlying saga goes back many years and has played out in three tax cases.

• Kroner v. Commissioner (Kroner I), T.C. Memo.  2020-73, here, sustaining the substantial penalty but denying the substantial penalty because of failure to obtain written supervisor approval required by § 6751(b)(1).
• Kroner v. Commissioner (Kroner II), 48 F.4th 1272 (11th Cir. 2022), here, reversing Kroner I on the § 6751(b) penalty issue (the Tax Court’s sustaining of the deficiency was not appealed); I previously wrote on Kroner II. Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (Federal Tax Procedure Blog 9/20/22), here. 
• Kroner v. Commissioner (Kroner III), T.C. Memo. 2024-41, TA here and GS here, applying the penalty on the merits on remand and rejecting Kroner’s reasonable cause defense. 

The holding in these cases that will likely be cited most in the future is the holding in Kroner II regarding the proper timing of the written supervisor approval requirement as courts further calibrate precisely what the requirement is (perhaps based in part on the Treasury proposed regulations when finalized).

I write today on the merits of the tax deficiency which the recitation of facts in the recent opinion in Kroner III suggested I should take a further look.

The deficiency issue was whether a series of transfers into Kroner’s accounts were gifts from a business associate (also an alleged friend), a David Haring, or taxable income. Kroner claimed the transfers were gifts which IRC § 102 excludes from taxable income; the IRS claimed that they were not gifts (or at least that Kroner had not shown on audit or at trial that they were gifts). The concept is that the Code taxes all income (generally all accretions to wealth presently subject to a realization requirement) unless the income is excluded by some Code section, in this case § 102. The taxpayer bears the burden of persuading the trier of fact that the transfers were gifts.

As an aside, the gift v. income issue can arise in many settings. See e.g., my trial and appellate war stories in Justice Thomas and Tax -- The Plot Sickens (Federal Tax Procedure Blog 10/29/23; 10/31/23), here.

Judge Marvel explains the Code’s gift meaning (Kroner I, slip op. 8):

District Court Rejects State End-Run of Federal Tax SALT Limitations with State Creditable "Charitable" Contribution (4/8/24)

In New Jersey v. Mnuchin, ___ F.Supp. 3d ___,  2024 WL 1386080, 2024 U.S. Dist. LEXIS 59122  (S.D. N.Y. 3/30/24), CL here and GS here, the Court rejected now familiar attacks, including APA and Chevron. This time the attacks come from the states rather than those who fear the administrative fear (either in reality or to stir the base). The complaint of the states (including New York and Connecticut components as named plaintiffs) is that Treasury failed both substantively (improper interpretation a la Chevron) and procedurally in promulgating the Final Rule interpreting § 170 (the charitable deduction provision). The Final Rule denies a charitable contribution deduction where the state gives a quid pro quo in the form of a state and local tax credit. The state tax credit was simply a state end-run around the 2017 Tax Act “SALT” (state and local tax) deduction limitation. 

The Court described the Treasury response to the state legislation (Slip Op. 2-3, footnotes omitted and cleaned up):

On June 13, 2019, the Treasury Department and the Internal Revenue Service ("IRS") promulgated a new regulation (the "2019 Final Rule") governing the availability of charitable contribution deductions for payments made to state and local governmental units where the taxpayer receives or expects to receive a state or local tax credit in return. The new regulation involves an interpretation § 170, which in part governs the deduction of charitable contributions on federal income tax returns.

The 2019 Final Rule provides that "the amount of the taxpayer's charitable contribution deduction under [S]ection 170(a) is reduced by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer's payment or transfer." 26 C.F.R. § 1.170A-1(h)(3)(i).

In this action, Plaintiffs seek a declaration that the 2019 Final Rule is invalid under the Administrative Procedure Act, 5 U.S.C. § 706. Plaintiffs contend that Defendants — Treasury, the IRS, and their officers (the "Government") — exceeded their statutory authority in promulgating the 2019 Final Rule, and that the issuance of the Rule was arbitrary and capricious.

The Court dispensed with threshold issues such as 

• Standing (Slip Op. 16-29), 
• Anti-Injunction Act (Slip Op. 29-32) , and 
• Violation of the Regulatory Flexibility Act (Slip Op. 32-36).

Moving to the Merits of the Claim under the APA (Slip Op. 35-59), The Court first holds that the Regulation easily passes Chevron’s two-step analysis.  Key points:

George Mason Law Review Symposium Articles on Chevron; My Discussion of Professor Bamzai's Article (4/4/24)

Readers of this blog interested in Chevron deference should consider the Chevron on Trial Symposium Law Review edition of the George Mason Law Review. See Megan Dill, The George Mason Law Review’s Chevron on Trial Symposium Issue (Yale J. on Reg.: Notice & Comment 4/2/24), here. The N&C article lists and links a number of articles in the Symposium Issue.

In the N&C list, I focused principally on Professor Aditya Bamzai’s On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024), html here and pdf here. I previously blogged on a draft of Professor Bamzai’s article. See Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 1/24/24), here. I have now made a few short amendments to that earlier blog (indicated in red font) to address the Final Article; hence, the final date in blog title’s parenthesis has changed to 4/4/24, which is how I flag the latest change). Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 4/4/24). Suffice it to say here that I continue to disagree with Professor Bamzai.

3rd Circuit Holds Tax Court Has Jurisdiction to Determine Overpayments in CDP Proceedings (3/29/24; 3/30/24)

In Zuch v. Commissioner, ___ F.4th ___, 2024 U.S. App. LEXIS 6827, 2024 WL 1224410 (3rd Cir. 3/22/24), CA3 here and GS temporary * here, the Court starts the opinion of the Court as follows:

When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress's will prevails. The IRS cannot say that such a right exists only under the circumstances it prescribes. That ought to go without saying, but this case requires us to say it.

This signals that the rest of the opinion is not favorable to the IRS.

I infer from Judge Jordan’s Wikipedia page here and even this opinion with some hyperbole that Judge Jordan is not an IRS skeptic like some other judges; Judge Jordan’s appointment to the Court of Appeals was unanimous (91 for, 0 against, and 9 not voting (including then Senator Biden). See Senate Vote Summary, here.

So what is Judge Jordan’s disaffection with the IRS? The Court summarizes in the next two paragraphs:

The IRS sent Jennifer Zuch a notice informing her that it intended to levy on her property to collect unpaid tax. She challenged the levy, arguing that she had prepaid the tax. The IRS Independent Office of Appeals (the "IRS Office of Appeals") sustained the levy, and Zuch petitioned the United States Tax Court for review of that decision. While the issue was being litigated in that Court over several years, the IRS withheld tax refunds owed to Zuch and applied them to what it said was her unpaid balance, satisfying it in full. When, according to the IRS's accounting, there was no more tax to be paid, the IRS filed a motion to dismiss the Tax Court proceeding for mootness, and the Court granted the motion.

Because Zuch's claim is not moot, we will vacate the dismissal and remand this matter to the Tax Court to determine whether Zuch's petition is meritorious.

Tax Court Holds Conservation Easement Proceeds Regulation Invalid Consistent with Eleventh Circuit Holding in Hewitt (3/28/24; 4/6/24)

In Valley Park Ranch, LLC v. Commissioner, 162 T.C. ___ No. 6 (3/28/24) (reviewed opinion), JAT Google Docs here and GS temp link here (GS permalink to follow when available)*, the Court declares the “proceeds” conservation easement regulation invalid by reversing its prior holding in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022) and adopting the holding of Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). The Tax Court gets there with a thin one-judge majority because it drew only 7 agreements with the opinion of the Court (including the author, Judge Jones); there were two concurring opinions in result only and 4 dissenting opinions. (Note that the Tax Court has only 13 active judges, with six vacant positions per § 7443(a).)

I noted yesterday that the commotion about Chevron deference is just a battle in a “larger war to discredit what is perceived (or claimed for political purposes) to be an evil administrative state.” See Discussion with Reporter about Possible Demise of Deference, Now Often Called Chevron Deference (Federal Tax Procedure Blog 3/28/24), here (See Bryan Camp’s comment that, for APA issues, everything looks like a nail.) My initial reaction when I saw the positions of all the judges on this issue was to test whether some such bent may have been involved in Valley Park Ranch. Here is my breakdown (readers can click on the graphic of the spreadsheet for a cleaner view and download; NOTE THERE WAS A BUST IN THE CALCULATION IN THE ORIGINAL POSTING THAT UNDERSTATED THE OBAMA NOMINEES; I CORRECTED ON 3/29/24 @ 8:45AM):

The breakdown is interesting.

Discussion with Reporter about Possible Demise of Deference, Now Often Called Chevron Deference (3/28/24)

Yesterday, I spoke with a reporter about the effect of reversal or elimination of Chevron deference would have on tax administration. As readers of this blog will know, that issue is now before the Supreme Court in two cases. 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). 

I thought some readers might like to engage with some of the points of the discussion. I will bullet point the key points starting with some predicate points to set up the issue of the effect of reversal or elimination of Chevron deference.

• The key predicate step is to define deference. Deference is a court applying an agency interpretation that the court does not believe is the best interpretation of the ambiguous statutory text. Based on my anecdotal research in significant datasets of courts of appeals opinions noising about Chevron, courts often are not concluding that there is a better nonagency interpretation. Best interpretations of otherwise ambiguous statutory text easily pass Chevron’s test that the interpretations be reasonable.
• I say that this is a predicate step, but it points to the final conclusion. If the Supreme Court says that deference is eliminated, that will only affect those cases where the court affirmatively determines that a nonagency interpretation is the best interpretation. Not affected are those cases where the court determines that, within the range of reasonable interpretations of the ambiguous statutory text, the agency interpretation is best reasonable interpretation or the court is in equipoise as to the best reasonable interpretation (unable to determine that any interpretation is best and agency interpretation is as good as nonagency interpretation).
• I did not discuss with the reporter how often a court might be in equipoise as to the best interpretation; some like the late Justice Scalia claimed that he was rarely if ever in equipoise in statutory interpretation; for present, I assume that legal realists know or intuit that a state of equipoise in statutory interpretation is at least a possibility.
• Chevron did not create deference. Deference existed long before Chevron, in Supreme Court cases describing deference as we now describe Chevron deference—(i) ambiguous statutory text; and (ii) reasonable agency interpretation within the scope of the ambiguity. See John A. Townsend, The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here (showing these articulated features particularly in tax cases before the APA).
• Reversal or elimination of Chevron deference will affect only interpretations in Treasury regulations (both final and temporary) because (i) Treasury (IRS) and DOJ Tax do not claim Chevron deference (or any other deference) and (ii) courts do not “defer” to interpretations in IRS subregulatory guidance (Revenue Rulings, etc.). In this regard, Skidmore respect is often mislabeled as deference but is not deference. See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here.
• If I am right in my conclusion based on anecdotal research and my intuition that courts now do not commonly really defer to agency interpretation (see definition above), then I suspect that eliminating deference (whether called Chevron or not) will not affect many outcomes, certainly not as many as the commotion about Chevron would suggest.
• Eliminating Chevron deference will exponentially increase tax litigation. It has been observed that the mix of administrative law and tax administration is like a lawyer with a hammer who imagines that there are a lot of nails out there that he or she can profitably hammer through litigation at high billing rates. See Bryan Camp, The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here (“Kristin Hickman loves the APA. To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love. It’s her Hammer, her righteous Mjölnir. And when you have a hammer, everything looks like a nail. Including ALL Treasury regulations.).
• The question that should be asked is whether the burst of litigation attacking IRS interpretations in regulations will (or should) affect many final outcomes. I think not. But lawyers with this anti-Chevron hammer will certainly try and in the process charge their high fees. The IRS will underwrite those attempts by giving the taxpayers deductions for the high fees they pay their lawyers to go on what is often a quixotic adventure. (Part of the cost-benefit analysis for taxpayers is how many dollars are involved and the benefits of delay (including the audit lobby and the time benefit/cost of delay).)
• I pointed particularly to the commotion about the written supervisor approval requirement in § 6751(b) involving intersection of a poorly written statute (drafted in a highly partisan atmosphere surrounding RRA ’98 apparently without much thought about how it would actually work) and courts trying to make sense from nonsense. Sooner or later (much, much later), the courts will reach some consensus as to the various ambiguous (or nonsensical) terms in the statute or, more likely, either the courts will honor the IRS’s interpretations in final regulations (now in proposed form) or the Supreme Court will have to come in more than once to clean up the mess. See Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here.
• Section 6751(b) is just one instance where deferring to agency regulations will avoid a lot of unnecessary commotion. Another instance I like to use (although not mentioned to the reporter) are interpretations such as those “deferred to” in United States v. Correll, 389 U.S. 299 (1967) where the agency interpreted the statute’s “away from home” requirement to include sleep or rest, hardly compelled by the statutory text but reasonable for administering the tax system. What happens to the thousands, if not millions, of interpretations buried in Treasury regulations that may now seem to be in play to those with a high-priced hammer?
• Finally, I vented to the reporter my concern that deference is just a battle in the larger war to discredit what is perceived (or claimed for political purposes) to be an evil administrative state. That is a political issue that plays out in many contexts; deference is just one context where politics is disguised with legal and even constitutional overtones (lipstick on the pig). My point is that given the community we have in the United States and where we want to be in the world, a robust administrative state is required. That means that we should honor those who work in that administrative state (military, IRS agents, etc.) and strive to make them better rather promoting a narrative that administrative agencies are enemies, a narrative that can seep through our fabric, even for such things as Chevron deference. 

Added 3/30/24 @ 2:30 pm:

Government Files Petition for Cert on Issue of Whether 90-day Period for Tax Court Petitions is Jurisdictional (3/26/24)

The Government has filed a petition for certiorari with the following requested issues (see Petition in Commissioner v. Culp (S. Ct. No. 22-1789), here (Pet. (I):

1. Whether 26 U.S.C. 6213(a) grants the Tax Court jurisdiction to review an untimely petition for redetermination of a tax deficiency?

2. Even assuming that the Tax Court has jurisdiction to review some untimely petitions for redetermination of tax deficiencies, whether that jurisdiction extends to a petition filed after the Internal Revenue Service has already assessed the previously determined deficiency, as it is required to do under 26 U.S.C. 6213(c) “[i]f the taxpayer does not file a petition with the Tax Court within the time prescribed.”

Readers of this blog (and most others paying attention to tax procedure matters) will already be familiar with the first issue, so I won’t address that issue further here except to say that the Government requests Supreme Court review because the court of appeals decision (Culp v. Commissioner, 75 F.4th 196 (2023)) is: (i) wrong; and (ii) to resolve a conflict among the Circuits.

The second issue is apparently a new or at least newly articulated as a separate issue if the Court were to hold that the 90-day period is not jurisdictional. Specifically, it articulates a point in which an open-ended inquiry for equitable relief can apply based on the statutory mandate to assess the tax if the taxpayer does not file a petition. The Government makes its argument on this as a separate issue in a footnote under the heading B. The Decision Below Creates A Clear Circuit Conflict On An Important And Recurring Question (Pet. 28 n. 3):

    n3 Because every other court to have addressed the question has held that the 90-day deadline is itself jurisdictional, no circuit conflict exists on the second question presented, see p. i, supra, concerning whether a post-deadline assessment made in compliance with Section 6213(c) independently deprives the Tax Court of deficiency jurisdiction. But because that question is itself jurisdictional, is closely related to the first question presented, and could not arise in circuits that treat the 90-day deadline as jurisdictional, it should be considered in this case along with the first question presented.

A Reminder on Chevron in Agency Adjudications (3/25/24)

With the Supreme Court poised to decide the future, if any, of Chevron deference, I hesitated to provide a discussion of a current decision on deference. Still, I thought it would be helpful to do so because the case discussed in this blog involves the application of Chevron deference to agency adjudications which differ materially from the current cases before the Supreme Court involving agency rulemaking. The context for this blog entry is retroactivity in agency adjudicative interpretation which has different features than agency rulemaking interpretation. (That is not to say that whatever the Supreme Court does will not affect appellate review of agency interpretations in adjudications.)

As an aside, I do wonder why courts, such as the Second Circuit in the case prompting this blog entry, are deciding cases on the basis of Chevron deference, rather than postponing them for decision when the current Supreme Court challenges are resolved (probably by the end of May).

As an introduction to today’s discussion, I think it helpful to state the material differences between agency rulemaking and agency adjudications as respects interpretation and retroactive application. In this introduction, I state general propositions in most cases without citations. All of the subjects are covered in my prior article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 4/8/22), posted on SSRN, here.

In this discussion, I will refer to Chevron deference as the applicable benchmark, but as I have previously discussed, deference to agency interpretations with the key features of Chevron deference was applied long before Chevron. Those key features of are—(i) ambiguity in the statutory text; and (ii) reasonable agency interpretation within the scope of the ambiguity. Supreme Court opinions prior to Chevron stated deference in those terms. See The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here.

Agency rulemaking

If the rule is legislative in character, the rule must be promulgated in a notice and comment regulation. The only exception is when the legislative rule is accompanied by a “good cause” statement as to why it should be immediately effective when first promulgated (called an interim final rule in general administrative law jargon and a temporary regulation in tax jargon). The general rule is that, without explicit statutory authority for retroactivity, legislative rules cannot be retroactive prior to the date of promulgation of the rule. (This parallels the general rule that legislation cannot be retroactive.) Legislative rules being the law rather than interpretations of the law are not susceptible to Chevron deference, which tests the reasonableness of an interpretation within the scope of ambiguity in the statutory text. (The statement made by many pundits and even courts that Chevron deference applies to legislative regulations or only to legislative regulations is an oxymoron; making such statements, even by pundits or courts, does not make them true.)

If the rule is interpretive in character, the general rule is that a valid interpretation can be retroactive to the date of enactment of the statute. The concept is that the interpretation merely clarifies an ambiguity in the statutory text within its reasonable scope of interpretation from the date of enactment; the application of the interpretation does not offend due process since all persons to whom the law could apply were on notice that some interpretation of the ambiguous statutory text may be forthcoming; in other words, they did not reasonably rely upon some alternative interpretation. This is the same rule that applies generally to court interpretations of statutes—retroactivity to the date of enactment of the statute.

Statistical Sampling for Large Dataset Issues in Tax Litigation (3/23/24)

In Kapur v. Commissioner, T.C. Memo. 2024-28, GS here,  the Court (Judge Pugh) set out the issue as follows (Slip Op. 2, two footnotes omitted):

    Before the Court is petitioners' Motion for Protective Order. The parties dispute whether discovery and trial should be limited to a sample of projects at this stage of litigation. We decline to order sampling for the reasons summarized below. n4
   n4 This appears to be a recurring issue. See, e.g., Phx. Design Grp., Inc. v. Commissioner, No. 4759-22 (T.C. Aug. 29, 2023) (order); Feller v. Commissioner, No. 11581-20 (T.C. Aug. 10, 2023) (order). Respondent referred us to these orders but of course they are not precedential.

The Court reviews (Slip Op. 5) sampling by agreement of the parties (whether encouraged by the Court or not). The Court then says (Slip. Op. 5-6, bold face supplied by JAT):

    Respondent also claims that we do not have discretion to order sampling at the request of petitioners if respondent objects. We disagree: We do have authority to limit discovery (including by ordering sampling) over the objection of a party. See Rule 70(c)(1). Nonetheless, we agree that exercising our discretion to limit the scope of discovery and trial in 6*6 accordance with petitioners' Motion for Protective Order is improper at this stage. The only issue in this case is whether petitioners are entitled to the research credits claimed for the years in issue. Evaluating compliance with section 41 necessarily involves consideration of the underlying business components. And petitioners agree that they have the burden of showing entitlement to the claimed research credits. See Feigh, 152 T.C. at 270. As we have said previously, "[a]bsent an agreement between the parties, project sampling improperly relieves the taxpayer of its burden of proving entitlement to the research credit claimed." Betz v. Commissioner, T.C. Memo. 2023-84, at *77 n.30 (citing Bayer, 850 F. Supp. 2d at 538, 545-46).

As I understand the Court said it can order sampling for discovery purposes but cannot order sampling over IRS objection for resolution of the merits on issues as to which the taxpayer bears the burden of persuasion.

It is not clear to me that the final conclusion is consistent with the Court’s earlier rejection of the IRS claim that Court does not have authority to order sampling when the IRS does not agree. Another way of reading the paragraph is that the Court will not order sampling based on the stage of pretrial development right now in Kapur.

This raises some issues for me, but let me start with my understanding of good sampling that permits reasonable inferences about the universe of data that is sampled. Those reasonable inferences can be stated in possibilities or margins of error for the inferences, which generally can be slimmed down by increasing the sample size.

War Story-Appellate: My Early Brush (1969) with Administrative Law Meaning of Legislative Regulations (3/16/24)

I am starting a new series of procedure-related appellate war stories, mostly from my time with DOJ Tax Appellate Section (1969-1974). The purpose of the series is to tell the war story because it is interesting to me but to do so only when the telling of the story offers some opportunity for students (including for this purpose, practitioners) to learn from the story. I have previously posted some such war stories; all such stories will be under the label “War Story-Appellate", here (the link can be clicked at any time to show all postings).

Today’s War Story-Appellate relates to one of the first cases I handled with DOJ Tax, Davis v. Commissioner, 422 F.2d 401 (6th Cir. 1970), here. I wrote the brief in late 1969; the case was decided in 1970. The substantive issue was whether the taxpayer had proved entitlement to more expenses than allowed by the Tax Court. That is not a tough issue to address and is factual with no precedential importance. The Sixth Circuit addressed it in a one-line per curiam opinion:

On consideration of the files and records in this case, the judgement of the Tax Court is affirmed for the reasons set forth in the Memorandum Opinion of the Tax Court, Tax Ct. Memo 1969-74.

As I have said before in War Story-Appellate, the DOJ Tax Appellate Section did not assign tough cases to relatively new attorneys. I had joined DOJ Tax Appellate in June 1969. I had not yet proved my self capable of handling more difficult cases.

My Davis assignment had a more significant threshold procedural issue that is not addressed in the Sixth Circuit’s one-line per curiam opinion. The issue was (presented in our brief as filed, here, p. 1):

1. Whether this Court has jurisdiction over the merits of this appeal when taxpayer failed to file a notice of appeal until ninety-two days after entry of the Tax Court decision.

Actually, that question was written by my reviewer, Tom Stapleton. In my draft (here), I stated the question as follows:

1, Whether the taxpayer's untimely filing of the notice of appeal from the Tax Court's decision denies this Court from deciding the merits of the appeal.

Tom’s version was better, but still not optimal. How would I improve the question today? Here is my current shot at the best statement of the issue.

1. Whether FRAP 13(a)'s requirement to file notice of appeal within 90 days from the Tax Court decision override the previously enacted statute's (§ 7483) three-month requirement.

District Court Rejects Transferee's Claim of Lack of Personal Jurisdiction for FBAR Willful Penalty Suit (3/12/24)

In United States v. Wolin (E.D. N.Y. No. 1:17-CV-02927 Dkt 137 Memo & Order 2/26/24), CL here and GS here, the Court denied the motion to dismiss the Government’s FBAR willful penalty collection suit for lack of jurisdiction over the defendant Greenberg, a recipient of an alleged fraudulent transfer from the person liable for the FBAR penalty. Greenberg’s motion for summary judgment alleged lack of personal jurisdiction. (The CL Docket Entries are here.)

Essentially, although Greenberg was a resident of Israel, she maintained sufficient contacts with New York to support jurisdiction. The Court summarized those contacts as follows (Slip op. 6-8):

          As noted previously, Defendants Wiesel and Greenberg are both daughters of Ziegel and Defendant Wolin is Ziegel’s granddaughter. (FAC ¶¶ 38-39.) Although Defendant Wiesel still lives in New York (FAC ¶ 6), Plaintiff acknowledges that throughout the relevant time period, Defendant Greenberg has lived in Israel. (FAC ¶ 7.) Nevertheless, Plaintiff asserts that Defendant Greenberg maintains sufficient contacts with the State of New York to be subject to personal jurisdiction. (Id.) Plaintiff first contends that Defendant Greenberg is a U.S. citizen and exercises the many benefits and privileges of U.S. citizenship, including by voting in the last two presidential elections. (Id.) Plaintiff further contends that Defendant Greenberg maintains an active New York voter registration in connection to which she listed a Queens, New York address as her residence. (Id.) Plaintiff also alleges that Defendant Greenberg filed federal income tax returns and New York state tax returns for each year during the 2015 — 2019 period. (Id.) Defendant Greenberg is alleged to have made nine visits to the state of New York between January 1, 2014 and December 31, 2019, some of which lasted several months. (Id.) Plaintiff asserts that Defendant Greenberg is the co-owner of residential real property in Queens, New York, that was previously owned by her deceased father, Ziegel, and in connection to which she commenced and is engaged in two lawsuits in New York state courts in Queens County.n2 (Id.) Defendant Greenberg also commenced four additional lawsuits in New York state court, Kings County, which relate to disputes with Defendant Wiesel regarding real properties and business entities previously owned by Ziegel and Ziegel’s estate generally, in which Defendant Greenberg claims an interest. Defendant Greenberg commenced a Queens County Surrogate Court proceeding relating to Ziegel’s estate wherein Defendant Greenberg moved to compel production of Ziegel’s last will and testament and petitioned for letters testamentary in a probate proceeding involving Ziegel’s estate. (Id.) Finally, Plaintiff alleges that Defendant Greenberg is the sole or partial owner of eight personal bank accounts at HSBC in New York and that Greenberg has an ownership interest in at least two New York limited liability companies. (Id.)
   n2 The real property located at 135-41 78th Drive, Flushing, New York 11267 (the "Queens Property") is co-owned by Defendants Greenberg and Wiesel and was originally owned by Ziegel. (ECF No. 131-3, Ptf. Opp. Ex. C, "N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl." ¶ 7.) In 2006, Ziegel executed a "Life Estate Deed" designating his daughters, Defendants Greenberg and Wiesel, as the beneficiaries of the ownership interest in the Queens Property, in equal shares. (N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl. ¶ 8.) Upon Ziegel’s death in 2014, the ownership interest in the Queens Property transferred to Defendants Greenberg and Wiesel and has since been the subject of multiple lawsuits, including at least two in Queens County, which were commenced by Greenberg against Wiesel in New York Supreme Court. See e.g., (ECF No. 131-2, Ptf. Opp. Ex. B, "N.Y. Sup. Ct. Queens Cnty. 705219-2018 Compl."; N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl.).

The Court examined New York law and Due Process Law to find sufficient basis for personal jurisdiction.  (Slip Op. 19-49.)

Court on Summary Judgment Sustains FBAR Liability and Fraudulent Transfer Liability But Orders Further Briefing on Repatriation to Pay Liabilities (3/11/24)

In United States v. Harrington (D. Colo. No. 1:19-CV-02965 Dkt. #111 Order 2/28/24), here, the Government brought an FBAR willful penalty collection suit against George Harrington, later expanded to include his wife, Monica on fraudulent transfer liability.  The Government sought judgment for the FBAR penalties plus interest and costs (Count One), fraudulent transfer liability against Monica (Count Two), and an order for repatriating sufficient funds necessary to pay the respective liabilities (Count Three).  (The CL docket entries are here.)

Count One (FBAR liability) is fairly straightforward with the Court imposing the civil standard for willfulness approved by other circuits because the 10^th Circuit had not spoken on the issue. See pp. 15-24.)

Count Two (fraudulent transfer liability) is also fairly straightforward, with the Court imposing fraudulent transfer liability upon Monica for having received assets from George under the Federal Debt Collections Procedures Act, 28 U.S.C. §3304(b)(1). See pp. 24-30. The FDCP imposes liability for transfers having 11 nonexclusive characteristics called badges of fraud. The Court discusses the presence  or absence of those characteristics and concludes (p. 30):

The Court finds six (out of 11) badges of fraud are present. See Key, 837 F. App’x at 354 (five badges of fraud sufficient to uphold summary judgment for government); Osborne, 807 F. App’x at 524 (six badges of fraud sufficient to affirm summary judgment). As a result, the Court finds a reasonable jury could only determine that George’s transfer of his interest in the ValorLife policies to Monica was a fraudulent transfer under 28 U.S.C. §3304. See Anderson, 477 U.S. at 248. The Motion is granted, therefore, as to Count 2.

JAT Comment: I infer that the 11 characteristics permit some weighting rather than just majority controls the decision (I infer this because 5 was sufficient in the cited Osborne precedent.; I have not otherwise researched the issue of weighting).

Buckeye Institute Claims that "§ 6033(b) [Required Contributor Disclosure] violates the First Amendment" (3/8/24)

In Buckeye Institute v. IRS, et al. (S.D. Ohio No. 2:22-CV-04297 Dkt. 60 Opinion and Order 11/9/23), here, the court denied the parties' motions for summary judgment. (The CL docket entries in the case are here.) In the case, Buckey sought (Prayer for Relief in Amended Complaint p. 12, here). 

• A declaration that compelling disclosure of contributor names and addresses pursuant to 26 U.S.C. § 6033(b) violates the First Amendment, both on its face and as applied to Buckeye”; and
• “preliminary and permanent injunctive relief barring Defendants from compelling Buckeye to disclose contributor names and addresses pursuant to Section 6033(b)”.

Accordingly, with the denials of the motions for summary judgment, the case will proceed to trial.

The factual basis for Buckeye’s complaint is that the IRS may not keep the information about contributors secret. In support of its factual (or projected factual) basis for the claim, Buckeye claims that, in some instances, such information has escaped the walls of the IRS. I have no way of predicting the court’s resolution of the claim based upon such isolated disclosure instances. .

I thought, however, that there must be an agenda in pursuing this issue. In its Amended Complaint (par. 8, p. 3, bold-face supplied), Buckeye alleged that “Buckeye is a nonpartisan, nonprofit, tax-exempt organization.” My limited observation of Buckeye’s activities is principally through Supreme Court amicus briefs filed). My sense is that Buckeye usually aligns itself with partisan positions, principally Republican positions, but in any event partisan positions (in the broader sense of the term).

The Government responded to Buckeye’s claim (Answer to Amended Complaint, here, par. 8, p. 4):

Response: Admits that Buckeye holds itself out as a “nonpartisan, nonprofit, tax-exempt organization, organized under Ohio law” and has a headquarters in Columbus, Ohio. Lacks knowledge or information sufficient to form a belief about the truth of the remainder of the allegations.

Taxpayers Should Be Prosecuted Along with Enablers of Abusive Tax Shelters (3/8/24)

This blog entry is an opinion piece. Individual taxpayers should be prosecuted along with their enablers who promote and implement the abusive shelters (particularly enablers from the tax professions).

The following is from a report of Attorney General Garland's comments (Kerry K. Walsh Deborah A. Curtis Amy Jeffress, “Swift” Justice: Attorney General Garland Vows To Uphold DOJ Priorities in Fireside Chat (Arnold & Porter 3/6/24), here):

Additionally, AG Garland explained how DOJ’s three co-equal priorities — upholding the rule of law, keeping America safe, and protecting civil liberties — implicated corporate accountability. AG Garland stressed that the greatest deterrent of white collar crime is holding individual corporate executives to account. AG Garland also reiterated the importance of applying the rule of law equally, regardless of rank or position of power.

I supplied the bold-face to emphasize the point. There has been a perception that, by delivering up the corporation (or other entity) for criminal consequences, the people in the corporations (collectively, the executives) could escape accountability.

A similar perception and resulting phenomenon exists in the tax area where the promoters of abusive tax shelters (think, for example, the Son-of-Boss shelters in the late 1990s and early 2000s) were prosecuted, but the taxpayers generally were not. Yet all of those taxpayers or at least most of them knew that they were violating the law and participated in the fraud. For example, the abusive shelters wrapped in complex structures and voluminous more-likely-than-not opinions, required at the minimum that the taxpayers represent to the promoters that they had a nontax profit motive when, in fact, they did not. That was a lie that was essential to abusive tax shelter. Moreover, most of those wealthy taxpayers had independent counsel (other than the ones supplied or recommended by the promoters) before buying into the deal. Assuming that most of those independent counsel were competent, those taxpayers knew that the deals were bogus, but nevertheless sought to buy fraud insurance through the legal opinions rendered by the promoter’s supplied or recommended counsel (as opposed to their own independent counsel). That worked as insurance.

My argument has been that the way to discourage abusive tax shelters is to prosecute the taxpayers along with the promoters. This would discourage the tax professional penalty insurance industry and abusive tax shelters generally.

This blog entry is cross-posted on the Federal Tax Crimes Blog here.

District Court in ND Alabama Holds the Corporate Transparency Act Unconstitutional (3/4/24)

In Nat'l Small Business United v. Yellen et al. (N. D. Ala. No. 5:22-cv-1448-LCB Dkt 52 3/1/24), CL here, the Court declared the Beneficial Ownership reporting requirements of the Corporate Transparency Act unconstitutional and enjoined its application against the defendants in the case.  For more on the Beneficial Ownership Information requirements, see the FinCEN page here. The judgment in the case is here.

The Court starts its opinion with the following: 

            The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.

That’s a cute opening for a final conclusion of unconstitutionality that is, in my gut reaction, constitutionally suspect. Indeed my cute initial analysis (I do not offer a detailed analysis here) is:

This opinion is dumb, stupid.

I will be back to discuss it later when I have given more complete analysis. I will hold open the possibility that my initial reaction above is itself dumb, stupid. (That will not be the first time.) But for now, until further analysis drives me to a different conclusion, I stick to the dumb, stupid characterization.

In the meantime, I do note that the injunction is limited to the plaintiffs only. The court does not attempt universal vacatur which itself is a bit suspect. So, at least,. it is modest in its holding as to the effect of the unconstitutionality holding.

Added 3/5/24 8am Eastern Time:

Garland v. Cargill-Comments on Briefs and Oral Argument (2/29/24)

Yesterday, the Supreme Court held oral argument in Garland v. Cargill (No. 22-976 docket here, oral argument audio here, and transcript of oral argument here). The ultimate issue is whether “bump stock” devices are within the definition of “machinegun” in the National Firearms Act of 1934, as amended, and the Gun Control Act of 1968. Bump stocks were not devised when the statute was enacted and there is no definitive interpretation of the statutory term “machinegun” that includes or excludes bump stocks. Hence, the job of the regulator or the court in interpreting or applying the term is to determine whether, within the fair bounds of interpretation, the term includes or excludes bump stocks.

At first glance, this issue might call for the application of Chevron deference. Recall that Chevron deference requires two steps—

• Step One where the Court determines whether, on the text alone using proper tools of statutory interpretation, the text resolves the issue. If the text does, the interpreted text applies and there is no deference. If the text does not resolve the interpretive issue and the text is said to be ambiguous.
• Step Two, reached only if Step One does not resolve the interpretive issue, where the court determines whether the agency interpretation is reasonable (also called permissible). If so, the agency interpretation will prevail. Note that I said “prevail” rather than that the agency interpretation receives deference which is the standard Chevron Step Two formulation. Deference is only meaningful when the agency interpretation is not the best interpretation. If, within the zone of ambiguity in the statutory text, the agency interpretation is the better interpretation or even in equipoise as to the best interpretation, applying the agency interpretation is not deference.  See e.g., What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (Federal Tax Procedure Blog 10/21/22; 11/8/22), here.

In the facts of Cargill, the agency interpretation of “machinegun” to include bump stocks was made in the Trump administration in a notice and comment regulation adopting an “interpretive” rule. (I will address the interpretive characterization for the regulation below.) In adopting the regulation, the agency relied on Chevron. In the litigation culminating in Cargill in the Supreme Court, the agency did not rely on Chevron but rather asserted that the interpretation was the best interpretation. (Conceptually, the best interpretation can be determined at Step One or at Step Two (if the agency interpretation is the best in the zone of ambiguity); so it is unclear which Step the government’s reliance on the best interpretation applies.)

At oral argument, apparently because the government was not relying on deference or perhaps the uncertain future of Chevron deference, Chevron or deference was not mentioned. The argument simply addressed whether the text “machinegun” resolved the issue.

District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)

  In United States v. Kerr (D. AZ Dkt O. 2:19-CV-05432 Order dtd 2/23/24), TN here and CL here, the district court ruled indicatively clarifying the intended effect of the district court termination of the case after remand to the IRS of willful FBAR penalties for certain years. The intended effect was not to vacate those penalties but to provide a procedure to reconsider and modify the amount of the penalties for future district court judgment. In other words, the remand did not require a new assessment of FBAR willful penalties (for which the assessment statute of limitations had run). Rather, any IRS action would adjust the previously timely assessed FBAR penalties. After this indicative ruling, the appeal of the case can proceed in the Ninth Circuit.

Links to items related to this blog are:

• FRCP 62,1, titled Indicative Ruling on a Motion for Relief That is Barred by a Pending Appeal, here,
• FRAP 12.1, Remand After an Indicative Ruling by the District Court on a Motion for Relief That Is Barred by a Pending Appeal, here,
• Kerr docket entries for this civil case (FBAR penalty enforcement case): CL, here.
• Ninth Circuit Order staying Ninth Circuit proceedings pending the district court’s indicative ruling, here.

Prior blogs involving Mr. Kerr are (reverse chronological order):

Grossly Overvalued Conservation Easement Disallowed in Full and Gross Valuation Misstatement Penalty Applied (2/24/24)

In Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25 (2/21/24), GS here, the Court (Judge Lauber) denied the charitable contribution deduction because

• the allegedly relied upon appraisers were not “qualified appraisers” because the petitioners knew the property was worth only a fraction of the appraisers’ opined values (Slip Op. 39-48; and
• the property was “ordinary income property” in the hands of the promoters and that character carried over to the partnership, thus limiting the charitable deduction to the promoters basis. Petitioner supplied “no evidence” of that basis. (Slip Op. 48-57.)

Further, the Court held that, although entitled to no deduction, the Court still had to determine the value of the contributed easement to determine whether the valuation misstatement penalties applied. § 6662(a), (b)(3). The penalties are 20% if the valuation is substantial—i.e., 150% or more of the correct value--and 40% if the valuation is gross—200% or more of the correct value. (Slip Op. 74, citing § 6662(h) and § 6662(h)(2)(A)(i), respectively.) The value of the easement claimed on the return was $20.67 million but the value determined “was no greater than $4,972,002, thus the claimed value “exceeded the correct value by 416%.” (Slip Op. 74-75.)

In support of the first holding (not qualified appraisers), the Court said (Slip Op. pp. 45-46):

A person who achieves an advance agreement with an appraiser that property will be overvalued—knowing that it is being overvalued—cannot establish good faith reliance on professional advice that the appraisal is acceptable. n14

But there is more in the indicated footnote, the Court said (Slip Op. 46):

   n14 In its opening post-trial brief petitioner asserted that the regulations governing qualified appraisals and qualified appraisers “did not go through a proper notice-and-comment process and are, therefore, invalid.” That assertion occupied a single sentence; petitioner supplied no argument in support of that assertion, stating that “the Court need not reach that issue in this case.” And in its post-trial Answering Brief petitioner did not mention any challenge to the validity of Treasury Regulation § 1.170A-13(c)(5)(ii), or any other provision of the regulations, based on the Administrative Procedure Act (APA). Under these circumstances, petitioner has not properly presented or preserved an APA challenge to any regulation discussed in this Opinion.

Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Oral Argument in Corner Post on Whether Procedural Challenges to Regulations Are Subject to § 2401(a)’s Six-Year Statute of Limitations (2/21/24; 4/6/24)

I previously included in another blog an introduction to Corner Post v. Board of Governors of the Federal Reserve System (Sup. Ct. Case No. 22-1008), here, See Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation) (Federal Tax Procedure Blog 10/1/23), here. The question presented in Corner Post is addressed to § 2401(a)’s general fallback statute of limitations of six years :

Does a plaintiffs APA claim "first accrue[]" under 28 U.S.C. §2401(a) when an agency issues a rule-regardless of whether that rule injures the plaintiff on that date (as the Eighth Circuit and five other circuits have held)-or when the rule first causes a plaintiff to "suffer[] legal wrong" or be "adversely affected or aggrieved" (as the Sixth Circuit has held)? 

The Solicitor General (“SG”) worded the question presented slightly differently (appellate fans will understand the subtle difference):

Whether the court of appeals correctly held that petitioner’s freestanding challenge to a rule adopted by the Board of Governors of the Federal Reserve System in 2011 was untimely under the six-year statute of limitations in 28 U.S.C. 2401(a) because petitioner had brought that challenge more than six years after the rule was adopted.

I noted that the resolution of Corner Post could affect many cases, including tax cases. E.g., Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), GS here (where the Court invalidated an interpretive tax regulation promulgated in the 1980s for procedural irregularity (failing to consider and respond to meaningful comments during the notice and comment process).

Oral argument in Corner Post was held Tuesday, February 20, 2024. See the transcript here and the recording here. I won’t cover oral argument except as it might affect an issue I have discussed before—the difference between arbitrary and capricious procedural review and interpretation review through Chevron deference. The context for the following excerpts is whether procedural challenges (such as failure to consider and respond to comments in the notice and comment process) are subject to § 2401(a)’s six-year statute of limitations. Other nonprocedural challenges, referred to as substantive but, I think, meaning interpretive challenges of whether the regulation properly interprets the statute may be made on an as-applied basis during enforcement many years after the regulation was promulgated. [Added 4/6/24 1pm - see * at end of this blog entry] I quote the entire portions of the transcript (Tr. 33-24; & 73-74; note that Mr. Weir is counsel for Corner Post. and Mr. Snyder is Assistant Solicitor General, counsel for the Government):

Court Holds that Untimely Refund Claim by Amended Return Stating a Different Legal Basis Does Not Relate Back to Timely Refund Claim by Amended Return (2/20/24)

In American Guardian Holdings, Inc. v. United States (N.D. Ill. Case 23 C 1482 Memo Op. & Order 2/7/24), GS here and CL here, the district court held that that it had no jurisdiction over an untimely refund claim (by untimely amended return, Form 1120X) requesting a refund in the same amount as a prior timely refund claim (by timely amended return, Form 1120X) but stating a different legal basis than the timely refund claim. In the untimely refund claim, the taxpayer asked the court to “discard” the timely filed amended return. (The latter fact was not relevant to the holding.)

For clarity, the taxpayer filed the following documents: the original return; a timely refund claim  (by Form 1120X) seeking most of the tax paid; a timely refund claim (by Form 1120X) seeking all of the tax paid; and an untimely third amended return (by Form 1120X) seeking all of the tax paid. For analysis of the issue of whether the court had jurisdiction over the untimely amended return, the court compared the untimely third amended return to the timely second amended return. The issue was whether the claim in the untimely third amended return was a clarification of the claim made in the timely second amended return or stated a different basis.  I simplified in the original paragraph by mentioning only a timely filed refund claim and a subsequent untimely filed refund claim.

I discuss the general issue in the most recent edition of the Federal Tax Procedure (Practitioner Edition p. 236; Student Edition (without footnote p. 165)) as follows:

(d) Germaneness Doctrine.

          The germaneness doctrine may apply where the taxpayer:

          (1) files a formal claim within the limitations period making a specific claim; and (2) after the limitations period but, while the IRS still has jurisdiction over the claim, files a formal amendment raising a new legal theory -- not specifically raised in the original claim -- that is “germane” to the original claim, that is, it depends upon facts that the IRS examined or should have examined within the statutory period while determining the merits of the original claim. Unlike the waiver doctrine, the inquiry here is not whether the particular legal theory for recovery has been considered by the IRS during the limitations period but whether the underlying facts supporting that legal theory were discovered or should have been discovered by the IRS in considering the original claim during the limitations period. n1049

n1049  Computervision Corp. v. United States, 445 F.3d 1355, 1370 (Fed. Cir. 2006) (citing  Bemis Brothers Bag Co. v. United States, 289 U.S. 28, 53 S. Ct. 454 (1933) and United States v. Andrews, 302 U.S. 517, 524 (1938).  In Computervision, the Federal Circuit rejected the holding of two other courts that the more specific formal claim could be filed after the IRS has completed consideration of the inadequate original claim by granting the original claim, by denying the original claim, or by the taxpayer having filed a suit for refund without IRS formal action on the claim. The cases rejected in Computervision are:   Mutual Assurance Inc. v. United States, 56 F.3d 1353 (11th Cir. 1995); St. Joseph's Lead Co. v. United States, 299 F.2d 348 (2d Cir. 1962).

 In American Guardian, the Court discusses the germaneness doctrine as follows: