DC Circuit Interprets the § 751 Inventory Exception to Achieve a Result Congress Cannot Have Intended (7/29/24)

In Rawat v. Commissioner, 108 F.4th 891 (D.C. Cir. 2024), DCCir here and GS here, the Court held that the portion of a foreign person’s gain from sale of a partnership interest attributable to partnership inventory taxed under § 751 as other than capital gain is not U.S. sourced and therefore not subject to U.S. tax. The opinion really has nothing to do with tax procedure, except on the picky point that I note at the end of this blog.

As I see the issue (perhaps not from the same literalist reading of the statutes as the Court but as a high level overview of what I think Congress was trying to do), the purpose of recharacterizing what would be capital gain into ordinary income for the underlying appreciated inventory in the partnership is to give the partner treatment as if the partnership had sold the inventory, realized the gain, and allocated it to the foreign partner for U.S. tax. Judge Gustafson in the Tax Court reached that result well within the constraints of the language in the Code. See Rawat v. Commissioner, T.C. Memo. 2023-14 , here. Only by fixating on certain text does the D.C. Circuit panel avoid that result. The whole purpose of all judicial interpretive methodologies is to be the faithful agents interpreting the will or intent of Congress. Foregoing U.S. tax on the gain attributable to inventory certainly was not the intent of Congress.

I post on this case because it seems to me to be of the same genre of resolution as Gitlitz v. Commissioner, 531 U.S. 206 (2001), here, Justice Thomas' infamous literalist / textualist opinion oblivious to the overall design of the Code. I discuss in general terms the interpretive methodologies in the Federal Tax Procedure Book 2024 versions (Student Ed. at pp. 6-11) and (Practitioner Ed. at pp. 8-17). Specifically, in another part of the book (Practitioner Ed.  at p. 109 n. 505), I discuss Gitlitz as follows in a footnote regarding the chaos some Supreme Court opinions:

   n505Charles I. Kingson, How Tax Thinks, 37 Suffolk U. L. Rev. 1031 (2004) (critiquing two leading Supreme Court cases: Frank Lyon Co. v. United States, 435 U.S. 561 (1978) and Commissioner v. Brown, 380 U.S. 563 (1965)); see also Charles I. Kingson, Confusion Over Tax Ownership, 93 Tax Notes 409 (Oct. 8, 2001) (critiquing the same). I also cite Gitlitz v. Commissioner, 531 U.S. 206 (2001) as a prime example of Supreme Court’s mischief in this area. See René Matteotti, Struggling With Words in Tax Jurisprudence -- A Plea for an Equal Treatment Mode of Analysis in Construing Tax Statutes, 2005 TNT 130-30. My quip, not much of an overstatement, is that tax cases are too important to let the Supreme Court decide them.

Bills to Approve Deference - Stop Corporate Capture Act (7/26/24)

The Supreme Court rejected Chevron deference based on implied delegated authority from statutory ambiguity or silence as a matter of statutory interpretation of APA 5 U.S.C. § 706. Loper Bright Enterprises v. Raimondo, 603 U. S. ____, 144 S.Ct. 2244 (2024). I covered that development in a prior blog. The Supreme Court Pronounces the Demise of Deference (Federal Tax Procedure Blog 6/29/24; 7/26/24), here. Loper Bright recognizes that, since the demise of deference is a matter of statutory interpretation of APA 5 U.S.C. § 706, Congress may legislatively delegate interpretive authority to agencies (although some read Chief Justice Roberts’ Loper Bright rhetoric as suggesting constitutional overtones). The delegation may be explicit or implicit, but it can’t be by ambiguity or silence alone. I discuss the possibility an implied delegation of interpretive authority in Can § 7805(a) & (b) Be Read as Delegating to Treasury/IRS Interpretive Authority with Deference (7/14/24), here.

Senator Warren has introduced the Stop Corporate Culture Act in the Senate. See Press Release titled Warren Leads Senate Response to End of Chevron Doctrine (7/23/24), here. The Press Release has links at the top to: Bill Text (PDF), Section-by-Section (PDF), and Bill Two-Pager (PDF). 

The Senate “Stop Corporate Culture Act” is the Senate version of a similar House Bill introduced in the House in 2023, Stop Corporate Capture Act, H.R. 1507, 118th Cong., see links to the bill and related material here.

I haven’t compared the two bills, but suspect that there may have been some tweaking in Senator Warren’s version to address specific issues raised by the recent Supreme Court decisions since the introduction of the House bill. However, below, I compare provisions in the two bills on deference and found no differences.

Both bills go substantially beyond the deference issue to address certain administrative law problems raised by decided cases and otherwise in the public discussion. These are suggested by the following from Senator Warren’s description of the bill in the press release:

The Senate version of the Stop Corporate Capture Act would (copy and paste from Senator Warren's Press Release):

Federal Tax Procedure Book 2024 Editions on SSRN (7/26/24)

The 2024 versions of the Federal Tax Procedure Book are now posted on SSRN. SSRN still has to approve them, but those interested can view or download them in the interim. See here.

Those using the 2024 versions should consult the Update page for significant developments here.

Tax Court Rejects Bullshit Grossly Overvalued Conservation Easement Claim (7/19/24)

In Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, JAT Google Docs here and GS here, the Court (Judge Lauber) denied a charitable deduction for an alleged conservation easement and imposed accuracy-related penalties. The Court’s opening paragraph tells the story of a bullshit tax shelter, as so often these days, in the guise of a conservation easement (footnote omitted):

          This case presents what might be called the urban version of the conservation easement tidal wave that has deluged this Court. A partnership acquired a historic office building in downtown Cleveland, Ohio, and proceeded to renovate it into luxury [*3] apartments. The renovation was undertaken pursuant to a “rehabilitation plan” approved by the National Park Service (NPS) and the State of Ohio, both of which awarded historic preservation tax credits. The partnership used the tax credits to finance the renovation.

          Gilding the lily, the partnership then granted a conservation easement over the very same property, claiming a $22.6 million charitable contribution deduction on the theory that it had relinquished valuable development rights. The “lost development rights” allegedly consisted of the notional opportunity to add a 34-story vertical addition on top of the historic building. Apart from being structurally implausible and economically unsound, adding 34 floors of steel and concrete atop the building would have required the partnership to forfeit the Federal and Ohio tax credits upon which it relied to finance the renovation. As a condition of receiving those credits, it had pledged that the rehabilitation plan would entail no rooftop improvements “visible from the street.”

          Needless to say, a 34-story addition on top of the building would have been visible from the street. Finding that the 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal, we will sustain the Commissioner’s disallowance of the charitable contribution deduction and his imposition of a 40% penalty under section 6662(h) for a “gross valuation misstatement.”

I include at the end of this blog entry several quotes from the opinion that I thought particularly good to show the perfidy of the actors involved in the drama. First, I will address two tax procedure issues:

Can § 7805(a) & (b) Be Read as Delegating to Treasury/IRS Interpretive Authority with Deference (7/14/24)

I recently updated a post on Corner Post. See Does Corner Post Permit § 2401(a)’s 6-year Statute of Limitation to Apply from Date of Regulation for Procedural Challenges? (Federal Tax Procedure Blog 7/10/24; 7/11/24), here. In the update (in red), I argued that the Corner Post holding was meaningless because Loper Bright compels that the best interpretation controls whether or not incorporated in a regulation (previously required for deference) and whether or not such a regulation was procedurally or substantively valid. So, whenever a court adjudicates, the best interpretation should now be applied from the effective date of the enacted statute.

One consequence of that for tax is that § 7805(b), here, is rendered meaningless unless, as I note here, there is a continuing role for deference. A reminder on what § 7805(b) does. From my Federal Tax Procedure Book 71 (2023.2 Practitioner Edition) (footnotes omitted and emphasis supplied), here:

          (1) if issued within 18 months of the date of the statute, then to “the date of the enactment” of the statute;

          (2) if issued later than 18 months, then the earliest of the following dates: (a) the date the final regulation was published; (b) the date on which any Proposed or Temporary Regulation was published; and (c) the date on which any notice substantially describes the contents of the expected Proposed, Temporary or Final Regulation;

          (3) if necessary “to prevent abuse,” with no limitation as to the date of retroactivity;

          (4) “to correct a procedural defect in the issuance of any prior regulation,” with no indication as to the date of retroactivity;

          (5) if “relating to internal Treasury Department policies, practices, or procedures,” with no limitation as to the date of retroactivity.

These are limitations on the regulations but not the interpretation. If the [Treasury] interpretation is the best interpretation of the statutory text, then perforce the interpretation will apply from the effective date of the statute (whether or not the interpretation is in a regulation). In other words, if the IRS [Treasury] were to include the interpretation in a regulation which violated the time limitations, that would not invalidate the interpretation or prevent the interpretation from applying from the effective date of the statute; it would just invalidate the regulation.

Loper Bright’s Rejection of Deference Moots the Liberty Global Dispute About the Validity of the Temporary Regulation (7/12/24)

I have discussed various suits arising out of Liberty Global’s allegedly sham transactions to avoid tax based on an alleged loophole in the CFC regime as amended by the 2017 TCJA which taxed U.S. shareholders currently on all foreign earnings, except for certain limited categories of income. (For all blog entries mentioning Liberty Global, see here.) Liberty Global’s planning for the transactions was called “Project Soy.” The IRS sought to impose tax on Liberty Global for the Projects Soy transactions under the IRS’s application of the 2017 TCJA change. (The technical details of the statute and the Project Soy planning are complex and not needed for the point I make here.) The Project Soy initiative generated three separate lawsuits (making their contribution to full employment for lawyers, particularly with amici briefs on the inevitable appeal):

• Liberty Global brought a refund suit in the Colorado district court after reporting the liability and paying tax based on its claim that tax was not due,
• The United States brought a collection suit against Liberty Global to reduce the claimed tax to judgment before issuing a notice of deficiency, and
• Responding to a notice of deficiency, Liberty Global brought a Tax Court deficiency suit.

I won’t get into the procedural aspects of these various suits, except to note here that the refund suit requires Liberty Global to prove that it is entitled to a refund. (The other actions are still pending in the district court and Tax Court, respectively.) In the refund suit, the district court rejected Liberty Global’s refund claim, holding that the economic substance doctrine applied to defeat the claim. Liberty Global  appealed the refund suit. (10th Cir. No. 23-1410, see CourtListener Docket Entries, here.) On appeal, the parties fight over the application of the economic substance doctrine, either as a doctrine or its iteration in  §7701(o). None of the parties in their briefs cite Chevron or deference. (Determined by a search on those words in all of the briefs available in CourtListener as of today; my review of the district court order also indicates no reference to those words.) Accordingly, in the Loper Bright paradigm, the Government can prevail if its interpretation of the economic substance doctrine and § 7701(o) is the best interpretation.

Although Chevron deference does not appear to be directly at issue, I infer that the parties and amici for some reason think it may sub silentio because the parties commote at length about the validity Temporary Regulation  § 1.245A-5T. If the case is governed by the best interpretation of the statutory text as Loper Bright commands, what difference does it make whether the Temporary Regulation is valid? As I have explained in several blogs, the only interpretive benefit of a valid Regulation (whether Temporary or Final) was the potential for application of Chevron deference, a potential now denied by Loper Bright.

Does Corner Post Permit § 2401(a)’s 6-year Statute of Limitation to Apply from Date of Regulation for Procedural Challenges? (7/10/24; 8/17/24)

Added 7/11/24 4:00 pm: Caveat: My blog post below was an attempt to hammer Corner Post into the interpretive system as I understood it. Within that parameter, I think I got it right. But, since posting the blog below (after this update in red), I went back to basics to try to understand what this all means in the real world. So, here is another way to think about the interpretive regime we now have as a result of the confluence of Loper Bright (deference gone) and Corner Post. Here are the key bullet points:

• Loper Bright teaches that the best interpretation of the statute controls. The best interpretation gains or loses nothing (i) by being adopted in an agency regulation or (ii) whether the regulation is procedurally valid. 
•  The best interpretation issue is substantive and can be raised at any time (i.e., upon application or enforcement to the particular person).
• Ergo, Corner Post is the proverbial tempest in a teapot.

To extend the analysis:

• The best interpretation (whether or not in a regulation) is the interpretation applicable from the effective date of the interpreted statute. That means that the § 7805(b) constraints on retroactivity are meaningless if the IRS includes the best interpretation in a regulation.
• The adoption of the best interpretation in a regulation adds nothing of interpretive value to the regulation. However, perhaps at the theoretical margins, a procedurally regular notice and comment regulation interpretation might add some Skidmore oomph (whatever that is) to the persuasive value of the agency interpretation in the regulation.

If that makes sense and—dare I say—is persuasive to readers, there is no need to read the older portion of this blog below (but I think if one were to wallow around in the concepts presented below (as have I), one might get to the same point).

___________________________________

In Corner Post, Inc. v. Board of Governors, FRS, 603 U. S. ____ (2024), SC here and GS here, the Court (Justice Barrett) held that cause of action “accrues” for purposes of the fallback 6-year statute of limitations in 28 U. S. C. § 2401(a), here, when the particular plaintiff first suffered injury from an agency action. The agency action was a regulation promulgated well before the 6-year period prescribed by § 2401(a). Corner Post, a new entity, suffered injury once it was created, thus its judicial challenge to the Regulation was timely under § 2401(a).

The gravamen of the Court’s holding is its focus on § 2401(a)’s text starting the statute of limitations when “the right of action first accrues.” That requires that the Court determine “the right of action” in the context.

The majority held that Corner Post’s claim was that the agency acted without statutory authority, an ultra vires claim. A party is injured and can challenge an invalid interpretation when the agency action applies to that party. This permitted the challenge by Corner Post, an entity created within the 6-year period before filing the challenge.

But, there is another type of APA challenge, a procedural challenge, that can be asserted to invalidate a regulation. The procedural challenges arise upon promulgation regardless of whether the regulation is otherwise substantively valid. Procedural challenges include the claim that notice and comment regulations have been promulgated without the agency having engaged in the APA procedural requirements of considering and responding to material comments. In such a procedural foot-fault case, the regulation can be within the authority conferred (e.g., offer the best interpretation of the statute) but might be invalid qua regulation solely for an alleged procedural defect. In such a case, of course, the interpretation (as opposed to the regulation) can still be valid and still be applied in a judicial proceeding despite the procedural invalidity of the regulation.

An aside: Prior to Chevron’s demise, the only effect of a procedurally invalid regulation was that the interpretation did not qualify for Chevron deference, so the court could still apply the best interpretation. See Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA6 here and GS here (rejecting Hewitt’s procedural invalidity holding but in any event holding that the agency interpretation was the best interpretation thus valid even without Chevron deference); see also Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here.

Supreme Court Accepts Cert in Deference Case and Remands to D.C. Circuit for Consideration of Loper Bright Chevron Overruling (7/3/24)

 By order dated July 2, 2024, here, the Court ordered (p. 3):

 23-413 LISSACK, MICHAEL V. CIR
 The petition for a writ of certiorari is granted. The judgment is vacated, and the case is remanded to the United States Court of Appeals for the District of Columbia Circuit for further consideration in light of Loper Bright Enterprises v. Raimondo, 603 U. S. ___ (2024),

Loper Bright is the opinion where the Court overruled Chevron deference. See The Supreme Court Pronounces the Demise of Deference (Federal Tax Procedure Blog 6/29/24; 7/2/24), here. The prior Court of Appeals opinion in Lissack is Lissack v. Commissioner, 68 F.4th 1312, 1324, 1327 (D.C. Cir. 2023), here. The Lissack petition for writ of certiorari, here, had one of its 2 questions presented the following:

2. Whether the Court should overrule Chevron or at least clarify that where Congress acts to remove discretion from an agency, regulations promulgated thereunder should not be deferred to.

That question was essentially the same as addressed in Loper Bright, hence the acceptance of cert and remand. (Note in this regard that the D.C. Circuit opinion in Lissack is cited in Justice Kagan’s dissenting opinion in Loper Bright (Kagan dissenting Slip Op. 26), but without the mention that petition for certiorari was pending:

The majority says differently, because this Court has ignored Chevron lately; all that is left of the decision is a “decaying husk with bold pretensions.” Ante, at 33. Tell that to the D. C. Circuit, the court that reviews a large share of agency interpretations, where Chevron remains alive and well. See, e.g., Lissack v. Commissioner, 68 F. 4th 1312, 1321–1322 (2023); Solar Energy Industries Assn. v. FERC, 59 F. 4th 1287, 1291–1294 (2023).