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.

Further, focusing on the refund requirement that the taxpayer bears the burden of proof to establish entitlement to a refund, Burden of proof--also called risk of nonpersuasion--certainly has a factual aspect, but also conceptually can have a role in a legal interpretation context. What happens if a court (such as the 10th Circuit in this case) is in equipoise of the interpretation of the economic substance doctrine or statutory iteration and application of the interpretation to the facts? I discuss the possibility of legal interpretive equipoise under Loper Bright in The Supreme Court Pronounces the Demise of Deference (Federal Tax Procedure Blog 6/29/24; 7/5/24), here (see paragraph 3 of the section titled "IMPLICATIONS OF DEMISE OF DEFERENCE.") Is it even possible that a court will never be in interpretive equipoise on the economic substance issue--i.e., isn't persuaded whether it applies or not. And, if it is possible that the phenomenon of equipoise can apply, wouldn't the burden on the taxpayer to prove entitlement to a refund mean that the taxpayer must lose? 

The same issue would be presented in Global Liberty's deficiency proceeding in the Tax Court where it must prove that the IRS erred in the notice of deficiency; I think that the taxpayer may have the same burden in a collection suit, although I have not researched that issue in many years. In any event, as it respects the United States collection suit against Global Liberty, the district court resolution in the refund suit will be stare decisis at that level and then the appeal may have been decided for even stronger claim of stare decisis  and/or precedent whichever way it is decided. The same stare decisis / precedent considerations would apply to the Tax Court resolution when finally resolved in the Tax Court decision document.