9th Circuit 3-Judge Panel Has Three Different Interpretations Illustrating the Stupidity of Loper Bright's Rejection of Deference (9/3/24; 9/7/24)

In Brown v. Commissioner, ___ F.4th ___ (9th Cir. 2024), CA9 here & GS here, the Court rejected Brown’s claim that his offer in compromise had been statutorily deemed accepted under § 7122(f) because, he claimed, the IRS had not rejected the offer within 24-months of the date of the offer. Brown’s claim would have permitted him to settle $50 million+ tax liability for a bare fraction.

 Section 7122(f) provides:

(f) Deemed acceptance of offer not rejected within certain period
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

The Tax Court held that, under the facts, the offer had been rejected within the 24-month period. The Court of Appeals, in a 3-way split opinion (more below) held that Brown loses on the issue, with two judges reaching the result by different interpretations of the law and the dissenting judge reaching a contrary result (Brown wins) on a different interpretation. In other words, all the judges differed in their interpretations of the applicable law, but 2 interpretations favored the IRS and one favored Brown. Brown loses.

I don’t propose to get into the nitty-gritty on the facts leading up to the three-way splinter which are not relevant to the overview point I make in this blog. Rather, I just copy and paste the Court’s “Summary” which a footnote cautions “constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader:” 

          The panel affirmed the Tax Court’s judgment sustaining a notice of federal tax lien.

          Taxpayer Michael Brown requested a collection due process hearing pursuant to 26 U.S.C. § 6330 regarding a notice of tax lien on his property for unpaid taxes. He also submitted an offer-in-compromise of the tax liability, which the Appeals Officer responsible for the due process hearing referred to the Collection Division’s Offer-in-Compromise Unit for investigation. Within seven months, the Collection Division returned Brown’s offer-in-compromise because it was not processable. More than twenty-four months after the offer-in-compromise was submitted, the Office of Appeals sustained the notice of tax lien.

          Brown petitioned the Tax Court, which issued a final order and decision sustaining the determination of the Office of Appeals. The Tax Court rejected Brown’s contention that his offer-in-compromise was deemed accepted by operation of law under 26 U.S.C. § 7122(f)—which governs the submission of an offer-in-compromise of outstanding tax liability to the IRS, imposes a 24-month deadline for the IRS to respond to a taxpayer’s offer-in-compromise, and provides that an offer-in-compromise is deemed accepted if the IRS fails to reject it within 24 months—because the [*3] Collection Division had returned Brown’s offer-in-compromise within 24 months of submission. The panel agreed with the Tax Court that Brown’s offer-in-compromise was not deemed accepted by operation of law under § 7122(f).

          The panel rejected Brown’s contention  that, because he submitted his offer-in-compromise during a collection due process hearing, only the Office of Appeals’ notice of determination can operate as the “rejection” that terminates § 7122(f)’s 24-month deadline. The Collection Division’s return of Brown’s offer-in-compromise within seven months constituted a “rejection” under § 7122(f), regardless of whether that offer was submitted as part of a collection due process hearing or not.

          Concurring, Judge Lee wrote separately because he believes the 24-month limitation in § 7122(f) does not apply to the collection due process proceeding that Brown invoked under § 6330. There are two separate tracks for the IRS to process offers-in-compromise: one under § 7122(f) for standalone offers, which offers no judicial review but guarantees resolution within 24 months; and one under § 6330, which offers judicial review but is not bound by any timeline. Brown chose the latter track by raising his offer as part of a collection due process hearing. In doing so, he gave up the benefits of § 7122(f), including the 24-month deadline.

          Dissenting, Judge Bumatay would reverse the Tax Court. Together, §§ 6330 and 7122(f) mean that when a taxpayer demands his rights under a collection due process hearing only the appeals officer—not the Collection Division—must have rejected an offer-in-compromise within 24 months or the offer is deemed accepted. Because the appeals officer [*4] did not return Brown’s offer-in-compromise within 24 months, it should have been deemed accepted.

JAT Comments:

1. The Tax Court decision spawned much discussion which I just cite here: Caleb Smith, The Age of Offers: Pitfalls and Possibilities for “Aging Into” Offer Acceptance (Procedurally Taxing Blog 7/20/22); Caleb Smith, Aging Offers into Acceptance: When Does the Clock Stop? (7/21/22); Caleb Smith, Administrative Law in Practice: Deemed Offer Acceptance and IRS Notice 2006-68 (Procedurally Taxing Blog 7/22/22); Caleb Smith, Contract Law and Rejecting Offers in Compromise (Procedurally Taxing Blog 7/25/22); and Bryan Camp, Lesson From The Tax Court: The Difference Between Rejecting An OIC And Reviewing A Rejection (Tax Prof Blog 7/18/22)

2. The point I wish to use (and abuse) this Ninth Circuit Brown opinion for is that it illustrates the type of morass the courts and the public face as a result of the Supreme Court’s rejection of deference in Loper Bright Enterprises v. Raimondo, 603 U. S. ____, 144 S. Ct. 2244 (2024). In Loper Bright, the opinion of the Court held that statutory interpretations at least for deference have an ascertainable best interpretation without any ambiguity to lead judges astray into thinking there may more than one best interpretation. In the Ninth Circuit’s most recent machinations, each of the three judges interpreted the applicable law differently.

3. I posit to readers that the absurdity of a claim that there is always a discernible single best interpretation of a statute, meaning that there is no possible situation where a judge cannot pick between two equally plausible / reasonable interpretations. (Perhaps off topic, but I am reminded of the famous bluegrass song There Are More Pretty Girls Than One, e.g., here by Flatt & Wiseman.) 

4. Deference could serve greatly in rationalizing tax procedure subject to a reasonableness of the interpretation standard. Loper Bright licenses hundreds, perhaps thousands of judges, with little appreciation of the tax system to make their own interpretations that will, with great commotion in the courts, require ultimately the Supreme Court to become micro-manager of the tax system (and other legal systems affected by Loper Bright).

5. And, not only did the Loper Bright Court do a stupid-in-result thing, it did it for stupid reasons—(i) the false claim that deference was limited when the APA was enacted in 1946 (a false claim that permitted the Court to make a motivated interpretation of APA § 706 which was intended to carry forward present law); and (ii) ignored the requirement in § 706(2)(A) that an interpretation not be set aside unless “not in accordance with law,” which Dobson had held just 3 years before required deference. John A. Townsend, The Tax Contribution to Deference and APA § 706  (SSRN 1/17/24) , here (discussing both aspects, including Dobson v. Commissioner, 320 U.S. 489 (1943), reh. den., 321 U.S. 231 (1944)). 

6. (Added 9/7/24 11:45am) I noted in ¶ 5 that the Supreme Court completely screwed up the history of deference as is if deference were a law nothing when the APA was enacted. The Supreme Court did that in order to support its claim that APA § 706’s unquestioned intent to carry forward judicial review as it then existed was judicial review without deference. In fact, the history shows that deference much like Chevron deference was relatively well settled in 1946 when the APA was enacted. Moreover,  § 706 incorporated the command that agency action (here interpretation) not be set aside unless “not in accordance with law,” which the Supreme Court in Dobson (1943) said commanded deference (not just allowed, but commanded). Not only does that cast doubt on the Supreme Court’s claim that its special competence is statutory interpretation, in contrast, so it claimed to agencies having no special competence. That too is counterfactual. I urge readers interested in this aspect (the special competence of agencies) to read an article, now in draft form, Anya Bernstein & Cristina Rodríguez, Working with Statutes (forthcoming Tex. L. Rev. 2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4906895. Here is the opening paragraph of the abstract:

            In its 2024 decision overruling the decades-old Chevron doctrine directing judges to accept an agency’s reasonable interpretation of ambiguous statutory language, the Supreme Court declares: “agencies have no special competence in resolving statutory ambiguities. Courts do.” This Article makes clear how profoundly blinkered an assertion of judicial hubris this statement is. Our interview-based empirical study, involving dozens of agency officials across the administrative state, shows how agencies work with statutes, evincing a unique competence—to make democratic enactments real. Agencies, we show, act as a statute’s custodians, managing the statutory regime over a lifecycle that exceeds any political governing coalition.

I used to tell my students that tax cases are too important to let the Supreme Court decide them. Maybe that quip can be extended to a general proposition that all important cases are too important to let the Supreme Court decide them.