Giants in Tax Law: Roger John Traynor (10/26/19; 8/26/23)

I am spending more time than perhaps I should reading some old law review articles by giants in the tax law.  I will do a series of posts introducing these giants to younger lawyers whose knowledge of them may be hazy or nonexistent and offering some of the nuggets I have found in my reading.

I start with Roger John Traynor.  Traynor's Wikipiedia entry is here.  Wikipedia reports that Traynor "is widely considered to be one of the most creative and influential judges as well as legal scholars of his time."  Some other items from Wikipedia:

• At Boalt Hall of UC Berkeley, Traynor wrote groundbreaking articles on taxation, while serving as editor-in-chief of the California Law Review, and became a full-time professor in 1936.
• Traynor took leave from Boalt Hall "in 1937 to help the Treasury Department draft the Revenue Act of 1938."

From their work on the 1938 act, and the mitigation provisions specifically, Traynor and two of his colleagues wrote what, in my mind, is one of the finest article ever written on a Code subject, specifically the mitigation provisions (now in §§ 1311-1314 of the 1986 Code).  John M. Maguire, Stanley S. Surrey and Roger John Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L. J. 509 (Part 1), here, and 719 (Part 2), here (1939). Fans of tax history should recognize the co-authors -- Maguire and Surrey, but perhaps more on them later.  If you want a good introduction to the mitigation provisions of the Code, I highly recommend the article.  For grins, I provide at the bottom of this blog entry an anecdote from my personal experience with the mitigation provisions involving yet another giant in the tax law, Harvard Law Dean Erwin Griswold, then Solicitor General of the United States.

Traynor wrote another law review article from his work on the 1938 Revenue Act:  Roger John Traynor, Administrative and Judicial Procedure for Federal Income, Estate, and Gift Taxes-A Criticism and a Proposal, 38 Colum. L. Rev. 1393 (1938).  Unfortunately, I do not have a link to the article.  I obtained a copy from HeinOnLine, here.  But retrieving the article requires subscriptions.  I obtained my copy from the UVA Law Library, but I don't think I am authorized to post it, so I just have to leave readers to their own resources to obtain a copy if they are interested.

Traynor surveys some big issues with tax administration and tax procedure, many of which are still with us today.  I will discuss and quote some of this article:

1.  Traynor laments the process of self-assessment, examination, notice of deficiency, litigation (Board of Tax Appeals (now Tax Court) and district and Claims Court and Courts of Appeals) and how inefficient it is when the taxpayer starts off with all of the relevant facts (certainly as compared with the IRS) which, if the IRS is to protect the revenue, the IRS must learn afresh and may not learn at all.  Traynor is armed with a lot of statistics to back up his arguments.  He proposes a procedure that would force the taxpayer to divulge facts earlier in the process (and be limited to the facts so divulged) so that the IRS can make decisions on the basis of those facts (unless the IRS contests them) and the taxpayer then limited to the record presented to the IRS rather than having de novo review.  (Of course, that happens in the refund suit via the required claim for refund and variance doctrine, but Tax Court litigation in deficiency cases is de novo.)

The Mitigation Provisions of the Code Are Hard (10/18/19)

In Whitesell v. Commissioner, T.C. Memo. 2019-126, here, the facts are somewhat complex but for present purposes are fairly presented in the Court's opening summary:

P-H owned a 100% interest in WIC, an S corporation. In 2008, a Michigan trial court entered a civil monetary judgment against WIC. For tax years 2008, 2009, and 2010, R allowed WIC $10,982,856 in deductions for the judgment and interest thereon. In 2011, the Michigan Court of Appeals reversed the trial court and remanded the case. In 2015, R determined deficiencies for 2010 and 2011. The deficiency for 2011 was premised in part on R’s determination that WIC must include $10,982,856 in income for tax year 2011 because 2011 was the year in which the Michigan Court of Appeals reversed the judgment. Ps filed a petition in this Court in October 2015 and filed an amended petition in December 2015. In neither pleading did Ps challenge R’s determination of the amount of income inclusion ($10,982,856) or the year of inclusion (2011). Three years later, in October 2018, Ps moved to file an amendment to the amended petition to assert that WIC had settled the Michigan lawsuit in 2013 and that the income inclusion had to be made for the 2013 tax year. By the time Ps filed their October 2018 motion, the three-year period for assessing tax for Ps’ 2013 tax year had expired. 

My simplified summary of key facts (with assumptions):

1.  In 2008, through WIC, taxpayers' S corporation, Whitesell deducted approximately $11 million (rounded down to the nearest million) based upon a judgment in a lawsuit.  The validity and timing of this claimed deduction was not in issue.

2.  In 2011, the deficiency year, the judgment was reversed.

3.  In 2013, the parties settled the suit.  I could not find what that settlement amount was, but let's assume for purposes of this discussion that WIC paid a net of $5 million.

Just on these bare facts, from an economic perspective, WIC (and thus the shareholders) are entitled to a net $5 million for their actual expenses.  But, because of the timing of the events and the annual accounting system, there are alternative possibilities in getting to the right net amount.

There are at least 3 ways to do it.

1.  Say that no deduction is allowable until 2013 (when the settlement occurred), then only $5 million would be deductible.  Under this choice, in the final analysis, "the pot is right."

2.  But, as happened, say $11 million is claimed as a deduction in the year of the judgment (2008), then we know that, by the end (2013), $6 million in deductions are excessive and, on a tax benefit theory, that $6 million has to come back into income.  That could happen in 2013 when the final settlement occurs.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

3.  As a variation, the taxpayer (at the insistence of the IRS) must include the $11 million as income when the judgment is reversed in 2011.  If this choice happened, then when the liability was settled in 2013, the taxpayer would have a $5 million deduction in  2013 because there would then be no excess deductions taken in earlier years.  Under this choice, in the final analysis, "the pot is right" (the net quantum of income inclusion is right).

Mitigation Provisions of the Code - §§ 1311-1314 (10/10/16)

I have recently been revisiting the mitigation provisions of the Code (Discussed in the Federal Tax Procedure book at Chapter VI - Statutes of Limitation, VII. G. (Student Edition pp. 177-185; and Practitioner Edition pp. 256-265).  I will have a revised version of that discussion in the next edition of the Federal Tax Procedure Book (currently planned for early August 2017, although I will try to post the revised version of this mitigation discussion prior to then)

On the last page of the discussion in the current edition (2016), I have the following (footnotes omitted)

5. Supplementary Reading for Mitigation Enthusiasts. 

I commend to your further study on mitigation the best (in my judgment) tax procedure law review article ever written: John M. Maguire, Stanley S. Surrey and Roger John Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L. J. 509 (Part 1) and 719 (Part 2) (1939). Students using this book may not recognize the authors, but they are a team of all-time legal “superstars.” The authors were young brain trusters lured to Washington by Franklin Delano Roosevelt's “New Deal.” They assisted in the drafting and enactment of the mitigation provisions of the Code in the late ‘30s. Maguire and Surrey rose to the heights of tax academia with distinguished private and public careers. Traynor became one of this country's most respected jurists as a Justice on the California Supreme Court where he shaped the debate of thoughtful discussion in many legal areas. All law students and lawyers should at least know who Traynor is. The ultimate contributions to American jurisprudence by each these authors in their own way was foreshadowed by this article.

I have received permission from the Yale Law Journal to provide linked copies of the two part law review article so that readers of this blog and the book can review online or download, as appropriate.  The links are here (Pat 1) and here (Part 2).

The Mitigation Provisions of the Code - An Example of How They Work to Open an Otherwise Closed Year (4/3/14)

All taxpayers facing a tax liability hope that the IRS will fail to assess within the applicable period of limitations.  For example, the IRS often requests a Form 870, Waiver of the Restrictions on Assessment, which, because it waives the notice of deficiency which, in turn, would have suspended the statute of limitations, hope that the IRS will not get around to assessing in time.  (That is vain hope in the overwhelming number of cases.)  There are a myriad of other circumstances where a similar situation occurs.

One such circumstance applied in El Paso CGP Company, L.L.C. v. United States of America, 748 F.3d 225 (5th Cir. 2014), here.  In this case, the facts are complex, but I think I can distill them for purposes of the point I want to make in this blog entry. Normally, when a year is closed, it is just closed.  If the taxpayer got a benefit he was not entitled to, that is just the IRS's tough luck; and vice versa.  However, various Code provisions and judicial doctrines may apply to mitigate the effect of the improper benefit in the closed year.  Indeed, the most beautiful such provisions are called the mitigation provisions of the Code -- Sections 1311-1314.  Essentially, the effect of those mitigation provisions in most of  the circumstances of adjustment to which they apply is to take away a double benefit to a taxpayer from achieving a tax benefit for the treatment of an item in a correct open year when the taxpayer has previously achieved a benefit in an incorrect otherwise closed year.

Without getting into the facts in too great a detail (read the opinion), the taxpayer claimed credits in 1986 which because of limits were carried forward to some later years.  After some audit activity, the parties agreed that the taxpayer had overstated the credits in question but was entitled to other credits so that, for the year 1986, the taxpayer was still entitled to a refund.  However, because the credits in question had been overstated in 1986, the carry forward of those credits to post-1986 years was wiped out, meaning that the taxpayer had deficiencies in those post-1986 years which were then closed.  This apparently was a circumstance of adjustment under the mitigation provisions.  (I have not chased down that issue, but the Court and the parties seemed to assume it.)  Under the mitigation provisions of the Code, the IRS has a one-year window from the time of the determination to assess, collect, refund or credit the tax, as appropriate for the type of adjustment.  See Section 1314(b), here.

The IRS netted the agreed upon deficiencies for the post-1986 years in the aggregate against the refund due for 1986 and refunded the difference (with appropriate interest).  But, as best I understand the opinion, the IRS did not assess the netted amount to the particular post-1986 years within the one-year period.  In other words, the IRS had collected the tax by offset but had not made the assessments for the particular years involved in that one-year period.  The taxpayer argued that, therefore, the IRS had not met the procedures required for mitigation and therefore, must treat the collection via netting as an overpayment for the post-1986 years that must be refunded.

A taxpayer making that argument or any argument that the IRS has not timely assessed does not want to launch the argument when the IRS still has time to assess.  Therefore, for example, it is common practice -- albeit perhaps not the best form -- to file a claim for refund for a year when there are not previously adjustments that would increase the tax liability near the end or after the assessment period of limitations.  (I say that is perhaps not the best form, because it may be difficult to sign a claim for refund under oath when the taxpayer knows that the unspotted adjustments wipe out the claim for refund; but that's a subject for another day.)

At any rate, this taxpayer did a mitigation variant of this timing strategy.  "A year after the Closing Agreement was executed, in August 2006, El Paso sent a precisely timed memorandum to the IRS claiming that the deficiencies for 1987-1990 must be refunded to El Paso because the IRS had failed properly to assess those deficiencies before the just-expired one-year statute of limitations."  (Bold-face supplied by JAT.) That memorandum was treated as a claim for refund.