CFC Invalidates GILTI Gap-Filling Regulation That Avoided Textual Statute Inconsistency (7/7/26)

In Keysight Technologies, Inc. v. United States, ___ Fed.Cl. ___ (7/2/26), the Court held invalid a Treasury Regulation designed to plug a gap in the statutory text. The opinion may be found: CFC here, TN here, GS here.

The Court opens with this sentence projecting the outcome (Slip Op. 1):

When Chevron fell, so too did the presumption that statutory ambiguity favors the agency. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), overruled by Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).

If that were not clear enough as to where it is going, the Court opens the next paragraph (bold face supplied by JAT):

This controversy relates to the Treasury’s self-inflicted fix of a mismatch between foreign subsidiaries with fiscal- or calendar-year tax filing requirements that Congress quietly built into the global intangible low-taxed income ("GILTI") statutory scheme.

And the next paragraph (bold face supplied by JAT):

The Treasury’s antipathy for this inconsistency resulted in the Secretary promulgating Regulation 1.951A-2(c)(5) ("the Regulation").

I won’t parse the quoted text any further (although my bold face may imply something).

The technical issue was whether Treasury could, by interpretive regulation, fix what appears textually to be a timing glitch producing materially different tax result based on differences in tax years between calendar year taxpayers and fiscal year taxpayers. As the Court says (Slip Op. 2): “Enactment of the TCJA created an inconsistency between treatment of certain taxpayers depending on whether they were fiscal-year or calendar-year filers.”

Basically, the taxpayer argued that it, as a fiscal year taxpayer, was entitled to a benefit that a calendar year taxpayer could not achieve. Without wallowing around in the details, it appears to me that an intuitive view of how Congress enacts tax legislation, one can fairly infer that Congress did not intend the result that the regulation sought to forbid and the Court blesses. Congress appears to have had no specifically articulated intent on the precise issue, but Congress generally does not make such distinctions to permit disparities between otherwise similarly situated taxpayers.

District Court Invalidates and Vacates Listed Transaction Reporting Regulation (4/18/26)

In Drake Plastics Ltd. Co. v. IRS, ___ F. Supp. 3d ___ (S.D. Tex. 4/15/26), CL here, and GS here, the court (Judge Lee Rosenthal) considered APA claims of invalidity of the regulations determinations of “transactions of interest” and “listed transactions” for micro-captive insurance companies (from the conclusion):

          The court grants in part the plaintiffs’ motion for summary judgment and a permanent injunction, (Docket Entry No. 58), and grants in part the defendants’ cross-motion for summary judgment, (Docket Entry No. 63). The defendants (1) appropriately designated micro-captive transactions as transactions of interest through 26 C.F.R. § 1.6011-11; but (2) exceeded their statutory authority in designating micro-captive transactions as listed transactions through 26 C.F.R. § 1.6011-10. The court declares unlawful 26 C.F.R. § 1.6011-10 and vacates it. The case is remanded to the Department of the Treasury and the Internal Revenue Service for further agency action consistent with this opinion.

          The vacatur is stayed until May 1, 2026, to avoid taxpayer confusion on Tax Day. Cf. Purcell v. Gonzalez, 549 U.S. 1, 4–5 (2006) (“Court orders . . . can themselves result in . . . confusion . . . .”). Final judgment is entered separately.

I am not sure what the last paragraph stay is about, but I do understand the holdings in the first paragraph.

The court’s holding turns upon interpretation of the statutory requirement that "transactions of interest" have the “potential” for tax avoidance but that “listed transactions” that have tax avoidance, at least presumptive tax avoidance, rather than just the potential for tax avoidance. The court reasoned that the IRS did not adequately explain microcaptive arrangements identified in the "listed transaction" regulation.

Judge Rosenthal is a very good judge, so I respect her analysis, even though I am not convinced that it is correct.

Comments on Highly Recommended Article Extending Skidmore "Deference" Approved in Loper Bright (3/7/26; 3/8/26)

I have just read a great article: Mitchell Zaic, Note: The Skidmore Compromise: Interpreting Skidmore as a Tiebreaker to Preserve Judicial Wisdom in the Era of Loper Bright, 110 Minn. L. Rev. 1535 (2026), here, and post some thoughts on the article and on Skidmore (Skidmore v. Swift & Co., 323 US 134 (1944), here).

First, I acknowledge Mr. Zaic has published an exceptional work with substantial research and creative thought after Loper Bright Ent. v. Raimondo, 603 U.S. 369 (2024), SC here (Preliminary Print), which overruled so-called Chevron deference. Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), GS here. Mr. Zaic says in the asterisk for his name: “Writing this piece has been one of the great privileges of my life.” He has also privileged readers of the article.

Mr. Zaic states his thesis in these two excerpts (pp. 1356 and 1569):

This interpretation of Skidmore would only be used by interpreters when judges are faced with interpretive ties that have no other method of resolution. Only then can judges resort to applying the agency's interpretation. This method of interpreting Skidmore ensures that agency interpretations never overrule the best meaning of the statute, instead facilitating the judge in his or her interpretive quest. In addition, the tiebreaker continues the long tradition of respect for agency interpretations beyond that of the typical litigant.

* * * *

Where competing interpretations are at equipoise to an interpreter, courts should resolve conflicts in the agency's favor so long as the agency's reasoning is valid, thorough and its interpretation arises from experience and informed judgment.

Bottom line, Mr. Zaic argues that, in a state of statutory interpretive equipoise, a court needs—indeed, must—apply a default rule to decide the case. The default rule in a case where a regulated party opposes an agency interpretation is that the court should default to the agency interpretation. Mr. Zaic gets to his conclusion through a process of reasoning.

My previous Chevron research indicates that Chevron worked in equipoise (without necessarily the qualifiers at the end of Mr. Zic's last sentence). Chevron was supposed to apply only where, after vigorous statutory interpretation (Chevron fn. 9), the statutory text was still ambiguous—in equipoise—where the court could not determine which of two or more interpretations within the zone of ambiguity was the best interpretation.

Tax Court on Default Rules in Statutory Interpretation-Herein Also of Chevron, Loper Bright and APA § 706(2(A) (11/14/25)

In Apache Corp. v. Commissioner, 165 T.C. ___ No. 11 (11/1325), reviewed opinion, the Court addressed the momentous (to some) issue of whether a taxpayer electing not to carryback some categories of net operating losses (NOLs) can reserve in the election to carryback other categories of NOLs. The opinions in Apache may be viewed on the Tax Court Docket Sheet for Case # 25984-22, here, at #56, on my Google Drive here, on GS here, and on TN here.  I must say that I have neither worried nor lost sleep over that issue, either before or after this opinion. As respects the issue actually decided in Apache, I am agnostic which may be an admission that I have not really dug deeply into the issue. So, I don’t propose here to deal with the merits of the issue decided.

I want to address the methodology in reaching the majority opinion and Judge Buch’s concurring opinion.

Judge Buch’s concurring opinion (Slip Op. 22-23) is very short. If I may summarize a very short opinion:

(i)          the statutory text is inconclusive on the competing interpretations which are equally plausible, phenomenon I describe as statutory ambiguity where a best interpretation cannot be made; and

(ii)        where the statute is ambiguous, courts are “inclined to rely on the traditional canon that construes revenue-raising laws against their drafter.”

The majority determines that the statutory text is not ambiguous but then says (Slip Op. 18-19) that the default rule Judge Buch relies on should carry the day even if the text were ambiguous (calling it a “tiebreaking principle"). As stated, this supposed principle, sometimes stated as a canon or maxim of interpretation, operates like the rule of lenity that construes criminal statutes in favor of a defendant, which is a default rule in cases of ambiguity. See e.g., Ryan D. Doerfler, The "Ambiguity" Fallacy, 88 Geo. Wash. L. Rev. 1110, 1116 (2020) (referring to Chevron and lenity as default rules); Intisar A. Rabb, The Appellate Rule of Lenity: Responding to Abbe R. Gluck & Richard A. Posner, Statutory Interpretation on the Bench: A Survey of Forty-Two Judges on the Federal Courts of Appeals, 131 Harv. L. Rev. 179, 194 N. 77 (2018) (Same re lenity).

That interpretive methodology in ambiguity is a default rule similar to the Chevron default rule prior to Chevron’s demise in Loper Bright. As readers of this blog and observers in general know, Loper Bright overruled Chevron and thus the Chevron default rule does not apply in a state of ambiguity as between two or more interpretations, one of which is an agency interpretation qualifying for Chevron deference (generally notice and comment interpretive regulations).

Tax Court Rejects Various Hail Mary Claim, Including APA Claims, to Get Out of Penalty Free (10/8/25)

In Computer Sciences Corp. v. Commissioner, 165 T.C. ___, No. 8 (2025), TC Case No. 4823-21, here, at entry 305 dated 10/6/25*, GS here**, and TN here, the Court (Judge Lauber) issued yet another § 6751(b), here, written supervisor approval opinion where, as in other cases, the taxpayer seeks to avoid an IRS penalty because of a supposed IRS footfault in the penalty assertion process. In addition to the usual § 6751(b) hail mary claims for a get out of penalty free escape, the taxpayer raises Administrative Procedure Act (“APA”) Claims which, I presume, are the reason the opinion was designated for T.C. reporting (as opposed to T.C. Memo or simply an Order).

For persons wanting a preliminary look at the underlying issues of what the case is all about, go to the docket entries linked above at entry 42 Order dated 7/24/23.

I report here on the APA claims, and will then cover its reference to the § 6751(b) regulations adopted in final in December 2024.

I start my discussion with a quote from Bryan Camp’s iconic post The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here, which opens:

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.

Although Computer Sciences is not directly attacking regulations, the same comment is appropriate here. With the modern claims about the APA, everything begins to look like a nail, so taxpayers unleash the APA to attack IRS action regardless of how far-fetched the attack is.

In Computer Sciences, I introduce the Court’s holdings from the opening relevant headnotes that, while not technically part of the opinion, for present purposes fairly summarize the opinion (after each holding, I provide brief comment for context):

Tax Court Rejects Constitutional Challenges to Appeals Office CDP Participation (1/30/25)

In Tooke v. Commissioner, 164 T.C. ___, No. 2 (1/29/25), here * and GS here**, the Court, in a CDP case, rejected taxpayer arguments that (i) Appeals Office participants violated the Appointments Clause of the Constitution and (ii) Appeals Office violated the Separation of Powers requirement of the Constitution. I just provided a nonnuanced summary of the arguments rejected. This blog entry will serve primarily as notice to practitioners and students of the holding, an important one; I copy and paste the Tax Court syllabus which, I think, fairly summarizes the full opinion:

           P filed federal income tax returns for taxable years 2012 through 2017 but did not pay the tax. The Internal Revenue Service (IRS) assessed the tax and separately issued P a Notice of Federal Tax Lien Filing and a Final Notice of Intent to Levy. P timely requested a collection due process (CDP) hearing with the IRS Independent Office of Appeals (Appeals). During the CDP hearing, P raised constitutional arguments that Appeals, and the employees who work therein, serve in violation of the constitutional separation of powers, particularly the Appointments Clause; these arguments were rejected. The Appeals Officer prepared a draft Notice of Determination, which was subsequently reviewed and approved by the Appeals Team Manager.

          Pursuant to I.R.C. § 6330(d)(1), P timely filed a Petition with the Tax Court. During this proceeding, P filed two Motions concerning the constitutional separation of powers and the CDP hearing before Appeals: (1) an Appointments Clause Motion, asserting that the Appeals Officers who conducted the CDP hearing, the Appeals Team Manager who reviewed and approved the Notice of Determination, and the Chief of Appeals (Chief), who the statutory scheme tasks with the “supervision and direction” of Appeals, see I.R.C. § 7803(e)(2)(A), but did not  [*2] participate in the CDP hearing, each serve in violation of the Appointments Clause, see U.S. Const. art. II, § 2, cl. 2; and (2) a Separation of Powers Motion (Removal Power Motion), asserting that Appeals, codified by the Taxpayer First Act, Pub. L. No. 116-25, § 1001(a), 133 Stat. 981, 983 (2019) (codified at I.R.C. § 7803(e)(1)), is a de facto independent agency whose head, the Chief, a position also codified by the Taxpayer First Act § 1001(a), 133 Stat. at 983 (codified at I.R.C. § 7803(e)(2)(a)), is subject to an unlawful removal restriction.

          Held: We reject P’s “root-to-branch” theory of causation. P has not made the necessary showing that the Chief’s tenure affected his hearing and prejudiced him in some way. See, e.g., United States v. Smith, 962 F.3d 755 (4th Cir. 2020); United States v. Castillo, 772 F. App’x 11 (3d Cir. 2019).

SSRN Paper: Loper Bright Is the Law But Poor Statutory Interpretation (10/28/24; 1/20/25)

I have posted to SSRN the following paper: Loper Bright Is the Law But Poor Statutory Interpretation, available at SSRN here. The Abstract is:

While teaching law, I sometimes claimed that tax cases are too important to have the Supreme Court decide them. I had a list of tax cases to back up that claim. I have now expanded my list beyond tax cases to one administrative law case.

In Loper Bright Ent. v. Raimondo, 603 U.S. ___, 144 S. Ct. 2244 (2024), the Court pronounced that APA § 706, properly interpreted, requires that court review agency statutory interpretations de novo without deference. The claim rests on the opening words of § 706 coupled with a claim that, at the time of enactment of the APA, the courts did not defer to agency interpretations. Both claims are false, resting on poor scholarship of the history and law relevant to Congress’ meaning of § 706 at its enactment in 1946. One key is the Court’s perceived need to address the state of deference upon enactment of the APA. If the words of § 706 command de novo review, then what difference does it make what the state of deference was upon enactment of the APA?

In this article, I show that § 706, properly interpreted requires deference, because as enacted in 1946:

(i) the words of the APA, including the requirement in § 706(2)(A) that agency action be “held unlawful and set aside” only if “not in accordance with law,” a standard the Supreme Court held required deference in Dobson v. Commissioner, 320 U.S. 489 (1943) , and

(ii) the unquestioned understanding that § 706, upon enactment, applied the then-current state of review, which included deference.

Loper Bright failed to correctly assess the meaning of § 706. Loper Bright is the law, but, at a minimum, poor scholarship.

Added 1/18/25 2:30pm: I am experimenting with various AI tools. Today, I "asked" MS Co-Pilot to summarize the article linked in this blog.  I found Co-Pilot did only a fair summary, but missed subtle points. I have thus refined the Co-Pilot summary and offer here that summary as I have edited it to clarify key points in the article:

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, 116 F.4th 861  (9th Cir. 2024), CA9 here & GS here, the Court rejected Brown’s claim that his offer in compromise had been statutorily eemed 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.

Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (1/23/24; 4/4/24)

Introductory Note 4/4/24 10:00am: This blog post originally addressed a new draft article that Professor Bamzai posted on SSRN: Aditya Bamzai, On the Interpretive Foundations of the Administrative Procedure Act, 31 George Mason Law Review ___ (Forthcoming) (SSRN 4684895 1/17/24), here, Professor Bamzai's article has been published in final.  On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024), html here and pdf here. I have not compared the draft with the final article, although the final seems to track the arguments made in the draft. I have, however, made certain changes to the blog entry below inspired by the Final. I note those changes in red font. I have no way of knowing whether Professor Bamzai was aware of my article or my blog posts about my article since he does not cite me in his article. I am not surprised Professor Bamzai does not cite my article or me since I circle in a lower administrative law orbit than he does. Finally, I have not attempted to go down some of the tangential rabbit trails Professor Bamzai goes down (such as Professor Dickinson's 1947 parallel articles misinterpreting and misapplyying Dobson, for, on the deference issue, those articles lapsed into the obscurity they deserved).

Now to the original posting on 1/23/24 (as amended on 1/24/24 with changes made today marked in red font):

I recently posted to SSRN an article arguing, in part, that the APA § 706 standard of review for legal questions is a deference standard via the requirement that agency interpretations be set aside only if “not in accordance with law.” § 706(2)(E). The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here, hereafter referred to as Townsend Deference APA). In that article, I asserted that a prominent leading article missed or misunderstood key indicators of the meaning of the APA standard of review—“not in accordance with law.” Aditya Bamzai, The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here.

Specifically, Professor Bamzai

• missed robust deference authority cited in the Final Report of the Attorney General’s Committee on Administrative Procedure (1941) which skewed his conclusion of limited deference authority in the Final Report and as of 1940.

• missed the deferential interpretation of “not in accordance with law” in Dobson v. Commissioner, 320 U.S. 489 (1943), reh. den., 321 U.S. 231 (1944).

I show in the article that the fair interpretation of the APA’s  “not in accordance with law” standard was the Dobson interpretation to require deference.

Professor Bamzai has published an article on SSRN that is scheduled for publication in the George Mason Law Review. Aditya Bamzai, On the Interpretive Foundations of the Administrative Procedure Act, 31 George Mason Law Review ___ (Forthcoming) (SSRN 4684895 1/17/24), here, hereafter referred to as Bamzai Interpretive Foundations APA. Professor Bamzai's Final is On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024) 

In this new article (Draft and Final),

• Professor Bamzai again misses the robust statement of deference that he missed in his earlier article. (Townsend Deference APA pp, 5-9.)

• more importantly, although he now identifies Dobson as important to the discussion after ignoring Dobson in the earlier article, he misinterprets the meaning of Dobson.

Article on The Tax Contribution to Deference and APA § 706 Posted on SSRN (12/14/23)

I have just posted this article to SSRN here.

The recommended SSRN cite is: Townsend, John A. and Townsend, John A., The Tax Contribution to Deference and APA § 706 (December 14, 2023). I don’t know why SSRN doubles up on my name, but have just not tracked it down. (If anyone knows how to fix that, please send me an email.)

 The abstract is at the link and then links to the pdf version. Here is my abstract of the SSRN abstract.

The tax authorities supporting APA to include deference are compelling. These tax authorities have been marginalized in the discussion. The law at the time of the APA in 1946 was settled to include deference when (i) the statute was ambiguous and (ii) the agency interpretation within the scope of the ambiguity was reasonable. That was Chevron deference before Chevron. That alone would support interpreting APA § 706 to include deference. But, there is more, § 706 states the standard of review for interpretations “not in accordance with law” which the Supreme Court interpreted in Dobson, a 1943 tax case, to mean review with deference rather than review de novo.

There is a lot of tax history in this rather short article. One key matter of interest is the roles in the tax system occupied by Justice Robert H. Jackson, Wikipedia here. He served successively in the following positions: Chief Counsel of the IRS, Assistant Attorney General Tax Division, Solicitor General, Attorney General, and Supreme Court Justice. He moved into all of those positions in a period of less than 10 years. Later, he also took a leave of absence from the Supreme Court to be the chief prosecutor at the Nuremburg war crimes trial. Jackson features prominently in the article as author of the Dobson decision, a unanimous decision, which authoritatively interpreted the Tax Court standard of review "not in accordance with law" to mean deference--hence Dobson deference--much like Chevron deference. The standard "not in accordance with law was incorporated in APA § 706.

I would appreciate any comments anyone would care to make to me.  My email address is jack@tjtaxlaw.com.

Fun Fact: The original draft of this article was over 140 pages long. I then bumped it down to 47 pages. It now is 32 (including appendix with the versions as it moved from the AG Final Report in 1941 to enactment in 1946).

Justice Sandra Day O'Connor, Tufts, Chevron Deference, Dobson Deference, and APA § 706 (12/2/23)

Yesterday, Sandra Day O’Connor died. See Linda Greenhouse, Sandra Day O’Connor, First Woman on the Supreme Court, Is Dead at 93 (NYT 12/1/23), here. She served many iconic roles in our legal history. I won’t attempt to catalog those roles and her achievements. I present in this blog some of her history in a tax and administrative law context that I hope is of some interest to some readers. 

In 1983, Justice O’Connor burst into my consciousness because of her concurring opinion in Tufts v. Commissioner, 461 U.S. 300 (1983), here. Tufts addressed an issue arising from the then infamous footnote 37 in  Crane v. Commissioner, 331 U. S. 1  14 n. 37 (1947), here. See for an illustrative discussion of Crane’s importance in the tax law in a series on important cases in different disciplines, Vada W. Lindsey, The IRS’s Hollow Victory in Crane v. Commissioner, 331 U.S. 1 (1947), here. (noting that, by itself, Crane may not seem important but its importance ever after is in the term “tax shelter,” which I discuss below)

Crane addressed the issue of how to treat the taxpayer’s disposition of property subject to a nonrecourse debt. The taxpayer there had acquired the property subject to a nonrecourse debt equal to the value of the property; the taxpayer included the nonrecourse debt in the basis for the property, and, while she held the property, had taken depreciation on tax basis including the nonrecourse debt. The taxpayer then disposed of the property subject to the nonrecourse debt. The question was whether, in reporting the tax consequences on disposition, the taxpayer should include the nonrecourse debt and any other consideration (there $2,500 cash) in amount realized. The amount realized is the minuend of the calculation of gain realized; from that minuend, basis is subtracted (subtrahend) to compute gain realized. The Court held that the nonrecourse debt was included in the calculations as follows:

1	Cash (net)	$2,500
2	Nonrecourse debt	$200,000
3	Amount Realized (1+2)	$202,500
4	Less Undepreciated Basis *	($175,000)
5	Yields Gain Realized (3-4)	$127,500

This calculation comports with the actual tax results, where the taxpayer had taken $25,000 in depreciation offsetting other income but had walked away with cash of $2,500 net from dealing in property. The tax books balance by including the nonrecourse debt in amount realized. If the Court had held the amount of the nonrecourse debt was not included in the amount realized calculation, the tax books would not have balanced because the taxpayer would have gained the interim depreciation offsetting other income without some balancing to account for the fact that the debt was nonrecourse meaning the taxpayer never paid for the tax deductions (either in cash or an equivalent amount of offsetting income).

Crane involved property worth the value of the nonrecourse debt at acquisition and disposition. The Court said in fn. 37:

   n37 Obviously, if the value of the property is less than the amount of the mortgage, a mortgagor who is not personally liable cannot realize a benefit equal to the mortgage. Consequently, a different problem might be encountered where a mortgagor abandoned the property or transferred it subject to the mortgage without receiving boot. That is not this case.

Crane and its implications, fn. 37 in particular, spawned many tax shelters (abusive and otherwise) where taxpayers could acquire property subject to nonrecourse debt, claim the tax benefits of a “cost” basis in the property including the nonrecourse debt that would never cost anything, and then, to the extent that the nonrecourse debt exceeded the value of the property, never have a balancing tax entry because not included in calculation of amount realized.

Most of the abusive tax shelters have a familiar theme generally—false excessive valuations of the property with false deductions for depreciation or some other tax benefits (e.g., credits). The current in vogue abusive tax shelter is the syndicated conservation easement, the abusive variety of which depend on grossly excessive valuations to “justify” claimed charitable contribution deductions. In earlier times based on what some read as the implications of Crane, shelter promoters “sold” the opportunity for deductions that would never cost anything (including never being reversed by income inclusions). (Of course, the more “white-shoe” variety of abusive tax shelters, the transfer pricing abuse, involve abusive valuations in transfer pricing.)

Submitted - Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706 (11/18/23)

Yesterday, I submitted my article for publication (hopefully). The article is titled Tax Deference Cases–the Rest of the Story in the Interpretation of APA § 706.

Here is the abstract I submitted with the article (always subject to change prior to publication).  I provide links to the key documents cited for blog readers' convenience through quick web connection.

Abstract

The Supreme Court granted two petitions for writ of certiorari to address in the October 2023 Term whether Chevron deference should be overruled or clarified. Chevron is shorthand for deference articulated in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). [The two Supreme Court cases are 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.

The key features of Chevron deference are: (i) ambiguity (or silence sometimes treated as ambiguity) in the statute and (ii) agency reasonable interpretation within the scope of the statutory ambiguity. Deference with those features has been used in statutory interpretation judicial review since well before Chevron and the APA.

One of the issues on cert is whether the APA Scope of Review provision (5 U.S.C. § 706), here, precludes, requires, or permits deference. Some in the legal community (including judges, but none so far in opinions of their respective courts) argue that the APA, properly interpreted, precludes deference. The most prominent argument that § 706 precludes deference is by UVA Law Professor Aditya Bamzai in The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here. Using some of Professor Bamzai’s claims, I address whether § 706 precludes deference. This article does not address other bases (such as constitutional) against deference.

This article asserts that § 706 permits deference. Since so much has already been written on that issue, this article focuses on new discussion of the tax background largely ignored in the competing claims on § 706 and deference. By tracing the relevant tax history prior to the APA’s enactment in 1946, the article shows the claim that § 706 precludes deference is a misreading of the history. The article argues that deference with the characteristics of Chevron deference preceded the APA. Further, contrary to Professor Bamzai’s claim, such deference in tax cases was featured prominently in the authoritative Final Report of the Attorney General's Committee on Administrative Procedure (1941), here, which led to the APA. The article also introduces into the discussion Dobson v. Commissioner, 320 U.S. 489 (1943), here, reh. den., 321 U.S. 231 (1944), here, a tax case applying deference to Tax Court statutory interpretations. Dobson adds to the discussion because: (i) the Court treated the Tax Court as an agency rather than a court because the statute said the Tax Court was an agency and (ii) the statutory standard for review of Tax Court interpretations permitted reversal only if “not in accordance of law.” The Court interpreted the statutory standard “not in accordance with law” to require deference. APA § 706 has verbatim the same scope of review–”not in accordance with law”– for agency interpretations. In explaining § 706 as the proposal moved through Congress to enactment, the refrain was repeated often that it did not change existing law (which included deference), neither adding to nor lessening the existing scope of review. And, the authoritative Attorney General’s Manual on the Administrative Procedure Act (1947), here, said that § 706 restated rather than changed the current scope of review.

Based on this analysis of this history and the text of the APA, the article concludes that the APA permits deference. If the Court rejects deference or wishes to revise or clarify deference (similar to the way it did for Chevron deference’s lesser cousin, Auer deference, in Kisor v. Willkie, 589 U.S. ___, 139 S. Ct. 2400 (2019)), the Court should do it on some basis other than § 706.

Republicans Press Again on SOPRA Legislation that, They Claim, Eliminates Deference (8/30/23)

I am presently drafting an article, the principal point of which is to bring deference in tax cases to the discussion of the original meaning of APA § 10(e) of the original APA in 1946 (now codified at 5 USC § 706, here), which requires court review of agency action, in this case, agency regulations interpretations of ambiguous statutory text. The question is whether de novo review includes or does not include deference. For an example where prominent scholars have agreed upon de novo review including deference, see Conference of the United States (“ACUS”) and the American Bar Association Section of Administrative Practice and Regulatory Practice (“ACUS/ABA Site”), here:

Agency conclusions on questions of law are reviewed de novo. When a court reviews an agency’s construction of the statute it administers, the court is required to uphold Congress’s intent where Congress has directly spoken to the precise statutory question at issue. If the statute is silent or ambiguous with respect to the specific issue, however, the agency’s interpretation of the statute must be upheld if the agency’s construction of the statute is “permissible.” See Chevron USA Inc. v. Nat. Res. Def. Council, Inc., 467 US 837 (1984).

The review of tax cases applying deference before enactment of the APA in 1946 (thus setting the background for the meaning of the words in the APA), ignored or discussed only at the margins by most pundits pontificating. In my article, I will show that the mainstream discussion at the time of enactment of the APA in 1946 treated deference to agency interpretations as a process for interpreting de novo with deference, like tools of interpretation applied during the de novo review of the agency interpretation just as the quote above says it is. I discuss some tax deference cases and articles before 1940 (I peg that date to a claim by UVA Law Professor Bamzai in his acclaimed article, The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here, that there are 2 key periods to understand the state of deference prior to enactment of the APA in 1946 -- (i) pre 1940 and (1940 (app) to the date of enactment. I read the case authority and scholarly discussion differently than does Professor Bamzai particularly because of the tax case authority and scholarly discussion which he basically ignores.

I pause from attention to that future (if ever article) to write this blog to bring attention to readers a recent Republican legislative initiative to statutorily repeal deference by amending § 706 to require de novo review without deference. (The current brouhaha and misinformation about Chevron and how and when it works is mostly political and ideological emerging from hatred and fear, at least imagined, of the administrative state.)  Actually, this Republican legislative initiative goes back several years to other Congresses, all pursued with smoke and mirrors but, thankfully, no legislation.

On June 15, 2023, the House passed an act with the “Short Title” of “This Act may be cited as the ‘Separation of Powers Restoration Act of 2023” or “SOPRA”. (See Congress.gov, here,  on the bill and its movement through Congress.) The net effect intended by the Republicans introducing SOPRA in the House and voting to pass it over Democrat opposition is, so Republicans believe, is to eliminate deference. The act thus would amend APA 5 USC 706(a) to read as follows (new language is redlined):

(a)         To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, rules made by agencies, and interpretative rules, general statements of policy, and all other agency guidance documents. Notwithstanding any other provision of law, this subsection shall apply in any action for judicial review of agency action authorized under any provision of law. No law may exempt any such civil action from the application of this section except by specific reference to this section.

For the House Committee Report showing the amended entire § 706 with the changes in italics, see here.

This quixotic Republican adventure with no reasonable prospect of being enacted any time soon is a play to their base who Republicans have convinced should hate the administrative state as much as Republican politicians claim they (the Republican politicians) do. They claim that deference  is an administrative agency takeover from the courts of a large swath of the interpretive process. See Daniel Goldbeck & Shantanu Kamat, The Administrative State After Chevron (American Action Forum: Insight 8/8/23), here (caveat, this is a screed by an organization, the American Action Forum which as the name implies is a Republican Group not surprisingly anti-deference; why do Republicans consistently wrap their political agendas in things like America First or, in this case, the American Action Forum to imply that those who oppose are unamerican? That’s a rhetorical question.) Why is it when Republicans raise such whipping boys (the IRS is one, but the deference whipping boy goes to all agencies) as this can we assume that there is much hyperbole exceeding the bounds of critical analysis?

I have the following questions:

On Remand from 6th Circuit, District Court Orders Vacatur of Listed Transaction Notice (1/19/23)

I have previously written on the Sixth Circuit’s invalidation of an IRS listed transaction Notice (as opposed to regulation).  Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (Federal Tax Procedure Blog 3/3/22), here, discussing  Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 3/3/22) CA6 here and GS here.

On remand, on 1/18/23, the district court held that the 6^th Circuit’s holding required vacatur of the Notice, thus applying nationwide rather than just vacatur as to the plaintiff or some other subset of taxpayers more limited than nationwide (e.g., in the Sixth Circuit).  Mann Construction, Inc. v. United States, 651 F.Supp.3d 871 (E.D. Mich. 1/18/23), CL here and GS here.

The only thing worth commenting on is the vacatur holding applying like a nationwide injunction.  I can’t add anything beyond what I have already written.  On vacatur generally see Law Prof Article on the APA Tax Revolution and My Extended Comments (12/1/22; 12/3/22), here.  On alternative judicial approaches, see District Court Holds IRS Tax Shelter Notice Imposing Obligations Invalid as a Legislative Rule Without Notice-and-Comment But Limits Holding to Parties (Federal Tax Procedure Blog 11/20/22), here; Fifth Circuit En Banc Reverses the Bump Stock Regulation By Wobbling Around Statutory Interpretation Issues (Including Chevron) (Federal Tax Procedure Blog 1/8/23), here (discussing vacatur in paragraph 12); and Law Prof Article on the APA Tax Revolution and My Extended Comments (Federal Tax Procedure Blog 12/1/22; 12/3/22), here (discussing original meaning of the APA and vacatur at portion of blog after the section captioned Original Meaning of the APA and Other Post-APA Spinning).

Supreme Court Denies Certiorari in Oakbrook Land Holdings (1/17/23)

I have previously discussed the Circuit arguable split between the Eleventh and Sixth Circuits over the procedural validity of the so-called Treas. Reg. 26 C.F.R. 1.170A-14(g)(6) (the Proceeds Regulation). See Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here, discussing Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) (held regulation procedurally arbitrary and capricious and thus invalid for failure of regulation to address a significant comment); and Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022) (Proceeds Regulation interpretation valid). On 1/9/23, the Supreme Court denied Oakbrook's petition for writ of certiorari. (See Sup. Ct. Case 22-323 Docket Entries here.)

Denials of certiorari usually do not state or hint the reasons for the denial of certiorari. Certain inferences can be drawn if one or more Justices make a statement or dissent from denial of certiorari, but there was none here.

The Government’s brief in opposition to the petition for writ of certiorari, here, perhaps was influential in the denial. The broad claims the Government made (Br. 18-24, with numbering same as in brief) were:

1. “The decision below does not implicate any conflict with a decision of another court of appeals that warrants this Court’s review.” (Br. 18.)

a. regarding a possible conflict with Hewitt, the Government argued (Br. 18) that both courts applied the correct standard but just reached different conclusions as to the Proceeds Regulation. In perhaps inartful language, the Government claims that:

Hewitt did not purport to vacate or otherwise invalidate the proceeds regulation  as such; instead, it held only that “the Commissioner’s interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements to the easement property in the extinguishment proceeds allocated to the donee, is arbitrary and capricious and therefore invalid.” 21 F.4th at 1353 (emphasis added).

I think, however, that the Hewitt court did not declare the interpretation invalid; rather, it declared invalid the regulation that contained the interpretation. The difference is important. In any event, the Government closes this section with the following (Br. 19):

Third, petitioners do not identify any other court of appeals that has addressed whether the agency adequately responded to comments when promulgating the proceeds regulation nearly 40 years ago, and the government is not aware of any. Indeed, it appears that this case was the first in which the Tax Court itself opined on the issue. The issue would therefore benefit from further percolation in the regional courts of appeals, counseling against this Court’s review in this case at this time.

 [b not discussed]

c The Government argues (Br. 21-24) that, in any event, apart from the validity of the regulation, the deed violated the statutory language which, if true, would temper any perceived conflict between Oakbrook and Hewitt.

Law Prof Article on the APA Tax Revolution and My Extended Comments (12/1/22; 12/3/22)

Readers of this blog may be interested in a recent article by Professor Reuven S. Avi-Yonah (Michigan Law bio here), The APA Tax Revolution, 177 Tax Notes Fed. 981 (Nov. 14, 2022), here. He says there is an APA Tax Revolution, I think principally started by Professor Kristin Hickman (bio here). Professor Avi-Yonah pronounces: "Hickman has won the debate, and the APA revolution in tax law is here to stay." The debate is grounded in her claim that there are no interpretive Treasury regulations and extensions of that claim (including that Treasury's Temporary Regulations have historically violated the APA, hence Treasury has routinely in the past violated the APA). Professor Hickman and I disagree on that point. See The Report of the Death of the Interpretive Regulation Is an Exaggeration  117-118 (SSRN December 14, 2021), here. Professor Hickman's claim is bottomed on various developments post-Chevron that, she claims, eliminate the interpretive regulation category. (I find Professor Hickman somewhat elusive about those developments; I deal in my article with those rabbit trails I could identify.)

To be sure, there is a lot of commotion on the point, with many scholars and courts accepting Professor Hickman's premises. For the reasons noted in my article, I think they do so without fully thinking through the point from historical perspective as to the meaning of the APA. (See my concluding points about APA original meaning below.)

Most importantly, the Supreme Court has not spoken in a precedential holding on the key issue of whether there are interpretive regulations, so we don't know what the Supreme Court would say on that issue. (See also my concluding points about APA original meaning below.)

There have been contrary Supreme Court voices on that issue. I go into detail in my article. I won't repeat that detail here but ask readers to consider the background and two examples:

Background: As I note in my article, Professor Hickman claims that there are no longer any interpretive Treasury regulations which, if true, would mean there are no other agency interpretive regulations. (Remember her drumbeat claim that tax is not exceptional.) At our ABA Tax panel presentation in October, I asked Professor Hickman whether the regulation considered in Chevron was a legislative regulation. She said yes, an answer I knew she would have to give because she has said too often that there are no longer interpretive regulations. (To be fair, in most of our discussions, Professor Hickman claims that post-Chevron developments are the bases for her claim, but she did say on the panel that Chevron was a legislative regulation under her claim.)  Consider her answer against the following:

Illustrative examples of important voices claiming Interpretive regulations exist:

District Court Holds IRS Tax Shelter Notice Imposing Obligations Invalid as a Legislative Rule Without Notice-and-Comment But Limits Holding to Parties (11/20/22)

In GBX Associates, LLC v. United States (N.D. Ohio Case No. 1:22cv401 Dkt. # 21 Memo. Opinion & Order 11/14/22), CL here and GS here, the Court held consistent with Sixth Circuit (including lower court) opinions that IRS Notice 2017-10, entitled “Listing Notice- Syndicated Conservation Easement Transactions,” was invalid because it was a legislative rule adopted without notice-and-comment.  After reaching that conclusion, the court focused on the APA language in 5 USC § 706(2) that the court “hold unlawful and set aside agency action” found to be “not in accordance with law” or ” without observance of procedure required by law “ The question was whether the scope of the remedy could include not only the plaintiff a material (investment advisor) before the court but universal applying throughout the country to all similarly situated parties.  The relief could either be granted by a universal injunction commanding the IRS not to apply the Notice or by “vacatur” declaring the rule null and void which would cover IRS action against all parties similarly situated not before the court.  The latter is sometimes call universal or nationwide vacatur.

I think the opinion is quite good in discussing the issues.  In a nutshell, the issue is whether an invalid rule (here the Notice requirements) adopted without the notice-and-comment required for legislative rules, making it void ab initio, should allow or require piecemealing the remedy, requiring it to be litigated by various aggrieved persons throughout the country.  The Court said (Slip Op. p. 18, cleaned up):

As noted above, GBX asserts that the Notice 2017-10 should be in vacated in whole (and not just as to GBX itself) because, by its very nature, the “set aside” remedy of vacatur set forth in APA § 706(2) acts against the agency action itself—not the government actor. GBX asserts that, under established case law from the Third, Ninth, and D.C Circuit Courts of Appeals, the “ordinary result” upon a finding of unlawful agency action is that the [agency action] itself is vacated—not that its application to the individual petitioners is proscribed. Defendants strongly disagree, arguing the law on this issue is, in fact, unsettled and “hotly contested.” Defendants emphasize, in particular, that the Sixth Circuit has not expressly ruled on this issue and that at least one district court in this Circuit has rejected GBX’s argument and declined to order universal relief under § 706(2).

The Court in GBX exercised her discretion in concluding (Slip Op. p. 32): "The Court declares that Notice 2017-10 is unlawful and hereby sets that Notice aside as to Plaintiff GBX Associates, LLC only."

This litigant-only or universal application issue is presented in Texas v. United States, 40 F. 4th 205 (5^th Cir. 2022) (per curiam), GS here, a nontax case.  The Fifth Circuit opinion summarized its holding (at 212, emphasis supplied by JAT):