Are Discussions with Lawyer Colleagues Waivers of the Work Product Privilege? (4/30/20)

Today, I discuss a facet of the work-product doctrine, often called the work product privilege.  I address waiver for opinion work product in the setting for discussions among lawyers (or others for whom the privilege might apply) who have not been retained in the engagement to develop and refine legal issues and theories.

The specific context that this came up was for a legal email discussion group maintain by an attorney organization to discuss particular tax contexts and issues.  The discussion group contains a large number of lawyers (I think it is limited to lawyers), and so far as I am aware, the list of lawyers (as it may change from time to time) is not made available to the members of the group.  So participants invariably do not know some or even many in the group.  There is a prohibition on Government attorneys being members.  Of course, members may from time to time become Government attorneys and have the prior discussions available to them, but that’s a rabbit trail I won’t go down right now.  Suffice it to say that there is the expectation that the discussions in the group are not available to the IRS or DOJ.

The clients' identities are not disclosed in the discussions. I have no way of knowing, but assume that the attorneys anonymize any facts that are disclosed in order to set up and move the discussion forward.  For purposes of this discussion, let’s assume that the facts are so anonymized.

The issue I present is whether the discussions that, from each participating attorney’s perspective disclose anonymized facts and seek only legal discussion, thereby constitute a waiver of the work product privilege.  Yesterday, there was a discussion on an attorney mail group regarding whether the discussions in emails to the group constituted a waiver of the work-product privilege.

The issue is whether the IRS or DOJ could in a tax investigation (including grand jury investigation) or tax litigation discover the group email discussions on the basis of waiver of the work product privilege and thereby prejudice the client (taxpayer).  For example, the first interrogatory and/or request for production in tax litigation from the Government would be to identify all discussions by the attorney relating to the client’s facts and produce all documents relating to those discussions.  Similarly, the Government could use its investigative compulsory process to demand access to the discussions and documents related to the discussions.

I had never thought about the issue before (that I can recall).  In a more general sense, I had never thought that discussing anonymized facts with fellow practitioners was a waiver of the work product privilege as to the anonymized facts and the legal and practice discussions that the anonymized facts generate.  The settings presenting the issues can be myriad, including a lunch with a fellow practitioner, a small discussion group of practitioners (many larger cities have such groups), or larger groups (such as at CLE events or, in the present case, an email discussion group.  (I should note that perhaps, if the “waiver” were viable in this context, it might also apply to Government attorney discussions with fellow Government attorneys who are not involved in the particular litigation.)

Having now thought about the issue and done some poking around on the issue, I am just going to offer some non-definitive thoughts on the issue.

I first offer the generic discussion from the current working draft of my Federal Tax Procedure Book (for publication in August 2020) (footnotes omitted, but those wanting footnotes can get the pdf with footnotes here):

f. Work Product Doctrine.

8th Circuit Rejects Wells Fargo Bullshit Tax Shelter (4/27/20)

In Wells Fargo & Company v. United States, ___ F.3d ___ (8th Cir. 2020), here, the Eight Circuit rejected the taxpayer’s claim of entitlement for bullshit tax shelter benefits and claim that it should not be subject to the negligence penalty for claiming the supposed benefits of the bullshit tax shelter.

On the merits of the bullshit tax shelter, I just observe that it had a common characteristic for such nonsense - considerable complexity that served both to create a superstructure designed in part to hide the sham nature of the transaction.  The Eighth Circuit said (Slip Op. 4):

Turning to the facts of this case, we note that STARS is a sophisticated financial transaction with a fairly complex structure. See Wells Fargo & Co. v. United States (Wells Fargo I), 143 F. Supp. 3d 827, 831 (D. Minn. 2015) (“The STARS transaction was extraordinarily complicated—so complicated, in fact, that it almost defies comprehension by anyone (including a federal judge) who is not an expert in structured finance.”); Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 48 (D. Mass. 2013) (noting that STARS was “surpassingly complex and unintuitive; the sort of thing that would have emerged if Rube Goldberg had been a tax accountant”).

In my Federal Tax Procedure Book, I describe characteristics of abusive tax shelters as follows (footnotes omitted):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. 

Moving to the penalty issue, the bottom line holdings are:

1.  The negligence penalty in § 6662 applies to conduct including “any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.”  § 6662(c).  The regulations flesh this out by providing a “reasonable-basis” defense if the taxpayer’s return reporting position was “reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments).” 26 C.F.R. §§ 1.6662-3(b)(1), (3).  The issue was whether, in order to invoke the defense, the taxpayer must have actually based the return reporting position on authorities recognized by the regulation or whether, in the absence of such actual reliance, the taxpayer can ex post facto assert that the authorities render the position reasonable.  The majority held that actual reliance was required.  The majority based its holding on a de novo interpretation of the regulation text, which it found unambiguous on the issue, without any deference to the IRS’s interpretation of the regulation.

2.  The Court held that § 6751(b)’s written supervisor approval requirement did not apply because the Government asserted the penalty as a setoff in a refund suit in which no assessment was made (perhaps because beyond the statute of limitations).

JAT Comments:

1.  Professor Leslie Book has an excellent discussion of the case:  Leslie Book, In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities (Procedurally Taxing Blog 4/27/20), here.

2.  For those who like dancing on the head of pins, one might focus on the difference in deference aspect of the interpretive strategies by the majority and the dissenting judge.  The majority held that the regulation was not ambiguous as to whether actual reliance on the authorities was required, so that the majority made the de novo interpretation of the reliance requirement.  The dissent apparently thought the regulation was ambiguous and, since the IRS was interpreting the regulation to require actual reliance, performed an Auer analysis (a la Kisor) to (i) determine that Auer deference did not apply and (ii) the best interpretation of the ambiguous regulation was that actual reliance was not required.

3.  I have to wonder why, for such a blatantly sham transaction, the Government did not assert the civil fraud penalty as an offset.

4.   Of course, often bullshit tax shelter promoters will provide or arrange for an opinion that will, so the taxpayers are promoted or otherwise belief, will also shelter them from penalties if the underlying bullshit tax shelter fails.  Those opinions are often, let's say, result oriented and lacking in intellectual and research rigor.  Nevertheless taxpayers anticipate that they may be able to rely on the opinions to avoid penalties.  To do that, of course, they have to produce the opinions and subject them to the scrutiny of the IRS and the courts (and to the public if they litigate the issue).  For  bullshit tax shelters, those opinions are also bullshit.  And might well only succeed in avoiding the criminal penalty, but will not withstand analysis for the civil penalties.  Hence, although Wells Fargo certainly had at least one law or accounting firm opinion, it did not rely on the supposed authorities cited.

Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (4/26/20)

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, ___ F.3d ___ (5th Cir. 4/24/20), here, the Court of Appeals affirmed the district court’s enforcement of a John Doe Summons (JDS) to a law firm to obtain documents, and thus identities, of the Firm’s clients who “at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] . . . to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.”  The Court affirmed the district court's enforcement of the summons, rejecting the firm's argument that the client's identities were confidential client communications.

I have revised the relevant portion of the working draft of my Federal Tax Procedure Book (for publication in August 2020) and offer below a cut and paste of the revised portion (footnotes omitted).  I also point readers to a good law review article on the general subject:  Richard Lavoie, Making a List and Checking it Twice: Must Tax Attorneys Divulge Who's Naughty and Nice, 38 U.C. Davis L. Rev. 141 (2004), here.  The following discussion from my Federal Tax Procedure Book is under the attorney-client privilege discussion.

    (4) Client Identity Privilege.

 Is the identity of the client privileged under the attorney-client privilege?   A frequent context in which this question is presented is the reporting requirements for cash payments via the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  (Recall that the Form 8300 is a double agency form–for the IRS and for FinCEN.)  This reporting requirement applies to cash received by attorneys.  Often clients engaged in criminal activity pay their attorneys in cash.  Can the attorney receiving cash omit the client’s name from the report?  The mere receipt of the cash might disclose, at least implicitly, something confidential that is important to the purposes behind the attorney-client privilege; thus a requirement that the attorney disclose the receipt of the cash from the identified client might be inconsistent with the attorney-client privilege.  Another context in which the issue comes up is when the IRS issues a John Doe Summons (“JDS”) to a law firm related to abusive tax shelter transactions to discover the names of clients engaging the firm with respect to the shelter. That those clients engaged the firm with respect to the shelter does imply something about the clients’ communications with the firm, at a minimum the clients’ desire and tax need for some form of tax mitigation.  The conventional holding in this context is that the identity of the client and fee arrangements are not attorney-client communications invoking the the attorney-client confidential communications privilege.

 Some courts of appeals recognize that there may be a “narrow exception * * * when revealing the identity of the client and fee arrangements would itself reveal a confidential communication.” For purposes of convenience I refer to this narrow exception as the “identity privilege” which is a common term for it, but you should remember that it is not a separate privilege but rather a particular subset of one or more other privileges or policies that might be involved (here the attorney-client privilege).  The district court in Gertner relied upon the identity privilege but the Court of Appeals did not address the issue because it denied enforcement of the summons in any event because the Government had not used the proper John Doe summons procedure.

 I attempt here just a summary of the law in the area in tax cases:

Tax Court Power to Reform Contract Involving Party Not Before the Court (4/16/20)

In Hoffman Properties II v. Commissioner, 956 F.3d 832  (6th Cir. 4/14/20), CA6 here and GS here, the Court affirmed the Tax Court’s denial of a conservation easement deduction because, as interpreted, the agreement between the taxpayer and the conservation organization failed the perpetuity requirement for somewhat technical reasons.  The taxpayer sought to have the contract interpreted to meet the perpetuity requirement.  The Tax Court and the Sixth Circuit rejected that argument.  Then the Sixth Circuit says (Slip Op. p. 8):

What’s more, the Tax Court refused Hoffman’s request to reform the donation agreement. In the end, it was up to the Tax Court to grant this form of equitable relief. See Woods v. Comm’r, 92 T.C. 776, 782–89 (1989); see also Kelley v. Comm’r, 45 F.3d 348, 351 (9th Cir. 1995) (discussing Woods). And Hoffman hasn’t shown that the court’s refusal to do so was an abuse of discretion. See Greer v. Comm’r, 595 F.3d 338, 344 (6th Cir. 2010); Kelley, 45 F.3d at 352; see also Anchor v. O’Toole, 94 F.3d 1014, 1025 (6th Cir. 1996)  (describing the general standard of review for denials of equitable relief). 

The Sixth Circuit seems to have been laboring under the notion that the Tax Court could have power to reform a contract between the taxpayer and a party not before the Tax Court.  In the cases cited, contracts or quasi-contracts were between the taxpayer and the IRS. The Tax Court may also have been laboring under the notion that, had the taxpayer satisfied the requirements for reformation under Ohio law, it might have equitably reformed the contract.  See e.g., Tax Court Order Dated July 12, 2017, here, Slip Op. 10-11 n. 7 (where the Court discusses the Ohio Law of reformation but concludes that the taxpayer had not met the summary judgment standard for putting the argument in issue).

I question whether the Tax Court has jurisdiction to reform a contract involving a taxpayer and a party not before the Tax Court.  The cases cited by the Sixth Circuit involved contracts or quasi-contract like documents signed by the taxpayer and the IRS and are thus, in my mind, not authority for the power to reform a contract with a party not before the court.

Chevron and Shakespeare (4/4/20)

On my self-isolating walk today in the Charlottesville neighborhood (beautiful), I listened to a podcast interview of Emma Smith, the author of This is Shakepeare.  The book is here; and importantly, the interview is Emma Smith on "This Is Shakespeare" or “That’s Not My Meaning” (Folger Shakespeare Library Podcast), here (with audio and transcript).  (I highly recommend the Folger site and its podcasts.)

The discussion in this podcast was evocative of of the Chevron phenomenon in administrative law that scholars obsess about and, although not a scholar, I have written much about.  Remember that, in summary, Chevron teaches that, when the text being interpreted is not clear (OK, if its clear, maybe there is no interpretation but I think determining that a text is clear requires interpretation), then the reader (court in the case of Chevron) must apply one of the reasonable interpretations (one or more reasonable interpretations are required to make the text not clear).  Chevron is often described as a method to fill in the "gaps" of ambiguity of statutory text.

What’s that got to do with Shakespeare?

Emma Smith tells us that Shakespeare is notoriously unclear, or ambiguous, often has more than one reasonable interpretation, and that choosing among those reasonable interpretations allows us in ongoing generations to view Shakespeare creatively and relevant to our time. Here are excerpts (Barbara Bogaev is the interviewer):

BARBARA BOGAEV: Emma, your thesis that Shakespeare's broad appeal across cultures and centuries hangs on a concept with a wonderful, made up word—maybe not so made up—but you call it, "gap-i-ness". What is "gap-i-ness?" 

EMMA SMITH: Well, “gappiness” is just all this breathing space that there is in Shakespeare: all the things that we don't know, the space there is for our creativity. So, I'm trying to say these plays are really incomplete, and the thing that they need to complete them is us and our sort of inventiveness, our world, our experience. So those gaps are not a negative. In fact, they're a really enabling positive. 

* * * * 

Just on the most basic level we don't know what characters look like. We very rarely know how old characters are. There's lots of elements of plot that we are not fully given. Sometimes things are described to us, but they're not shown, so there's a question mark about how they should be interpreted. Lots of actions in Shakespeare's plays are not scripted or there aren't stage directions telling us. 

And there are also some sort of more historical gaps that I think inform the way Shakespeare writes; a gap between an older form of understanding the world and some new things that are coming in, and that sense of being astride two world views. That's particular to perhaps the end of the 16th century, but it's actually been a situation that we've often felt we're in and that is a code in later ages, too. 

BOGAEV: Well, you ran through some categories of gaps. Can you give us some specific gaps in specific plays? 

Section 7805(a) - Legislative or Interpretive and Problem of Retroactivity (4/2/20; 4/24/20)

In my article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 2/28/20, here), I argued that interpretive regulations for agencies generally and for the IRS under § 7805(a) remain viable despite some claims to the contrary.  Today, I summarize a key facet of my argument in the article – that § 7805(a) authorizes only interpretive regulations (rather than legislative regulations as some scholars argue) and that the limitations on retroactivity in § 7805(b) are properly viewed as limitations on the general rule of retroactivity for interpretive regulations rather than grants of authority to promulgate retroactive legislative regulations.  Since I provide copious citations in the article, I will not lard up this blog post with citations except as necessary.  (Variations on this theme have been addressed in prior blogs, particularly, Treasury Regulations and the APA Categories of Legislative and Interpretive Regulations (Federal Tax Procedure Blog 1/12/19; 1/19/19), here, and Legislative Rules And Chevron Deference An Oxymoron? (Federal Tax Procedure Blog 1/31/20; 2/10/20), here, but I recommend that readers sort through this blog before going to those other offerings.)

Section 7805, here, is a familiar Code Section.  It is titled:  Rules and regulations.  It’s first subsection is:

(a) Authorization
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Note that the authorization is for “rules and regulations.”  I focus here just on regulations (although I will sometimes use the term rules, which is an APA category that may include both regulations and subregulatory guidance (such as in the case of the IRS, Revenue Rulings).

The antecedents of the current § 7805(a) trace back to the dawn of the modern income tax (stated by scholars as 1917, 1918 or 1921, with some antecedents ever further back in general administrative law). Section 7805(a) is often referred to as a “general authority” provision in contrast to specific authority in a Code section to promulgate regulations to either define (interpret) a term in the statutory text (interpretive regulations) or to prescribe the law (a legislative regulation).  Most Treasury regulations are general authority regulations issued under § 7805(a).  (There is some fuzziness here because some would argue that a specific authority statutory direction to define a statutory term makes the regulations legislative in character rather than interpretive, even though all the statute does is direct the IRS to interpret the statutory term; but let’s not get hung up on that because that would mean that the specific authority regulations are all legislative rather than interpretive and would not affect the dividing line between § 7805(a) general authority regulations and specific authority regulations.)

The question I address here is whether regulations issued under general authority statutes such as § 7805(a) (or even under inherent authority derived from Congress’ assigning administrative authority to the agency) are interpretive or legislative in character.  I focus here on § 7805(a) for Treasury Regulations, but the issue is presented for other agency general authority regulations.

In the current context, § 7805 had a pretty clear meaning for most of its statutory life.  The meaning was that § 7805(a) authorized the Treasury (IRS) to prescribe guidance in the form of “rules and regulations” which did not create new law but interpreted ambiguous text in existing statutes.  The understanding was that § 7805(a) authorized interpretive regulations and did not authorize legislative regulations.

I think most judges and scholars were comfortable with understanding at least until Chevron and more likely until later cases interpreting Chevron.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and then principally United States v. Mead Corp., 533 U.S. 218 (2001).  Then some new ways of viewing § 7805(a) crept into the academic discourse.  Section 7805(a), so the new notion goes, is a grant of authority to the IRS to create legislative regulations (legislative rules must be regulations).  A key feature of legislative regulations is that they create the law just as if they were statutes and are not interpretations of the law (statutes).  Because legislative regulations are the law (and not interpretations of the law), they are said to have the force of law.  Thus, morphing that traditional modeling of the legislative regulations to deference concepts under Chevron and its progeny, the new notion is that § 7805(a) regulations, within the scope of the authority granted, are the law.  Why?  Because, once you say that § 7805 regulations have the force of law, you say that they are the law just like statutes and not interpretations of the law (statutes).

Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Crimes Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/22/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

Legislative Adjudicatory "Rulemaking?" (3/14/20; 3/16/20)

I write today on a wrinkle that I recently discovered relating to an argument that I made in an article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 1/25/20), posted on SSRN, here.  In that article, I stated (p. 104) that

The APA confers no legislative rulemaking authority on agency adjudicatory bodies, whether courts or the BIA or any other agency tribunal. Under the APA, the exercise of delegated legislative authority requires the regulations process of Notice in the Federal Register, receipt and consideration of Comments from the affected or interested public, publication in final in the Federal Register with a reasoned explanation of the comments and the decisions made, and an effective date 30 days after publication in final. BIA opinions are not subject to Notice and Comment, are not published in the Federal Register, and are not prospective only (e.g., at a minimum, they can apply the interpretations in the case); this suggests that BIA opinions are interpretive rather than legislative in character at least for APA purposes.

I made that statement in the context of critiquing then Judge Gorsuch’s opinions (panel and concurring) in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016), here.  Judge Gorsuch treated the Board of Immigration Appeals decision as legislative adjudicatory rulemaking.  Perhaps adjudicatory rulemaking is an oxymoron but hang with me for now.

My statement was not nuanced.  I learned that from recently reading the following draft article:  Kristin E. Hickman and Aaron Nielson, Narrowing Chevron’s Domain (February 28, 2020). 70 Duke Law Journal (2021, Forthcoming) (SSRN here) which focused my attention on SEC v. Chenery Corp., 332 U.S. 194 (1947) (often referred to as Chenery II), here.  Professors Hickman and Nielson explain Chenery II as follows (pp. 13-14, here, footnotes omitted):

Agencies can deliberately create policy through either rulemaking or adjudication. This surprising reality was blessed by the Supreme Court in 1947, in a foundational case known as Chenery II. There, following the agency’s decision on remand from Chenery [I] (which held that nothing in the common law, which is all the agency had cited, prohibited the corporate [*14] transactions at issue), the Court allowed the Securities and Exchange Commission (“SEC”) to delineate what was and was not lawful for corporate reorganizations case-by-case through adjudication, rather than through rulemaking. The Court, over Justice Jackson’s dissent, explained that although rulemaking has important advantages and should be preferred, an agency may announce policy in a common-law fashion through adjudication. Thus, the Court explained that there is “a very definite place for the case-by-case evolution of statutory standards. And the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.” The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.” And because adjudication is retroactive (indeed, that is a key dividing line between rulemaking and adjudication), it follows that agencies can make policy through adjudication, and policies so developed are then applied against individual parties based on past conduct. The Court has often reiterated this principle.

There is a lot to unpack there.  The framework that I use is the APA distinction between legislative rulemaking which generally must be prospective and interpretive rulemaking which generally may be retroactive to the date of the enactment of the ambiguous statutory text.  In my article, I develop that distinction, using tax examples–(i) consolidated return regulations for legislative rulemaking and (ii) the away from home sleep or rest regulation approved in  United States v. Correll, 389 U.S. 299 (1967), here, for interpretive rulemaking.  If we overlay that framework (at least by analogy) to the adjudication context, I submit that legislative rulemaking (or its equivalent by adjudication) must be by notice and comment regulation under the APA and that adjudication, with retroactive effect, can only be by interpretation of the existing ambiguous statutory text.

I don’t think that is the thrust of Professors Hickman and Nielson’s draft article, but there may be some semantical issues involved.  The key quote from above is: “The upshot, the Court later explained, is that “adjudication [thus can] operate[] as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.”  (bold-face supplied by JAT.) The semantics, using the APA categories, is that interpretive regulations may, in some non-APA sense, be “lawmaking” if given Chevron deference.  But, as I argue at length in my article, that is not the sense that the APA uses in distinguishing between legislative and interpretive rulemaking, with prospectivity required for legislative rulemaking and retroactivity allowed for interpretive rulemaking.