Really, Skidmore "Deference?" (5/31/20; 2/14/21)

Today, I discuss an interpretation “strategy”--that might not be the right word but bear with me--commonly called Skidmore deference, named for the interpretive process described in Skidmore v. Swift & Co., 323 U.S. 134 (1944), here. I provide links at the end of this blog to the pages in the current (2019) editions of my Federal Tax Procedure book (both 2019 editions)  and to key offerings from this blog that readers might want to read to pursue my thoughts on Skidmore, along with others' thoughts cited therein. These offer background and some overlap on what I discuss today.

I start with my definition of deference. This is in the context of Chevron but applies equally to Skidmore:

Deference is a court applying a reasonable agency interpretation of ambiguous statutory text despite the court’s belief that there is a more reasonable interpretation of the ambiguous statutory text.

This is my definition. I don’t think that it is controversial in the context of Chevron. (Nothing in my definition is original to me; the core concept has been expressed frequently and, so far as I am aware, unanimously (at least extrapolating from the small but, I think, representative cases I have read over the years).)

Chevron requires that a court apply a reasonable agency interpretation despite believing that there is a more reasonable interpretation which the court would apply if Chevron did not command deference. That deference is outcome determinative as to the interpretation in issue.  

But does Skidmore demand deference in this sense? Answering that question requires that we actually read Skidmore. here. Since Skidmore is the law, we should always start with the law. (As Justice Frankfurter is reported to have said, the cardinal rules for statutory interpretation are: “(1) Read the statute; (2) read the statute; (3) read the statute!” Henry J. Friendly, Mr. Justice Frankfurter and the Reading of Statutes, in Benchmarks 196, 202 (1967) (quoting Justice Frankfurter); so, where the case is the law, then read the case, read the case, read the case. The Court said in Skidmore (p. 140):

We consider that the rulings, interpretations and opinions of the Administrator under this Act, while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.

Suspensions of Statute of Limitations Make Collection Suit Timely (5/27/20)

In United States v. Weiss (E.D. Penn Dkt. 19-502 Order dated 5/21/20), here [GS here], the Court denied the taxpayer’s statute of limitations defense in a collection suit where the Government seeks judgment on the assessment.  The issue was whether the Government timely filed its suit to obtain judgment on assessments based on delinquent returns filed on October 10, 1994.  The assessments were made later in October 1994.  Those assessments triggered the 10-year collection statute of limitations under § 6502(a)(1).  The Government brought the collection suit on February 5, 2019, over 14 years after the collection statute would have normally expired on in October 2004.  The devil, of course, is in the word "normally."  The IRS cannot unilaterally extend or suspend the statute of limitations, but the taxpayer can take actions that will do so.  The trajectory of those actions are what caused the collection suit to be timely.

In my view, there is nothing particularly surprising in the way the Court pieced together the events causing the suspensions to apply over the years.  Although not surprising, the trajectory is a good lesson particularly for students trying to understand how suspensions work.  Indeed, I used to teach these in my class, with examples, and then, on the exam, would have a fact pattern starting with a notice of deficiency through the Tax Court proceeding and appeal (including a petition for certiorari) and ask the students to answer the earliest date the IRS could assess and the latest date the IRS could assess.  For each answer I wanted a specific date and then the relevant Code section(s), with any further explanation the student desired.  Usually the Code section(s) would be sufficient to tell me that they had the basis for the answer.

So, this case reminded me of my teaching and examinations.  For students of tax procedure the case is a good read.  I won’t summarize it because it is fairly short and well written.  I will say that the key legal issue is whether a petition for certiorari is an appeal that is within the suspension period for appeals under § 6330(e)(1), here.  So, I offer the facts from the opinion (these are just the facts, with references to Code and Regulations sections, usually in footnotes, omitted).  I invite readers to perform their own analysis of the statute suspensions (Note that I am including in the block quote below only the facts I think pertinent for the analysis and am using the cleaned up technique to eliminate discussion not relevant to the fact trajectory):

Excellent Blog Postings on the State of the Altera Petition for Certiorari (5/22/20)

Readers of this blog may be interested in an excellent cross-posting by Professors Susan Morse (Texas) and Stephen Shay on the state of play and their views on Altera.  See Pending Cert Petition in Altera: Tax Law in an Administrative Law Wrapper (Procedurally Taxing Blog 5/22/20), here and Pending cert petition in Altera: tax law in an administrative law wrapper, by Susan C. Morse and Stephen E. Shay (Notice & Comment 5/22/20), here.  I highly recommend the offerings (reading either of them is obviously sufficient).  The authors contributed to an amicus brief opposing certiorari, so they summarize their view of the case.

JAT Comments:

1. The petition for cert and the S.G.’s brief in opp may be viewed, along with amicus briefs, at the SCOTUSblog site here.  Altera's reply, if any, has not been filed yet.

2. I posted a comment on the Procedurally Taxing Blog posting.  My comment, beside saying that the posting was excellent, was in the form of questions on perhaps side issues that piqued my interest after reading the offering.  Readers can see my comments here.

Article On Justice Scalia's Modest Success and/or Failure to Persuade Other Judges to Reject Legislative History in Statutory Interpretation (5/16/20)

Readers of this blog may be interested in a recent Draft of a Law Review article recently posted to SSRN.  Stuart Minor Benjamin and Kristen Renberg, The Paradoxical Impact of Scalia's Campaign Against Legislative History 157 (SSRN 2020), for publication in Cornell Law Review, Vol. 105, No. 4, 2020, here; see also the SSRN Abstract, here,; and a summary of the article in Stuart Benjamin, In His Advocacy Against Legislative History, Did Scalia Get Half a Loaf, or None at All? (The Volokh Conspiracy 5/15/20), here.

Here is the SSRN Abstract:

Beginning in 1985, Judge and then Justice Antonin Scalia advocated forcefully against the use of legislative history in statutory interpretation. Justice Scalia’s position, in line with his textualism, was that legislative history was irrelevant and judges should not invoke it. Reactions to his attacks among Justices and prominent circuit judges had an ideological quality, with greater support from ideological conservatives. In this Article, we consider the role that political party and timing of judicial nomination played in circuit judges’ use of legislative history. Specifically, we hypothesize that Republican circuit judges were more likely to respond to the attacks on legislative history than their Democratic counterparts, and that judges who joined the bench during or after these attacks were more likely to be influenced than their counterparts who were appointed before the attacks. Utilizing a dataset containing all published federal appellate court majority opinions between 1965 and 2011 (more than 240,000 opinions), we find that, for both hypotheses, the judges whom we would expect to be more influenced by the attacks on legislative history were in fact less likely than their counterparts to cite statements from floor debates or committee hearings, traditionally regarded as among the least reliable forms of legislative history. But they were more likely than their counterparts to cite committee reports, traditionally regarded as the most reliable form of legislative history. The attacks on legislative history thus seem to have had the effect of pushing judges who might be expected to be influenced to (re)examine their treatment of legislative history but not (as Scalia had advocated) to ignore it. Instead, they adopted what had been the consensus approach for most of the twentieth century. Scalia influenced, but he did not persuade.

And here is the Conclusion from the Article (pp. 158-159, footnotes omitted):

Tax Court Sustains Key Conservation Easement Regulation But Wobbles on Legislative/Interpretive Regulation Issue (5/14/20; 5/26/20)

In Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020) (reviewed opinion), here, the Tax Court upheld the Treasury Regulation’s interpretation of § 170(h)(5)’s requirement that the easement be “protected in perpetuity.”  The Court first held (Slip Op. 9-25) that the promulgation process was not procedurally defective, it was not arbitrary or capricious.  The Court next held (Slip Op. 26-33) that the interpretation met Chevron’s Step Two test that it reasonably interpret the ambiguous statutory text and was therefore entitled to deference.

In reaching its conclusions, the majority opinion treated the regulation as a legislative regulation.  I think the Court was wrong in doing so and will summarize my reasons.  But, I think that if the Court had properly treated the interpretation as an interpretive regulation, it would have gone through the same process–i.e., it would have found the promulgation of the interpretive regulation to be procedurally proper and it would have found the interpretation a reasonable interpretation of the statute under Chevron Step Two.

So, my quibble over the proper characterization of the regulation interpretation of the “protected in perpetuity” statutory requirement would not, if correct, reach a different result.

What the Court did not find and could not find was an express congressional delegation of legislative rulemaking authority such as, in the quintessential tax example, the delegation of authority in § 1502 to promulgate consolidated return regulations that are the law.  Section 1502 is a delegation to the IRS to make the law and not just to interpret the text of § 1502.

Rather, all the Tax Court could find was (i) ambiguity in the statutory term “protected in perpetuity” and (ii) a regulation fleshing out details of that statutory text in a way the Court found reasonable in Chevron Step Two (although presenting the Chevron analysis as arbitrary and capricious review).  In this respect, the regulation interpretation of “protected in perpetuity” is like one of the classic interpretive regulations approved by the Supreme Court in United States v. Correll, 389 U.S. 299 (1967) where the regulation interpreted the statutory term “away from home” for business expense deduction to require sleep or rest.

The Court’s reasoning, after positing glittering generalities about the difference between legislative and interpretive regulations was (Slip Op. 17):

Because the regulation imposes a requirement not explicitly set forth in the statute, it is appropriately treated as a legislative rule.

Tenth Circuit Wobbles on Legislative / Interpretive Distinction (5/13/20)

In Aposhian v. Barr, 374 F. Supp. 3d 1145 (D. Utah 2019), here, the Court consider a challenge to the bump-stock rule similar to the challenge rejected in Guedes v. Bureau of ATF, 920 F.3d 1 (D.C. Cir. 2019), cert. den. 589 U. S. ____ (2020), ___ S.Ct. ___ (2020).  In part relevant to what I want to discuss, the district court said (pp. 1150-1151, footnote omitted and emphasis supplied):

Mr. Aposhian argues that the Final Rule was issued in excess of statutory jurisdiction because the NFA does not vest the Attorney General or the ATF with rulemaking authority. In response, the defendants argue, and the court agrees, that the Final Rule does no more than interpret undefined statutory terms. Although the Attorney General and ATF promulgated their interpretations through the more laborious, formal notice-and-comment process, the use of that procedure does not alter the Final Rule's interpretive character. And Mr. Aposhian does not dispute that the ATF, under the direction of the Attorney General, is empowered to interpret and administer both the NFA and the GCA. See Pl.'s Mot. for Prelim. Inj. (ECF No. 10 at 6); 18 U.S.C. § 926(a); 26 U.S.C. § 7801(a)(2); Guedes v. ATF, 356 F.Supp.3d 109, 129 n.3 (D.D.C. 2019) (rejecting challenges to the Final Rule's interpretations and the ATF's interpretive authority, noting the "ATF's clear authority to interpret and administer" the relevant statutes).

I think the district court was correct in its understanding that using the notice and comment procedure for interpretative rulemaking (as opposed to legislative rulemaking) does not transform an interpretive rule into a legislative rule.

Aposhian has been affirmed on appeal.  Aposhian v. Barr, 958 F.3d 969 (10th Cir. 5/7/20), GS here.  But in a way that seems to reject the reasoning of the district court that I discuss above.  Here is where I think the Court of Appeals wobbles in its analysis (958 F.3d at 980-981):

Initially, the applicability of Chevron depends on what kind of rule the Final Rule represents. There is a "central distinction" under the APA between legislative rules and interpretive rules. Chrysler Corp. v. Brown, 441 U.S. 281, 301 (1979); see 5 U.S.C. § 553(b), (d). Legislative rules generally receive Chevron deference, whereas interpretive rules "enjoy no Chevron status as a class." United States v. Mead Corp., 533 U.S. 218, 232 (2001). 

A legislative rule is one that "is promulgated pursuant to a direct delegation of legislative power by Congress and . . . changes existing law, policy, or practice." Rocky Mountain Helicopters, Inc. v. F.A.A., 971 F.2d 544, 546 (10th Cir. 1992). A legislative rule affects individual rights and obligations, and, if it is "the product of certain procedural requisites," it has the force and effect of law. Chrysler Corp., 441 U.S. at 301-02. An interpretive rule, on the other hand, "attempts to clarify an existing rule but does not change existing law, policy, or practice." Rocky Mountain Helicopters, 971 F.2d at 546-47. An interpretive rule simply "`advise[s] the public of the agency's construction of the statute and rules which it administers.'" Sorenson Commc'ns, Inc. v. F.C.C., 567 F.3d 1215, 1222 (10th Cir. 2009) (quoting Shalala v. Guernsey Mem. Hosp., 514 U.S. 87, 99 (1995)). 

The government contends—and the district court found—that the Final Rule is merely interpretive. See Aple. Br. at 37-38; Aplt. App. at 176. But "[t]he agency's own label for its action is not dispositive." Sorenson, 567 F.3d at 1223. Instead, "[t]he court must rely upon the reasoning set forth in the administrative record and disregard post hoc rationalizations of counsel." Id. at 1221. Here, "[a]ll pertinent indicia of agency intent confirm that the [Final] Rule is a legislative rule." Guedes v. Bur. of Alcohol, Tobacco, Firearms & Explosives, 920 F.3d 1, 18 (D.C. Cir. 2019) (reviewing the Final Rule under the Chevron framework).

Certiorari Granted in CIC Servs on AIA Application to Pre-enforcement Guidance Challenges (5/12/20)

I have previous written on CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den.  936 F.3d 501 (6th Cir. 2019).  See CIC Servs Petition for Rehearing En Banc Petition Denied with Hyperbolic Concurring and Dissenting Opinions (Federal Tax Procedure Blog 8/29/19; 8/31/19), here.  The Supreme Court granted certiorari in May 4, 2020 to consider the following issue ((See SCOTUSBLOG page on the case, here):

Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.

I have not spent a lot of time on this blog addressing the Anti-Injunction Act (“AIA”), § 7421(a), or the parallel tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201, which generally is interpreted coterminously with the AIA.  With this acceptance of certiorari, the AIA will likely be a large topic of interest in the near future, although a decision will not likely appear until 2021.

For the time being , I cut and paste some excerpts from the current working draft of my Federal Tax Procedure Book (footnotes omitted, but the footnotes are offered in a pdf version here):

Excerpts from Working Draft of Federal Tax Procedure Book, for August 2020 Publication.

a. Litigating IRS Interpretations and Other Guidance.

For most agency guidance, particularly guidance in a binding format such as legislative regulations, affected parties have an opportunity to raise procedural challenges in court under the APA upon promulgation of the guidance and before the agency attempts to enforce the guidance against the affected parties.  The statute of limitations for such review is the general six-year statute of limitations in 28 U.S.C. § 2401(a).  However, for Treasury guidance documents (both regulations and subregulatory), such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions (discussed below starting on p. ?) which have historically channeled tax litigation, including challenges to agency guidance, into post-enforcement litigation venues such as deficiency, refund or collection suits. Those post-enforcement venues have their own statutes of limitations triggered by the enforcement being challenged (e.g., a deficiency notice, denial of a claim for refund, or collection action).  Accordingly, historically, litigation challenging IRS agency guidance has not been allowed for pre-enforcement procedural challenges. If § 2401(a) were applicable, post-enforcement review would not be adequate for APA procedural challenges in tax litigation because, in most cases, the six-year statute would have expired before IRS enforcement action made the case ripe for the traditional tax challenge venues.  As a result, the general six-year statute of statute of limitations in § 2401(a) has not barred procedural challenges to IRS guidance in post-enforcement cases outside the six-year period in § 2401(a).

Notwithstanding the foregoing, in 2020, the Supreme Court accepted certiorari in CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den.  936 F.3d 501 (6th Cir. 2019) to address the following question:

Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.

The IRS “regulatory mandate” in question was Notice 2016-66 designating section 831(b) micro-captive transactions” as transactions of interest, thereby imposing a reporting requirement on all such transactions and their advisors. The Notice was not issued with notice and comment.  CIC sought to challenge the Notice in advance of any actual enforcement against CIC. There will undoubtedly be more learning on this subject in the next edition of this Book.

Tax Court Conflates Standards for Testing Interpretive and Legislative Regulations (5/7/20; 5/11/20)

In Whirlpool Financial Corp. v. Commissioner, 154 T.C. ___ No. 9 (2020), here, the Tax Court (Judge Lauber) held that income from a foreign manufacturing and sales structure was foreign base company sales income (FBCSI) under § 954(d).  Whirlpool’s tax shenanigans to avoid that result failed.  I won’t get into the details of the underlying tax issues.  I focus here on the Court’s explanation of how it applied Chevron to approve a regulation interpretation that was important to the result.

The Court discusses the Chevron analysis at Slip Op. pp. 54-62.  The regulation in question interpreted § 954(d)(2).  Although the Court did not state whether the regulations were interpretive or legislative regulations, it seemed to treat the regulations as interpretive regulations, testing the regulations under “the familiar two-step test of Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).”  (Slip Op. p. 54.)  As I have noted before, Chevron applies to an interpretive regulation, ultimately testing the reasonableness of an agency interpretation of ambiguous statutory text.  The questions are (i) is the interpretation within the scope of the statutory ambiguity and (ii) is the interpretation reasonable (sometimes called permissible).  By contrast, legislative regulations (such as the consolidated return regulations) are the law within the scope of the delegation and are not interpretations of the law, so testing a legislative regulation for reasonableness of the interpretation is an oxymoron.  Rather, legislative regulations are tested under the arbitrary, capricious or manifestly contrary to the statute standard under 5 U.S.C. § 706(2)(A); and Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983), focusing on the procedural regularity of the regulations promulgation process.  Questions I sometimes ask to those I engage on the subject are:  Do courts defer to statutes (deference being meaningful only to interpretations of statutes)? Since legislative regulations within the scope of the authority granted are the law just as if they were statutes and are not interpretations of the law, how exactly does a court defer to the legislative regulation?

As other courts have misread Chevron and subsequent cases, the Court conflated the two standards.  But, they are not the same standard, and the two standards do not apply to the same type of regulation.  I cite readers to my article, John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN 1/25/20), here.  (Caveat, the main theme of the article and the points I make in this blog are rejected by many, if not most, scholars addressing the issue, as I note in setting up the discussion in the article; if error there be in my view, I still stick with it.)

These are the parts of Judge Lauber’s opinion that I think improperly conflate (or at least confuse) the two standards:

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.