Summary of Tax Crimes for Tax Procedure Class (3/31/22)

This past Tuesday, I was a guest lecturer at Jim Malone’s UVA Law Class on Tax Procedure.  My subject was tax crimes.  I circulated in advance a pdf summary of the topic here (which I have changed slightly as indicated in red).  The summary is taken from the corresponding section of my Federal Tax Procedure Book Practitioner Edition but stripping out the footnotes and modifying the text as I thought appropriate).  Readers of this blog can download the summary here.  SSRN links to download either the Student or Practitioner Editions of the book are here. 

Rationality and Chevron (3/22/22)

I am reading Steven Pinker’s book Rationality: What It Is, Why It Seems Scarce, Why It Matters. (Penguin 2021) here, to lead the discussion in a book club.  At the same time, I am preparing an outline—yet another-- on Chevron deference.  The two exercises (reading Pinker’s Rationality and trying to make sense of Chevron deference) have converged. 

Chevron deference, as normally articulated, requires a court sometimes (at least as a conceptual possibility) to apply a “not-best” but “reasonable” agency interpretation of a statute in lieu of what the judge believes is the best interpretation.  In order to apply the best interpretation in lieu of the agency not-best interpretation, a judge can use several escape routes where the judge can fuss around about Chevron and still apply the judge’s best interpretation.  The two key ways built into the Chevron Two-Step Framework to avoid deferring to a “not-best” agency interpretation is (i) at Step One, to find the statutory text not ambiguous and (ii) at Step Two, to find the agency interpretation unreasonable.  There are other ways to avoid as well, such as the “major questions” doctrine and interpretations not within the agency’s expertise where the judges read the tea leaves to conclude that surely Congress did not intend the agencies should have primacy of interpretation authority.  E.g., King v. Burwell, 576 U.S. 473 (2015).

I will focus here on the escape hatches formalized in the Chevron Two-Step.

First, a judge can avoid the agency not-best interpretation by finding it unreasonable at Chevron Step Two.  Judges are trained to derive the best interpretation.  I think that is a judge's preference by education and practice.  I have wondered whether judges having a bias in favor of their own best interpretations might be motivated to find the agency not-best interpretations unreasonable.

Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22)

I recently discussed the Eleventh Circuit’s opinion in  Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). 11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21), here; and Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here. In Hewitt, the Eleventh Circuit invalidated the regulation § 1.170A-14(g)(6)(ii) requiring for charitable conservation donations of partial interests (such as easements) that the deed does not permit the donor to share in proceeds on extinguishment in the property values attributable to post donation improvements made by the donor. Yesterday, the Sixth Circuit sustained the regulation, thus creating a Circuit conflict between Hewitt and Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA6 here and GS here.

The Sixth Circuit in Oakbrook holds the regulations are procedurally valid, rejecting the reasoning of the Eleventh Circuit for holding the regulations procedurally invalid. The Sixth Circuit so holds in separate parts of the majority opinion that

(i)                addresses procedural regularity or “arbitrary or capricious” review (in 5 USC § 706 stated in disjunctive but often stated in conjunctive “arbitrary and capricious review) (28 F.4th at 710-718 and 720- 722); and 

(ii)              Chevron analysis (28 F.4th at 718-720). 

 (It is not clear to me why the Court sandwiched Chevron analysis between components of arbitrary and capricious review, but there is a lot of confusion in this general area.)

Justices Discuss Limited Ambiguity Role for Lenity and by Analogy Chevron Deference (3/11/22)

Ambiguity in statutory text can invoke two interpretive regimes.  Ambiguity in a criminal statute invokes the rule of lenity that says that if a criminal statute is ambiguous (or, sometimes, grievously ambiguous) the statutory ambiguity must be interpreted in the criminal defendant’s favor.  Ambiguity in a statute potentially subject to Chevron deference to an agency interpretation is interpreted consistent with the Chevron-entitled agency interpretation if it is reasonable (permissible).  Both interpretive regimes turn on ambiguous statutory text.

The question I address in this blog is what ambiguity means for both lenity and Chevron deference.  The only thing that I am sure of is that ambiguity in either context has no litmus test, thus is itself ambiguous.  As I note in The Report of the Death of the Interpretive Regulation Is an Exaggeration 75 n. 296 (SSRN December 14, 2021), here.

   n. 296 The word ambiguous in deference jurisprudence may be ambiguous. E.g., Aditya Bamzai, Delegation and Interpretive Discretion: Gundy, Kisor and the  Formation of Future Administrative Law, 133 Harvard L. Rev. 164, 187 n. 140 (2019) (“The question of how to identify ‘ambiguity’ is a long-running one in both administrative law and elsewhere,” citing scholarly discussions); Brett M. Kavanaugh, Book Review: Fixing Statutory Interpretation, 119 Harv. L. Rev. 2118, 2118-2119 (2016) (“judges often cannot make that initial clarity versus ambiguity decision in a settled, principled, or evenhanded way”); and Ryan D. Doerfler, The “Ambiguity” Fallacy, 88 Geo. Wash. L. Rev. 1110 (2020) (“‘ambiguity,’ is critically ambiguous.”)

Ambiguity in the ambiguity concept also infects lenity.  In Wooden v. United States, 595 U. S. ____ 2022 U.S. LEXIS 1421 (3/7/22), S.Ct. here and GS here, Justices Kavanaugh and Gorsuch, in concurring opinions, weighed in on the issue in ways that evoke the ambiguity discussion for Chevron deference and may offer some guidance in Chevron deference.

I start with Justice Gorsuch’s discussion on p. 9 of his concurring opinion which starts here.  Justice Gorsuch starts with a complaint about the gloss sometimes added to the lenity discussion that the ambiguity must not only be ambiguous but also must be “grievously ambiguous.”  I think he does a pretty good job in demolishing the spurious notion that there are two categories of ambiguity for lenity purpose – grievous in which lenity applies and non-grievous in which lenity does not apply.  Lenity applies where there is ambiguity, period.

This still does not help in determining what ambiguity is.  Is it just that the judge knows it when he or she sees it.  Justice Kavanaugh discusses that issue in his concurring opinion starting here.  Basically, Justice Kavanaugh argues that ambiguity in statutory interpretation for lenity purposes is a rare phenomenon.  Evoking the Chevron / Auer concepts hinging on ambiguity, Justice Kavanaugh says (p. 2 of concurring opinion):

Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (3/3/22)

In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 3/3/22) CA6 here and GS here, the Sixth Circuit panel held invalid IRS Notice 2007-83, 2007-2 C.B. 960, entitled “Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits,” which identified the transactions as listed transaction requiring participants in various categories to report the transactions and be potentially subject to penalties if they did not. The company and two shareholders (“taxpayers”) failed to report. The IRS imposed § 6707A penalties for their failures. The taxpayers apparently made no claim that they did not know of the reporting requirement. Rather, they raised only administrative law issues under the Administrative Procedure Act (“APA”) that the IRS adopted the Notice requirement without following the APA’s procedural requirements or was otherwise outside the statutory authority. 

The Court of Appeals addressed only one issue raised by the taxpayers – whether the IRS’s promulgation of the reporting requirement with penalty regime by Notice, a subregulatory guidance document, was a legislative rule that could only be adopted by notice-and-comment rulemaking. The Court held that the reporting requirement was a legislative rule, thus requiring notice-and-comment rulemaking and thus invalid because the IRS had not undertaken notice-and-comment rulemaking.

I will not attempt a detailed analysis of the Court’s reasoning. One thing I am sure of is that there is a lot of confusion about what precisely is a legislative rule subject to or exempted from the notice-and-comment rulemaking requirement. I think the Court falls into some fallacies in that regard, but won’t go down that rabbit hole here because that is a long and complex discussion, principally because of misreadings of Chevron. 

My reading that, I think, is straight-line. 

 1.  Section 6707A(a), here, imposes the penalty for failure to file a return or statement providing information regarding a “reportable transaction” under § 6011.

2.  Section 6011(a), here, in turn provides

(a) General rule
When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.

Tax Court (Judge Lauber) Rejects Shareholders' Attempts to Reduce Transferee Liability (2/10/22)

In Slone v. Commissioner, T.C. Memo. 2022-6, TC Dkt Entry 107 *, here, and GS here, after two reversals by the Ninth Circuit, the last of which held the related taxpayers liable for transferee liability from a Midco transaction, the Tax Court was tasked with determining the amount of the liabilities of the related taxpayers in order to enter judgment (decision) for the Commissioner. Judge Lauber took over the case from Judge Vasquez on 10/19/21. See Dkt Entry 103 *. The related taxpayers raised various arguments to reduce the amount of the liabilities. Hence, as Judge Lauber noted (Slip Op. pp. 2 & 3),

The IRS has calculated these numbers to include a deficiency of $13,494,884, an accuracy-related penalty of $2,698,997, and interest of $8,559,729, for a total of $24,753,610.

* *  * *

             The parties have submitted dueling Rule 155 computations. They agree that the transferor corporation’s total tax liability is $24,753,610. But they disagree as to the extent to which petitioners are liable for this debt. Petitioners contend that they are not liable for the penalty or “prenotice” interest, that the IRS has “double counted” the transfers, and that they are entitled to reductions for “equitable recoupment.” Finding no merit in the arguments petitioners tender in support of their computations, we will enter decisions as requested by respondent.

 Judge Lauber helpfully provides readers a synthesized summary of the prototypical Midco transaction (Slip Op. p. 3, case citations omitted):

In Midco Transaction Malpractice Case, Oregon Court Applies Issue Preclusion From Tax Court Opinion To Dismiss Accounting Firm But Not Law Firm (2/3/22)

A reader of this blog sent me two related opinions decided by the Oregon Court of Appeals in malpractice and related litigation against two advisors—a law firm and an accounting firm advising the shareholders in a firm with a large tax liability in a Midco transaction. The plaintiffs, the Marshalls, were shareholders selling in the Midco transaction that avoided tax liability. The advisers, the defendants, were Schwabe Williamson & Wyatt, P.C. (law firm) and PricewaterhouseCoopers (accounting firm) that advised the Marshalls in the transaction. The opinions are: Marshall v. PricewaterhouseCoopers, Ltd. Liab. P'ship, 316 Or. App. 610, 2021 Ore. App. LEXIS 1845 (2021), here (involving the accounting firm,  PWC); and Marshall v. Pricewaterhousecoopers, Ltd. Liab. P'ship, 316 Or. App. 416, 2021 Ore. App. LEXIS 1775 (2021), here (involving the law firm, Schwabe Williamson & Wyatt, P.C).

In part here pertinent, the Oregon Court of Appeals held that the findings in the Tax Court litigation holding the Marshalls liable for the tax as transferees were (i) issue preclusive as to the accounting firm but (ii) were not issue preclusive as to the law firm. The findings in question were Estate of Marshall v. Commissioner, T.C. Memo. 2016-119, here. The following overview of the Tax Court opinion is from the LEXIS-NEXIS report for the case summarizes the key holdings:

HOLDINGS: [1]-The record supported the Commissioner's decision requiring individual taxpayers who sold a construction company they owned to pay $15,482,046 in income tax the company owed, accuracy-related penalties of $6,192,818 under I.R.C. § 6662, and $9,592,446 in interest; [2]-The taxpayers knew or should have known that the sale of their company was constructively fraudulent under Or. Rev. Stat. § 95.240 because it left the company without sufficient assets to pay its federal tax liability, and the Commissioner had the power under I.R.C. § 6901(a)(1) to collect taxes the company owed from the taxpayers because the company's assets were transferred to them; [3]-The taxpayers' claim that they should not have to pay taxes the company owed because they acted in good faith lacked merit because, inter alia, the good faith defense in Or. Rev. Stat. § 95.270 did not apply to § 95.240.

The Tax Court’s opinion included damning fact-finding regarding the shareholders’ knowledge and/or constructive knowledge that the Midco promoter would strip the target company of assets from which to pay the tax. The Tax Court concluded from the facts that

The Marshalls, Schwabe, and PwC had constructive knowledge of the entire scheme. John [shareholders representative] knew that Essex [the promoter company] was interested 35*35 in buying MAC [the target company with the tax liability] only for its tax liability; that Essex intended to use high-basis low-value assets to offset MAC's income; that Essex intended to obtain a refund of MAC's prepaid taxes, a plan he was leery about; and that Essex was splitting MAC's avoided taxes with the Marshalls.

Tax Court (Judge Halpern) Discusses Chevron and Retroactivity Issues in Significant Opinion (2/2/22)

Caveat:  The Tax Court opinion was corrected on 2/8/22 (see TC here Dkt. 86 *).  There is no indication of the changes made in the opinion.  I have checked the quotes below against the corrected opinion; they do not appear to have been revised.  I don't know whether the changes will result in new posts to Casetext and Google Scholar.  I will check later and post updates if they are made to those services.  (I earlier sent a letter to the Tax Court Clerk suggesting that, when revising an opinion, the Court provide public notice of such revisions.  See My Suggestions to Tax Court on Procedure Related Matters (11/23/20), here (noting that the Supreme Court makes the revisions available).)

In TBL Licensing LLC v. Commissioner, 158 T.C. ___ No. 1 (1/31/21), TC here Dkt. 85 *, Casetext here, and GS here, the Court (Judge Halpern) determined that inter-company shuffling of assets among related U.S. and foreign entities constituted a reorganization in which a domestic entity made a taxable distribution of intangible assets to a foreign entity. The amount of the resulting increase in income is  $1,452,561,000. (Slip Op. 91.)  It is not clear whether that is just a timing difference; in any event, I don't propose to get into the nitty-gritty on the reorganization and resulting increase in income. Instead, I offer the case to discuss two procedural issues related to issues I have discussed before on this blog.

First, in broad strokes, the case involved the statute and regulations. In part relevant here, the regulations did not apply, so the Court resolved the relevant issue solely by interpreting the statute and applying the best interpretation. There is no Chevron issue there, and the IRS did not assert Chevron deference. But TBL apparently attempted to assert something sounding like Chevron into the analysis. The Court stated its confusion about that (Slip Op. 79-80):

            Petitioner suggests that respondent is to blame for the absence of a provision in the regulations that can be applied to petitioner's circumstances. The absence of an applicable regulatory provision, however, requires that we look to the statute alone to determine the tax consequences of petitioner's transaction. For the reasons explained supra part III, section 367(d)(2)(A)(ii)(II), interpreted in accordance with the legislative history, requires petitioner to recognize gain. The absence of a provision in the regulations providing otherwise is petitioner's problem — not respondent's.

            Because respondent's position is grounded in an interpretation of the applicable statutory provisions and not on any regulations, we do not understand petitioner's argument that respondent's "litigating position" is "impermissible" under Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988). Bowen stands for the proposition that an agency's litigating position is not entitled to the same deference a court would give to a position adopted through notice and comment rulemaking. See id. at 212-13; see also Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Respondent does not ask that we grant Chevron deference to the interpretation of the applicable statutes that he advances in this case.

Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, 25 F. 4th 67 (2d Cir. 1/27/22), GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were moot. n3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this:

Statutory Interpretation: Best vs. Least Bad (1/23/22l 1/25/22)

I have stated my definition of deference as follows: 

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. That's it.

See John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration 70 (SSRN last revised 12/15/21), here. This requires that the court actually determine the best interpretation and then defer to a lesser agency interpretation

Some state that Chevron deference can include a court applying a reasonable agency interpretation without the court having to struggle with the issue of the best interpretation. I divide reasonable agency interpretations into two relevant categories:  (i) the best interpretation, which is perforce reasonable; and (ii) an interpretation that is less than the best but still reasonable (whatever that means). Category (i) involves no deference; Category (ii) involves deference. If the court stops at determining that the agency interpretation is reasonable without determining the best interpretation, the court may or may not have deferred to a less persuasive agency interpretation.

These Categories and ones I discuss in my article Postscript (separately available here) depend upon the potential for a "best" interpretation. In Polselli v. United States Dep't of the Treasury-IRS. 23 F.4th 616 (6th Cir. 1/7/22), CA6 here and GS here, although not in a Chevron context, the dissenting judge stated the concept of the best interpretation as: "the least bad interpretation."  For purposes of Chevron analysis, I think the best and the least bad interpretation are the same. The term "least bad interpretation" may be catchy, but I think the term best (or better) interpretation is more appropriate for statutory interpretation.

I discuss Polselli (although not in the Chevron context) in my earlier blog. 6th Circuit Holds Summonses in Aid of Collection Do Not Require Notice to Taxpayers Or Others (Federal Tax Procedure Blog 1/13/12, here); see also Leslie Book, Polselli v US: Circuit Split on Notice Rules For Summonses to Aid Collection (Procedurally Taxing 1/20/22), here.

Added 1/25/22 9:30am: