Chevron Deference: Much Ado About Not Much (8/15/21)

This is my third offering on the most recent D.C. Circuit opinion in Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 8/9/22), DCCir here,  and GS here. My prior offerings are (chronological order):  Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here; and § 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (Federal Tax Procedure Blog 8/11/22), here.  (Note that I omitted from my original discussion the parallel Fifth Circuit opinion in Cargill v. Garland, 20 F.4th 1004 (5th Cir. 12/14/21), CA 5 here and GS here; see Fifth Circuit Affirms Agency Best Interpretation of Statute, thus Not Applying Chevron (Federal Tax Procedure Blog 12/20/21; 12/21/21), here.)

The point I want to make here explicit that which may be only implicit in my prior offerings. When courts defer (or parties (usually the Government) argue that a court should defer) to a “reasonable” agency interpretation, they often do not differentiate between (i) those reasonable agency interpretations that are the best interpretations and (ii) those agency interpretations that are not the best interpretations but are only reasonable agency interpretations qualifying for Chevron deference.  Thus, by chanting "reasonable" and Chevron and appearing to defer, many (I think most) cases involve agency interpretations that are the best interpretations so there is no deference at all.  That is the key point of this new Guedes opinion (and the Cargill opinion). 

And, that is why courts should, as did the court in the new Guedes and in Cargill opinions, make clear what the best interpretation is so that they can either (i) apply that interpretation without any nonsense about Chevron or (ii) apply Chevron only when Chevron deference is outcome determinative – i.e., when the agency interpretation is not the best interpretation.  Keep in mind that, in making the determination as to the best interpretation, courts should give Skidmore respect (not deference) to the agency's interpretation because the agency, not the courts, has been assigned to administer the administrative scheme and is in a better position to deal with subtleties in administration than a court is.  See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21).

As to the latter applying Chevron deference only when the agency interpretation is not the best interpretation, I point readers to some discussion in my article John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), https://ssrn.com/abstract=3400489:

In the postscript to the article (pp. 122-123) I offer the following reformulation of steps preserving Chevron's basic teaching but isolating when it is outcome determinative (footnotes omitted):

§ 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (8/11/22)

I recently posted a blog on Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here,  and GS here. See Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here. The essence of this new Guedes case is that an interpretation that is the best interpretation of the statute applies without any deference to the agency interpretation. The best interpretation controls, not because it is the agency interpretation, but because it is the best interpretation. So, for example, even if that best interpretation is in an interpretive regulation, the best interpretation controls. And the best interpretation controls even if the regulation is procedurally invalid. I have made that point (not much discussed in the mainstream claims) in several blog posts. I list only a few:  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; Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here; and Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22), here.

I focus here on the consequences of this key point—the best interpretation of the statute controls independently of the validity or characterization of the regulation in which the best interpretation may appear. Readers may recall that § 7805(b) limits retroactivity for § 7805(a) regulations interpreting Code sections enacted after the effective date of the 1996 amendments to § 7805(b). For regulations interpreting Code sections enacted before the 1996 effective date, the interpretations may be fully retroactive to the date of enactment of the Code sections being interpreted. So, imagine a hypothetical Code section enacted after 1996, say enacted in 1997, so that § 7805(b) applies to limit the retroactivity of an interpretive regulation. Suppose that, in 2022, the IRS adopts a regulation interpreting the Code section. The regulation qua regulation cannot apply retroactively to 1997. But, the best interpretation can and should apply retroactively to 1997. (I need to clarify what retroactive means in this context; the interpretation has to be within the range of reasonable interpretations since the date of enactment so, in that sense, the interpretation is not retroactive; but the retroactive language is often used to describe the concept of the interpretation later recognized (in the example, in 2022) as the best interpretation applying from the date of enactment.)

The point is that an interpretation in a Treasury regulation (Temporary or Final) otherwise subject to the § 7805(b) time limits will avoid those time limits if the interpretation is the best interpretation of the statute.   Let me repeat that so that it sinks in:  An interpretation that is the best interpretation can and should apply retroactively without regard to § 7805(b). Indeed the best interpretation is effective even if announced in subregulatory guidance (such as Revenue Ruling or Notice). What that necessarily means is that § 7805(b)’s time limits practically apply only to an agency regulation interpretation that is not the best interpretation and thus needs a valid regulation (in this case within the § 7805(b) time limits) for Chevron deference.

This raises some questions:

Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (8/9/22; 8/15/22)

In Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here and GS here, the Court rendered an important decision.  Although it is not a tax case, it deals with administrative law themes – APA and deference – important in the tax area.  The case involved the proper interpretation of the statutory term “machine guns” [I split the statutory word "machineguns" as is common] includes so-called “bump stocks.”  There was an earlier Circuit opinion in Guedes, Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 2019), here, cert. denied cert. denied, 589 U. S. ___, 140 S.Ct. 789 (2020); see Guedes Cert Denial on Bump Stock as Machinegun, Justice Gorsuch's Cryptic Statement and My Digression (Federal Tax Procedure Blog 3/2/20; 3/5/20), here.

The Court summarized the key conclusion of the opinion in the opening (Slip Op. p. 3):

The central question on appeal is whether the Bureau had the statutory authority to interpret “machine gun” to include bump stocks. Employing the traditional tools of statutory interpretation, we find that the disputed rule is consistent with the best interpretation of “machine gun” under the governing statutes. We therefore affirm.

 The Court expounds (Slip Op. pp. 8-10)

             The threshold question is whether to treat this case as a matter of pure statutory interpretation or to apply the Chevron framework. Both parties advocate for the former. Plaintiffs argue that Chevron does not apply for a multitude of reasons: the rule is interpretive in nature; the government waived Chevron deference; the Court may not apply Chevron to a statute with criminal penalties; and the rule of lenity must supersede Chevron in the criminal context. The Bureau also characterizes the Rule as interpretive, and it likewise urges us to analyze the Rule under a statutory interpretation framework.

            The Guedes II panel employed the Chevron framework—just as the District Court had done—in denying the motion for preliminary injunction. The panel concluded that the Bump Stock Rule was a legislative rule; the Bureau explicitly relied on Chevron in crafting it; the government cannot recharacterize a rule as legislative or interpretative during litigation; and the government cannot waive Chevron. 920 F.3d at 18, 21–23.

            Ultimately, we need not wrestle with the Chevron framework here. Rather, the parties have asked us to dispense with the Chevron framework, and in this circumstance, we think it is appropriate to do so. See Am. Hosp. Ass’n v. Becerra, 142 S. Ct. 1896 (2022) (rejecting agency’s interpretation “after employing traditional tools of statutory interpretation,” rather than inquiring into the interpretation’s reasonableness under Chevron). Using a statutory interpretation lens, we decide that the Bureau offered the best construction of the statute without wading into the subsidiary questions that the Chevron analysis poses.

Precedential Effect of Published Plurality Appellate Opinion That Majority of Panel Doesn't Accept (8/9/22)

In Trafigura Trading v. United States, 29 F.4th 286 (5th Cir. 3/25/21), CA5 here and GS here, the Court affirmed the district court judgment that the taxpayer was entitled to a refund.  The district court held that the reason for the refund was that the tax violated the Export Clause of the Constitution.  (For purposes of this blog, getting into the merits of the reason the tax violated the Export Clause is not important.)  On the Government’s appeal, the Fifth Circuit 3-judge panel affirmed, with one judge (Judge Ho) issuing a “plurality” opinion, another judge (Judge Wiener) concurring only in the judgment but not Judge Ho's opinion, and a third judge (Judge Graves) dissenting from Judge Ho's opinion.

The question that I and some colleagues have discussed recently, perhaps without definitive conclusion, is:

What is the precedential effect of the Fifth Circuit plurality opinion by Judge Ho, which as the F.4^th citation indicates was published?

Judge Ho’s opinion was only his opinion and was not approved by either Judge Wiener (concurring in judgment only) or by Judge Graves (dissenting).  The only judge on the panel who addressed the issue of precedential effect was Judge Graves who, in his dissenting opinion says (p. 796 n. 1):

    n2  Judge Wiener concurs only in the judgment, which means that Judge Ho’s opinion does not have a quorum and does not constitute precedent in this Circuit. Indest v. Freeman Decorating, Inc., 168 F.3d 795, 796 n.1 (5th Cir. 1999) (Wiener, J., concurring). Thus, I refer to it as the plurality when referencing any portion other than the judgment. 

This seems a straight-forward bar (if accurate) to precedential effect of Judge Ho’s opinion, but there is some confusion (at least in my mind) about the last sentence (saying Judge Ho’s non-precedential plurality opinion includes only “any portion other than the judgment.”  What does that mean?  Judge Ho’s opinion itself does not have a judgment.  There is a Fifth Circuit judgment (here) but it only says in relevant part that “the judgment of the District Court is affirmed.”  Presumably, this Fifth Circuit judgment is the judgment that Judge Graves refers to. 

 By contrast to the Fifth Circuit judgment, the district court judgment, here, says

Having determined that § 4611(b) violates the Export Clause of the United States Constitution, the Court orders the Government to refund Trafigura $5,215,924 in § 4611(b) taxes that Trafigira paid for the tax periods in issue, as well as statutory interest pursuant to 28 U.S.C.A. § 2422.  This is a Final Judgment and finally disposes of all claims and causes of action asserted by any party.

Technically, as I understand it, the district court judgment is only the amount that the United States owes the taxpayer.  The reason for that debt amount is not part of the judgment and in many judgments with which I am familiar the judgment only states that the taxpayer is entitled to a refund without elaboration of the reasons.  (Similarly in the Tax Court where judgment-equivalent “decisions” are rendered, they do not state the reasons for the tax, refund determined, or no deficiency.)  For the limited effect for which judgments are important (such as enforcing the judgment), merely stating the amounts is all that is required and, I think, is the judgment.

So, I infer that, since Judges Graves and Wiener did not concur with the Judge Ho’s opinion, Judge Ho’s opinion is not precedential.

Petition for Cert in Whirlpool, SG Waiver of Response, and Several Amici Arguing for Cert (8/5/22; 8/16/22)

The Sixth Circuit recently called out Whirlpool’s bullshit tax shelter. Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944 (6th Cir. Dec. 6, 2021), CA6 here and GS here, affirming 154 T.C. 142 (2020), here; see Whirlpool’s BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22), here. Not surprisingly, given the stakes, Whirlpool filed a petition for certiorari. See the Supreme Court docket entries here for handy links to the documents I discuss here.

Here is the trajectory of filings from the docket entries:

• On June 30, 2022, Whirlpool filed its petition. The question presented is (without the context fluff in the petition:

Whether the divided Sixth Circuit properly held—in conflict with precedent of this Court and settled administrative-law principles—that a statute that is conditioned on regulations delineating its reach may be enforced without regard to those regulations?

• On August 3, 2022, the United States through the Solicitor General (SG) filed its one-sentence Waiver:  “The Government hereby waives its right to file a response to the petition in this case, unless requested to do so by the Court.”  [Wow! Take that Whirlpool; when I was with DOJ Tax Appellate, I don’t remember any case where we did that rather than filing a brief in opposition; I interpret the waiver as saying that the petition is not of sufficient merit to warrant a brief in opposition; there has to be a backstory there.]
  
  
• On August 3 and 4, three amicus briefs were filed on behalf of (i) the National Association of Manufacturers, (ii) a group of major national accounting firms (PWC, Deloitte Tax LLP, and KPMG LLP; and (iii) a group consisting of the Silicon Valley Tax Directors Group, National Foreign Trade Council, Information Technology Industry Council, and Technet. 

Only one of the amicus briefs (# iii above) states the question to set up the arguments in the amicus brief, by just quoting the question presented in the petition. I thought that a bit odd that two of the amicus briefs left out the question presented for which they were arguing cert should be granted. But, what do I know? 

What is all the kerfuffle about, particularly when the SG has given the petition the back of her hand? 

Exxon Strikes Out on Its Tax Refund Claims But Dodges the § 6676(a) Penalty Bullet (8/4/22; 8/8/24)

In Exxon Mobil Corp. v. United States, 43 F.4th 424 (5th Cir. 8/3/22), CA5 here and GS here, Exxon Mobil (“Exxon”) filed a mammoth claim for refund claiming that it had misreported two separate tax matters on its original income tax return.  The first item it misreported (paying more tax than it claims was due) was worth “worth a billion dollars” related to the proper tax treatment of payments arising from an oil and gas transaction.  Related to this first claim, the IRS imposed a § 6676(a) 20% penalty worth about $200 million.  The second item, called by the Court a “purported blunder” (not a good sign to use the purported adjective) “this one worth $300 million,” about how to treat the renewable fuel tax credit.

I have two gut level comments.  

First, Exxon has and has had for a number of years one of the best tax departments ever and certainly the funding to buy the best outside legal talent available.  (General Electric used to claim that it tax department was the best law firm ever, but as those who have been watching, General Electric’s supposed inside best tax firm got them into bullshit tax shelters, so much for the best claim.)  So, why would these supposed legal giants overreport Exxon’s tax liability?  The answer as this new case determines, Exxon did not overreport the tax liability.  

Second, so what is this, shall I call it bullshit, about an amended return claiming that their legal geniuses overreported Exxon’s tax liability by $1.3 billion.  (I am sure those legal geniuses had a sigh of relief over this outcome.) And while many might claim that $1.3 billion for Exxon is pocket change, still that is the stuff that tax department promotions and pay is based on (and for outside counsel litigating aggressive positions, contingency fees).

2022 Editions of Federal Tax Procedure Book Online at SSRN (8/3/22)

The Federal Tax Procedure Book Editions (Student and Practitioner) are available on SSRN for viewing or downloading.  The links for the editions are on the FTP Blog page in the right-hand column titled "Federal Tax Procedure Book (2022 Editions)," here,

Please note that related items are available on the pages linked in the right-hand column of this Blog.

DC Circuit Case on IRS Use of Glomar FOIA Response Neither Admitting Nor Denying (7/26/22)

I was reading David Lat’s article, My Latest Theory About The SCOTUS Leaker (Original Jurisdiction 7/26/22), here.  Lat's theory is that the Politico authors publishing the original article about the Supreme Court draft opinion leak in Dobbs, with a link to the draft opinion, do not know the leaker (after the opening in Lat's article), he calls the person "The Leaker."  Lat offers the steps behind this theory, some of which sound cloak and dagger or even conspiracy theories. Nevertheless, it is a good read; well at least an interesting read.  

Among the steps Lat reports he took to confirm his theories

I contacted Gerstein and Ward [the Politico authors] with my theory that they don’t know the name of their source. I invited them to reassure me, even off the record, that they do know The Leaker’s name, in which case I wouldn’t float my theory. They didn’t do that; instead, they put me in touch with Politico spokesperson Brad Dayspring, who emailed me: “Given the sensitivity of the matter and the importance of protecting sources and methods, we are going to decline to comment—as I am sure that you can appreciate.”

This struck me as something like a so-called Glomar response when information is sought through a legal process (say FOIA), and there is an exemption from disclosure under circumstances that the law permits the agency to make a nonresponse.  That is on my mind because I am updating my Federal Tax Procedure Book editions for 2022 (hopefully will be published in early August), I just incorporated a recent case, Montgomery v. IRS, 40 F. 4th 702 (D.C. Cir. July 19, 2022), DCCir here and GS here.  In Montgomery, the taxpayers believe that someone was a whistleblower concerning their investment in a bullshit tax shelter long ago called out, with taxes and penalties visited on the Montgomerys.  The Montgomerys then pursued a long-running quixotic quest via FOIA to find out who the whistleblowers were.  (It is unclear what they would do with the identities, but I suspect it would not be good for the whistleblowers.)  I wrote on an earlier district court opinion in the ongoing saga, Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (Federal Tax Procedure Blog 3/30/20), here.  In relevant part, the IRS gave a Glomar response to the FOIA request.  I thought I would offer the portion of the FTPB as revised to include the new Montgomery case (I omit footnotes except for the Montgomery case which I quote from):

Teaching Tax Through Movies -- Loverly (7/11/22)

Please note that I added toward the end a comment from Robert Steinberg with a tax parody on a My Fair Lady song.

I was in my former life an Adjunct Professor at University of Houston Law School where I taught courses in Tax Procedure and in Tax Crimes.  Often in the courses, I would mention My Cousin Vinny to illustrate (often by stretch) some point relevant to the classes.  

This offering caught my attention.  Alice G. Abreu (Temple), Teaching Tax Through Film Is Not As Crazy As It Sounds, 19 Pittsburgh Tax Rev. 183 (2022), here.  I was intrigued to see what Professor Abreu offered her students in the way of teaching tax law through the movies. I offer the relevant portions (pages 205-207 of the article (pages 24-26 of the pdf), footnotes omitted).

The films for this course were chosen for a breadth of genres and eras from the 1960s to last year. Some were animated; some were about superheroes; some were musicals. I aspired for every student to enjoy at least one film, and I hope they enjoyed many more. At the same time, an underlying need was to choose films that highlight specific tax topics. Although all films raise important tax issues, some are more clearly on point for the topics we covered.

4th Circuit Holds the Tax Partnership Receiving an Administrative Summons is Different Than its Representative for Purposes of § 7602(d) (7/9/22; 7/12/22)

In Equity Inv. Assocs., LLC v. United States, 40 F.4th 156 (4th Cir. July 8, 2022), CA 4 here and GS here, the Court held that, for purposes of the § 7602(d) limitation on IRS administrative summonses after a criminal referral to DOJ, the person investigated for whose records a third party (bank) was summonsed (in this case a syndicated conservation easement tax partnership) is not the same as a related person (the partnership representative under 26 C.F.R. §§ 301.6223-1) who was under criminal referral, at least in part arising from the same set of facts. See the discussion at Slip Op. 8-11 under the heading “A. “Person” in § 7602(d) does not include a legal person's agents.”  The Court rejects the suggestion that anything other than an actual referral of the person to whom the summons is issued will meet the terms of the statutory limitation. See Slip Op. 11-14, saying at Slip Op. 12:.

            Equity [the summonsed tax partnership] must show evidence that a referral existed before the IRS summons, because the IRS can generally use its summons power to further a criminal investigation. § 7602(b). The summons power only ends “at the point where an investigation was referred to the Justice Department for prosecution.” United States v. Morgan, 761 F.2d 1009, 1012 (4th Cir. 1985). And a Justice Department referral is not simply some generalized suspicion of criminal activity, but a specific procedural mechanism used to share information. Id. (describing a Justice Department referral as a “mechanical test”).

These are pretty straightforward holdings that I am surprised were seriously disputed.  Hence, I think they require no further discussion for the prototypical reader of this blog (as I imagine that reader). But I note that the court makes some statements in the opinion that on their face seem noteworthy or curious. I will just list them without further comment:

 1. Slip Op. 2 n1:

   n1 The IRS has broad powers to investigate criminal tax fraud, but it lacks the power to prosecute tax fraud. So if an IRS criminal investigation discovers evidence of criminal activity, the IRS must refer the case to the Justice Department for prosecution. Once referred, the IRS typically plays a continued role in investigating and prosecuting the case.

2. Explaining how the tax partnership inflates the value of the donated easement (Slip Op. 3 n3):

   n3 This inflation is possible because the easement's value is often not calculated based on the land's recent purchase price but based on the value of its highest and best use. See PBBM-Rose Hill, Ltd. v. Comm'r, 900 F.3d 193, 209 (5th Cir. 2018). So the limit on the valuation is little more than the imagination of the appraiser (who may be in on the scheme), tempered only by the fear of an audit. See generally Mary Clark, Greedy Giving, Bad for Business: Examining Problems with Arbitrary Standards in Appraising Conservation Easements, 51 U. Mem. L. Rev. 479 (2021).