Professor Yin Article on the Tax Legislation Process and Legislative History (12/17/22)

George Yin, a retired UVA law professor (bio here) has published an article that takes on some of the conventional wisdom of jurists and scholars who reject or are at least suspicious of legislative history as useful for statutory interpretation. Those jurists (including most prominently the late Justice Scalia) and scholars often are considered textualists, although that is a broader category than those who reject or are suspicious of legislative history. Yin calls the subcategory “new textualists” or sometimes just textualists.  Yin’s article is George K. Yin, Textualism, Textualism, the Role and Authoritativeness of Tax Legislative History, and Stanley Surrey (December 4, 2022). Law and Contemporary Problems, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4286174.

Here is the SSRN Abstract description of the article:

When Stanley Surrey died in 1984, the school of thought sometimes known as the “new textualism” that has gained such influence in the United States over the last three decades had not yet emerged. Surrey would have been very interested in this development. As revealed in his recently published memoirs, he had extensive first-hand experience with the tax legislative process and recognized early on the connection between that process and statutory interpretation. He would have been surprised by some of the assumptions about the process underlying the new textualist claims as well as recent empirical findings about the process reported by scholars.

This essay aims to fill in some of Surrey’s missed engagement. Drawing on his memoirs and other sources, the essay describes aspects of the tax legislative process—the preparation of tax statutes and legislative history—of significance to statutory interpretation and the positions of the new textualists. Importantly, the description is at the granular level at which Surrey experienced it, material not generally included in standard political science or legal scholarship on the topic. After considering the on-the-ground realities of the tax legislative process, this essay contends that in interpreting tax statutes, courts should rely upon both textual canons and other common tools of judicial interpretation (questioned by recent scholar-empiricists) and legislative history (questioned by textualists). The essay also explains why, contrary to the claims of textualists, committee reports are authoritative evidence of statutory meaning.

Yin’s article is particularly directed to interpretation of federal tax statutes (i.e., principally the Codes in 1939, 1954 and 1986 iterations). Yin is former Chief of Staff of the Joint Committee on Taxation, which is heavily involved in the tax legislative process and in producing legislative history. He knows the process and knows that the claims these textualists make about legislative history are not true for tax legislation.

The process Yin describes for tax legislation--but apparently perhaps to a lesser degree for other legislation-- involves both tax legislation experts (the JCT) and each House’s legislative counsel who bring statutory drafting expertise to the table that the tax Committees and their members usually lack.

I have written on the use of legislative history before. See the following that I think relate to the topics in Yin’s new article:

Tax Court Holds that § 6213(a) Time Deadline for Petitions for Redetermination Is Jurisdictional, Thus Not Subject to Equitable Relief (12/13/22)

I have not yet written on Hallmark Research Collective v. Commissioner, 159 T.C. 126 (2022)  (unanimous reviewed opinion), TCPamphlet here & GS here.

The holding is that the § 6213(a) 90-day / 150-day period for petitions to redetermine deficiencies is jurisdictional, meaning that there is no equitable relief to file out-of-time petitions. I won’t analyze the holding because the opinion speaks for itself and makes, perhaps, the best case for the holding. (That is not a statement that it is a correct holding.) The issue was whether § 6213(a) was subject to the recent trend to treat time statutory time deadlines as claims processing rules rather than jurisdictional requirements (meaning must be met). The most relevant and recent iteration is Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022), where the Court held that the § 6330(d)(1) 30-day CDP deadline was not jurisdictional, thus subject to equitable relief.

Readers interested in this area of law have already seen several, perhaps many, comments on the Hallmark holding. I don’t think I have anything to add to those commentaries. Perhaps the longest and strongest criticism of the Hallmark opinion is in a series of posts by Carl Smith on the Procedurally Taxing Blog titled What’s Wrong with the Tax Court’s Hallmark Opinion: Part 1 ….., here (I think there are more Parts to come, but the link is a search link and should pick up the later Parts). 

I am agnostic as to the resolution of the issue of whether the § 6213(a) deadline must be met (jurisdictional) or not (claims processing subject to equitable relief). However, I do note that there are some consequences if that particular deadline is deemed to be claims processing rather than jurisdictional that should be considered given the collateral provisions (such as statute of limitations suspension while the taxpayer can file a petition, etc.); I am not sure they have been fully dealt with in the Hallmark opinion, perhaps because the Court held that the deadline was jurisdictional; still they should be considered as perhaps reasons that the deadline must be jurisdictional in order to make the parts of the superstructure work.

Supreme Court Grants Cert in Polselli on Issue of a Collections Summons to Third Party Requires Notice to Taxpayer (12/10/22)

The Supreme Court granted the petition for writ of certiorari in Polselli v. IRS (Sup. Ct. Case No. No. 21-1599).  The opinion of the Sixth Circuit in the case is at Polselli v. Dept. of Treasury, 23 F.4th 616 (6^th Cir. 2022), GS here.  The Order granting cert is dated December 9, 2022, here.  The documents are not consistent as to the case name, but I infer that the case name is Polselli v. IRS as stated on the docket here.  See discussion in the Note at the end of this blog.

The question presented in the petition is (with introduction) (Pet p. i):

            The Internal Revenue Code generally requires the IRS, when it serves a summons on a third-party recordkeeper for records pertaining to a person “identified in the summons,” to give that identified person notice of the summons. I.R.C. § 7609(a)(1). If the IRS issues a summons directing a bank to produce an accountholder’s records, for example, it must generally notify that accountholder of the summons. Section 7609 then provides that “any person who is entitled to notice of a summons under subsection (a) shall have the right to begin a proceeding to quash” that summons in district court. Id. § 7609(b)(2); see id. § 7609(h)(1). In other words, only a person entitled to notice of a summons can seek judicial review of that summons.

            There are a few exceptions to the notice requirement. As relevant here, the IRS need not provide notice of “any summons … issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).” Id. § 7609(c)(2)(D).

            The question presented is whether the § 7609(c)(2)(D)(i) exception applies only when the delinquent taxpayer owns or has a legal interest in the summonsed records (as the Ninth Circuit holds), or whether the exception applies to a summons for anyone’s records whenever the IRS thinks that person’s records might somehow help it collect a delinquent taxpayer’s liability (as the Sixth Circuit, joining the Seventh Circuit, held below).

JAT Notes:

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

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

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

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

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

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

Illustrative examples of important voices claiming Interpretive regulations exist:

Conservative Ninth Circuit Judges Unsuccessfully Question Constitutionality of Pass-Through Taxation without "Realization" (12/25/22)

We don’t normally encounter constitutional issues in federal tax. There are some, however. See e.g., Justice Ginsburg' successful constitutional attack in Moritz v. Commissioner, 469 F.2d 466 (10th Cir. 1972), cert. denied, 412 U.S. 906 (1973), memorialized in the movie On the Basis of Sex (see Sex and Tax (Federal Tax Crimes Blog 1/7/19) here, where the pre-Judge/Justice Ginsburg with her husband Marty (best tax lawyer ever) in the background succeeded in having a Code provision declared unconstitutional.  

Another instance not yet successful but imagined is asserted by a minority of the Ninth Circuit in a dissent to denial of petition for rehearing en banc. Moore v. United States, 53 F.4th 507 (9th Cir. 11/22/22), CA9 here and GS here, denying the petition from Moore v. United States, 36 F.4th 930 (9th Cir. 2022), CA9 here and GS here. 

While Moore is not a tax procedure case, I mention it because it illustrates the lengths to which conservative-bent judges will go to try to restrain the federal government in a way that can throw a monkey-wrench into settled expectations of our tax system. They often mount these attacks in tax procedure cases, with the APA a tool of their angst (see Bryan Camp, The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here. The judges on the Moore dissent were authoring Judge Bumatay (Trump) and joiners Ikuta (Bush), Callahan (Bush), and Vandyke (Trump). A frequent target for such types is the administrative state. The target this time was Congress in enacting a statute that required a type of pass-through taxation for certain foreign corporations. By pass-through, I mean requiring the owner of an entity to include in the owner’s income for tax purposes the income earned by the entity even if the income is not distributed from the entity to the shareholder. Readers of this blog who, I hope, are familiar with the tax structure we have, know that there are any number of pass-through entities that are essential to the tax we have. To mention a few, S Corporations, partnerships, and some foreign corporations. I cannot recall any serious claims by serious people that the pass-through taxation was unconstitutional.

First Circuit Sustains Holding That Late Filed Return Is Not a Return for Bankruptcy Discharge (11/25/22)

As readers of this blog know, there are a lot of fun facts about the Internal Revenue Code and the twists and turns it has taken from passage, amendment, and application by the IRS and the Courts (including interpretation). Sort of like the line from the Major-General’s song in G&S’s Pirates of Penzance:

About binomial theorem I'm teeming with a lot o' news,
With many cheerful facts about the square of the hypotenuse.

OK, no more diversions. The topic today is the famous “hanging paragraph” (sometimes called the “so-called hanging paragraph,” the “unnumbered hanging paragraph,” etc.) in the Bankruptcy Code at 11 USC § 523(a), here [I link the Code section because you just have to see it in context to fully enjoy it; it appears sort of just out there at the end of subsection (a) and just before subsection (b)]. The hanging paragraph is also referred to as “§ 523(a)(*)” (or some variation with an asterisk). In full, the hanging paragraph is:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.

There are other hanging paragraphs in the U.S. Code (either the positive law Codes or the compilation Codes (on which see On the Internal Revenue Code (Title 26), the U.S. Codes, and Statutes, here).

This Bankruptcy Code’s hanging paragraph has created discordant notes in the courts as to the meaning of the statutory text: “the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  (Emphasis supplied.) Specifically, does “applicable filing requirements” mean that the return has to be timely in order to achieve a discharge? This often comes up in the context of the IRS having prepared a substitute for return (“SFR”) pursuant to § 6020(b) after the taxpayer failed to file a return. The tax computed in the SFR is assessed. The IRS tries to collect. The taxpayer dodges and weaves. The taxpayer, wanting to rid himself (or herself) of this nuisance, then checks out the possibility of a bankruptcy discharge. The taxpayer’s lawyer, unaware of or unconcerned about the hanging paragraph commotion in the courts, advises that the taxpayer needs to file a return and wait two years before filing for bankruptcy. So he files a tax return mimicking the results of the SFR, waits two years, seeks bankruptcy protection and, hopefully, discharge of the tax liability. 

Supreme Court Denies Cert in Whirlpool Financial; On Phantom Regulations (11/23/22)

I previously wrote on the petition for writ of certiorari (colloquially “cert petition”) stage in Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944 (6th Cir. Dec. 6, 2021), CA6 here and GS here. See Petition for Cert in Whirlpool, SG Waiver of Response, and Several Amici Arguing for Cert (Federal Tax Procedure Blog 8/5/22; 8/16/22), here. My even earlier blog on the Sixth Circuit opinion is: Whirlpool's BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22), here. In the blog on the cert petition, I noted that the Solicitor General in effect claimed that the cert petition was a nothingburger (to use a popular term), by filing a one-sentence waiver of response. Despite the waiver, the Supreme Court ordered the SG to respond. See the Supreme Court docket entries here. The SG filed a brief in opposition (colloquially a “brief in opp”). On that record before the Court, on November 21, 2022, the Supreme Court denied the cert petition.

There is nothing substantive that I think would be helpful to readers to add. I thought that, particularly for students, it might be helpful to offer something briefly on the “phantom regulation” concept which is not mentioned in the Sixth Circuit opinion but are mentioned in the cert petition. I will only try to summarize at a high level, but direct to my discussion in my book Federal Tax Procedure (2022 Practitioner Ed.) (SSRN https://ssrn.com/abstract=4180710. I there note that the issue is often raised by the taxpayer seeking a benefit where the statute seems to command a regulation for the benefit and ask the question whether the IRS can deny the benefit by simply not promulgating a regulation? Here, the shoe is on the other foot, with the IRS achieving the benefit where, in one way of reading the statute, the IRS has not promulgated a regulation required by the statute. I state how the Tax Court has dealt with the issue (p. 69, footnotes omitted):

In a 2016 * reviewed opinion, the Tax Court concluded the task is to determine whether the statutory text, considered in light of the legislative history or other interpretive tools, can be applied without further explication in a regulation. The analysis turns upon whether “Congress couched its delegation of rulemaking authority in mandatory or permissive terms.” If mandatory, the Court could treat the delegation of authority as  self-executing” and could discern from the statutory text as interpreted the result that Congress intended the IRS to adopt and apply in the case at hand.

    * The quote in the book says it is a 2017 opinion; the opinion was 2016: 15 West 17th Street LLC v. Commissioner, 147 T.C. 557 (2016) (Reviewed opinion) (I will correct in the 2023 editions). 

That quote is focused on a taxpayer seeking the benefit in the absence of regulations. Does the same analysis apply if the IRS seeks the benefit in the absence of a statutory delegation of requirement or authority to promulgate regulations? Arguably, that is what the Sixth Circuit did without mentioning the term phantom regulations. At least that is what Whirlpool Financial claimed in its cert petition, albeit indirectly by citing (p. 3) Andy Grewal, The Sixth Circuit Conjures Phantom Regulations, Yale J. on Regul. Notice & Comment (Feb. 21, 2022), here. In its response, the SG did not mention the term. In its reply, Whirlpool Financial only mentions the term in citing Grewal’s article.

Court of Federal Claims Rejects Defective § 6603 Strategy for Multiple Transferee Liabilities (11/21/22)

In Dillon Trust Company LLC v. United States, ___ Fed. Cl. ___, 2022 U.S. Claims LEXIS 2575 (11/10/22), FC here and GS here, the Government moved for partial dismissal for lack of jurisdiction and for partial summary judgment with respect to plaintiff’s interest-related claim. I focus here on the interest-related claim.

The background is an intermediary or Midco transaction by a family corporation with the assets stripped out of the corporation by direct or indirect transfer to shareholders without paying the large tax corporate liability generated by the corporation. In initially reporting the transaction, the corporation claims the benefit of a bullshit tax shelter to effectively zero out the gain and tax, but on audit and denial of bullshit tax shelter benefit, the gain is taxed to the corporation which has no assets (because the shareholders stripped them out directly or indirectly). So, the IRS has to chase the “transferees” – here the shareholders – to collect the payment through transferee liability under § 6901.  I cover these transactions in Federal Tax Procedure (2022 Practitioner Ed.), here, at pp. 745-746. In a footnote, I quote Alterman Trust v. Commissioner, T.C. Memo. 2015-231, at *2:

Courts, including this court, have been plagued by Midco cases. Rarely do these cases present themselves for a determination of the underlying liabilities. Instead, these cases are postured so that the courts are asked to determine whether someone other than the taxpayer should be on the hook for the taxpayer's liability. They are transferee liability cases, and so are these cases.

The corporate taxpayer involved was Humboldt Shelby Holding Corporation (“HSHC”) which was unable to pay the tax, the gross valuation misstatement penalty, and the interest on each. The corporate liabilities as of August 2014 were “a federal income tax deficiency of $25,617,887 and a gross valuation misstatement penalty of $10,247,155, plus interest, which remained unpaid.” The transferees the IRS targeted were certain Dillon family trusts (with the parties agreeing that the results would apply to all of the family trusts as direct or indirect transferees). 

Among other arguments in this refund suit, the trusts argue that they cannot be held for transferee liability for the gross valuation misstatement penalty “because they lacked knowledge of HSHC’s plan to carry out the tax shelter scheme that formed the basis of the I.R.C. § 6662 penalty.”  Good luck to them on that. 

But in this case, the  court only addressed interest issues. The interest issue arose from the trusts’ apparent desire to invoke § 6603 to prevent the running of interest during the period of the deposit. I cover § 6603 in Federal Tax Procedure (2022 Practitioner Ed.) pp. 268-272. The rules of § 6603 are not particularly complex, but the application of those rules in the Dillon Trust case was complex because of the machinations involved where the trusts, as putative persons liable for transferee liability, apparently thrusted about to achieve some purpose to avoid interest but did so in which appears to be a haphazard fashion. The result is that, although the IRS had the deposit money in a large amount and for a significant period, the taxpayer and the transferees achieved no interest benefit under § 6603 that might have been achieved had they structured the deposits/payments differently.

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

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

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

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

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

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

Tax Court in Reviewed Opinion Invalidates Notice Identifying Reportable Transactions (11/10/22)

In Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022) (reviewed opinion), TCPamphlet here,, TN here and GS here, the Court held that Notice 2017-10, 2017-4 I.R.B. 544 was invalid because the Notice is a legislative rule improperly issued by the IRS without notice and comment. As a result, the Court “set aside” the Notice and prohibited the imposition of § 6662A (here) accuracy-related penalties for understatements for reportable transactions identified in the Notice. The case turns upon the application of the APA requirement that legislative rules be promulgated as notice-and-comment regulations except for contemporaneous “good cause” statement or congressional exception to the notice-and-comment, neither of which the Court found to apply.

In high level overview, the question was whether the IRS must identify transactions subject to the penalty in a regulation (either Final or Temporary (interim final)) or could identify transactions in a Notice which is subregulatory guidance. The statute referred to transactions identified in regulations under § 6011. The regulations under 6011 defined reportable transaction as a transaction that is the same or substantially similar to one of the types of transactions that the IRS has determined to be tax avoidance transactions and identified by notice, regulation, or other form of published guidance. Reg. § 1.6011-4(b)(2).

The Court reasoned that the Notice which clearly was not a regulation did not meet the statutory command that the transaction be identified in a regulation. Although it included a lot more words and reasons, that is the guts of the holding. As a result, the Court invalidated the application of the penalty in the case and stated (p. 24 n. 22): “Although this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.” 

This holding is a big deal. Syndicated conservation easements as they have been reported in many cases are clearly the type of abusive transactions that Congress intended the penalty to apply once the IRS identified them. The Court held that the IRS improperly identified these transactions by subregulatory guidance rather than by regulation, a procedural footfault. A lot of people clearly abusing the system will escape penalties clearly meant to apply to them and that would have applied except that the Court held that  the IRS promulgated the rule in a procedurally incorrect way.