The Supreme Court Pronounces the Demise of Deference (6/29/24; 6/1/25)

Added 8/7/24 and revised 10/28/24: I have published the 2024 editions of the Federal Tax Procedure Book, here. I have substantially revised the section dealing with the Demise of Deference as of 10/28/24; the revised version is viewable and downloadable here. In the FTPB 2024 discussion I have added to and refined some of the points in this blog entry.

In Loper Bright Enterprises v. Raimondo, 603 U. S. ____, 144 S. Ct. 2244 (2024), SC Slip Op. here & GS here, the Court (per Chief Justice Roberts) held (Slip Op. 35):

          Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.

I provide in this blog several points about this holding. I divide my discussion into (i) the implications of the demise of deference and (ii) some key points going to the correctness of some claims made in the opinions. I try in this blog entry to address major points. Given the short amount of time I have had to devote to the blog, I may have missed or even misstated some things which I may need to supplement or correct later. I apologize in advance to readers, but this is just too important a development not to do my best to provide in this one place my discussion of key points. 

IMPLICATIONS OF DEMISE OF DEFERENCE.

1. First, we need clear definitions of key terms used in the discussion.

a. Deference. Deference is--well, was--a court accepting an agency statutory interpretation that is not, in the court’s opinion, the best interpretation of the statute.

b. Chevron deference. The discussion of deference has been framed by the 1984 Chevron decision. However, deference with essentially the same features as Chevron was in the law well before Chevron, going back to before the new deal and the enactment of the APA in 1946. See John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN December 14, 2023), pp. 5-23)   https://ssrn.com/abstract=4665227 That is not how the Loper Bright Opinion of the Court imagines the pre-Chevron landscape so I will only address this further in the section below dealing with some of the things the majority erred. And, when I use the term Chevron deference, I include that pre-Chevron Chevron-like deference.

2. The Opinion of the Court justifies deference’s demise based on both the APA and the role of courts in the constitutional scheme, as exemplified by Justice Marshall's claim (judicial soundbite) “[i]t is emphatically the province and duty of the judicial department to say what the law is.” Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803).

3. The definition of deference I offered does not help if the court is in legal interpretive equipoise and thus cannot decide the best interpretation of the statute. The Court’s opinion does not appear to even recognize the possibility of legal interpretive equipoise. For example, the Court states (Slip Op. 22, emphasis), that “Courts instead understand that such statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning.”  (See Slip Op.22 (emphasis supplied); see also 23 and 31 (“The statute still has a best meaning, necessarily discernible by a court deploying its full interpretive toolkit.”) Whether legal interpretive equipoise is a possibility is a key point of Justice Kagan’s dissenting opinion. (See e.g., Dissenting opinion Slip Op. 7 (stating that sometimes there is no “fixed single best meaning” (cleaned up) of the statute text).

a. Query: Is the majority’s key assumption of the absence of the possibility of legal interpretive equipoise correct?

Did Moores Counsel Concede Their Refund Suit? (6/25/24)

In Moore v. United States, 602 U. S. ____ (2024), here, the Supreme Court held constitutional the Mandatory Repatriation Tax (“MRT”), a “one-time, backwardlooking, pass-through tax on some American shareholders of American-controlled foreign corporations to address the trillions of dollars of undistributed income that had been accumulated by those foreign corporations over the years.” (Quoted explanation of the MRT is from Syllabus.)  I don’t see any tax procedure issues in the case, which worked its way to the Supreme Court as a straight-forward traditional refund suit.

However, Justice Barrett concluded in her concurring in judgment opinion that (Concurring in judgment opinion, p. 17, here; emphasis supplied by JAT):

          Congress’s power to attribute the income of closely held corporations to their shareholders is a difficult question— and unfortunately, the parties barely addressed it. Without focused briefing on the attribution question, I would not resolve it. Subpart F and the MRT may or may not be constitutional, nonarbitrary attributions of closely held foreign corporations’ income to their shareholders. In this litigation, however, the Moores have conceded that subpart F is constitutional. Tr. of Oral Arg. 9. And I agree with the Court that subpart F is not meaningfully different from the MRT in how it attributes corporate income to shareholders. Ante, at 20–21. Taxpayers generally bear the burden to show they are entitled to a refund. United States v. Janis, 428 U. S. 433,  440 (1976); see also Haaland v. Brackeen, 599 U. S. 255, 277–278 (2023) (burden to show unconstitutionality). Given the Moores’ concession, they have not met that burden here. For that reason, I concur in the Court’s judgment affirming the judgment below.

That strikes me as odd. From apparently an isolated statement during oral argument, Justice Barrett (and Justice Alito who joined her opinion) rest their concurring in judgment opinion on Moores' Counsel havomg conceded the issue they expressly raised. I am not sure that Moores Counsel’s words are as crisp a concession as Justice Barrett presents it. Here is the part of the oral argument,she refers to (p. 9, here):

JUSTICE BARRETT: So you concede that Subpart F is constitutional? I just want to be sure that I understand your answer.

MR. GROSSMAN: We think that the defect with the MRT doesn't really apply to Subpart F. You know, Sub -- the Court has never considered the constitutionality of Subpart F, but, as we take it, we don't think that there's a constitutional issue there.

Moores Counsel stated only that he did not “think” there was a constitutional issue with subpart F, not that he conceded that there was no constitutional issue. Accordingly, I think (but do not concede) that Justice Barrett rested her concurring in judgment opinion on a thin reed.

Justice Kavanaugh, in the opinion for the Court, makes a similar point about the concession, although without tying the "concession" to the requirements to prevail in a refund suit. The majority this says (Slip op. 20-21, here):

Therefore, even if we were to accept the Moores’ constructive-realization nomenclature and theory, the Moores’ concession that subpart F imposes taxes on so-called constructively realized income would necessarily[*21] mean that the MRT likewise imposes taxes on constructively realized income. After all, the MRT is integrated into subpart F’s framework, and it has the same essential features as subpart F. If subpart F is not unconstitutional under the “constructive realization” theory—and the Moores explicitly concede that it is not, Tr. of Oral Arg. 9—then the MRT is likewise not unconstitutional on that theory.

On Footnotes--More or Less (6/21/24)

In 2021, I blogged on the demise of Appendix C of my Federal Tax Crimes Book (Student and Practitioner Editions). See On Footnotes and the Demise of Appendix C from FTPB (7/28/21; 11/21/23), here. In noting (and somewhat lamenting) its demise, I incorporated the footnote as it then was written into the blog. I have subsequently updated the blog so that my ranting on footnotes is somewhat fresh.

I picked up the following article today: David Weisenfeld, Want to understand the logic behind a Supreme Court opinion? Focus on footnotes, says professor (ABA Journal 6/18/24), here. The article discusses some aspects of Professor Peter Charles Hoffer’s book, The Supreme Court Footnote: A Surprising History, Amazon here, indicating a publication date of June 18, 2024 (perhaps explaining the lack of customer reviews (as of viewing on 6/21/24 at 12:00pm).

Hoffer is a Professor of History at the University of Georgia (see bio here).

I don’t know whether Professor Hoffer includes my favorite Scalia quote on footnotes. I have continued including that quote in the body of the text since retiring Appendix C. That quote as I present it in the current working draft of the August 2024 editions is (footnotes omitted, of course):

Eleventh Circuit Invalidates IRS Designation of Listed Transaction by Notice; Designation Must be by Notice and Comment Regulation (6/16/24)

In Green Rock LLC v. IRS, 104 F. 4th 220 (11th Cir. 6/4/24), CA11 here and GS here, the Court held invalid IRS use of subregulatory guidance—Notices—to designate listed transactions subject to reporting obligations and penalties. The statute says that reportable transactions are those “determined under regulations prescribed under section 6011.” The regulations define a “listed transaction” to include (Reg. § 1.6011-4(b)(2)):

 a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction. 

The Court said, in effect, that the § 6011 regulations authorizing the determination by subregulatory guidance was invalid because, as it read the statute, the listed transaction determination must be made  only in a notice and comment regulation and not, as the § 6011 regulations state, by “notice, regulation, or another form of published guidance.”

In APA-speak, the crux of the Court’s holding was a syllogism:

• Major Premise: Legislative rules must be promulgated by notice and comment regulation
• Minor Premise: The requirements of reporting and penalty imposed for listed transactions make the designation a legislative rule.
• Conclusion: the designation of a listed transaction must be made by notice and comment regulation; hence designation by Notice is invalid.

I think this is yet another hypertechnical textual holding because, in my view, the statute could be read another to support Treasury’s approving notice in the § 6011 regulations by subregulatory guidance. The Court quibbles to avoid a practical interpretation of the statutory word “under.” (Slip op. 15-17.) 

JAT Comments:

Today’s Supreme Court Decision on Bump Stock Not Being Machineguns Ducks the Chevron Issues (6/14/24)

In Garland v. Cargill, 602 U. S. ____ (6/14/24), SC here, the Supreme Court rejected the ATF regulation treating bump stocks as within the meaning of the statutory term “machinegun, “which is  statutorily defined as “any weapon which shoots, is designed to shoot, or can be readily restored to shoot, automatically more than one shot, without manual reloading, by a single function of the trigger.” 26 U. S. C. §5845(b).

I won’t get into the fray of whether the majority correctly treats a bump stock as not a “machinegun.” The majority view is now the law of the land. Any change will have to come from Congress. (But we all know that, given the polarization over guns and other hot-button divisive political issues, the Supreme Court now determines the law of the land in the swath of decisions it alone can decide to pronounce; the Court makes the policy decisions that Congress should make.)

I do want to mention that in its opinions (majority and minority), the Court ducked any discussion or hint of the Chevron issues. Ultimately, the issue before the Court was whether the ATF regulations definition was within the reasonable scope of the statute’s text definition of “machinegun.” That sounds both within Chevron Step One (assuming that an unreasonable agency interpretation cannot get past Step One which conflates the Chevron Steps) or, at a minimum, Chevron Step Two (certainly Chevron Step Two rejects an unreasonable interpretation). The Court side-stepped any mention of Chevron by simply holding in a straight-forward manner (without mentioning Chevron), that the ATF interpretation was outside the permissible scope of a reasonable interpretation (as the majority saw it). In other words, for an unreasonable interpretation (i.e., outside the reasonable scope of any ambiguity in the statutory text), the agency interpretation cannot stand without mentioning Chevron.

The Courts below found some reason to at least mention or discuss Chevron. After all, notice and comment regulations interpreting statutory text has been the common ground for applying the Chevron two-step analysis (even before Chevron). (Most commentors don’t recognize or acknowledge that Chevron-type analysis has been a feature for testing the validity of agency rules since well before the APA in 1946. See John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN December 14, 2023), pp. 5-23), https://ssrn.com/abstract=4665227

FBAR First Time Abate ("FTA") Relief for First Year Delinquent FBAR Filings (6/3/24)

I have just focused on the IRS’s adoption in the IRM of First Time Abate (“FTA”) opportunity for failure to file an FBAR. First Time Abate has long been available even without a showing of reasonable cause for a first-time failure to file, failure to pay, and/or failure to deposit penalties. The FBAR FTA, however, is more limited.  The relief is described:

IRM 8.11.6.2(20) (09-27-2018), FBAR Overview [link here; go to (20)]

First Time Abatement (FTA) - Effective with the Calendar year 2016 FBAR, FTA is available to the taxpayer who failed to file the FBAR the first time an FBAR was required to be filed by the taxpayer. At the time of publication, procedures have not been established with FTA.

I am not aware that the procedures have yet been established.

Note the restricted wording. FTA will apply only for the year that was the first year the FBAR was required. So, for example, if the taxpayer failed to file FBARs for years 1-4, the IRS might abate the penalty for year 1 but then assert the penalty for years 2-4. So, effectively, the FTA relief will apply to only the first year, but not any other year. By contrast, the income tax FTA can apply to a year even after the taxpayer has failed to file in earlier years so long as the relevant penalties were not asserted in earlier years.

Thus, as a practical matter, the benefit from this FTA would be for persons failing to file in year 1 but then timely filing in the following years.

Also, just as the income tax FTA, I doubt that FBAR FTA will apply to the FBAR willful penalty. However, with possible FTA relief facially available for one delinquent year, if timely filings were made in later years, an agent might not pursue the complex investigation required for asserting a willful civil or criminal FBAR penalty. (This is analogous to criminal fraud cases where willfulness is usually shown in a multi-year pattern.) Note that, whether or not FTA could apply if the delinquency is willful, if the willful penalty were to apply in other years, the penalty might not be affected at all. For example, assume failure to file in years 1-4. Even if year 1 would not be penalized under FTA, years 2-4 could and, since the willful penalty is calibrated to the high year aggregate balances, the quantum of the  penalty would not be affected if years 2-4 included the aggregate high balances; all it would mean is that the penalty is spread over 3 years rather than 4. But, in any event this latter comment may not be meaningful if the IRS does not grant FTA to a multi-year pattern of willfulness.

Substantial § 6700 Promoter Penalty Case Involving Refund Suit and Counterclaim Settled for $5,200,000 (5/25/24)

In Clark v. United States (S.D. Fla. 9:21-CV-82056), CL docket entries here, the taxpayer, Celia R. Clark, an attorney active in the promotion of microcaptive insurance companies for certain claimed tax advantages, brought a suit for refund of § 6700 penalties in the amount of $1,745,544. That amount represented 15% of the aggregate § 6700 penalties of $11,636,919 required in order to meet the jurisdictional requirement (special rule to avoid the Flora full payment requirement) for refund suits for the § 6700 penalties. See Complaint, here, paragraphs 65-67). (Actually, the aggregate amount paid was slightly in excess of 15% of the aggregate penalties.)

The 6700 penalty here for false or fraudulent misstatements as to a material matter is 50% of the gross income derived or to be derived from the penalized conduct. The penalized conduct is the organization or participation in a plan or arrangement in which the person furnishes or causes to be furnished a statement that the person “knows or has reason to know is false or fraudulent as to any material matter.”  being the organization or participation in the sale of a plan or arrangement that claims false tax benefits. I discuss the  § 6700 penalty and the § 6703(c) relief from Flora full payment requirement in my Federal Tax Procedure Book (Practitioner Ed. 2023.2), here, at pp. 853-856.

In the Government’s Answer and Counterclaim, here, the Government responded to the allegations in the complaint and sought judgment for $10,095.359 (Answer pp. 26-27, which seems to be the net amount after application of Clark’s payments with some add-ons.) Among the allegations in the Answer and Counterclaim are (i) a mélange of facts implying or proving (if proved) that Clark knew or had reason to know of the falsity of the scheme and documents implementing the scheme (Answer pp. 16-25, ¶¶ 16-85) and (ii) “From 2008 through 2016, Clark, through her law firm, earned over $23 million in fees from the microcaptive insurance programs.” (Answer p. 25 ¶ 87.) I infer that the alleged aggregate fee amount was the basis for the penalties exceeding $11 million.

Eaton Corp. Loses Summons Enforcement Summons Skirmish with IRS over Foreign Employee Valuations (5/23/24)

In United States v. Eaton Corp. (N.D. Oh Case No. 1:23-MC-00037 Doc 22 Opinion & Order dated 5/16/24), CL here, the Court rejected Eaton’s attempt to hide evidence in this long-running dispute with the IRS. (The CL docket entries are here.) The case was a summons enforcement proceeding to enforce an IRS summons seeking various information and documents.  The parties settled all of the disputed items except “whether Eaton needed to produce certain foreign employees’ performance evaluations.” Now, what was that about? The ultimate dispute is about Eaton’s transfer pricing with a foreign affiliate. Plainly, one line of inquiry is how much “value” the foreign affiliate’s employees contributed to the whole income-producing pie. Performance evaluations might be relevant to that issue.

The Court goes through the standard drill for summons enforcement and finds that, given the IRS’s broad investigatory powers to protect the revenue, the summons was appropriate. Further, the Court held, Eaton’s feint to avoid disclosure based on certain alleged foreign country prohibitions on disclosure prevented its compliance with the summons and the Court’s ability to avoid compliance. Consistent with prior cases, that does not work. Summons enforced.

Of course, this is just a skirmish in the battle. There is more to come.

The Golsen Rule and Parties' Ability to Stipulate Appellate Venue from Tax Court Decisions (5/21/24; 5/24/24)

Readers of this blog are (or should be) familiar with the Tax Court’s Golsen rule requiring the Tax Court to apply directly in point precedent of the Circuit to which an appeal may be taken in the case. See On the Tax Court's Golsen Rule (Federal Tax Procedure Blog 12/3/23; 12/5/23), here; for an interesting discussion of the Golsen this rule with respect to a Tax Court precedent which had been reversed by one Court of Appeals so that the Tax Court precedent would not apply to appeals to that Circuit but remained as Tax Court precedent for application in other Circuits that had not yet addressed the issue, see Tax Court Again Declines to Reconsider Its Holding that the Preparer's Fraud without the Taxpayer's Fraud Invokes Unlimited Statute of Limitations (Federal Tax Procedure Blog 1/25/24; 2/5/24), here.

Section 7482(b) here, titled “Courts of Review,” prescribes venue for appeals. For individuals, under § 7482(b)(1), the default venue is in the Court of Appeals with jurisdiction over the “legal residence of the taxpayer.” For example, if A resides in Houston, TX, appeal venue is in the Fifth Circuit Court of Appeals. Under § 7482(b)(2), the parties may stipulate venue in another Circuit (including, of course, the Circuit in which the taxpayer resides, even though the stipulation is meaningless).

These rules are why the Tax Court is careful to note the residence of the individual taxpayer early in the findings of fact and, if the parties have stipulated to a different appellate venue, state the stipulation. (In most cases, there is no stipulation, so the Tax Court usually does not state that there is no stipulation, and addresses the issue in the opinion only if there is a stipulation.) Not only does the finding get the facts into the opinion as to appellate venue, it assists the Court in applying its Golsen rule.

In Anderson v. Commissioner, 2024 U.S. App. LEXIS 11966  (10th Cir. 5/17/24) (Nonprecedential), CA10 here and GS [to come], an opinion otherwise not noteworthy for this blog, the Court said (slip op. 6 n. 2) that “The parties stipulated to review in the Tenth Circuit. See 26 U.S.C. § 7482(b)(2).” That was a repeat of the same finding in the Tax Court. Anderson v. Commissioner, 2023 TC Memo 42, *2. (“The parties have stipulated that venue for any appeal in this case is the U.S. Court of Appeals for the Tenth Circuit. See § 7482(b)(2).”) Today’s blog is about the § 7482(b)(2) provision for stipulating appellate venue.

Further Lesson on Importance of Credibility for Clients and Expert Witnesses (5/14/24)

I recently blogged about credibility. Litigation is About Persuasion Which Requires Credibility (Federal Tax Procedure Blog 4/12/24; 4/23/24), here. The Tax Court yesterday issued an opinion, Schwarz v. Commissioner, T.C. Memo. 2024-55, TC Dkt 12347-20 at Doc 190, here and GS here, in which Senior Judge Goeke offers lessons on the same subject. Those lessons appear in about 17 pages of the 117 page opinion. I’ll discuss the pages, but first offer an introduction to the case via the Court summary or syllabus at the beginning. See Supreme Court Opinion Syllabus as Persuasive Authority? (Federal Tax Procedure Blog 2/8/21), here):

          Ps have a history of conducting real estate activities in South Texas, mostly involving ranch land. Through entities they controlled, Ps bought 15,070 acres of land in Zapata County in 2005 with the intent to improve and sell it. Ps later decided to conduct ecotourism operations consisting of hunting, fishing, and events on a portion of the land.

          In the years at issue, 2015–17, ecotourism in Zapata County was conducted by TI, a partnership owned by Ps. TI leased the Zapata County land from entities controlled by Ps. TI also conducted farming and construction operations on the Zapata County land and other properties owned by Ps, related entities, and third parties.

          TI filed Schedule F, Profit or Loss From Farming, with its return for each year 2005–20. TI reported income and expenses for both ecotourism and farming/construction operations on Schedule F. TI reported Schedule F gross income totaling over $14 million for years 2005–20. However, large expenses resulted in TI’s reporting a Schedule F net loss for each year. These net losses total over $15 million for years 2005–20. TI’s Schedule F losses flowed through to Ps, who used them to offset significant taxable income.

          R issued Ps a notice of deficiency for years 2015–17. R determined that TI’s Schedule F activity was not engaged in for profit pursuant to I.R.C. § 183. Multiple adjustments flowed from this determination, including the disallowance of deductions for TI’s Schedule F losses. R also determined that a 20% accuracy-related penalty applies for each year at issue.

          Ps filed a Petition challenging R’s determinations. Ps contend that TI’s Schedule F activity was engaged in for profit and that it and the real estate activities that Ps and related entities conducted are a single activity. Ps also contend they have a reasonable cause defense to penalties.

          Held: TI’s Schedule F activity and the real estate activities are separate activities.

          Held, further, TI’s Schedule F activity was not engaged in with the intent to make a profit.

          Held, further, accuracy-related penalties are not applicable.