Comments Please (9/26/24)

I have eliminated the past comment tool (Disqus) which proved to be so daunting to readers of the blog who tried to make comments. I have returned to the comment tool provided by Blogger/Blogspot which is the blog tool that I have used since the inception of the blog. The Blogger/Blogspot comment tool seems to be better than it formerly was when I moved to Disqus. In any event, it is much easier to post comments, so I urge those wanting to comment and engage in discussions of the issues presented in the blogs to do so. Comments can provide a useful learning experience for those commenting and those reading the comments and discussion.

I urge readers to review the page to the right titled Guides to Use and Posting of Comments (9/26/24), here. As noted on that page, I moderate the comments, meaning that I read the comments prior to approving them to appear publicly on the particular blog entry. I plan to approve comments liberally, weeding out only comments that are not appropriate under the Guides to Use.

Thank you,

Jack Townsend 

Court Cannot Determine on Motion to Dismiss Malpractice and Related Claims from Bullshit Tax Shelter that the Statute of Limitations from 1997 Was Not Tolled (9/24/24)

In Cáceres v. Sidley Austin LLP (N. D. GA No 1:23-cv-00844 Dkt # 35 Opinion & Order dated 9/17/24), TN here and CL here, the Court denied the motion to dismiss filed by Sidley Austin (“Sidley,” the giant law firm, here). The Cáceres engaged R.J. Ruble, then a partner at the predecessor firm of Brown & Wood, to opine about a 1997 Midco transaction, an abusive tax shelter transaction in which the Cáceres sought to avoid the double tax upon sale of their corporate business. For an explanation of the Midco transaction, see FTP Practitioner Edition pp. 797-798 and Student Edition p. 537; and for Federal Tax Procedure Blog discussions of Midco transactions, here. Basically, tax shelter promoters use a variety of abusive techniques to avoid the built-in corporate level gain and then the sellers and the promoters share the tax thus illegally evaded, leaving the IRS without the tax. Usually, the promoters use a bullshit tax shelter to try to shield the corporate level tax, and when that tax shelter is denied, there is no money to pay the tax, requiring the IRS to seek the tax from third party such as the Cáceres.

At the motion to dismiss stage, the well-pled pleadings are analyzed to see if they pled sufficiently that, if the allegations and claims are true, a case had been stated. (This is before any factual development by discovery and cannot consider facts outside the complaint that a party may know; it is just a test of the sufficiency of the complaint.) The issue on the motion to dismiss was whether on the facts pled the statute of limitations barred the suit. The underlying transactions (including the legal opinion) were in 1997; this particular suit was brought in state court in 2023 and removed to federal court in 2023. Various claims in the complaint had statutes of limitations that were much shorter than the 20+ years that intervened from the 1997 accrual of the actions claim in the complaint. The question was whether, on the facts pled and claims made, the relevant statutes of limitations were tolled because of Sidley’s actions in hiding its alleged misconduct. The Court held that, on the facts pled, it could not determine that the statute of limitations had not tolled, so the case survived the motion to dismiss.

Perhaps the key fact was the IRS commencement in 2018 of a transferee liability suit under § 6901 against the plaintiffs as shareholders wrongfully sharing the corporate-level tax illegally avoided. See United States v. Henco Holding Corp., 985 F. 3d 1290 (11^th Cir. 2021), here. (Of course, significant audit commotion would have likely preceded for years the filing of the transferee liability suit, but the issue was whether on the facts pled,  the plaintiffs had been fairly put on notice as to the causes of action at a time outside the limitations period.) As described by the Court, the Cáceres alleged (Slip Op. 14-15)

11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (9/4/24; 1/24/25)

Added 1/24/25 10:00am: The opinion discussed in this blog was vacated by United States v. Schwarzbaum, ___ F.4th ___ (11th Cir.1/23/25), CA11 here and GS here [to come], with a new opinion substituted. I discuss the new opinion in the following blog: [to come]

In United States v. Schwarzbaum, 114 F.4th 1319  (11th Cir. 8/30/24), 11Cir here and GS here, the Court:

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

The unanimous opinion is quite long (53 pages) and offers a lot of interesting discussion of the history of the FBAR penalties. Those relatively new to the subject, can learn from reading the opinion closely. Those who are veterans to the subject can probably skim through the opinion and understand the holdings.

JAT Comments:

9th Circuit 3-Judge Panel Has Three Different Interpretations Illustrating the Stupidity of Loper Bright's Rejection of Deference (9/3/24; 9/7/24)

In Brown v. Commissioner, 116 F.4th 861  (9th Cir. 2024), CA9 here & GS here, the Court rejected Brown’s claim that his offer in compromise had been statutorily eemed accepted under § 7122(f) because, he claimed, the IRS had not rejected the offer within 24-months of the date of the offer. Brown’s claim would have permitted him to settle $50 million+ tax liability for a bare fraction.

 Section 7122(f) provides:

(f) Deemed acceptance of offer not rejected within certain period
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

The Tax Court held that, under the facts, the offer had been rejected within the 24-month period. The Court of Appeals, in a 3-way split opinion (more below) held that Brown loses on the issue, with two judges reaching the result by different interpretations of the law and the dissenting judge reaching a contrary result (Brown wins) on a different interpretation. In other words, all the judges differed in their interpretations of the applicable law, but 2 interpretations favored the IRS and one favored Brown. Brown loses.

Has Auer Time Passed? (8/20/24)

A question raised by the demise of deference pronounced in Loper Bright Enterprises v. Raimondo, 603 U. S. ____, 144 S. Ct. 2244 (2024) is the continuing viability or application of Auer/Kisor deference. Recall that Auer/Kisor deference applied Chevron-type deference framework to agency subregulatory guidance interpreting ambiguity in agency regulations. Loper Bright did not speak to the continuing viability of Auer/Kisor deference. The Loper Bright opinion of the Court cited Kisor for other propositions, but did not speak to whether Auer/Kisor was viable after Loper Bright.

Although Loper Bright did not speak directly to the continuing viability of Auer/Kisor deference, I think that the inevitable logic of Loper Bright pronounces the demise of Auer/Kisor deference. Of course, because the Supreme Court did not expressly overrule Auer/Kisor deference, some pundits and courts may still pay homage to it until and unless the Supreme Court speaks to its continuing viability. See e.g., Fourth Circuit Applies Auer/Kisor Deference to Include in Guidelines "Loss" the Commentary Inclusion of "Intended Loss" (Federal Tax Procedure Blog 8/24/24), here; and More on United States v. Boler (Federal Tax Procedure Blog 8/25/24), here.

However, a confident lower court reading Loper Bright as I do might be willing to step out on that issue by holding that Loper Bright is inconsistent with Auer/Kisor deference. Or, alternatively, as happened in Coplan, a Court of Appeals might signal in an opinion that there is a major conceptual problem that the Supreme Court should address. See Is It Too Much to Ask that the Defraud Conspiracy Crime Require Fraud? (Federal Tax Crimes Blog 8/3/24; 8/6/24), discussing United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. den. 571 U.S. 819 (2013).

Now, I will state why I think Auer/Kisor deference is not consistent with the demise of Chevron deference pronounced in Loper Bright.

Tax Court Applies the Best Interpretation as Required by Loper Bright Rejection of Chevron Deference (8/27/24)

In Varian Medical Systems, Inc. v. Commissioner, 163 T.C. ___, No. 4 (2024), JAT GD here [see note below at *] and GS here, a reviewed opinion with no dissents, the Tax Court fired its first round of application of the demise of Chevron deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024). For discussion of Loper Bright, see The Supreme Court Pronounces the Demise of Deference (6/29/24; 7/26/24), here (with linked revisions through 8/27/24 for discussion in Federal Tax Procedure Book (2024 Practitioner Ed.).
 
The issue in Varian Medical involved esoteric (to me) Code sections related to taxation of U.S. taxpayers doing business through foreign corporations. I don’t propose to get into the nitty gritty of that (probably could not do it with clarity anyway), but in summary the situation was:

A statute imposed U.S. tax on certain accumulated foreign earnings with an effective date. The statute purportedly had an unintended benefit arising from the interface with another Code provision. As I understand it, the unintended benefit was to allow the U.S. taxpayer both a credit and a deduction for foreign taxes deemed paid. Congress closed the purportedly unintended benefit (the deduction side) but with an effective date that did not go back to the effective date of the original statute. Could the IRS by interpretation (including an interpretation adopted in regulations) move the purportedly correcting amendment effective date back to the date of the original statute?

As stated, the result may have been a no-brainer even without the demise of Chevron. Facially, from the statute, the later “correcting” legislation only was effective from its stated effective date rather than the earlier effective date. Fair interpretation of the statute just couldn’t get that far even with Chevron. As thus stated, the issue could have been resolved at Chevron Step One. To be sure, it is probably fair to say that Congress did not intend both a credit and a deduction related to the same expense (in a broad sense), but Congress did clearly state its intent as to the two statutes' effective dates.
 
The Court addressed the deference and interpretation issues as follows (Slip Op. 28-32, cleaned up somewhat; sorry for the long quote but as this is a first application of Loper Bright, this is important):

More on United States v. Boler (8/25/24)

Yesterday, I wrote a blog entry on United States v. Boler, 115 F.4th 316 (4th Cir. 2024). Fourth Circuit Applies Auer/Kisor Deference to Include in Guidelines "Loss" the Commentary Inclusion of "Intended Loss" (Federal Tax Procedure Blog 8/24/24), here. (The blog entry was cross-posted on my Federal Tax Crimes Blog, here.) I think there is more that can and should be said about Boler. This post will be more of a “notice” post (like the fabled notice pleading lawyers at least of my generation learned about early in our law school careers).

1. The structure of the Federal Sentencing Guidelines. The 2023 version of the U.S. Sentencing Guidelines is here. The Guidelines (with accompanying Commentary and Policy Statements) are promulgated by the U.S. Sentencing Commission which is “a bipartisan, independent agency located in the judicial branch of government, was created by Congress in 1984 to reduce sentencing disparities and promote transparency and proportionality in sentencing.” See website here. So, we know at the outset that it is a strange creature in our constitutional framework—the only agency located in the judicial branch. 

JAT Side Note: Readers of this blog will surely have some passing acquaintance with the difficulty going back to the 1940s of determining precisely what the Tax Court was, even though the statute said since its earliest days (then the Board of Tax Appeals) that the Tax Court was an independent agency in the Executive Branch. As I have noted, the nature of the Tax Court was an issue was much discussed with more heat than light in the 1940s, including in the consideration of the APA; the Supreme Court in Dobson v. Commissioner, 320 U.S. 489 (1943), reh. den., 321 U.S. 231 (1944), a unanimous opinion authored by Justice Jackson, the most tax procedure savvy Justice ever, held that the Tax Court was an agency rather than a court and applied Chevron-like deference to its statutory interpretations. I cover these issues in John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN December 14, 2023), pp. 5-23)   https://ssrn.com/abstract=4665227.

2. Guidelines treated as Legislative Rules; Commentary Treated as Interpretive Rules. As an agency, albeit a Judicial Branch agency, the issue underlying Boler was the authority of the Guidelines and the Policy Statements and Commentary. In Stinson v. United States, 408 U.S., 36 (1993), GS here, the Court treated the Guidelines as analogous to legislative rules which make law pursuant to Congress’ delegation and treated Commentary as an interpretive rule interpreting the law (the law being the Guidelines). The Court said (p. 44-45, cleaned up to omit most case citations):

Although the analogy is not precise because Congress has a role in promulgating the guidelines, we think the Government is correct in suggesting that the commentary be treated as an agency's interpretation of its own legislative rule. The Sentencing Commission promulgates the guidelines by virtue of an express congressional delegation of authority for rulemaking, and through the informal rulemaking procedures in 5 U. S. C. § 553, see 28 U. S. C. § 994(x). Thus, the guidelines are the equivalent of legislative rules adopted by federal agencies. The functional purpose of commentary (of the kind at issue here) is to assist in the interpretation and application of those rules, which are within the Commission's particular area of concern and expertise and which the Commission itself has the first responsibility to formulate and announce. In these respects this type of commentary is akin to an agency's interpretation of its own legislative rules. As we have often stated, provided an agency's interpretation of its own regulations does not violate the Constitution or a federal statute, it must be given "controlling weight unless it is plainly erroneous or inconsistent with the regulation." Bowles v. Seminole Rock & Sand Co., 325 U. S. 410, 414 (1945). 

Bowles v. Seminole Rock is the predicate for Auer deference which I now call Auer/Kisor deference because of the authoritative treatment of Auer deference in Kisor v. Wilkie, 588 U.S. 558 (2019). As I discussed in yesterday’s blog on Boler, the issue was the application of Auer deference to Guidelines’ Commentary (Application Note) defining the Guidelines term “loss” to include “intended loss.”

3. Did Auer/Kisor Deference Survive the Demise of Chevron. One of the issues I presented in yesterday’s blog was whether Auer/Kisor deference survived the demise of Chevron deference. I just want to make a few bullet points about that issue.

Fourth Circuit Applies Auer/Kisor Deference to Include in Guidelines "Loss" the Commentary Inclusion of "Intended Loss" (8/24/24)

In United States v. Boler, 115 F.4th 316 (4th Cir. 2024), CA4 here and GS here [to come], the Court held that the term loss included the pecuniary loss that Boler intended from filing false refund claims with the IRS. Boler filed six returns claiming false refunds; the IRS paid refunds on only four of the returns. Boler wanted the loss to be calculated using only the amounts actually refunded and thus to exclude the refund amounts claimed but not refunded. The district court held that Sentencing Guidelines inclusion of loss included intended loss. Since the pecuniary loss is a principal driver of the Sentencing Guidelines calculations, the inclusion of the intended loss increased the advisory Guidelines sentence and factored into the resulting sentence. On appeal, Boler argued that the Guidelines required inclusion of the loss, which facially does not include intended loss and that, the Guidelines Commentary interpretation of “loss” to include intended loss was an invalid interpretation of the Guidelines term “loss.” The Court of Appeals held that loss included the intended loss. (This is perhaps a moot issue in the future, because the definition of loss in the Guidelines was changed effective November 1 to include intended loss.)

The issue, as framed by the majority, turned on the application of Auer/Kisor deference. So, what is Auer/Kisor deference? As interpreted in Kisor v. Wilkie, 588 U.S. 558 (2019), GS here, the Court updated and constricted Auer deference, but, as constricted, held that in some cases courts should defer to agency interpretations of ambiguous agency legislative regulations. The majority in Loper Bright did not mention Auer/Kisor deference, although it cited Kisor several times; the dissent said (S.Ct. at 2306-2307) that Kisor approved Auer deference “which requires judicial deference to agencies' interpretations of their own regulations.” (Hereafter, whenever I use the term regulations, I mean agency notice and comment regulations required for legislative regulations and permitted for interpretive regulations.) The Loper Bright opinions make no statement that Auer/Kisor deference is affected.

I should note that, in my thinking, the Court analogized Auer/Kisor deference to Chevron deference which applied to agency regulations’ interpretations of ambiguous statutory text. The analogy is logical: Chevron deference applied to agency regulations interpretation of law (there statutory law); Auer deference applied to agency interpretations of law (legislative regulations that function like statutes to impose the law); so both forms of deference apply to agency interpretations of law.

6th Circuit Remands Case for Consideration of Certain Constitutional Claims Against § 6050I(d)(3) Addition to Include Digital Assets in CTR Reportable Cash (8/21/24; 8/22/24)

In Carman v. Yellen, ___ F.4th ___, 2024 U.S. App. LEXIS 20033 (6th Cir.), CA6 here and GS here, the plaintiffs made a number of constitutional claims against the 2021 addition to the definition of cash reportable on currency transaction reports under § 6050I. The addition is in § 6050I(d)(3) to include digital assets in the definition of reportable “cash.” The plaintiffs were particularly concerned about cryptocurrency. The constitutional claims as set forth by the Court are (Slip Op. 9-11, cleaned up for readability principally by omitting citations to the record): 

          Plaintiffs launch five distinct constitutional attacks on the amended § 6050I, including a Fourth Amendment claim, a First Amendment Claim, a Fifth Amendment vagueness claim, an enumerated-powers claim, and a Fifth Amendment self-incrimination claim. For each of these, plaintiffs bring facial challenges, meaning they contend all (or almost all) applications of the law are unconstitutional. That creates some confusion, however, because their legal theories, as we note in our analysis, sound in as-applied challenges by contending that specific applications of § 6050I or hypothetical future events tied to the statute would create constitutional infirmities. Yet, for all claims, plaintiffs’ requested relief is the same: a declaration that § 6050I is facially unconstitutional and that enforcement of the law be enjoined.

           Plaintiffs’ first claim is that the amended § 6050I violates the Fourth Amendment. Specifically, plaintiffs claim that the amended law compels senders and receivers of cryptocurrency in reported transactions to “share their personal identifying information in conjunction with the details of their covered transactions, and thereby reveal sensitive details about their personal affairs.” Because of the private nature of cryptocurrency transactions, plaintiffs contend that they have a reasonable expectation of privacy and that the amended law will invade that expectation of privacy, all without the need for a warrant. Plaintiffs additionally claim that the government will conduct searches by violating their property rights.

Ninth Circuit Denies Taxpayers a Refund for Failure to Satisfy § 6511 Timing Rules (8/15/24)

In Libitzky v. United States, 110 F.4th 1166 (9th Cir. 2024), CA9 here & GS here, the panel rejected the Libitzkys’ refund suit for failure to meet the refund suit limitations periods in § 6511, here. Many readers of this blog will likely already have some familiarity with the time limitations for refund suits and know that application of the time limitations can be complex. I cover the subject in the Federal Tax Procedure (2024 Practitioner Ed.), pp. 226-230 and Federal Tax Procedure (2024 Student Ed.), pp. 157-161, available free here. The only difference between the Practitioner Edition and the Student Edition is the former has footnotes and the latter does not. I have made significant revisions to these pages in my 2025 Working Draft (to be published in July or August 2025), particularly adding Example 8a inspired by Libitzky. The revisions as of the posting of this blog are in redline format here (Practitioner Edition). (Please note that a number of changes are nonsubstantive, such as changing April 15 of Year 02 to 4/15/02.

I have had considerable difficulty understanding the Libitzky opinion. The discussion I present here will likely reflect the difficulty. So, I have decided to first cover the applicable “law” as I understand it. I will then state key representative “facts” of Libitzky through Example 8a. That is the approach I take in the Book—to first present the law and then present various fact scenarios (Examples to discuss the complexities in the law). In presenting the law, I will copy and paste from the 2025 Practitioner Edition working draft retaining the redlines showing changes from the 2024 editions. I include only the portion related to Libitzky. I only include footnotes where they are needed for the discussion of Libitzky. (The numbering of the footnotes are not the same as in the Book.)

          There are two statutes of limitation on taxpayers claiming tax refunds.

          First, there is a statute of limitations for filing the claim for refund. A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment. § 6511(a). This is sometimes called the refund claim limitation period. This statute of limitations has traditionally been read literally, requiring filing within the stated periods with no equitable relief; so read literally, the statute of limitations is said to be jurisdictional for the predicate condition in § 7422(a) to file a suit for refund. Also, if read literally, the statute means that a taxpayer can file a return claiming a refund 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued. The answer to that concern is in the second rule, a limitation on the amount of tax that can be refunded. n1  

    n1 Omohundro v. United States, 300 F.3d 1065, 1068-1069 (9th Cir. 2002)); Weisbart v. Treasury, (2d Cir. 2000); and Rev. Rul. 76-511, 1976-2 C.B. 428. The 40 years late example is inspired by Oropallo v. United States, 994 F.2d 25, 30 (1st Cir. 1993) (noting that the limitation might be “illusory” for late filed returns because a taxpayer could “file a tax return 40 years late and still have 3 additional years in which to file a claim for refund;” the Second Circuit in Weisbart said that “Nevertheless” this construction makes sense, noting that the purpose of § 6511(a) “is not to bar stale refund claims, but to ensure that a taxpayer give the IRS notice of such claims before suing in federal court.”) But see Libitzky v. United States, 110 F.4th 1166, 1172 (9th Cir. 2024) (stating that “both the limitation period [in § 6511(a) and the look-back period in § 6511(b) (discussed immediately below the text above)] are shorter and less generous for taxpayers who do not timely file their tax returns.” (Bold-face supplied by JAT)). In other words, the Libitzky Court would not accept the conclusion that a refund claim return filed, say, 4 or 40 years after the return due date (meaning that the return is not timely filed) can avoid the two-year limitations period in § 6511(a). My concern with that notion is the limitations periods in § 6511(a) are whichever is later which, as I read the syntax of § 6511(a) would permit the return claiming a refund filed after the two year period to qualify under the first rule (3-years from the time the return was filed), thus mooting the applicability of the 2-year period in § 6511(a). For reasons that I note below, however, Libitzky may have been correct under § 6511(b) because of its distinction between a refund claim and a filed return. See below Example 8a on p. 233.