Taxpayer Advocate Service Issues Tax System Roadmap (7/10/19)

The Taxpayer Advocate Service (TAS) has issued a "Roadmap" -- also called a "subway map" -- for the taxpayer's journey through the tax system.

The TAS page for the roadmap is here.  On that page, the roadmap itself in pdf format may be viewed and downloaded and a short video introduction may be viewed.  I include below a jpg format version of the roadmap, principally for overview.  The pdf version is better for study.

The roadmap explains:

The map below illustrates, at a very high level, the stages of a taxpayer’s journey, from getting answers to tax law questions, all the way through audits, appeals, collection, and litigation. It shows the complexity of tax administration, with its connections and overlaps and repetitions between stages. As you can see from its numerous twists and turns, the road to  compliance isn’t always easy to navigate. But we hope this map helps taxpayers find their way. A project of the Taxpayer Advocate Service.

The graphic is very good.

The caveat is that, I think, most nonpractitioners may not spend a whole lot of time working their way through this roadmap of our complex tax system.  (In my own brief visual overview of the roadmap, I am reminded of a maze or a bowl of spaghetti or some such commotion.)  I suppose that those nonpractitioners (including taxpayers qua taxpayers) who get caught up in IRS tax enforcement might want to take the time to work through the maze.

I think the roadmap will be helpful for practitioners who want to check their knowledge about the processes or to study the process.  Like many such summary overviews, the graphic lacks nuance, but still that should not take away from its educational use for practitioners and even taxpayers with the stamina to work through it.

One question that must be asked is whether all the complexity hinted at via the roadmap is necessary.  That is a good question.  I don't have an easy answer, except that those of us who have practiced in the system understand the reason for the complexity (each component of the roadmap).  Whether the complexity is necessary is a different question.

IRS Raises Fraud In Tax Court Amended Answer and Prevails (7/9/19)

In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business.  There were some other issues.  The numbers are large.  I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):

After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009. 

See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.

The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):

The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard. 

Many of the critical documents in the record reflect “effective as of” dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti’s request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit’s evidence. 

The “effective as of” dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court’s comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent’s proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit’s briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties’ briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.

Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.

General Lesson

The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency.  This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.

Beyond the General Lesson

There is more in the details as lessons to trial counsel.  As noted above, the Court found that the "Petitioners Wegbreit’s briefs misstate the record and are unreliable."  Presumably those briefs were submitted by their trial counsel.

Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination).  Let's go back to the opinion.

Even More on Skidmore (Including Equipoise as to Interpretation)(7/7/19)

I have discussed so-called Skidmore deference on several occasions on this Federal Tax Procedure Blog.  I list the principal discussions at the end of this blog.  As traditionally formulated, Skidmore tells a court that an agency interpretation of law not entitled to Chevron deference can prevail if the interpretation is persuasive.  In Chevron parlance, Skidmore would involve Chevron-like steps as follows:  Step One would require that that the statutory text be ambiguous within the scope of the agency interpretation.  That would mean that the agency interpretation must be reasonable within the scope of the ambiguity but there must be other reasonable interpretations (otherwise the statutory text would not be ambiguous).  Then at Step Two, the agency interpretation of the ambiguous statutory text would apply if it is "persuasive."  But, if the interpretation is persuasive, then no deference is needed to apply it over any other reasonable interpretation that is not persuasive.  For this reason, many believe that calling Skidmore a deference concept is an oxymoron.  (See the quote from a recent article at the end of this blog.)

Now, this model of competing reasonable interpretations does raise an interesting issue.  In the fact-finding model, where there are competing interpretations of the facts and none prevail over the others, the fact-finder is said to be in a state of equipoise.  In the state of equipoise, under the preponderance of the evidence standard (more likely than not), the party bearing the burden of persuasion loses.  Of course, most observers of triers of fact (juries or judges) feel that the state of equipoise is rare, so that the assignment of the burden of persuasion is rarely outcome determinative.  But, obviously, assigning a winner or loser based on equipoise is outcome determinative when there is a state of equipoise, however rare.

The question I ask is whether the state of equipoise is a useful model in the deference context.  Let's assume that the court determines that an agency interpretation is reasonable but is at least one other reasonable interpretation and that none of the interpretations are more "persuasive" than the other.  This would mean that the court is in a state of equipoise as to the most persuasive interpretation.  Of course, if the agency made that interpretive choice in a Chevron-entitled regulation, Chevron would compel that the agency interpretation prevail.  But assume that the agency adopts the interpretation of the ambiguous statutory text in subregulatory guidance not entitled to Chevron deference.

What happens?

Well, if, after applying all available tools of statutory interpretation, the court really is in equipoise as to the most persuasive interpretation, I suppose the court could use the time-honored tie-breaker--flip a coin or some other arbitrary factor to reach a decision.  Or alternatively, the Court could default in equipoise to the reasonable agency interpretation.  I have not seen any court articulate such a default tie-breaker rule, however. Perhaps there has just been no need to default to such a tie-breaker because, like the fact-finding analog, equipoise is rare.

Justice Gorsuch asserts such positions of equipoise in interpretation are rare, perhaps nonexistent.  A good judge, he asserts, applying available interpretive tools should be able to determine that one interpretation is more persuasive than others, without a condition of equipoise between or among the interpretations.  In Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], Justice Gorsuch in concurring in the judgment (but not accepting the plurality analysis) addressed equipoise as to a regulations interpretation as a basis for Auer deference, saying (Slip Op. 9-10 and 139 S.Ct., at pp. 2429-30, one footnote omitted):

To be sure, JUSTICE KAGAN paints a very different picture of Auer, asking us to imagine it riding to the rescue only in cases where the scales of justice are evenly balanced between two equally persuasive readings. But that's a fantasy: "If nature knows of such equipoise in legal arguments, the courts at least do not." n31 In the real world the judge uses his traditional interpretive toolkit, full of canons and tie-breaking rules, to reach a decision about the best and fairest reading of the law. Of course, there are close cases and reasonable judges will sometimes disagree. But every day, in courts throughout this country, judges manage with these traditional tools to reach conclusions about the meaning of statutes, rules of procedure, contracts, and the Constitution. Yet when it comes to interpreting federal regulations, Auer displaces this process and requires judges instead to treat the agency's interpretation as controlling even when it is "not . . . the best one."
   n31 Scalia, Judicial Deference to Administrative Interpretations of Law, 1989 Duke L. J. 511, 520. 

I think the following from Justice Scalia's remarks captured in the article (a must read in this area, here) gives a fuller description of his meaning (521):

Auer Deference and Treasury and IRS Policy Statement on the Tax Regulatory Process (7/6/19)

In the  revised working draft for my Federal Tax Procedure editions (Student and Practitioner) which I will publish in final in August 2019, I have revised the section titled "Deference to Subregulatory Interpretations."  This is generally called Auer deference, after Auer v. Robbins, 519 U.S. 452 (1997).  (Auer deference seems to overlap what was formerly called Seminole Rock deference, after Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945).)

Auer deference may be stated as deference to agency interpretations of agency regulations.  As I analyze it, the agency regulations being interpreted may be legislative regulations which are the law but, like statutes, can be ambiguous and thus subject to reasonable agency interpretation.  The agency regulations more commonly may be Chevron-entitled interpretive regulations that are ambiguous and thus subject to agency interpretation.  In either event, the agency interpretation appears in subregulatory guidance not entitled to Chevron deference.

Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], approved a restricted version of Auer deference.  The plurality opinion written by Justice Kagan (concurred in by Justices Ginsburg, Breyer and Sotomayor), had a robust support for Auer deference as restricted.  See e.g., Cass R. Sunstein, Justice Kagan’s Powerful Defense of the Administrative State (BloombergOpinion 6/28/19).  Keep in mind that the plurality portion was written and concurred in by the two administrative law experts on the Court (Justices Kagan and Breyer).  [For earlier discussion on Kisor, see Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/26/19; 7/2/19), here.]

Kisor approved Auer deference to subregulatory interpretations of regulations but reined in its application.  Under Kisor, Auer deference for subregulatory interpretations (or more generally interpretations not entitled to Chevron deference) may draw deference and thus be the law.

In a tax context, however, the recent Treasury and IRS Policy Statement on the Tax Regulatory Process (3/5/19), here, informed the public that, as a policy matter, regardless of whether subregulatory interpretations might qualify for Chevron or Auer deference, the Treasury and the IRS (and presumable DOJ Tax) would not assert either Chevron or Auer deference for subregulatory interpretations.

This is odd.  Can Treasury and the IRS do that in light of the Supreme Court approval of Auer?  Well, of course, in one sense Treasury and the IRS certainly can avoid asserting deference.  The question is whether, if Chevron deference or Auer deference is otherwise applicable, a court can ignore either form of deference?

Here is the relevant portion of my current working draft on that issue (footnotes omitted):

D.C. Circuit Holds Equitable Tolling May Apply to Time Limit in Whistleblower Case (7/4/19)

In Myers v. Commissioner, ___ F.3d ___, 2019 U.S. App. LEXIS 19757 (D.C. Cir. 2019), here, the Court applied the jurisdictional/nonjurisdictional distinction to determine that the time period in § 7623(b)(4) to petition the Tax Court with respect to an IRS whistleblower determination is nonjurisdictional, thus allowing the potential for equitable tolling of the time period.  The Court of Appeals remanded the case to the Tax Court to determine whether equitable tolling applied.  (See also Carlton Smith (Guest Blogger), D.C. Circuit Holds Tax Court Whistleblower Award Filing Deadline Not Jurisdictional and Subject to Equitable tolling (Procedurally Taxing 7/3/19), here.

Based on Myers, I have just revised the section of my tax Federal Tax Procedure book working draft and offer it here.  (I remind readers that the next updated version of the book will by in early August.)  Here is the revised discussion of equitable tolling (without footnotes, although I do offer the text and footnotes in a pdf available here, but do caution readers that the quote has been "cleaned up" which I note in the footnote in the pdf version):

VII. Smoothing the Harsh Effects of Statutes of Limitation.

* * * *

C.  General Equitable Principles (Herein of Jurisdictional/Nonjurisdictional).

The Code’s time limits (often called statutes of limitations) are classified for some purposes as either jurisdictional or nonjurisdictional.  This issue is presented for time limits throughout federal law, including applications of time limit in the Code. In the tax context, this distinction has been in issue most importantly where there are time limits for a taxpayer to obtain court review of IRS action (such as the 90-day period to petition for redetermination of a notice of deficiency or the periods for filing claims or suits for refund).  The question is how rigid the time limits are.  If the time limits are rigid time limits that must be met without exception, they are called jurisdictional because failure to meet the time limit will deprive a court of “jurisdiction” to consider the dispute between the taxpayer and the IRS.  By contrast, if a time limit is nonjurisdictional, it may not be quite so rigid, and may permit relief by way of “tolling” or suspending the time limit in certain cases.  Ultimately, the question the distinction is based upon the court’s interpretation of the time limit (both the text and the context) as evidencing Congress’s choice that the time limit to be rigid or, alternatively, to permit some tolling or suspension of the time limit based on traditional equitable considerations.

In a tax case in 2019, The D.C. Circuit explained:

The Supreme Court in recent years has pressed a stricter distinction between truly jurisdictional rules, which govern a court's adjudicatory authority, and nonjurisdictional claim-processing rules, which do not.  Key to our present decision, the Court has made plain that most time bars are nonjurisdictional; they are quintessential claim-processing rules which seek to promote the orderly progress of litigation, but do not deprive a court of authority to hear a case.  Therefore, although the Congress is free to attach the jurisdictional label to a rule that we would prefer to call a claim-processing rule, we treat a time bar as jurisdictional only if Congress has clearly stated as much.  The Supreme Court has explained that this clear statement requirement is satisfied only if the statute expressly refers to subject-matter jurisdiction or speaks in jurisdictional terms. It is not enough, for instance, that a statute uses mandatory language.

The issue of jurisdictional/nonjurisdictional as to when the Code’s time limits must be met or might be tolled or suspended based on equitable considerations is not fully fleshed out.  As noted in the quote above, the Supreme Court “in recent years” began pressing a stricter distinction; that process of pressing the distinction generally has resulted in many time limits throughout the law to be nonjurisdictional so that rigid compliance is not required.  As with much of federal law, most of the time limits in the Code were adopted at a time before the jurisdictional/nonjurisdictional distinction became prominent, so Congress did not make its “intent” clear as to whether the time limit is to be rigid or not.  The courts thus have to consider closely the text and context, the statutory language and its context in the tax system involving millions of taxpayers where, at least in some cases, not imposing rigid time limits could impose its own inequities and impose unacceptable administrative burdens on the IRS.

Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (6/26/19; 7/2/19)

In Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], the Supreme Court decided to retain Auer deference, at least for now.  I offer some preliminary thoughts on the opinions in Kisor and may revise them as I think further and consider others comments.

Although perhaps oversimplifying for analysis, I think Auer deference functions like Chevron deference but one step removed from the statutory text.

• Chevron deference applies to some reasonable agency interpretations of ambiguous statutory text.
• Auer deference applies to reasonable agency subregulatory interpretations of  ambiguous agency regulations (which for this purpose may be either (i) ambiguous legislative regulations (e.g., in a tax context, ambiguous consolidated return regulations) or (ii) ambiguous interpretive regulations entitled to Chevron deference (e.g., in a tax context, say ambiguous “away from home” interpretive regulations entitled to deference as in Correll)).

In Kisor, while re-affirming Auer deference, the opinions were fractured as to what Auer continues to mean and whether it may be on life support.  All we can say for sure is that Auer lives (for now, although its precise application may be muddled and Kisor clearly restricts Auer’s application over what some of the prior less restrained applications suggested).

I don't want to get into the Justices competing views of Auer deference.  The pundits will be doing that for some time now.

I do want to get into what, if anything, Kisor says about the legislative / interpretive issue that I have fulminated about recently.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure Blog 6/21/19), here; and Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/23/19), here.

Just to restate the issue.  Some, a considerable consensus in the scholarly community, claim that the interpretive regulation is no longer viable, having been conflated into legislative rules by judicial opinions after the adoption of the APA.  I reject that notion.  I do note as an important pushback Justice Breyer's comment in the Kisor oral argument:  “there are hundreds of thousands, possibly millions of interpretive regulations.”   Justice Breyer is, of course, an administrative law expert (he and Justice Kagan are the administrative law experts on the Court), and he thinks that interpretive regulations are still viable.  (Significantly, at oral argument, no Justice challenged the notion that interpretive regulations were a viable APA category.)

The Kisor opinions, as I said, were fractured, with some key points not gathering a majority. The Justices in the plurality for the Court opinion which I discuss herein were Justices Kagan (author), Ginsburg, Breyer and Sotomayor.  Remember  that Justices Kagan and Breyer are the Court's administrative law experts, so from the perspective I focus on (the APA distinction between legislative and interpretive regulations), Justice Kagan's opinion concurred in by Justice Breyer are most important to the legislative /interpretive issue.

Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (6/23/19; 7/2/19)

The immediately preceding blog reported my new article posted on SSRN titled The Report of the Death of the Interpretive Regulation Is an Exaggeration.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure 6/21/19), here.  One of the threads in the claim that the APA category of interpretive regulations is no longer viable is the notion that Chevron deference, when applied to interpretations in agency rule (regulations in specific), gives the interpretation the force of law, supposedly the hallmark of a legislative rule (which must be by notice and comment regulation) rather than an interpretive rule.  I argue in the article that "force of law" is a slippery concept, but in this context is the consequence of a regulation being legislative and not a test that a regulation is legislative.

I address in this blog a new development that, I think, refutes the notion that Chevron deference for agency interpretations is relevant to the issue of whether rules (including regulations) are legislative or interpretive.

I noted in the article that, on March 27, 2019, during oral argument in Kisor v. Wilkie (Sup. Ct. No. 18-15), Justice Breyer, an administrative law expert (along with Justice Kagan), said: “there are hundreds of thousands, possibly millions of interpretive regulations.”  I noted in the footnote (p. 5 n. 14) that Justice Breyer was formerly a professor of administrative law at Harvard Law School and is the lead author on a leading administrative law book which continues with his name as a nominal author. Stephen G. Breyer, et al., Administrative Law and Regulatory Policy (8th ed. 2017 Walters Kluwer), co-authored with four other recognized administrative law experts, Richard B. Stewart, Cass R. Sunstein, Adrian Vermeule, and Michael E. Herz.  (Justice Kagan also taught administrative law at Harvard Law School.)

Justice Breyer is at it again, this time refuting the notion that Chevron sounded the death knell of the interpretive regulation.

In PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., 588  U.S. ___, ___ S.Ct. ___, 2019 U.S. LEXIS 4181 (2019), here, decided June 20, 2019, the issue was judicial reviewability of final orders of the Federal Communication Commission (FCC).  The FCC had issued a final Order interpreting the prohibition on "unsolicited advertisement" as used in the Telephone Consumer Protection Act of 1991, 47 U. S. C. §227(b)(1)(C).  The statute gave courts of appeals “exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity of” certain “final orders of the Federal Communication Commission.” 28 U. S. C. §2342(1).  That "exclusive review" was required in a proceeding brought within 60 days after the entry of the order.  The issue was whether a district court, in an application of the law long after the FCC adopted the Order, precluded the district court from considering the merits of the interpretation in the Order.

Justice Breyer for the majority felt that the issue turned upon preliminary issues not yet addressed by the courts--whether Order was (p. 5, cleaned up)

• "the equivalent of a legislative rule, which is issued by an agency pursuant to statutory authority and has the force and effect of law."

or

• "the equivalent of an interpretive rule, which simply advises the public of the agency’s construction of the statutes and rules which it administers and lacks the force and effect of law?"

Note the phrasing of "equivalent of."

Article on the Continued Viability of the APA Category of Interpretive Regulations (6/21/19)

I have posted on SSRN my article titled "The Report of the Death of the Interpretive Regulation Is an Exaggeration."  Here is the SSRN preferred citation with link to the Abstract page:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400489.  The article may be downloaded at that site.

The following is a brief summary of the SSRN abstract which is linked above:

There is a notion that the Administrative Procedure Act (APA) categories of legislative regulations and interpretive regulations have been conflated into the legislative regulation category so that the interpretive regulation category is now extinct.  The APA does not make the interpretive regulation category extinct, but the notion is based on judicial developments that in effect amend the APA to effectively legislate the category out of the statute.  (OK, that is argumentative.) That notion has considerable traction in the administrative law scholarly community, as I note in the article.  A consequence of this notion, if viable, is that Treasury (and presumably other agency) regulations that go into effect without notice and comment (e.g., Treasury Temporary Regulations) are illegal, and that interpretations in regulations that do no more than interpret the statute cannot have retroactive effect.  I push back on that notion.  With the considerable traction in the scholarly community, I may be wrong.  But, I feel compelled to state my case.

Any feedback from readers will be appreciated.

A subset of the article dealing with the Altera case was presented in Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19), here.

Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, ___ F.3d ___ (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert the the § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:

"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."

The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):

[*2]  

"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 

* *  * *

Ninth Circuit Reverses Unanimous Tax Court in Altera (6/7/19; 6/20/19; 7/2/19)

I have blogged on the Ninth Circuit's prior opinion reversing the unanimous Tax Court in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (reviewed opinion), here. Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here. That opinion was reversed because it was rendered after one of the panelist died.  Ninth Circuit Withdraws Altera Opinions (8/7/18; 8/13/18), here.  Another judge was substituted for the deceased judge and oral argument was heard by the reconstituted panel.

The Ninth Circuit reconstituted panel, with all members apparently still alive, issued its opinion reversing the unanimous Tax Court.  Altera Corp. v. Commissioner, ___ F.3d ___, 2019 U.S. App. LEXIS 17143 (9th Cir. 2019), here.

Altera has been quite a saga, including the strange concept of a dead judge joining a majority opinion.  At the outset, it might be worth doing a tally of the judges on the merits.  In just the win-lose category.  There are two judges giving the win to the IRS, but they are the most important judges -- two of the three judges on the reconstituted panel.  All the other judges (other than the deceased Ninth Circuit judge who apparently voted before his death) who voted on merits held against the IRS.  Those judges are the dissenting judge on the reconstituted panel and all of the judges (15 in number) who voted on the reviewed opinion in the Tax Court.  So, just counting heads, two judges thought the IRS should win; 16 thought the IRS should lose.  (And this is not counting the dead judge's vote for the original panel opinion, which, if counted, would have been 3 for the IRS and 16 for the taxpayer.)  For those with the time to review an anecdote from my earlier appellate career at DOJ Tax for a Government appeal, like Altera, from a reviewed Tax Court opinion with most of the judges voting for the taxpayer, see Developments - Federal Tax Procedure Book 2018 Editions and Altera (7/25/18; 7/27/18), here.

Now to the current opinions from the reconstituted panel with living panel members.  The split is as it was in the withdrawn opinion.  Judge Thomas was for the IRS; Judge O'Malley from the Federal Circuit (by designation for the original and reconstituted panel) was for the taxpayer.  The swing judge was Judge Graber from the Ninth Circuit, designated to the panel to replace the deceased Judge Reinhardt.  Like Judge Reinhardt, the swing judge voted with Thomas whose opinion thereby became the majority just as with the withdrawn opinion.

I am focusing here only on the new panel majority and dissenting opinions.  I make no attempt to compare the differences between the withdrawn opinions and reconstituted panel current opinions; I just assume that, in broad strokes, the positions are the same (with some interim tweaking) since the same judges wrote the panel majority and dissenting opinions. (Readers interested in the withdrawn panel majority and dissenting opinions can look at my prior blog or Google any other comment on them.)  Readers interested in a discussion of the differences between the withdrawn and the current opinions might watch the Miller & Chevalier Tax Appellate Blog, here, because, in a quick posting on the blog on Friday, there the author said:  "Although it borrows heavily from the withdrawn opinion (indeed, much of the language remains similar if not the same), there are some notable differences between today’s opinion and the withdrawn opinion. We will post some observations after a more careful comparison."  Steve Dixon, Ninth Circuit Again Upholds Cost-Sharing Regulation in Altera (Tax Appellate Blog 6/7/19), here.

In broad outline, the panel majority opinion holds:

1.  Chevron Analysis.

   a.  Chevron Step One. Section 482 is ambiguous on the issue presented (whether the qualified cost sharing arrangement ("QCSA") must include employee stock option costs in allocating income from the intangible ).  Accordingly, Chevron Step One is passed.

   b.  Chevron Step Two.  The regulations' requirement that employee stock option costs be included in the QCSA costs is reasonable and therefore the interpretation that the court applies, by Chevron deference, in Chevron Step Two.

2.  State Farm Analysis.  The promulgation of the regulation requirement met the reasoned decisionmaking requirement and was not procedurally defective.