On Footnotes and the Demise of Appendix C from FTPB (7/28/21; 2/25/24)

For the 2021 editions of my Federal Tax Procedure Book (Practitioner and Student editions), I decided the omit Appendix C where I digressed on footnotes.  I originally did that because footnotes in the Practitioner Editions are many and sometimes digressive in nature and wanted to add some humor on the subject.  I think the Appendix has outlived its use, if indeed it ever even had any use.  So, I am omitting the Appendix from the 2021 editions (which, I hope will be out in final by the end of next week.

I thought, however, that for those few misguided souls who liked such things, I would put the Appendix out here both in a cut and paste to the blog and a link to a pdf file, here.  (Those who review the pdf will see that the page number for the current working draft with Appendix C is 1,046, which will decrease to 1,043 when I strip this Appendix.)

APPENDIX C - ON FOOTNOTES

In earlier versions, I included as a footnote a long diversion on footnotes.  The diversion got out of control (certainly too many words).  Accordingly, since I was really liked the thought of a diversion on footnotes, I decided to offer the diversion as an Appendix at the end of the entire text, a destination not to be reached or easily ignored by many readers of the text.

In an earlier article, John A. Townsend, Judge Posner's Opinion in Kikalos, 108 Tax Notes 593 (Aug. 1, 2005) [SSRN link here], I had a footnote on footnotes and offer it here but have significantly revised it:

It was reported in 1999 that Judge Posner had never used a footnote in a judicial opinion. Lawrence Lessig, The Prolific Iconoclast, The American Lawyer (December 1999). I have not attempted empirical research, but I don't recall having seen a footnote in his opinions. I surmise that Judge Posner thinks that, if the point is worthy of the distraction of a footnote, the point can be concisely made perhaps with less distraction in the text.  Other noted jurists such as Justice Breyer and Circuit Judge Abner Mikva also tend to avoid footnotes.  Justice Neil Gorsuch Is No 'Footnotephobe' (National Law Journal Supreme Court Brief 7/3/19) [no free link available].  And Justice Scalia claimed not to read footnotes, but certainly was not averse to authoring footnotes.  William Jay, Tribute: The Justice who said he hated writing (SCOTUSBlog 3/4/16), here.

Primer on Contesting IRS Third Party Summonses (7/22/21)

In Gaetano v. United States, No. 20-2182, 2021 U.S. App. LEXIS 21139 (6th Cir. July 16, 2021) (unpublished), CA 6 here, the Court rejected the taxpayers’ petition to quash IRS summonses to third parties.  As an unpublished opinion, it has less precedential weight.  Still, it offers a good summary of established law regarding contesting summonses.  

General on the Summons (cleaned up):

In United States v. Powell [379 U.S. 48, 57-58 (1964)] the Supreme Court held that the government can establish a prima facie case for judicial enforcement of an investigatory summons by demonstrating [*3]  that (1) the investigation will be conducted pursuant to a legitimate purpose, (2) the inquiry may be relevant to the purpose, (3) the information sought is not already within the [IRS] Commissioner's possession, and (4) that the administrative steps required by the Internal Revenue Code have been followed.

            The government generally makes this prima facie showing for enforcement through the submission of the affidavit of the agent who issued the summons. If the government makes this showing, the burden shifts to the taxpayer to disprove any of the required elements or to demonstrate that enforcement of the summons would be an abuse of the court's process. n2  Such an abuse would take place if the summons had been issued for an improper purpose."  That said, a taxpayer must provide specific facts and evidence to meet the heavy burden necessary to demonstrate an abuse of process.
   n2 Where, as here, "the IRS issues a summons not to the investigated taxpayer herself, but to a third party who may possess records related to the taxpayer . . . , the named taxpayer is entitled to notice that the summons has been issued, and has the right to intervene in the summons-enforcement proceeding." Byers v. United States, IRS, 963 F.3d 548, 553 (6th Cir. 2020) (citation omitted). No matter whether the IRS issues the summons to the investigated taxpayer or a third party, "[t]he same standards apply." Ibid.

Relevance (cleaned up):

10th Circuit Rejects Constitutional Challenges to Passport Denial or Revocation for Seriously Delinquent Tax Debt ( 7/20/21)

In Maehr v. United States Dep't of State, ___ F.4th ___, 2021 U.S. App. LEXIS 21406 (10th Cir. July 20, 2021), CA 10 here, the Court rejected Maehr’s constitution attack on the 2015 FAST Act’s provisions for denying passport issuance and permitting revocation of previously issued passports.  § 7345; 22 U.S.C. § 2714a(e)(1), (2).

Maehr mounted a credible but ultimately unsuccessful claim that these provisions violated constitutional rights based on the right to international travel.  Basically, the Court held that there was no fundamental right to international travel and thus the review was limited to rational basis review which was easily passed because the Government has an interest in collecting taxes.

Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (7/19/21)

In United States v. Del. Dep't of Ins., Civil Action No. 20-829-MN-CJB, 2021 U.S. Dist. LEXIS 132716 (D. Del. July 16, 2021), here, the magistrate issued a Report and Recommendation that the IRS summons to the Delaware Department of  Insurance (“DDOI”) be enforced to compel production of documents related to “Artex Risk Solutions, Inc. (“Artex”), Tribeca Strategic Advisors, LLC (“Tribeca”) (which is owned by Artex) and others, in transactions involving micro-captive insurance plans.”  The summons “seeks information pertaining to approximately 200 insurance certificates of authority that DDOI issued to micro-captive insurance companies associated with Artex and Tribeca.”

Readers will recall that the routine for such petitions to enforce summons requires a rather minimal showing of need, called the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) as stated by the Court:

(1)  “that the investigation will be conducted pursuant to a legitimate purpose”; (2) “that the inquiry may be relevant to the purpose”; (3) “that the information sought is not already within the [IRS’] possession”; and (4) “that the administrative steps required by the Code have been followed.”

The Government handily met that Powell showing and DDOI failed to rebut it (as is usually the case for persons opposing IRS summonses).

The material dispute the Court resolved related to so-called reverse pre-emption.  The State insurance code provided secrecy protections to micro-captive insurance companies submitting documents and information to the DDOI.  Normally, the federal law permitting IRS summonses would pre-empt such a state law.  However, the McCarran-Ferguson Act (“MFA”) permits state statutes to trump federal law in certain circumstances.  The MFA reserves to the states the “regulation and taxation by the several States of the business of insurance.”  The statute, 15 U.S.C. §§ 1012(b), provides that

 (b) Federal regulation
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, [t]hat . . . the Sherman Act, . . . the Clayton Act[] and . . . the Federal Trade Commission Act . . . shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

The Court says (cleaned up):

Does Treasury Comply with Administrative Law, Including the APA? I Say Yes. Others Say No. (7/17/21)

In United States v. Kahn, 5 F.4th 167 (2d Cir. 7/13/21), here, the Court held that the FBAR willful penalty in 31 USC § 5321(a)(5), as amended in 2004 to increase the maximum amount of the penalty to 50% in the account(s), is not limited by the FINCen’s failure to update the underlying regulations (adopted in 1987) which, consistent with pre-2004 law, capped the willful penalty at $100,000.  This holding is currently the strong consensus.  I doubt there will be further aberrations on that issue. 

I generally discuss FBAR willful civil penalty issues principally on my Federal Tax Crimes Blog and did so in this case.  See Second Circuit Continues the Strong Consensus Rejecting the Argument that FINCen Regulations Under Pre-2004 Law Limit the Maximum Willful Penalty Prescribed under the 2004 Statutory Amendment (Federal Tax Crimes Blog 7/14/21), here.

I said in the Tax Crimes Blog posting that I might address Judge Menashi’s dissenting opinion which, in my view, is ideologically tinged repeating mantras in legal jargon that serve as proxies against the evils of the administrative state that play so well to the right.  Chevron is a chief bogeyman that Judge Menashi and other judges of similar bent use for the purpose.  Judge Menashi’s Wikipedia entry is here.

Judge Menashi’s analysis, in summary, is that an administrative agency, here FINCen with administration authority delegated to the IRS, should abide by its own regulations regardless of intervening changes in the statute.  Judge Menashi cites a rule called the Accardi principle (sometimes called a doctrine) after United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954).  FINCen is part of Treasury, but a different part than the IRS.  That issue then permits Judge Menashi to launch into administrative law.

What set me off particularly about Judge Menashi’s dissent is that, although not relevant to his analysis, he repeats Professor Hickman’s claims about the IRS not following administrative law, including the APA.   Judge Menashi thus asserts (p. 3) “The Treasury Department has sometimes evaded standard administrative law principles when enforcing the tax laws” citing in footnote 3 Kristin E. Hickman, Administering the Tax System We Have, 63 Duke L.J. 1717, 1718 (2014) (describing “tax departures from general administrative-law norms”).  Readers of this Federal Tax Procedure blog will recognize that type of claim by Professor Hickman.  The Court of Appeals in CIC Servs., LLC v. IRS, 925 F.3d 247. 258 (6th Cir. 2019), reh. en banc den. 936 F.3d 501 (6th Cir. 2019), rev’d and remanded 583 U.S. ___, 141 S.Ct. 1582 (2021) quoted Professor Hickman and a colleague as claiming that Treasury and the IRS “do not have a great history of complying with APA procedures, having claimed for several decades that their rules and regulations are exempt from those requirements.”  The quote is from Kristin E. Hickman & Gerald Kerska, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683, 1686 (2017)).  Fortunately, in the Supreme Court in CIC Servs. the parties submitting briefs (including Professor Hickman as amicus curiae) did not repeat that claim, and the Supreme Court did not make the claim.  Perhaps they steered away from the claim prominently made by the Court of Appeals because the claim is irrelevant to the issue presented (just as it was in the Court of Appeals) and, in my view, the claim is not true.  (I synthesize my conclusions on this at the end of this blog.)  And the claim is not relevant to the issue resolved in Kahn, but despite the claim's irrelevance, Judge Menashi makes the claim.

Supreme Court Opinion on Presumptions and Burden of Proof (6/21/21)

Readers will recall that I have written on burden of proof, including its components, the burden of persuasion and the burden of production.  I have posted blogs, but my principal offering burden of proof was in Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020), available on SSRN here.  Readers of this blog have surely been anxiously awaiting more on burden of proof.  The Supreme Court offered one today in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, ___ U.S. ___ (6/21/21), here.  Actually, I would not call it an update, but simply a rehashing of familiar burden of proof concepts in a specific setting in a class action securities fraud case.  The case is also perhaps notable because on the burden of proof issue, the majority opinion was written by Justice Barrett, and the dissent was written by Justice Gorsuch.

The case involved the burdens the parties bore in meeting the requirement that the class action plaintiffs show that the defendant’s false statements affected the market so that the plaintiffs’ reliance on the market price as a measure of value established damage.  The resolution turned on the plaintiffs’ invocation of a presumption in their favor and whether the presumption then shifted to the defendant a burden of production or a burden of persuasion.  The traditional role for a presumption, reflected in FRE 301, here, is to shift the burden of production—meaning a burden to produce some credible evidence without regard to whether that evidence persuades on the issue and without shifting the burden of persuasion.  In classic theory, the presumption does not shift the burden of persuasion, which, in Goldman, would have required that the plaintiffs bear the burden of persuasion on reliance.

The Court majority (Barrett, J.) held that, in this type of market reliance case, its precedents imposed the burden of persuasion on the defendant once the plaintiff met the requirements for creating the presumption.  In other words, the presumption in this case shifted the burden of persuasion, which is not the normal function of presumptions.

Once the majority found that its precedents imposed the burden of persuasion upon the presumption, the game was over.  Justice Gorsuch in dissent wanted to apply the general rule that the presumption only shifted the burden of production to Goldman and, once that limited production burden is met, the burden of persuasion remains with the plaintiffs.

That’s what the fight is all about.

Some interesting points from the opinions.

1. The shifting of the burden of persuasion (or, in a broader sense, the allocation of the burden of persuasion) only rarely would be outcome determinative.  (Majority Slip Op. 2 & 12-13).  This from pp. 12-13 is particularly good:

            Although the defendant bears the burden of persuasion, [*12] the allocation of the burden is unlikely to make much difference on the ground. In most securities-fraud class actions, as in this one, the plaintiffs and defendants submit competing expert evidence on price impact. The district court’s task is simply to assess all the evidence of price impact—direct and indirect—and determine whether it is more likely than not that the alleged misrepresentations had a price impact. The defendant’s burden of persuasion will have bite only when the court finds the evidence in equipoise—a situation that should rarely arise. Cf. Medina v. California, 505 U. S. 437, 449 (1992) (preponderance of the evidence burden matters “only in a narrow class of cases where the evidence is in equipoise”).

Judge Halpern Synthesizes Taxpayer and IRS Burdens when Seeking a Tax Result Based on Substance Rather than Form (5/31/21)

In Complex Media Inc. v. Commissioner, T.C. Memo. 2021-14 (as revised 3/31/21), TN here and TC Dkt entry 87 here, in a 103 page opinion, Judge Halpern had some interesting discussion on issues important to tax procedure fans.  I won’t try to slice and dice the entire opinion but will just point out the discrete parts that caught my attention.

1. “This Court has never accepted the Danielson rule. And, because the cases before us are not appealable to the Third Circuit (or to any other appellate court that has accepted the Danielson rule), the Golsen doctrine does not require us to apply that rule here.”  (Slip Op. 53-54.)

2. More interesting is the Court’s discussion as to the different burdens when the IRS and the taxpayer seeks to avoid the form of the transaction.  The key excerpt is (Slip Op. 63-64):

In sum, as our caselaw has evolved, it has become more hospitable to taxpayers seeking to disavow the form of their transactions. While we no longer reject those arguments out of hand, as we did in Swiss Oil Corp., J.M. Turner & Co., and Television Indus., we have repeatedly indicated that taxpayers may face a higher burden than the Commissioner does in challenging transactional form. On occasion, as in Glacier State Elec. Supply, we have suggested that the taxpayer's higher burden might be an evidentiary one. But we have not identified specific factual questions that should be subject to a higher burden than that imposed by Rule 142(a) or articulated the quantum of evidence necessary to meet that burden. [*64] Nor have we offered a clear justification for imposing on the taxpayer a higher burden to prove facts relevant to the disavowal of form than the generally applicable preponderance of the evidence standard.

Therefore, we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content--not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits (to either the taxpayer itself, as in Estate of Durkin, or to a counterparty, as in Coleman) that are inconsistent with those the taxpayer seeks through disregarding that form. When the form that the taxpayer seeks to disavow was chosen for reasons other than providing tax benefits inconsistent with those the taxpayer seeks, the policy concerns articulated in Danielson will not be present.

I have revised the relevant discussion in my Federal Tax Procedure book working draft to be published in August.  I link here a pdf of the discussion with the changes redlined.  Note that the page numbers and footnote numbers will be different in the final version published in August.

JAT comments:

Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21)

This morning, the Supreme Court released its opinions in CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here.  The main opinion is a unanimous opinion authored by Justice Kagan.  Justices Sotomayor and Kavanaugh joined the main opinion but also filed concurrences.

I have not studied the opinion, so offer at this time only the syllabus and a couple of quick comments:

Internal Revenue Service (IRS) Notice 2016–66 requires taxpayers and “material advisors” like petitioner CIC to report information about certain insurance agreements called micro-captive transactions. The consequences for noncompliance include both civil tax penalties and criminal prosecution. Prior to the Notice’s first reporting deadline, CIC filed a complaint challenging the Notice as invalid under the Administrative Procedure Act and asking the District Court to grant injunctive relief setting the Notice aside. The District Court dismissed the action as barred by the Anti-Injunction Act, which generally requires those contesting a tax’s validity to pay the tax prior to filing a legal challenge. A divided panel of the Sixth Circuit affirmed.

Held: A suit to enjoin Notice 2016–66 does not trigger the Anti-Injunction Act even though a violation of the Notice may result in a tax penalty. Pp. 5–16.

(a) The Anti-Injunction Act, 26 U. S. C. §7421(a), provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” Absent the tax penalty, this case would be easy: the Anti-Injunction Act would pose no barrier. A suit to enjoin a requirement to report information is not an action to restrain the “assessment or collection” of a tax, even if the information will help the IRS collect future tax revenue. See Direct Marketing Assn. v. Brohl, 575 U. S. 1, 9–10. The addition of a tax penalty complicates matters, but it does not ultimately change the answer. Under the Anti-Injunction Act, a “suit[’s] purpose” depends on the action’s objective purpose, i.e., the relief the suit requests. Alexander v. “Americans United” Inc., 416 U. S. 752, 761. And CIC’s complaint seeks to set aside the Notice itself, not the tax penalty that may follow  [*2] the Notice’s breach. The Government insists that no real difference exists between a suit to invalidate the Notice and one to preclude the tax penalty. But three aspects of the regulatory scheme here refute the idea that this is a tax action in disguise. First, the Notice imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty. Second, it is hard to characterize CIC’s suit as one to enjoin a tax when CIC stands nowhere near the cusp of tax liability; to owe any tax, CIC would have to first violate the Notice, the IRS would then have to find noncompliance, and the IRS would then have to exercise its discretion to levy a tax penalty. Third, the presence of criminal penalties forces CIC to bring an action in just this form, with the requested relief framed in just this manner. The Government’s proposed alternative procedure—having a party like CIC disobey the Notice and pay the resulting tax penalty before bringing a suit for a refund—would risk criminal punishment. All of these facts, taken together, show that CIC’s suit targets the Notice, not the downstream tax penalty. Thus, the Anti-Injunction Act imposes no bar. Pp. 5–13.

(b) Allowing CIC’s suit to proceed will not open the floodgates to pre-enforcement tax litigation. When taxpayers challenge ordinary taxes, assessed on earning income, or selling stock, or entering into a business transaction, the underlying activity is legal, and the sole target for an injunction is the command to pay a tax. In that scenario, the Anti-Injunction Act will always bar pre-enforcement review. And the analysis is the same for a challenge to a so-called regulatory tax—that is, a tax designed mainly to influence private conduct, rather than to raise revenue. The Anti-Injunction Act draws no distinction between regulatory and revenue-raising tax laws, Bob Jones Univ. v. Simon, 416 U. S. 725, 743, and the Anti-Injunction Act kicks in even if a plaintiff’s true objection is to a regulatory tax’s regulatory effect. By contrast, CIC’s suit targets neither a regulatory tax nor a revenue-raising one; CIC’s action challenges a reporting mandate separate from any tax. Because the IRS chose to address its concern about micro-captive agreements by imposing a reporting requirement rather than a tax, suits to enjoin that requirement fall outside the Anti-Injunction Act’s domain. Pp. 13–15.

JAT Comments:

Mayo -- the other Mayo -- reversed by CA8, Sustaining Regulations Interpretation (5/13/21)

In Mayo Clinic v. United States, 2021 U.S. App. LEXIS 14143 (8th Cir. 5/13/21), here, the Eighth Circuit reversed the district court’s invalidation of a regulation’s test for meeting the “qualified organization” requirement that turned upon being an educational organization under § 170(b)(1)(A)(ii).  Reg. § 1.170A-9(c)(1) defined a charitable organization as one whose “primary function is the presentation of formal instruction” and whose noneducational activities “are merely incidental to the educational activities.”  As stated by the Court, the district court “held that the Treasury Regulation is invalid ‘because it adds requirements — the primary-function and merely-incidental tests — Congress intended not to include in the statute.’”

A quick digression, I wrote on the district court opinion:  District Court Invalidates Interpretive Regulation at Chevron Step One (Federal Tax Crimes Blog 8/8/19; 3/11/19), here.  I concluded as follows:

I don't think the Court's reasoning is compelling.  The conclusion may be right.  I just don't think the reasoning articulated by the Court compels the conclusion that the statutory text does not offer sufficient ambiguity to permit the interpretation adopted by the IRS.

In reversing the district court, the Eighth Circuit panel did not adopt my implicit reasoning—that there was sufficient ambiguity in the statute to permit Chevron space for reasonable interpretations at Chevron Step Two.  (Although, if Chevron is conceptualized as a single step, all the work really could be done at Chevron Step One but I won’t go down that detour here.)  Rather, the Eighth Circuit panel stops at Step One because it found that the regulation was permitted by the unambiguous text of the statute, at least the unambiguous text as the Eighth Circuit panel interpreted the text.  (Because the regulations test is  not compelled by the statutory text and requires interpretation for it to be compelled, that means, in  my mind, that there is interpretive space in the statute; if there is interpretive space, then the court or the agency may fill that interpretive space, but if the agency has done it, the interpretation, is usually tested at Step Two)

Of course, at Chevron Step One, the usual tools of statutory interpretation apply to determine whether the statute is ambiguous and whether the interpretive regulation is within the scope of the ambiguity.  I gather what the Court did was to apply those interpretive tools to determine that there was no ambiguity and thus no remaining interpretive space under the Chevron Framework because the regulation was consistent with that unambiguous interpretation.  If that is true, then it seems to me that it is the statute that is the law and not the regulation, consistent with traditional distinctions between legislative and interpretive regulations.  Hence the interpretive regulation which is then consistent with the unambiguous statutory text (as interpreted) becomes the law and per se the regulation interpretation a is valid interpretation of the statute.  (Compare the Treasury’s adoption in some interpretive regulations of language mimicking the statute; what work and what validity do the regulations have in that context?)

 Two things further on Chevron:

Follow by Email Feedburner Email Notice Service Being Discontinued (5/10/21)

Some readers of the Federal Tax Procedure Blog have signed up for and have been receiving email notifications of new blog entries via a service called Feedburner through the “Follow by Email” widget that formerly was in the right hand column on this blog.  The Feedburner service is being discontinued in July 2021.  I am therefore eliminating that widget so that Follow by Email will not longer be available for new subscribers to that service and,  I gather, the Follow by Email service will stop working in July 2021 for persons who were already registered.

There are other services that, I understand, can provide that functionality, but I just have not spent the time to try to figure out how they work and how to implement them on the blog site.  If and when I figure that out, I will try to get a replacement Follow by Email.

I have downloaded the email addresses of those who were registered as of today.  So, if I get a substitute service for this functionality, I will email those persons with notice so that they can register.  I will also post a blog entry notifying of the replacement service (if I set up one).