Is Statutory Interpretation a Legislative Act When Agencies Do It But Not When Courts Do It? (4/8/22; 10/23/22)

I recently wrote on the Sixth Circuit’s important decision in Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA9 here and GS here. See Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22).  I was reading today Bryan Camp’s great discussion on this case in Lesson From The Tax Court: Penalty Approval In Conservation Easement Cases (Tax Prof Blog 4/4/22), here.  In concluding the post, Professor Camp offered this comment:

Comment: I said Judge Guy’s concurrence in Oakbrook was “ironic.”  Here's why.  Judge Guy thought the regulation was what is called a "legislative" regulation and was not an "interpretive" regulation.  While Treasury had followed the proper APA process for issuing an interpretive regulation, that process was not proper for issuing a legislative regulation.  So Judge Guy said the regulation was inoperative because it had not been validly issued.  Ok so far.  But then Judge Guy ends up construing (oh! dare I say "interpreting") the statutory language at issue.  The irony here is that Judge Guy totally agrees with the regulation on how the term “perpetuity” in the statute should be interpreted.  So the taxpayer loses.  But I doubt Judge Guy would say he was “legislating” from the bench!  Nah!  He was just “interpreting.”  Cuz that's what a court does, doncha know. Thus the irony: when Treasury does the same thing as a Court does in a regulation suddenly it’s a legislative act and not an interpretive act.  But when the Court does it, it’s just...well...interpretation.  Go figure.

This caught my attention because that precise point has bothered me.  As I note in my article, central to Professor Hickman’s argument that Treasury regulations which do no more than interpret ambiguous statutory text are legislative regulations.  This argument is embraced in many court opinions.  Indeed that is the argument I tilt against in my article John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 12/15/21), here..  I address Professor Camp’s point at several places in my article, but the following are two most pertinent here:

First, pp. 5-6, footnotes omitted and emphasis supplied):

    At a high level, the key difference I have with Professor Hickman’s claim hinges upon whether regulations that only interpret statutory text within the range of reasonable interpretations of the statute from enactment of the statute are  legislative regulations rather than interpretive regulations. Professor Hickman claims that interpreting is legislating. If that claim is true, regulations that only interpret statutory text are legislative, must be adopted with Notice and Comment, and must be prospective in application. My opposing claim is that such Treasury regulations are interpretive regulations which the APA specifically exempts from the Notice and Comment requirement although they may be adopted with Notice and Comment (and usually are by the Treasury) and can apply retroactively. The interpretations in such regulations operate within the same interpretive space as judicial opinions. When courts interpret, they are not legislating, for our constitution does not authorize courts to legislate. When agencies interpret within that interpretive space pursuant to explicit or implicit authority to interpret ambiguous statutory text, they also are not legislating.

Court Invalidates Regulation for Invalidity of Good Cause Statement (4/6/22)

In Liberty Global, Inc. v. United States (D. Colo. Dkt. 1:20-cv-03501-RBJ #46 Order dtd. 4/4/22), CL here and GS here, the Court granted summary judgment to Liberty Global holding IRS temporary regulations on § 245A invalid for not undertaking notice and comment before the effective date.  (The docket entries and pleadings on the motion are available on Courtlistener here.)  I am not so much concerned about the substantive issue of whether Liberty Global owes the tax in question.  I am concerned about what I perceive as lack of sound analysis on the APA issues by parties and, as a result, by the Court.

Basically, the Court held that:

1.  The regulation in issue was a legislative regulation, apparently without analysis of the issue because “the parties do not dispute that the temporary regulations are legislative rules.”  (Slip Op. 9.)

2. As a legislative regulation issued with a statement of good cause for immediate effect, the good cause statement was not persuasive; therefore the temporary regulation did not have immediate effect.

3. Implicit in #2 was that, if the good cause statement were valid, the temporary regulation could have not only been effective immediately upon promulgation but there was still the issue of whether good cause immediate effect would permit retroactivity under § 7805(b)(2) (although that may be implicit).

I think the Court’s holdings are consistent with mainstream judicial and scholarly current thinking.  As readers of this blog know, I part company with mainstream current thinking on key premises relevant to this discussion.  I provide key relevant points of departure, but those wanting detailed analysis can find it in John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 12/15/21), here.

On Tax Exceptionalism and Deference (4/3/22)

Yesterday in a blog on Chevron deference here, I stated in the first sentence that that the claim of tax exceptionalism was a false claim.  I included my reason for saying it was a false claim as a Postscript to that blog, but have decided to pull it out and make it a separate blog entry.  

A major component for that claim of tax exceptionalism was that there was a difference in deference for tax interpretations and deference for other agency interpretations.  Starkly, the claim was that Chevron deference to all other agency interpretations did not apply to tax interpretations.  Just stating that starkly should make one suspicious of the claim because Congress never did anything that justified the claim, and the Supreme Court never articulated the claim; when the Supreme Court did address the claim in 2011, it squarely rejected it.  Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011).  I also had anticipated the Mayo holding outcome in my pre-Mayo Federal Tax Procedure Books, e.g., the 2010 edition p. 59 here, where I conclude “My feeling is that the courts will ultimately reach consensus (perhaps enforced by the Supreme Court) that Chevron does apply, but the issue may be academic only in most cases since the two standards for deference would likely produce the same results.”

            I have recently written on the myth of tax exceptionalism in my article above, here, at pp. 67-70 which I quote here without the footnotes. (But remember  that the detail (the writing substitute for detail) is in the footnotes; to see the text and footnote, click here.)

                        10.      The Myth of Tax Exceptionalism.

            So-called “tax exceptionalism” has also crept into the discussion, at least as regards tax rulemaking and its imagined distinction from rulemaking by other agencies.  The notion, much bandied about for many years, is that IRS administration of the tax law was somehow outside the ambit of administrative law rules (including the APA) that applied to other federal agencies.  If not outside, then IRS administration was at least subject to peculiar applications of administrative law. In a recent case, quoting an article co-authored by Professor Hickman, the Sixth Circuit alleged in the conclusion to the majority opinion 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.”  That claim is based on Professor Hickman’s claim addressed in this article that interpretive regulations are legislative regulations so that the use of Temporary Regulations for immediate effect and presumably even retroactive effect for interpretations is not in compliance with the APA.  That allegation, the core of tax exceptionalism, is false which may explain why, although a central feature of the Sixth Circuit opinion, neither the parties nor Professor Hickman as amicus repeated the allegation in their briefs before the Supreme Court, and the Supreme Court judiciously did not repeat it.

Is Chevron on Life Support; Does It Matter? (4/2/22; 4/3/22)

In teaching tax procedure for many years, I introduced my students to Chevron deference while discussing the false claim of “tax exceptionalism.” I define Chevron deference as a court deferring to an agency statutory interpretation that is less persuasive than the interpretation determined by the court. After all, if a court determines that the agency interpretation is the best interpretation, it does not defer to the agency interpretation. In a recent article titled  See John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 12/15/21), here, I addressed the key feature for Chevron deference, the continued existence of the APA interpretive regulation category.  As a Postscript to that article I dug in deeper on Chevron deference.  Readers can view that Postscript separately here. In the Postscript, I review my evolved thoughts on Chevron, developing analytical Categories for potential deference to agency interpretations.  (Those Categories are below.)  I inferred that Chevron deference to lesser agency interpretations is rarely outcome determinative. I base my inference on how I understand judges work (do they really apply less persuasive interpretations if they can avoid it?) and my reading of many cases citing Chevron.

An author posted an empirical analysis of cases where he identified 56 Federal Courts of Appeals cases as “granted Chevron deference” for the year ended November 30, 2021. Damonta D. Morgan, Chevron’s New Step Zero?: Measuring the Impact of Justice Gorsuch’s “Pecuniary Interest” Query (Notice and Comment 1/4/22), here. Mr. Morgan graciously shared his data set and permitted me to use it to test my inference.

I used the Categories to identify which cases in Mr. Morgan’s dataset involve deference to lesser agency interpretations. My categorization of the cases is in the table linked here; and explanations for the Categories assigned in the table are here [Note: the linked file when this blog was originally published was the wrong one; on 4/3/22 at 1:30 pm, I posted the correct linked file.] The aggregate results by Category are:

Category 0 - Cannot characterize but no deference; some could be like Chevron Step 0; this Category was not in the Postscript.	8
Category 1 - Statute unambiguous with no interpretive space for agency interpretation; no deference.	2
Category 2 - Statute ambiguous; no agency interpretation; court interprets; no deference	0
Category 3 - Court determines agency interpretation is best interpretation and applies it; no deference	8
Category 4 - Court determines agency interpretation unreasonable & applies the court's better interpretation; no deference	2
Category 5 - Court determines agency interpretation is reasonable but not best interpretation and defers to the agency interpretation anyway; deference (only category where court expressly deferred to a less reasonable agency interpretation)	0
Category 6 - Court determines agency interpretation is reasonable but makes no determination of best interpretation; applies agency interpretation; inconclusive deference	36
Category 7 - Court determines agency interpretation is reasonable but there is at least one other reasonable interpretation and court is in equipoise as to the best interpretation; court applies agency interpretation; no deference (because the court does not defer to a less persuasive agency interpretation)	0

The only relevant Categories to test my inference are Categories 5, 6 and,7 possibly, 7.  I wanted to present the other Categories (0-4) to illustrate a large swath of cases involving interpretations where there is no deference.  Actually 56 identified cases in a year that could possibly involve Chevron deference is a very small percentage court of appeals cases in the courts of appeals.  Mr. Morgan’s data set already excluded the bulk of the Category 0-4 cases because they involve no possible deference.  I have cases in those Categories where I disagree with Mr. Morgan that they were “granted Chevron deference.” Based on my assignment of cases to Categories, I conclude:

Court Holds Defendant in FBAR Suit Alleging No Deficiency in Tax for Excessive Fines Argument Must Prove Deficiency Despite Tax Court No Deficiency Decision (4/1/22)

In United States v. Kerr, 2022 U.S. Dist. LEXIS 57004 (D. Az. 3/29/22), GS here and CL here, Government brought suit to collect an FBAR civil willful penalty. The Government conceded error in the calculation and submitted revised much lower calculations. The Court invoked the APA to remand the matter to the IRS for recalculation with a more robust explanation. Whether remand to the IRS can result in a valid FBAR assessment is yet to be determined.

I focus on Kerr’s claim that the FBAR civil willful penalty assessments violated the Eighth Amendment prohibition on Excessive Fines. This claim is often made in FBAR civil willful penalty cases, but it have never been made successfully so far as I am aware. Kerr also failed here.

I include the Court’s discussion in its entirety (Slip Op. 15-17, one footnote omitted) because it discusses the lack of preclusive effect for a stipulated no deficiency decision in the Tax Court without any judicial resolution of the issues behind the no deficiency stipulation.

c. Whether the Assessment Violates the Eighth Amendment

             Although the Court will only enter judgment on three of the penalties made in the Original Assessment, it will consider Mr. Kerr's argument that the FBAR penalties violate his rights under the Eighth Amendment. The Eighth Amendment provides that no “excessive fines” shall be imposed. U.S. Const. amend. VIII. A punitive forfeiture violation is excessive “if it is grossly disproportional to the gravity of a defendant's offense.” United States v. Bajakajian, 524 U.S. 321, 334 (1998). Although no court has expressly held that civil FBAR penalties constitute a fine under the Eighth Amendment, the Court will assume, without deciding, that they are. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (evaluating whether FBAR penalties are “grossly disproportional” to the gravity of the defense under the Eighth Amendment).

             Mr. Kerr bears the burden of showing that the civil penalties are grossly disproportional. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014). Courts show substantial deference to legislative bodies when reviewing statutorily established penalties. Bajakajian, 524 U.S. at 334; Solem v. Helm, 463 U.S. 277, 290 (1983). In Bajakajian, the Court considered several factors in determining whether a fine was excessive including the nature of the conduct, the resulting harm, and whether other penalties may be imposed. 524 U.S. at 336-38; see also United States v. Bussell, 2015 WL 9957826, at *7 (C.D. Cal. Dec. 8, 2015). The Ninth Circuit has noted that these Bajakajain [sic] factors are not “rigid” and so courts are not limited to these considerations. United States v. Mackby, 339 F.3d 1013, 1016 (9th Cir. 2003).

             Under these factors, Mr. Kerr argues that the penalty is grossly excessive because (1) the only crime he committed was willfully failing to report the accounts, (2) this failure was unconnected to other criminal activity, (3) that other criminal penalties already exist for this conduct, and (4) that “the government suffered no injury as it stipulated that [Mr.] Kerr did not underreport his tax liabilities.” (Doc. 47 at 25).

Summary of Tax Crimes for Tax Procedure Class (3/31/22)

This past Tuesday, I was a guest lecturer at Jim Malone’s UVA Law Class on Tax Procedure.  My subject was tax crimes.  I circulated in advance a pdf summary of the topic here (which I have changed slightly as indicated in red).  The summary is taken from the corresponding section of my Federal Tax Procedure Book Practitioner Edition but stripping out the footnotes and modifying the text as I thought appropriate).  Readers of this blog can download the summary here.  SSRN links to download either the Student or Practitioner Editions of the book are here. 

Rationality and Chevron (3/22/22)

I am reading Steven Pinker’s book Rationality: What It Is, Why It Seems Scarce, Why It Matters. (Penguin 2021) here, to lead the discussion in a book club.  At the same time, I am preparing an outline—yet another-- on Chevron deference.  The two exercises (reading Pinker’s Rationality and trying to make sense of Chevron deference) have converged. 

Chevron deference, as normally articulated, requires a court sometimes (at least as a conceptual possibility) to apply a “not-best” but “reasonable” agency interpretation of a statute in lieu of what the judge believes is the best interpretation.  In order to apply the best interpretation in lieu of the agency not-best interpretation, a judge can use several escape routes where the judge can fuss around about Chevron and still apply the judge’s best interpretation.  The two key ways built into the Chevron Two-Step Framework to avoid deferring to a “not-best” agency interpretation is (i) at Step One, to find the statutory text not ambiguous and (ii) at Step Two, to find the agency interpretation unreasonable.  There are other ways to avoid as well, such as the “major questions” doctrine and interpretations not within the agency’s expertise where the judges read the tea leaves to conclude that surely Congress did not intend the agencies should have primacy of interpretation authority.  E.g., King v. Burwell, 576 U.S. 473 (2015).

I will focus here on the escape hatches formalized in the Chevron Two-Step.

First, a judge can avoid the agency not-best interpretation by finding it unreasonable at Chevron Step Two.  Judges are trained to derive the best interpretation.  I think that is a judge's preference by education and practice.  I have wondered whether judges having a bias in favor of their own best interpretations might be motivated to find the agency not-best interpretations unreasonable.

Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22)

I recently discussed the Eleventh Circuit’s opinion in  Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). 11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21), here; and Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here. In Hewitt, the Eleventh Circuit invalidated the regulation § 1.170A-14(g)(6)(ii) requiring for charitable conservation donations of partial interests (such as easements) that the deed does not permit the donor to share in proceeds on extinguishment in the property values attributable to post donation improvements made by the donor. Yesterday, the Sixth Circuit sustained the regulation, thus creating a Circuit conflict between Hewitt and Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA6 here and GS here.

The Sixth Circuit in Oakbrook holds the regulations are procedurally valid, rejecting the reasoning of the Eleventh Circuit for holding the regulations procedurally invalid. The Sixth Circuit so holds in separate parts of the majority opinion that

(i)                addresses procedural regularity or “arbitrary or capricious” review (in 5 USC § 706 stated in disjunctive but often stated in conjunctive “arbitrary and capricious review) (28 F.4th at 710-718 and 720- 722); and 

(ii)              Chevron analysis (28 F.4th at 718-720). 

 (It is not clear to me why the Court sandwiched Chevron analysis between components of arbitrary and capricious review, but there is a lot of confusion in this general area.)

Justices Discuss Limited Ambiguity Role for Lenity and by Analogy Chevron Deference (3/11/22)

Ambiguity in statutory text can invoke two interpretive regimes.  Ambiguity in a criminal statute invokes the rule of lenity that says that if a criminal statute is ambiguous (or, sometimes, grievously ambiguous) the statutory ambiguity must be interpreted in the criminal defendant’s favor.  Ambiguity in a statute potentially subject to Chevron deference to an agency interpretation is interpreted consistent with the Chevron-entitled agency interpretation if it is reasonable (permissible).  Both interpretive regimes turn on ambiguous statutory text.

The question I address in this blog is what ambiguity means for both lenity and Chevron deference.  The only thing that I am sure of is that ambiguity in either context has no litmus test, thus is itself ambiguous.  As I note in The Report of the Death of the Interpretive Regulation Is an Exaggeration 75 n. 296 (SSRN December 14, 2021), here.

   n. 296 The word ambiguous in deference jurisprudence may be ambiguous. E.g., Aditya Bamzai, Delegation and Interpretive Discretion: Gundy, Kisor and the  Formation of Future Administrative Law, 133 Harvard L. Rev. 164, 187 n. 140 (2019) (“The question of how to identify ‘ambiguity’ is a long-running one in both administrative law and elsewhere,” citing scholarly discussions); Brett M. Kavanaugh, Book Review: Fixing Statutory Interpretation, 119 Harv. L. Rev. 2118, 2118-2119 (2016) (“judges often cannot make that initial clarity versus ambiguity decision in a settled, principled, or evenhanded way”); and Ryan D. Doerfler, The “Ambiguity” Fallacy, 88 Geo. Wash. L. Rev. 1110 (2020) (“‘ambiguity,’ is critically ambiguous.”)

Ambiguity in the ambiguity concept also infects lenity.  In Wooden v. United States, 595 U. S. ____ 2022 U.S. LEXIS 1421 (3/7/22), S.Ct. here and GS here, Justices Kavanaugh and Gorsuch, in concurring opinions, weighed in on the issue in ways that evoke the ambiguity discussion for Chevron deference and may offer some guidance in Chevron deference.

I start with Justice Gorsuch’s discussion on p. 9 of his concurring opinion which starts here.  Justice Gorsuch starts with a complaint about the gloss sometimes added to the lenity discussion that the ambiguity must not only be ambiguous but also must be “grievously ambiguous.”  I think he does a pretty good job in demolishing the spurious notion that there are two categories of ambiguity for lenity purpose – grievous in which lenity applies and non-grievous in which lenity does not apply.  Lenity applies where there is ambiguity, period.

This still does not help in determining what ambiguity is.  Is it just that the judge knows it when he or she sees it.  Justice Kavanaugh discusses that issue in his concurring opinion starting here.  Basically, Justice Kavanaugh argues that ambiguity in statutory interpretation for lenity purposes is a rare phenomenon.  Evoking the Chevron / Auer concepts hinging on ambiguity, Justice Kavanaugh says (p. 2 of concurring opinion):

Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (3/3/22)

In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 3/3/22) CA6 here and GS here, the Sixth Circuit panel held invalid IRS Notice 2007-83, 2007-2 C.B. 960, entitled “Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits,” which identified the transactions as listed transaction requiring participants in various categories to report the transactions and be potentially subject to penalties if they did not. The company and two shareholders (“taxpayers”) failed to report. The IRS imposed § 6707A penalties for their failures. The taxpayers apparently made no claim that they did not know of the reporting requirement. Rather, they raised only administrative law issues under the Administrative Procedure Act (“APA”) that the IRS adopted the Notice requirement without following the APA’s procedural requirements or was otherwise outside the statutory authority. 

The Court of Appeals addressed only one issue raised by the taxpayers – whether the IRS’s promulgation of the reporting requirement with penalty regime by Notice, a subregulatory guidance document, was a legislative rule that could only be adopted by notice-and-comment rulemaking. The Court held that the reporting requirement was a legislative rule, thus requiring notice-and-comment rulemaking and thus invalid because the IRS had not undertaken notice-and-comment rulemaking.

I will not attempt a detailed analysis of the Court’s reasoning. One thing I am sure of is that there is a lot of confusion about what precisely is a legislative rule subject to or exempted from the notice-and-comment rulemaking requirement. I think the Court falls into some fallacies in that regard, but won’t go down that rabbit hole here because that is a long and complex discussion, principally because of misreadings of Chevron. 

My reading that, I think, is straight-line. 

 1.  Section 6707A(a), here, imposes the penalty for failure to file a return or statement providing information regarding a “reportable transaction” under § 6011.

2.  Section 6011(a), here, in turn provides

(a) General rule
When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.