First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (11/9/22)

I am late posting on Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), 1^st Cir. here and GS here. So the principal point of this blog is to point to the excellent writings of others, which I provide below.

The basic holding of the case (as I understand it) is that, based on CIC and Direct Marketing, the Anti-Injunction Act, § 7421(a) (“AIA”)) does not apply to IRS actions to gather information as opposed to actions to assess and collect tax. As a result, under CIC, a taxpayer can have pre-enforcement review challenging the validity of the JDS and the resultant unlawful acquisition and retention of his financial information, on the notions that; (i) the APA § 702 contemplates pre-enforcement review of IRS information gathering activity (as opposed to assessing or collecting activity) and (ii) the ex parte John Doe Summons (“JDS”) is an information gathering function rather than a tax assessing or collecting function.

My only comment is that the underlying issue as to whether a taxpayer can get pre-enforcement review of the validity of a JDS is an important one.  The holding seems to portend a wide swath of pre-enforcement challenges in various other IRS information-gathering activities.  In a comment posted to a  PT Blog, I asked (cleaned up for typos):

Justice Gorsuch's Newest Rant on Chevron and the Administrative State (11/7/22; 11/8/22)

Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough, 143 S. Ct. 14 (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here; Supreme Court docket entries here.  

As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1153 (10th Cir. 2016), GS here, he rants alone, unable to attract any other Justices’ concurrence in his concurrence.  I will write more later today or tomorrow on his rantings; in the meantime, readers can read the rant (only 16 pages) without being distracted by my counter-rant.  I will say that my text search indicates that he does not repeat his Brizuela concurring rhetoric about elephant in the room. At least that is good, but he does have some other rhetorical sound bites that may play well with persons who hate the administrative state as much as he does.

When I write more, I will post it to this blog entry and note the date and time I added it.

Added 11/8/22 ___ pm 2:15 pm:

1. Justice Gorsuch makes clear that he does not like Chevron “deference” because, he believes, it allocates interpretive power to agencies that should belong to the courts. I think readers interested in this area should respectfully consider his arguments (sort of like Skidmore respect for arguments in non-majority opinions.). I do not deal in detail with the arguments because they are addressed in my article,  The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here. (Referred to in this blog entry as Report of the Death.)

2. I disagree with two major points in Justice Gorsuch’s argument:—

 (i) courts did not defer to agency interpretations before Chevron was elaborated after the decision in 1984 but instead only gave respectful consideration to agency interpretations a la some Skidmore-type respect to determine the best interpretation);  and

(ii) the APA § 706 allocated to the courts all interpretive power over ambiguous statutory text just as the Constitution requires from the sound bite in Marbury v. Madison.

Gorsuch Claims in Bittner Oral Argument that "nobody promulgates regulations anymore": True or False? (11/4/22)

This post discusses a claim that Justice Gorsuch made in oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.) The link for the typed transcript is here; the link for the audio is here.

The issue in Bittner is whether the FBAR nonwillful penalty of up to $10,000 applies per form (regardless of the number of foreign accounts not reported) or per account (for each account that should have been but was not reported on an FBAR for the year).

In the context of discussing guidance documents, Justice Gorsuch said (Tr. p. 64): "[N]obody promulgates regulations anymore. It's too troublesome."

That claim is demonstrably false. He may have meant that agencies disfavor and mostly do not use formal rulemaking (which does not require promulgation of regulations), although agencies regularly use informal rulemaking requiring promulgating notice and comment regulations. Here is the difference between the two as I explain Federal Tax Procedure (2022 Practitioner Ed.), SSRN here, at p. 57 n. 256.

   n256 The informal rulemaking process is described in 5 U.S.C. § 553, whereas the formal rulemaking process is described in § 556. David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Yale L.J. 276, 282 (2010) ("The first technique, so-called 'formal' rulemaking, involves onerous trial-type hearings and is rarely required unless a specific statute calls for rules to be 'made on the record after opportunity for an agency hearing.' Far more common is the second technique, variously known as 'informal,’ 'notice-and-comment,' or 'section 553' rulemaking.").  The formal rulemaking process is rarely used in agencies generally.  See Perez v. Mortgage Bankers Assn., 575 U. S. 92, 128 n5 (2015) (Thomas, concurring) (noting that (i) "almost all rulemaking is today accomplished through informal notice and comment," in contrast to the formal rulemaking process requiring "elaborate trial-like hearings in which proponents of particular rules would introduce evidence and bear the burden of proof in support of those proposed rules," citing 5 U. S. C. §556; and (ii) "formal rulemaking is the Yeti of administrative law" with "isolated sightings of it in the ratemaking context, but elsewhere it proves elusive.”). Informal rulemaking is permitted unless the authorizing statute mandates formal rulemaking.  United States v. Florida East Coast R. Co., 410 US 224, 236-238 (1973). 

I am not trying to pick on Justice Gorsuch, but he is an administrative law wannabe expert as shown by his ranting about Chevron and related confusion I address in my article The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here, at pp.  110-116 under the caption "b. Gorsuch's Imagined Elephant in the Room.").

Added 11/7/22 3:30 JAT Comment:

1. Justice Gorsuch continues his ranting against Chevron and the administrative state in a dissent today from a denial of a petition for certiorari.  Buffington v. McDonough (Sup. Ct. Case No. 21–972 11/7/22), SC here and GS here.  As with his concurring opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142. 1153 (10th Cir. 2016), GS here, Justice Gorsuch could not get any other Judge (this time 8 others rather than 2) to agree with what he has to say. (Of course, any of the other Justices could have not joined his opinions for a host of reasons rather than his over the topic rhetoric and questionable claims about the history of deference.  I will post a separate blog entry on his dissent in Buffington.

3rd Circuit Holds that Collection Statute of Limitations Is Suspended through Supreme Court Finality (11/2/22; 11/3/22; 11/7/22)

Section 6330(e)(1) ( provides that certain levy actions and certain statutes of limitations (including collection) are suspended while Collection Due Process (“CDP”) “hearing and appeals therein are pending.”  Readers will recall that the taxpayer invokes the CDP hearing by making a timely request and then, if not satisfied, can petition the Tax Court for review.  The Tax Court will then review, and that taxpayer and the IRS have the standard appeals processes to the Court of Appeals and, by petition for writ of certiorari, to the Supreme Court.

In United States v. Weiss, 52 F.4th 546 (3rd Cir. 11/2/22), CA3 here, the Court held that, for statute of limitations suspension in CDP cases, “appeals therein” and “pending” mean not until all appeals processes (including Supreme Court, if invoked as it was in Weiss) are final.  That holding stated that way makes sense—even common sense. 

But, it was not so simple for the Third Circuit.  The authoring judge, Judge Phipps, seized the opportunity to elaborate in 15 pages not including the cover caption page -- bringing out the dictionaries and other interpretive tools to tackle the weighty issue of what “appeals therein” and “pending” mean.  Stating the standard pablum that you look to the meaning of statutory words at the time of enactment, the judge holds forth on that and finds some potential ambiguity that can be cleaned by going through dictionaries and maxims. 

For those interested in reading footnotes, I commend footnotes 2-4, covering most of pages 8-10, particularly n4 where he holds forth on the “autohyponym.”  That was a new word for me.  He explains in the footnote:

Referral to Procedurally Taxing Blog on Tax Court Delays (10/31/22)

I refer readers to It is Time To Take Remedial Steps To Improve The Timeliness of Tax Court Dispositions (Procedurally Taxing Blog 10/31/22), here.  The subject is concern that, at various key points in the litigation process in the Tax Court, there are bottlenecks that result in some cases being delayed beyond what seems appropriate, given the important role the Tax Court serves in our ubiquitous tax system. It is perhaps hyperbole to state the common phrase that justice delayed is justice denied. Our litigation system involves delays, but that does not justify unnecessarily long delays of the type the authors have observed in some Tax Court litigation.

The post is signed by several persons who observe and write on tax system, focusing on procedure.  They are:

Leslie Book
Keith Fogg
Steve Olsen
Nina Olson
Jack Townsend

I encourage readers having creative ideas on how to make the system more timely make comments on the PT blog entry linked above or perhaps even offering a submission to the PT Blog Team for a Guest Blog.

To me, the most shocking point made in the PT blog is that the Tax Court (really through such management as the Tax Court has) does not track these bottlenecks. I have worked on databases for over 30 years now. I believe that most, if  not all, of the key data to track the bottlenecks is already in the Tax Court’s database system. I project that Tax Court management could easily establish some type of computer routine to extract key management information on cases and judges that are bottlenecks in the system.

Finally, although I suspect that most readers of this blog already make the Procedurally Taxing Blog part of their regular reading on tax procedure.  If not, I highly recommend it. 

What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (10/21/22; 11/8/22)

Last week, I participated in a panel at the ABA Tax Section Fall Meeting in Dallas. The panel was offered by the ABA Tax Section Teaching Taxation Section. The program was titled “Classification of Tax Regulations and the APA.” The panel participants were Les Book (moderator), Kristin Hickman, Gil Rothenberg, and me. The program dealt in part with some issues that Professor Hickman and I have engaged in the past. On those issues, Hickman and I continue to engage without agreement. 

I say "without agreement," but in fact Hickman and I did agree (i) on the starting point that, at the enactment of the APA in 1946, the APA permitted both legislative rules (must be notice and comment regulations) and interpretive rules (including, although not required, notice and comment regulations such as Treasury used for interpretive rules adopted as regulations) and (ii) that for well after the APA, the category of interpretive notice and comment regulations was alive and well, without controversy. Our point of continuing disagreement is whether something has changed that original meaning of the APA, so that notice and comment regulations that do no more than interpret ambiguous statutory text no longer exist but are now legislative regulations. That disagreement is not the focus of this posting but may underly some of the analysis in this posting.

In the panel discussion, I repeated my recent claim that Chevron deference is inapplicable if the agency interpretation is the best interpretation. The corollary to this is that Chevron’s domain in an outcome determinative sense involves only deference to “not best” agency interpretations. We only touched on that issue lightly in the panel, but one panelist questioned whether "best interpretation" was a meaningful concept. (Added 10/25/22 11:00am:  On Chevron's domain as limited to not best interpretations, see e.g., Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005) (“Chevron requires a federal court to accept the agency’s construction of the statute, even if the agency’s reading  differs from what the court believes is the best statutory interpretation.”).)

I thought it might be helpful to say further what I mean by “best interpretation.”  The best (or most persuasive) interpretation is the interpretation which the court would apply based solely on interpretive tools in the absence of an agency interpretation or, if there is an agency interpretation, in the absence of Chevron deference. The court’s job in statutory interpretation is to determine and apply the best interpretation of the statute to the facts before the court. (BTW, it is important to note that courts cannot legislate, so courts’ exercise of interpreting a statute to determine the best interpretation is not legislative.  See Is Statutory Interpretation a Legislative Act When Agencies Do It But Not When Courts Do It? (Federal Tax Procedure Blog 4/8/22; 10/23/22), here.). 

If the agency interpretation is that best interpretation, the court applies that interpretation because it is the best interpretation and not because it is deferring to the agency interpretation. Of course, in determining the best, most persuasive interpretation, the court should consider respectfully the agency interpretation. Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (Skidmore respect is not deference (although frequently mislabeled as deference) and applies at Chevron Step One as well as in generally determining the most persuasive interpretation.) See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here. Deference—real deference--is only outcome determinative if the court invokes Chevron to apply a “not best” interpretation over the court’s own best interpretation.

That best interpretation concept is simple and, I think, irrefutably true. There will always be a “best interpretation” so defined because, in the absence of an agency interpretation, it is the interpretation the court would apply to decide the case. In deciding whether or not to apply Chevron deference to an agency interpretation, a court will have to know what the best interpretation is (i.e., what the court would do without deference to the agency interpretation). How else could a court determine whether an agency interpretation is “reasonable” or “permissible” even though not best (the requirement for Chevron deference)?

The Reasonable Standard—Parody, Statutory Interpretation, and Chevron (10/9/22)

Many readers of this blog will likely already have heard about the Onion’s Amicus Brief on the petition for certiorari in Novak v. City of Parma (Sup. Ct. No. 22-293), Supreme Court docket entries are here; Novak’s petition for certiorari is here; the Onion’s Amicus Brief is here. The Onion (Wikipedia here) is a satirical medium, often parodying serious newspapers.  The Novak case arises from Novak’s parody on Facebook of a local police department’s web page. For the parody, Novak was arrested, indicted, prosecuted but acquitted of disrupting public services. Novak then sued the City and two investigating officers. The Sixth Circuit held that the City and the investigating officers had qualified immunity from suit. Novak v. City of Parma, 33 F.4th 296 (6th Cir. 2022) 6th Cir. here and GS here. Novak petitioned for writ of certiorari. The questions presented in the petition are:

1. Whether an officer is entitled to qualified immunity for arresting an individual based solely on speech parodying the government, so long as no case has previously held the particular speech is protected.

2. Whether the Court should reconsider the doctrine of qualified immunity.

 These are important questions. 

 In defense of parody, The Onion filed its Amicus Brief in defense of parody.  The Brief is well written, serious, and, on its points, persuasive (I think).  Highly recommended. In part relevant to posting here, Onion’s Amicus Brief argues (pp. 10-12) for the “reasonable reader” standard—whether a reasonable reader would understand the offering to be parody without an express disclaimer. 

Beyond being an entertaining and hopefully persuasive argument, the reasonable reader test offers an opportunity to address briefly the reasonable concept in other legal contexts relevant to this blog; Often, when a case outcome is determined by some “reasonable” conduct, what is reasonable is left to the judgment call of the judge or jury without any clear definition without any clear guidance as to what reasonable means.

The Onion's reasonable reader construct caught my attention because I just addressed the standard in discussing statutory interpretation in the Working Draft for my Federal Tax Procedure Book. One interpretive strategy I describe is:  “much in vogue now, is often called “original public meaning” or sometimes just original or ordinary meaning that some imagined reasonable person (or reasonable audience) at the time of enactment would have attached to the text.”  The footnote to that statement in the Working Draft is:

Government Files Collection Suit in Liberty Global Raising Procedural Issues (10/8/22; 10/12/22)

I  previously reported on a refund suit in which the court held invalid the IRS’s temporary regulation that, if valid, would have taxed a complex structured transaction designed to avoid tax.  See Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here, discussing 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 holding in the case was not a holding that disposed of the entire case, so it remains pending.

On October 7. 2022, the Government filed a complaint and then an amended complaint in a new case seeking to collect additional tax for the same year as involved in the prior case noted in the above paragraph.  See United States v. Liberty Global Inc. (D. Colo. Civ. # 1:22-cv-02622), CL dkt entries here (with the original complaint at dkt entry 1 and the amended complaint at docket entry 4) (I have not compared the original and amended complaints, but focus on the amended complaint here.) The amended complaint seeks judgment in amount (final amount to be determined) of $283,965,223 (including 20% accuracy-related penalty).

I don’t claim to understand the complexity and steps of the transactions at issue, but just note that, according to the amended complaint, it was a structure with 4 steps involving foreign entities related to Liberty Global, with 3 steps being without substance but necessary to facially qualify Liberty Global for the tax benefit claimed at step 4.  The 3 steps, the amended complaint claims, were without substance. should be disregarded for federal tax purposes, and thus the claimed benefit at step 4 should be denied.

The United States asserts in the amended complaint (par. 31) that it will seek to consolidate the case with the earlier refund case.

JAT Comments:

1. This tax strategy--more properly bullshit tax shelter if the Government’s claims are true --appears to have been a promoted shelter by Deloitte rather than something Liberty Global cooked up.  (See Amended Complaint par. 7.)  And, if the Government’s claims are true, the claimed tax benefits of the structure are a gaping loophole to what Congress meant to cover in the statute.  In other words, too good to be true but may be true anyway. (Presumably, as with past such shenanigans, Deloitte got paid based on some “value-added” basis rather than reasonable fees related to the work done.) 

2. As best I understand it, the temporary regulations invalidated in the refund case and also involved in the new collection suit were designed to address the gambit Liberty Global and Deloitte attempted to exploit. According to the complaint (par. 26), Liberty Global reported on its initial 2018 return consistent with the temporary regulations.  Just over 2 months after filing the original return, Liberty Global filed an amended return claiming a refund of $95,783,237 based on the invalidity of the temporary regulation.  As noted above, the court held in that refund suit that the temporary regulation was invalid, but the matter is still pending in the district court apparently to address other issues as to whether Liberty Global is entitled to a refund. I presume that the disclosures on the amended return were adequate to put the IRS on notice of the game being played, although disclosure does .  (I discuss below in paragraph 4 the § 6676 Erroneous claim for refund or credit penalty, which has no relief for adequate disclosure as allowed in some § 6662 accuracy-related penalties, including the economic substance accuracy-related penalty.)

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22; 10/6/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

Added 10/6/22 11:44am:  The foregoing is the question presented that appears on the Supreme Court's docket entries questions presented link, here.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Brockman Jeopardy Assessment of $1.4+ Billion Sustained (10/2/22)

On 9/30/22, the district court sustained the IRS’s $1.4+ Billion jeopardy assessment for taxes, fraud penalties, and interest.  United States v. Brockman (S.D. TX No. 4:22-CV-202 Dkt. # 71 Memo Opinion and Order 9/30/22), here (as retrieved from PACER); see also CL Dkt entries here (the pdf does not yet show up on the CL docket entries but should shortly).  The IRS asserted that the assessment “represents the largest jeopardy assessment/levy case in the history of the United States and features tax fraud on an unprecedented” scale.” (internal quotation marks omitted).

I won’t get into the details since the opinion is short (13 pages) and easily readable (with some nice graphics).  The opinion plows no new ground in jeopardy assessment law.  It is noteworthy (if at all) only because of the size of the assessments and the facts leading to the assessments.

I note that FBAR assessments (which certainly have been made or will be made, depending upon the statute of limitations) are not included.  There is no jeopardy assessment authority for FBARs, but the IRS does not need jeopardy assessment authority for FBARs because it can assess the FBAR penalties without predicate requirements for income tax assessments.  Of course, with FBAR assessments, the IRS will not have the substantial collection tools available for tax assessments and will have to proceed by suit to reduce the FBAR assessments to judgment.

I don’t know what type of estate Brockman had at death and the assets the IRS can get through various third-party liability remedies (such as transferee and similar state law remedies, alter ego, etc.), but I speculate that, with the probable size of the FBAR assessments and third-party liabilities, the IRS will be able ultimately to substantially wipe out his net worth (with third-party liabilities).  Of course, he lived large during his lifetime. And his death permitted him to escape criminal responsibility and liability.

This blog entry is cross-posted to my Federal Tax Crimes Blog.  Until this blog entry, I have not posted on the Brockman trajectory on the Federal Tax Procedure Blog.  For other postings on Brockman on the Federal Tax Crimes Blog, see here.