Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (1/23/24; 4/4/24)

Introductory Note 4/4/24 10:00am: This blog post originally addressed a new draft article that Professor Bamzai posted on SSRN: Aditya Bamzai, On the Interpretive Foundations of the Administrative Procedure Act, 31 George Mason Law Review ___ (Forthcoming) (SSRN 4684895 1/17/24), here, Professor Bamzai's article has been published in final.  On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024), html here and pdf here. I have not compared the draft with the final article, although the final seems to track the arguments made in the draft. I have, however, made certain changes to the blog entry below inspired by the Final. I note those changes in red font. I have no way of knowing whether Professor Bamzai was aware of my article or my blog posts about my article since he does not cite me in his article. I am not surprised Professor Bamzai does not cite my article or me since I circle in a lower administrative law orbit than he does. Finally, I have not attempted to go down some of the tangential rabbit trails Professor Bamzai goes down (such as Professor Dickinson's 1947 parallel articles misinterpreting and misapplyying Dobson, for, on the deference issue, those articles lapsed into the obscurity they deserved).

Now to the original posting on 1/23/24 (as amended on 1/24/24 with changes made today marked in red font):

I recently posted to SSRN an article arguing, in part, that the APA § 706 standard of review for legal questions is a deference standard via the requirement that agency interpretations be set aside only if “not in accordance with law.” § 706(2)(E). The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here, hereafter referred to as Townsend Deference APA). In that article, I asserted that a prominent leading article missed or misunderstood key indicators of the meaning of the APA standard of review—“not in accordance with law.” Aditya Bamzai, The Origins of Judicial Deference to Executive Interpretation, 126 Yale L.J. 908 (2017), here.

Specifically, Professor Bamzai

• missed robust deference authority cited in the Final Report of the Attorney General’s Committee on Administrative Procedure (1941) which skewed his conclusion of limited deference authority in the Final Report and as of 1940.

• missed the deferential interpretation of “not in accordance with law” in Dobson v. Commissioner, 320 U.S. 489 (1943), reh. den., 321 U.S. 231 (1944).

I show in the article that the fair interpretation of the APA’s  “not in accordance with law” standard was the Dobson interpretation to require deference.

Professor Bamzai has published an article on SSRN that is scheduled for publication in the George Mason Law Review. Aditya Bamzai, On the Interpretive Foundations of the Administrative Procedure Act, 31 George Mason Law Review ___ (Forthcoming) (SSRN 4684895 1/17/24), here, hereafter referred to as Bamzai Interpretive Foundations APA. Professor Bamzai's Final is On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024) 

In this new article (Draft and Final),

• Professor Bamzai again misses the robust statement of deference that he missed in his earlier article. (Townsend Deference APA pp, 5-9.)

• more importantly, although he now identifies Dobson as important to the discussion after ignoring Dobson in the earlier article, he misinterprets the meaning of Dobson.

Key Points in Oral Arguments on 1/17/24 in the Supreme Court Cases Considering the Future of Deference (1/18/24)

I have now had the time to read the transcripts of oral arguments in the cases challenging Chevron deference:

• Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451, here.) (“Loper Bright”), transcript here,
• Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219, here ) (Relentlesss transcript here),

Relentless was argued before Loper Bright. I infer that was because Justice Jackson recused herself in Loper Bright.

I will discuss what I think are the key points of the oral arguments. There is a lot more in the transcripts, including both somewhat important points and some nit-picky points. I will consider later posting the transcripts with pdf highlights with discussion behind the highlights as comments for readers to review if they wish.

With apologies for readers that may not have some introduction into the jargon of administrative law, I will often just use that jargon without further citation. For example. I refer to (i) Chevron deference which refers to the deference approved in the case of that name and (ii) Brand X which is the deference approved in a Supreme Court opinion with that name. I do not give the cites for these common administrative law shorthand before having any understanding of the issues involved.

In my discussion, I do not attempt to predict whether the Court will pronounce the demise of deference (whether with the Chevron label or not) or the constriction of Chevron deference, or whatever. I note, that  the three Trump appointees (Justices Gorsuch, Kavanaugh, and Barrett) almost certainly will vote for the demise or substantial restriction of deference (at least in its traditional formulation), because of their prior anti-Chevron musings and that anti-Chevron was a litmus test for their respective appointments as Justices.  See Jeremy W. Peters, Trump’s New Judicial Litmus Test: ‘Shrinking the Administrative State’ (NYT 3/26/18) (noting administrative state angst with anti-Chevron as a litmus test for Trump’s judicial, particularly Supreme Court Justice, nominees). And, Justices Thomas and Alito have expressed disdain for Chevron. Justices Kagan, Sotomayor, and Jackson seem pro-Chevron, although they might agree to some constriction (such as doubling down on Chevron Footnote 9). I think Chief Justice Roberts can go either way, but being an institutionalist may be inclined to lean toward stare decisis without terminating (but with constricting) Chevron in futuro.

What Are the Perceived Evils in Chevron? (Herein of The Deference Concept)

Oral Argument on 1/17/24 in Supreme Court Cases on the Future of Deference (1/16/24)

Oral argument in the cases (Loper Bright and Relentless, combined for oral argument) challenging Chevron deference is Wednesday, January 17. The relevant links are:

• Oral Argument Live, here (these are the only cases docketed for oral argument, so the oral argument should begin at 10am  EST).
• Recording of Oral Argument, here (listed under 22-451 Loper Bright Enterprises, Inc. v. Raimondo, Sec. of Comm. and 22-1219 Relentless, Inc. v. Dept. of Commerce.
• Transcripts of Oral Arguments (these are subject to change):
• Loper Bright, here.
• Relentless, here.

I thought I would use this blog to alert readers to some hyperbolic claims likely to appear in the oral argument (as they have proliferated in the press). (George Will, no fan of the administrative state or of Chevron, has said that “Hyperbole [is] the default setting in today’s discourse.” George F. Will, How the Supreme Court could end the ‘Chevron deference’ foolishness (WAPO 1/12/24), here (the claims he makes in his article prove the ubiquity of hyperbole).

Before addressing the hyperbole likely to appear in oral argument, I think it is helpful to establish what deference is:

Deference is commonly stated as a court applying an agency interpretation that reasonably interprets ambiguous statutory text within the scope of the ambiguity. Deference is more subtle than that. Deference is neither required nor applicable if the agency interpretation is the best interpretation (best interpretations are per se reasonable, after all). Rather deference only occurs when the agency’s reasonable interpretation is not the best; only then can a court defer to that not-best agency interpretation. (This does not address the phenomenon of the state of interpretive equipoise which I discuss in paragraph 4 below,)

 Now, to the hyperbole:

1. The hyperbole: Deference was the creation of the Chevron case decided in 1984. George Will says, “first propounded by the court in 1984.” That statement is not only hyperbole, it is false. Deference to reasonable agency interpretations of ambiguous statutory text has been a feature of authoritative judicial decisions since at least the 1920s. All Chevron did was to (i) articulate an additional rationale for deference in the executive branch’s more direct accountability to the citizens than courts with lifetime appointments and no constituency and (ii) permit the famous 2-Step, which later courts found implicit in Chevron. (Since deference was the same as prior deference, the 2-Step formula was implicit in pre-Chevron deference.)

NTA 2023 Annual Report and 2024 Purple Book (1/15/24)

The National Taxpayer Advocate has issued her 2023 annual report (here allowing download of the Full Report, the Executive Summary, and the NTA Purple Book Compilation of Legislative Recommendations, and Research Reports). The Full Report and its components have much that tax procedure enthusiasts will want to consider. I bullet point here some of the items that caught my eye on a quick overview. I may come back with more detail later.

• MOST LITIGATED ISSUES – NATIONAL TAXPAYER ADVOCATE RECOMMENDATIONS TO MITIGATE DISPUTE, pp. 169-171, beginning here.
• The 2024 Purple Book: Compilation of Legislative Recommendations, here.

Some of these are repeats of carryover issues from earlier years. For example, her recommendations on § 6751(b), which I discuss in Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here.

My only comments are:

Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (1/8/24; 1/15/24)

Section 6751(b)(1) provides:

(1) In general

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.

Penalties cannot be assessed unless they have written supervisor approval by some magical moment; stated otherwise, an assessment or a step predicate to assessment of penalties without prior written approval is invalid. The only magical moment in the statute is the “initial determination of the assessment.” That statutory language on its face is nonsense because there is no “initial determination of the assessment,” at least other than the assessment itself. The courts have made hash of the language of the statute, which, through its fuzziness coupled with a snippet in the legislative history, lends itself to fuzzy thinking about the tax system we have and to disparate outcomes. In short, the interpretation and application of § 6751(b) is a mess. 

I  discuss the mess in my Federal Tax Procedure (current 2023.2 Practitioner Edition SSRN here) at pp. 385-393. Because of the mess, which has been brewing for several years, I have noted in recent versions of my Federal Tax Procedure Practitioner Edition (e.g., 2023.2 Edition p. 387 n. 1645):

    n1645 This appears to me to be a classic case where a well-considered statutory amendment or, failing that, comprehensive interpretive regulations could clean up the mess. The courts have already found the statute ambiguous, the condition required for “reasonable” interpretive regulations. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). By adopting well-considered interpretive regulations, the IRS could essentially moot out the plethora of prior and future court machinations to deal with the problem. See National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967, 981 (2005) (permitting the agency to adopt interpretive regulations contrary to prior judicial interpretations so long as the prior judicial interpretations are not compelled by the text of the statute, which would not be true here because the statute is ambiguous). I don’t think reversal of the court interpretations of § 6751(b) would be foreclosed under Brand X by prior judicial precedent that foreclose the agency new interpretation as occurred in United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012). An interpretive regulation, with notice and comment, by Treasury, the expert on IRS processes and the big picture, would likely produce a more holistic set of interpretations than courts can do anecdotally as unique cases arise. The problem with the regulations approach is that final regulations could take a very long time, perhaps a couple of years. But since the regulations would be interpretive, Treasury could adopt a Temporary Regulation and, provided that the final Regulation is adopted within three years, the Temporary Regulation could be effective immediately (§ 7805(e)) and the final Regulation could be effective from the date of the Temporary Regulation (§ 7805(b)). And, perhaps even, the Temporary and Final Regulations might be persuasive authority under Skidmore v. Swift & Co., 323 U.S. 134 (1944) for application retroactively to the date of the statute for any case still in pipeline or getting there involving conduct prior to the effective date of the Temporary Regulation. Such retroactive application beyond the limits imposed by § 7805 is a long subject, I think that the interpretation might apply retroactively with the only limit being that the  interpretation be within the scope of § 6751(b)’s ambiguity from the enactment of the statute.

Separately, the Taxpayer Advocate proposed a legislative solution. See Legislative Recommendations 32 and 36 in Taxpayer Advocates Legislative Recommendations for 2023 and 2022, respectively as follows: 

Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (12/24/25)

As I close out my postings for the year, I decided to report on Castro v. United States, 2023 WL 8825316 (5th Cir. 12/21/23), unpublished (CA 5 here; GS here). The Fifth Circuit panel did not think it worthy of publication, so I initially decided to forego making it a topic of a blog. But then I learned that the plaintiff, John Anthony Castro, has been “player” in a series of tax cases is a presidential candidate, a Republican seeking to take Trump’s place as the frontrunner and ultimate nominee. See Castro’s Wikipedia page here (i) offering significant discussion of his playing in tax cases and (ii) noting that his status as a licensed attorney may be in doubt. So, I’ll discuss the recent 5^th Circuit opinion, for its discussion of settled law that do not justify a precedential opinion. In this opinion, Castro appears as plaintiff rather than as attorney (although, I suppose, he could be pro se attorney for himself).

In order avoid recreating the wheel with new discussion (with no temptation to plagiarize or make up new words without value) and given that brevity of the relevant discussion in the opinion, I just quote the opinion (using the cleaned up technique to eliminate parts that are not relevant to the point I want to make).

During an IRS criminal investigation into Castro, criminal investigative agent Tuan Ma (“Agent Ma”) contacted two potential witnesses to obtain information in furtherance of his investigation. The parties dispute whether Agent Ma disclosed to the two potential witnesses that Castro was under criminal investigation but that the investigation did not target the two potential witnesses. For the purpose of summary judgment, we assume that Agent Ma did in fact disclose such information to the two potential witnesses. The two potential witnesses submitted affidavits indicating that they spoke with Agent Ma after he reassured them that they were not under investigation.

            Even accepting as true that Agent Ma made the alleged disclosures in violation of §6103 of the Internal Revenue Code, a safe harbor provision shields the Government from liability if the agent's disclosure was based on “a good faith, but erroneous, interpretation of section 6103[.]” 26 U.S.C. §7431(b)(1) (“No liability shall arise under this section with respect to any inspection or disclosure . . . which results from a good faith, but erroneous, interpretation of section 6103[.]”). This circuit uses an objective standard to evaluate the applicability of this “good faith” exception to liability under the Internal Revenue Code.

Article on The Tax Contribution to Deference and APA § 706 Posted on SSRN (12/14/23)

I have just posted this article to SSRN here.

The recommended SSRN cite is: Townsend, John A. and Townsend, John A., The Tax Contribution to Deference and APA § 706 (December 14, 2023). I don’t know why SSRN doubles up on my name, but have just not tracked it down. (If anyone knows how to fix that, please send me an email.)

 The abstract is at the link and then links to the pdf version. Here is my abstract of the SSRN abstract.

The tax authorities supporting APA to include deference are compelling. These tax authorities have been marginalized in the discussion. The law at the time of the APA in 1946 was settled to include deference when (i) the statute was ambiguous and (ii) the agency interpretation within the scope of the ambiguity was reasonable. That was Chevron deference before Chevron. That alone would support interpreting APA § 706 to include deference. But, there is more, § 706 states the standard of review for interpretations “not in accordance with law” which the Supreme Court interpreted in Dobson, a 1943 tax case, to mean review with deference rather than review de novo.

There is a lot of tax history in this rather short article. One key matter of interest is the roles in the tax system occupied by Justice Robert H. Jackson, Wikipedia here. He served successively in the following positions: Chief Counsel of the IRS, Assistant Attorney General Tax Division, Solicitor General, Attorney General, and Supreme Court Justice. He moved into all of those positions in a period of less than 10 years. Later, he also took a leave of absence from the Supreme Court to be the chief prosecutor at the Nuremburg war crimes trial. Jackson features prominently in the article as author of the Dobson decision, a unanimous decision, which authoritatively interpreted the Tax Court standard of review "not in accordance with law" to mean deference--hence Dobson deference--much like Chevron deference. The standard "not in accordance with law was incorporated in APA § 706.

I would appreciate any comments anyone would care to make to me.  My email address is jack@tjtaxlaw.com.

Fun Fact: The original draft of this article was over 140 pages long. I then bumped it down to 47 pages. It now is 32 (including appendix with the versions as it moved from the AG Final Report in 1941 to enactment in 1946).

Fun Chevron: AI Weighs in on Chevron’s Future (and Golsen) (12/12/23)

Chevron deference and its possible demise is much in the news recently with the Supreme Court’s acceptance of two parallel cases that address the following question: 

Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451), here; and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219), here.

I decided to ask various AI platforms what they could offer on whether the Supreme Court will overrule Chevron deference. Here are the answers from three AI platforms (alphabetical order by AI platform without only formatting (such as bold face) offered by the AI; Chevron is not formatted) [Note that I use the free-to-me versions of each platform]:

Bard (Google)

Whether the Supreme Court will overrule Chevron deference is uncertain. While there are indications suggesting both possibilities, ultimately the Court's decision will depend on the specific case and the justices' interpretations of the law.

Arguments in favor of overruling Chevron deference:

• Increased judicial activism: Some argue that Chevron deference grants excessive power to federal agencies, diminishing the role of the judiciary in interpreting the law.
• Lack of democratic accountability: Others argue that agencies are not accountable to the same democratic processes as elected officials, making Chevron deference potentially undemocratic.
• Concerns about agency expertise: Some believe that agencies may not always have the necessary expertise to interpret complex laws.

Arguments in favor of retaining Chevron deference:

• Promotes administrative efficiency: Chevron deference allows agencies to implement and enforce laws without lengthy court challenges, promoting efficiency.
• Recognizes agency expertise: Agencies often possess specialized knowledge and experience relevant to the laws they administer.
• Reduces judicial workload: Deference to agency interpretations can reduce the burden on the courts, allowing them to focus on other matters.

Recent developments:

• Supreme Court agrees to hear case challenging Chevron deference: In May 2023, the Supreme Court agreed to hear a case related to the National Marine Fisheries Service's interpretation of a fishing law. The case could have significant implications for Chevron deference.
• Conservative justices express skepticism: Some conservative justices have expressed skepticism towards Chevron deference, suggesting a potential shift in the Court's stance.

Conclusion:

It is too early to predict whether the Supreme Court will overrule Chevron deference. The Court's decision will likely depend on the specific arguments presented in the case and the justices' individual interpretations of the law. However, recent developments suggest that the Court may be more receptive to challenges to Chevron deference than in the past.

Here are some resources that provide further information on this topic:

• Deference and its Discontents: Will the Supreme Court Overrule Chevron? (CRS Report): https://thehill.com/opinion/judiciary/4238063-what-happens-if-the-supreme-court-overturns-chevron/
• Supreme Court to Consider Major Case on Power of Federal Regulatory Agencies (SCOTUSblog): https://www.scotusblog.com/2021/11/chevron-deference-at-stake-in-fight-over-payments-for-hospital-drugs/
• Supreme Court to Consider Overruling Chevron Deference (Baird Holm LLP): https://www.theregreview.org/2022/07/14/pierce-chevron-deference/  [JAT Note: the link is to an article by Richard Pierce, a noted expert in administrative law]

On the Tax Court's Golsen Rule (12/3/23; 12/5/23)

In Kraske v. Commissioner, 161 T.C.___ No. 7 (2023), GS here, the Court provides a good application of its Golsen rule. Golsen v. Commissioner, 54 T.C. 742, 756-58 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), cert. denied, 404 U.S. 940 (1971). The Golsen rule, in brief, is that, in the case before it, the Tax Court will adopt a square prior holding of the court of appeals to which the case is appealable even if the Tax Court believes that Circuit's prior holding is wrong. Kraske gives me an opportunity to expound briefly on Golsen. 

Short statements about the Golsen Rule.

• The rule prior to Golsen was called the Lawrence rule. Lawrence v. Commissioner, 27 T.C. 713, 718 (1957), rev’d, 258 F.2d 562 (9th Cir. 1958). The Lawrence rule was that the Tax Court should apply the interpretation it felt best regardless of appeal to a Circuit which, through prior precedent, was likely to reverse. Golsen is a rule of judicial expedience.
• In determining whether there is such a conflict between the Tax Court’s best interpretation and the relevant Circuit Court’s holding, the Tax Court should determine whether the court of appeals decision at issue “is so clearly on point that it would be futile” to issue a decision contrary to it. See Sanders v. Commissioner, 161 T.C. ___ No. 8, *6-*7 (2023) here (reviewed opinion on the jurisdictional issue). I analogize this review to the much-ballyhooed Chevron Footnote 9 rigorous statutory interpretation to eliminate ambiguity at Chevron Step One. If by vigorous review of the Circuit’s case authority, the Tax Court finds that the authority is not squarely on point (meaning, I think, that the authority can be meaningfully distinguished or otherwise not applicable), the Tax Court can then apply its own best interpretation.
• Professor Camp says that the Golsen rule requires that the Tax Court “basically decide the likelihood that the Circuit Court of Appeals would reverse the Tax Court in the case at hand.” Bryan Camp, Lesson From The Tax Court: The Rules For Penalty Approval Depend On Geography (Tax Prof Blog 10/30/23), here, discussing Kraske. That raises the question whether a trial court such as the Tax Court can reasonably predict that a higher court would reverse; after all, the Circuit could reconsider and reverse its prior holding. That’s a judgment call which I don't think factors in that possibility. If the Tax Court makes the wrong judgment, I’m sure the Circuit Court will let it know.
• Where the Circuit’s interpretation is not squarely in point, concerns for “uniformity in interpretation” throughout the country require that the Tax Court apply its own best interpretation. Lardas v. Commissioner, 99 T.C. 490, 494-5 (1992).

Tax Case Illustrating the First Rule of Persuasion--Avoid Irritating the Person You Seek to Persuade (12/3/23)

In Fitzgerald Truck Parts, Inc. v. United States, 2023 WL 8100540, 2023 U.S. Dist. LEXIS 208420 (M.D. Tenn. 11/21/23), CL here and GS here, “After a trial held in Cookeville, Tennessee between July 10 and July 14, 2023, a jury found that Fitzgerald Truck Parts and Sales, LLC (“Fitzgerald”) was not liable for excise tax on some  12,830 glider semi trucks sold between 2012 and 2017.” The Government moved for Judgment as a Matter of Law or New Trial. The Court denied the motion.

I am not sure there is any federal tax procedure issue involved in the opinion, except that tax procedure necessarily involves trial procedures. For that reason, this decision is a doozy, primarily because the judge appears (my inference) to be irritated with the Government claims on the motion.

The essential facts are recounted in the opinion (pp. 1-3 bold face supplied by JAT):

          For more than 30 years, and up until Environmental Protection Agency (“EPA”) regulations essentially abolished the market, Fitzgerald manufactured glider semi-trucks. It did so by placing rebuilt engines and transmissions from wrecked highway tractors into glider kits produced by original equipment manufacturers. The kits from those manufacturers generally included such things as the cab, frame, sheet metal, mounting brackets and steering gear, to which the rebuilt powertrains were then added. Through this method, the goal was to offer for sale essentially a new truck – albeit with a rebuilt engine and transmission – at a lower price than a comparable truck from the factory.

          Not only did the customer receive a reduction in price, the customer was also not on the hook for  excise taxes, at least if the governing regulations were followed. Herein lies the core of the parties’ dispute.

          Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” of “tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.” 26 U.S.C. § 4051(a)(1). The code also contains a safe harbor provision that states:

(f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.

26 U.S.C. § 4052(f)(1).

          It has been Fitzgerald’s position throughout that the trucks it produced met the safe harbor [*3] provision. The Internal Revenue Service (“IRS”) disagrees. In accordance with IRS regulations, Fitzgerald paid the excise tax on one truck for each quarter of the tax years at issue, meaning excise taxes were not paid on some 12,800-plus gliders. The stakes are enormous, especially for a company that is no longer producing trucks, and never collected the excise tax from the purchaser in the first place. Those taxes are more than ten million dollars. Penalties and interest place that figure in the neighborhood of $300 million.