A Reminder on Chevron in Agency Adjudications (3/25/24)

With the Supreme Court poised to decide the future, if any, of Chevron deference, I hesitated to provide a discussion of a current decision on deference. Still, I thought it would be helpful to do so because the case discussed in this blog involves the application of Chevron deference to agency adjudications which differ materially from the current cases before the Supreme Court involving agency rulemaking. The context for this blog entry is retroactivity in agency adjudicative interpretation which has different features than agency rulemaking interpretation. (That is not to say that whatever the Supreme Court does will not affect appellate review of agency interpretations in adjudications.)

As an aside, I do wonder why courts, such as the Second Circuit in the case prompting this blog entry, are deciding cases on the basis of Chevron deference, rather than postponing them for decision when the current Supreme Court challenges are resolved (probably by the end of May).

As an introduction to today’s discussion, I think it helpful to state the material differences between agency rulemaking and agency adjudications as respects interpretation and retroactive application. In this introduction, I state general propositions in most cases without citations. All of the subjects are covered in my prior article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (last revised 4/8/22), posted on SSRN, here.

In this discussion, I will refer to Chevron deference as the applicable benchmark, but as I have previously discussed, deference to agency interpretations with the key features of Chevron deference was applied long before Chevron. Those key features of are—(i) ambiguity in the statutory text; and (ii) reasonable agency interpretation within the scope of the ambiguity. Supreme Court opinions prior to Chevron stated deference in those terms. See The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here.

Agency rulemaking

If the rule is legislative in character, the rule must be promulgated in a notice and comment regulation. The only exception is when the legislative rule is accompanied by a “good cause” statement as to why it should be immediately effective when first promulgated (called an interim final rule in general administrative law jargon and a temporary regulation in tax jargon). The general rule is that, without explicit statutory authority for retroactivity, legislative rules cannot be retroactive prior to the date of promulgation of the rule. (This parallels the general rule that legislation cannot be retroactive.) Legislative rules being the law rather than interpretations of the law are not susceptible to Chevron deference, which tests the reasonableness of an interpretation within the scope of ambiguity in the statutory text. (The statement made by many pundits and even courts that Chevron deference applies to legislative regulations or only to legislative regulations is an oxymoron; making such statements, even by pundits or courts, does not make them true.)

If the rule is interpretive in character, the general rule is that a valid interpretation can be retroactive to the date of enactment of the statute. The concept is that the interpretation merely clarifies an ambiguity in the statutory text within its reasonable scope of interpretation from the date of enactment; the application of the interpretation does not offend due process since all persons to whom the law could apply were on notice that some interpretation of the ambiguous statutory text may be forthcoming; in other words, they did not reasonably rely upon some alternative interpretation. This is the same rule that applies generally to court interpretations of statutes—retroactivity to the date of enactment of the statute.

Statistical Sampling for Large Dataset Issues in Tax Litigation (3/23/24)

In Kapur v. Commissioner, T.C. Memo. 2024-28, GS here,  the Court (Judge Pugh) set out the issue as follows (Slip Op. 2, two footnotes omitted):

    Before the Court is petitioners' Motion for Protective Order. The parties dispute whether discovery and trial should be limited to a sample of projects at this stage of litigation. We decline to order sampling for the reasons summarized below. n4
   n4 This appears to be a recurring issue. See, e.g., Phx. Design Grp., Inc. v. Commissioner, No. 4759-22 (T.C. Aug. 29, 2023) (order); Feller v. Commissioner, No. 11581-20 (T.C. Aug. 10, 2023) (order). Respondent referred us to these orders but of course they are not precedential.

The Court reviews (Slip Op. 5) sampling by agreement of the parties (whether encouraged by the Court or not). The Court then says (Slip. Op. 5-6, bold face supplied by JAT):

    Respondent also claims that we do not have discretion to order sampling at the request of petitioners if respondent objects. We disagree: We do have authority to limit discovery (including by ordering sampling) over the objection of a party. See Rule 70(c)(1). Nonetheless, we agree that exercising our discretion to limit the scope of discovery and trial in 6*6 accordance with petitioners' Motion for Protective Order is improper at this stage. The only issue in this case is whether petitioners are entitled to the research credits claimed for the years in issue. Evaluating compliance with section 41 necessarily involves consideration of the underlying business components. And petitioners agree that they have the burden of showing entitlement to the claimed research credits. See Feigh, 152 T.C. at 270. As we have said previously, "[a]bsent an agreement between the parties, project sampling improperly relieves the taxpayer of its burden of proving entitlement to the research credit claimed." Betz v. Commissioner, T.C. Memo. 2023-84, at *77 n.30 (citing Bayer, 850 F. Supp. 2d at 538, 545-46).

As I understand the Court said it can order sampling for discovery purposes but cannot order sampling over IRS objection for resolution of the merits on issues as to which the taxpayer bears the burden of persuasion.

It is not clear to me that the final conclusion is consistent with the Court’s earlier rejection of the IRS claim that Court does not have authority to order sampling when the IRS does not agree. Another way of reading the paragraph is that the Court will not order sampling based on the stage of pretrial development right now in Kapur.

This raises some issues for me, but let me start with my understanding of good sampling that permits reasonable inferences about the universe of data that is sampled. Those reasonable inferences can be stated in possibilities or margins of error for the inferences, which generally can be slimmed down by increasing the sample size.

War Story-Appellate: My Early Brush (1969) with Administrative Law Meaning of Legislative Regulations (3/16/24)

I am starting a new series of procedure-related appellate war stories, mostly from my time with DOJ Tax Appellate Section (1969-1974). The purpose of the series is to tell the war story because it is interesting to me but to do so only when the telling of the story offers some opportunity for students (including for this purpose, practitioners) to learn from the story. I have previously posted some such war stories; all such stories will be under the label “War Story-Appellate", here (the link can be clicked at any time to show all postings).

Today’s War Story-Appellate relates to one of the first cases I handled with DOJ Tax, Davis v. Commissioner, 422 F.2d 401 (6th Cir. 1970), here. I wrote the brief in late 1969; the case was decided in 1970. The substantive issue was whether the taxpayer had proved entitlement to more expenses than allowed by the Tax Court. That is not a tough issue to address and is factual with no precedential importance. The Sixth Circuit addressed it in a one-line per curiam opinion:

On consideration of the files and records in this case, the judgement of the Tax Court is affirmed for the reasons set forth in the Memorandum Opinion of the Tax Court, Tax Ct. Memo 1969-74.

As I have said before in War Story-Appellate, the DOJ Tax Appellate Section did not assign tough cases to relatively new attorneys. I had joined DOJ Tax Appellate in June 1969. I had not yet proved my self capable of handling more difficult cases.

My Davis assignment had a more significant threshold procedural issue that is not addressed in the Sixth Circuit’s one-line per curiam opinion. The issue was (presented in our brief as filed, here, p. 1):

1. Whether this Court has jurisdiction over the merits of this appeal when taxpayer failed to file a notice of appeal until ninety-two days after entry of the Tax Court decision.

Actually, that question was written by my reviewer, Tom Stapleton. In my draft (here), I stated the question as follows:

1, Whether the taxpayer's untimely filing of the notice of appeal from the Tax Court's decision denies this Court from deciding the merits of the appeal.

Tom’s version was better, but still not optimal. How would I improve the question today? Here is my current shot at the best statement of the issue.

1. Whether FRAP 13(a)'s requirement to file notice of appeal within 90 days from the Tax Court decision override the previously enacted statute's (§ 7483) three-month requirement.

District Court Rejects Transferee's Claim of Lack of Personal Jurisdiction for FBAR Willful Penalty Suit (3/12/24)

In United States v. Wolin (E.D. N.Y. No. 1:17-CV-02927 Dkt 137 Memo & Order 2/26/24), CL here and GS here, the Court denied the motion to dismiss the Government’s FBAR willful penalty collection suit for lack of jurisdiction over the defendant Greenberg, a recipient of an alleged fraudulent transfer from the person liable for the FBAR penalty. Greenberg’s motion for summary judgment alleged lack of personal jurisdiction. (The CL Docket Entries are here.)

Essentially, although Greenberg was a resident of Israel, she maintained sufficient contacts with New York to support jurisdiction. The Court summarized those contacts as follows (Slip op. 6-8):

          As noted previously, Defendants Wiesel and Greenberg are both daughters of Ziegel and Defendant Wolin is Ziegel’s granddaughter. (FAC ¶¶ 38-39.) Although Defendant Wiesel still lives in New York (FAC ¶ 6), Plaintiff acknowledges that throughout the relevant time period, Defendant Greenberg has lived in Israel. (FAC ¶ 7.) Nevertheless, Plaintiff asserts that Defendant Greenberg maintains sufficient contacts with the State of New York to be subject to personal jurisdiction. (Id.) Plaintiff first contends that Defendant Greenberg is a U.S. citizen and exercises the many benefits and privileges of U.S. citizenship, including by voting in the last two presidential elections. (Id.) Plaintiff further contends that Defendant Greenberg maintains an active New York voter registration in connection to which she listed a Queens, New York address as her residence. (Id.) Plaintiff also alleges that Defendant Greenberg filed federal income tax returns and New York state tax returns for each year during the 2015 — 2019 period. (Id.) Defendant Greenberg is alleged to have made nine visits to the state of New York between January 1, 2014 and December 31, 2019, some of which lasted several months. (Id.) Plaintiff asserts that Defendant Greenberg is the co-owner of residential real property in Queens, New York, that was previously owned by her deceased father, Ziegel, and in connection to which she commenced and is engaged in two lawsuits in New York state courts in Queens County.n2 (Id.) Defendant Greenberg also commenced four additional lawsuits in New York state court, Kings County, which relate to disputes with Defendant Wiesel regarding real properties and business entities previously owned by Ziegel and Ziegel’s estate generally, in which Defendant Greenberg claims an interest. Defendant Greenberg commenced a Queens County Surrogate Court proceeding relating to Ziegel’s estate wherein Defendant Greenberg moved to compel production of Ziegel’s last will and testament and petitioned for letters testamentary in a probate proceeding involving Ziegel’s estate. (Id.) Finally, Plaintiff alleges that Defendant Greenberg is the sole or partial owner of eight personal bank accounts at HSBC in New York and that Greenberg has an ownership interest in at least two New York limited liability companies. (Id.)
   n2 The real property located at 135-41 78th Drive, Flushing, New York 11267 (the "Queens Property") is co-owned by Defendants Greenberg and Wiesel and was originally owned by Ziegel. (ECF No. 131-3, Ptf. Opp. Ex. C, "N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl." ¶ 7.) In 2006, Ziegel executed a "Life Estate Deed" designating his daughters, Defendants Greenberg and Wiesel, as the beneficiaries of the ownership interest in the Queens Property, in equal shares. (N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl. ¶ 8.) Upon Ziegel’s death in 2014, the ownership interest in the Queens Property transferred to Defendants Greenberg and Wiesel and has since been the subject of multiple lawsuits, including at least two in Queens County, which were commenced by Greenberg against Wiesel in New York Supreme Court. See e.g., (ECF No. 131-2, Ptf. Opp. Ex. B, "N.Y. Sup. Ct. Queens Cnty. 705219-2018 Compl."; N.Y. Sup. Ct. Queens Cnty. 712033-2015 Compl.).

The Court examined New York law and Due Process Law to find sufficient basis for personal jurisdiction.  (Slip Op. 19-49.)

Court on Summary Judgment Sustains FBAR Liability and Fraudulent Transfer Liability But Orders Further Briefing on Repatriation to Pay Liabilities (3/11/24)

In United States v. Harrington (D. Colo. No. 1:19-CV-02965 Dkt. #111 Order 2/28/24), here, the Government brought an FBAR willful penalty collection suit against George Harrington, later expanded to include his wife, Monica on fraudulent transfer liability.  The Government sought judgment for the FBAR penalties plus interest and costs (Count One), fraudulent transfer liability against Monica (Count Two), and an order for repatriating sufficient funds necessary to pay the respective liabilities (Count Three).  (The CL docket entries are here.)

Count One (FBAR liability) is fairly straightforward with the Court imposing the civil standard for willfulness approved by other circuits because the 10^th Circuit had not spoken on the issue. See pp. 15-24.)

Count Two (fraudulent transfer liability) is also fairly straightforward, with the Court imposing fraudulent transfer liability upon Monica for having received assets from George under the Federal Debt Collections Procedures Act, 28 U.S.C. §3304(b)(1). See pp. 24-30. The FDCP imposes liability for transfers having 11 nonexclusive characteristics called badges of fraud. The Court discusses the presence  or absence of those characteristics and concludes (p. 30):

The Court finds six (out of 11) badges of fraud are present. See Key, 837 F. App’x at 354 (five badges of fraud sufficient to uphold summary judgment for government); Osborne, 807 F. App’x at 524 (six badges of fraud sufficient to affirm summary judgment). As a result, the Court finds a reasonable jury could only determine that George’s transfer of his interest in the ValorLife policies to Monica was a fraudulent transfer under 28 U.S.C. §3304. See Anderson, 477 U.S. at 248. The Motion is granted, therefore, as to Count 2.

JAT Comment: I infer that the 11 characteristics permit some weighting rather than just majority controls the decision (I infer this because 5 was sufficient in the cited Osborne precedent.; I have not otherwise researched the issue of weighting).

Buckeye Institute Claims that "§ 6033(b) [Required Contributor Disclosure] violates the First Amendment" (3/8/24)

In Buckeye Institute v. IRS, et al. (S.D. Ohio No. 2:22-CV-04297 Dkt. 60 Opinion and Order 11/9/23), here, the court denied the parties' motions for summary judgment. (The CL docket entries in the case are here.) In the case, Buckey sought (Prayer for Relief in Amended Complaint p. 12, here). 

• A declaration that compelling disclosure of contributor names and addresses pursuant to 26 U.S.C. § 6033(b) violates the First Amendment, both on its face and as applied to Buckeye”; and
• “preliminary and permanent injunctive relief barring Defendants from compelling Buckeye to disclose contributor names and addresses pursuant to Section 6033(b)”.

Accordingly, with the denials of the motions for summary judgment, the case will proceed to trial.

The factual basis for Buckeye’s complaint is that the IRS may not keep the information about contributors secret. In support of its factual (or projected factual) basis for the claim, Buckeye claims that, in some instances, such information has escaped the walls of the IRS. I have no way of predicting the court’s resolution of the claim based upon such isolated disclosure instances. .

I thought, however, that there must be an agenda in pursuing this issue. In its Amended Complaint (par. 8, p. 3, bold-face supplied), Buckeye alleged that “Buckeye is a nonpartisan, nonprofit, tax-exempt organization.” My limited observation of Buckeye’s activities is principally through Supreme Court amicus briefs filed). My sense is that Buckeye usually aligns itself with partisan positions, principally Republican positions, but in any event partisan positions (in the broader sense of the term).

The Government responded to Buckeye’s claim (Answer to Amended Complaint, here, par. 8, p. 4):

Response: Admits that Buckeye holds itself out as a “nonpartisan, nonprofit, tax-exempt organization, organized under Ohio law” and has a headquarters in Columbus, Ohio. Lacks knowledge or information sufficient to form a belief about the truth of the remainder of the allegations.

Taxpayers Should Be Prosecuted Along with Enablers of Abusive Tax Shelters (3/8/24)

This blog entry is an opinion piece. Individual taxpayers should be prosecuted along with their enablers who promote and implement the abusive shelters (particularly enablers from the tax professions).

The following is from a report of Attorney General Garland's comments (Kerry K. Walsh Deborah A. Curtis Amy Jeffress, “Swift” Justice: Attorney General Garland Vows To Uphold DOJ Priorities in Fireside Chat (Arnold & Porter 3/6/24), here):

Additionally, AG Garland explained how DOJ’s three co-equal priorities — upholding the rule of law, keeping America safe, and protecting civil liberties — implicated corporate accountability. AG Garland stressed that the greatest deterrent of white collar crime is holding individual corporate executives to account. AG Garland also reiterated the importance of applying the rule of law equally, regardless of rank or position of power.

I supplied the bold-face to emphasize the point. There has been a perception that, by delivering up the corporation (or other entity) for criminal consequences, the people in the corporations (collectively, the executives) could escape accountability.

A similar perception and resulting phenomenon exists in the tax area where the promoters of abusive tax shelters (think, for example, the Son-of-Boss shelters in the late 1990s and early 2000s) were prosecuted, but the taxpayers generally were not. Yet all of those taxpayers or at least most of them knew that they were violating the law and participated in the fraud. For example, the abusive shelters wrapped in complex structures and voluminous more-likely-than-not opinions, required at the minimum that the taxpayers represent to the promoters that they had a nontax profit motive when, in fact, they did not. That was a lie that was essential to abusive tax shelter. Moreover, most of those wealthy taxpayers had independent counsel (other than the ones supplied or recommended by the promoters) before buying into the deal. Assuming that most of those independent counsel were competent, those taxpayers knew that the deals were bogus, but nevertheless sought to buy fraud insurance through the legal opinions rendered by the promoter’s supplied or recommended counsel (as opposed to their own independent counsel). That worked as insurance.

My argument has been that the way to discourage abusive tax shelters is to prosecute the taxpayers along with the promoters. This would discourage the tax professional penalty insurance industry and abusive tax shelters generally.

This blog entry is cross-posted on the Federal Tax Crimes Blog here.

District Court in ND Alabama Holds the Corporate Transparency Act Unconstitutional (3/4/24)

In Nat'l Small Business United v. Yellen et al. (N. D. Ala. No. 5:22-cv-1448-LCB Dkt 52 3/1/24), CL here, the Court declared the Beneficial Ownership reporting requirements of the Corporate Transparency Act unconstitutional and enjoined its application against the defendants in the case.  For more on the Beneficial Ownership Information requirements, see the FinCEN page here. The judgment in the case is here.

The Court starts its opinion with the following: 

            The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.

That’s a cute opening for a final conclusion of unconstitutionality that is, in my gut reaction, constitutionally suspect. Indeed my cute initial analysis (I do not offer a detailed analysis here) is:

This opinion is dumb, stupid.

I will be back to discuss it later when I have given more complete analysis. I will hold open the possibility that my initial reaction above is itself dumb, stupid. (That will not be the first time.) But for now, until further analysis drives me to a different conclusion, I stick to the dumb, stupid characterization.

In the meantime, I do note that the injunction is limited to the plaintiffs only. The court does not attempt universal vacatur which itself is a bit suspect. So, at least,. it is modest in its holding as to the effect of the unconstitutionality holding.

Added 3/5/24 8am Eastern Time:

Garland v. Cargill-Comments on Briefs and Oral Argument (2/29/24)

Yesterday, the Supreme Court held oral argument in Garland v. Cargill (No. 22-976 docket here, oral argument audio here, and transcript of oral argument here). The ultimate issue is whether “bump stock” devices are within the definition of “machinegun” in the National Firearms Act of 1934, as amended, and the Gun Control Act of 1968. Bump stocks were not devised when the statute was enacted and there is no definitive interpretation of the statutory term “machinegun” that includes or excludes bump stocks. Hence, the job of the regulator or the court in interpreting or applying the term is to determine whether, within the fair bounds of interpretation, the term includes or excludes bump stocks.

At first glance, this issue might call for the application of Chevron deference. Recall that Chevron deference requires two steps—

• Step One where the Court determines whether, on the text alone using proper tools of statutory interpretation, the text resolves the issue. If the text does, the interpreted text applies and there is no deference. If the text does not resolve the interpretive issue and the text is said to be ambiguous.
• Step Two, reached only if Step One does not resolve the interpretive issue, where the court determines whether the agency interpretation is reasonable (also called permissible). If so, the agency interpretation will prevail. Note that I said “prevail” rather than that the agency interpretation receives deference which is the standard Chevron Step Two formulation. Deference is only meaningful when the agency interpretation is not the best interpretation. If, within the zone of ambiguity in the statutory text, the agency interpretation is the better interpretation or even in equipoise as to the best interpretation, applying the agency interpretation is not deference.  See e.g., What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (Federal Tax Procedure Blog 10/21/22; 11/8/22), here.

In the facts of Cargill, the agency interpretation of “machinegun” to include bump stocks was made in the Trump administration in a notice and comment regulation adopting an “interpretive” rule. (I will address the interpretive characterization for the regulation below.) In adopting the regulation, the agency relied on Chevron. In the litigation culminating in Cargill in the Supreme Court, the agency did not rely on Chevron but rather asserted that the interpretation was the best interpretation. (Conceptually, the best interpretation can be determined at Step One or at Step Two (if the agency interpretation is the best in the zone of ambiguity); so it is unclear which Step the government’s reliance on the best interpretation applies.)

At oral argument, apparently because the government was not relying on deference or perhaps the uncertain future of Chevron deference, Chevron or deference was not mentioned. The argument simply addressed whether the text “machinegun” resolved the issue.

District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)

  In United States v. Kerr (D. AZ Dkt O. 2:19-CV-05432 Order dtd 2/23/24), TN here and CL here, the district court ruled indicatively clarifying the intended effect of the district court termination of the case after remand to the IRS of willful FBAR penalties for certain years. The intended effect was not to vacate those penalties but to provide a procedure to reconsider and modify the amount of the penalties for future district court judgment. In other words, the remand did not require a new assessment of FBAR willful penalties (for which the assessment statute of limitations had run). Rather, any IRS action would adjust the previously timely assessed FBAR penalties. After this indicative ruling, the appeal of the case can proceed in the Ninth Circuit.

Links to items related to this blog are:

• FRCP 62,1, titled Indicative Ruling on a Motion for Relief That is Barred by a Pending Appeal, here,
• FRAP 12.1, Remand After an Indicative Ruling by the District Court on a Motion for Relief That Is Barred by a Pending Appeal, here,
• Kerr docket entries for this civil case (FBAR penalty enforcement case): CL, here.
• Ninth Circuit Order staying Ninth Circuit proceedings pending the district court’s indicative ruling, here.

Prior blogs involving Mr. Kerr are (reverse chronological order):