Out-of-Time Deficiency Case Declaring NOD Invalid but with ASED Statute Still Open (4/17/24)

In my Federal Tax Procedure book, I note that there may be some procedural foot-fault in the IRS issuance of a notice of deficiency (“NOD”), such as failure to send to the last known address. If the NOD is invalid, any resulting assessment is invalid. I note that a traditional way to challenge the NOD for failure to send to the last known address is by filing an out-of-time petition for redetermination with the Tax Court. If the Tax Court then dismisses for lack of jurisdiction of an untimely petition it may base the decision on the invalidity of the NOD which invalidates the assessment requiring a valid NOD; that will invalidate the assessment. I caution that this gambit might be a pyrrhic victory if the IRS can still issue a new deficiency for which the statute of limitations is still open when the Tax Court dismisses.  (See the Federal Tax Procedure book 2023.2 Practitioner Edition pp. 515-516.)

Phillips v. Commissioner, T.C. Memo 2024-44, TA here & GS here [to come], is such a case. In Phillips which the Court says is a deficiency case (see p. 1; for more explanation see my note # 1 below explaining how a CDP case morphed into a separate deficiency case), the petition for redetermination of the deficiency was out of time. The Court found the NOD and resulting assessment to have been invalid for failing the last known address requirement. In getting to the holding of invalidity, the Court offers good discussion of the application of the Regulations on last known address including the IRS access to USPS change of address information as a licensee, the IRS’s processes for insuring last known address, and the IRS’s failure to meet the Regulations’ requirements in this case. I will not further address the merits of the Tax Court’s last known address resolution.

I focus instead on the Phillips opinion’s closing shot (p. 15 n. 10):

Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for 2014 that is properly mailed to petitioner’s last known address.

Tax Court Judge Lauber Denies Petitioner Motion for Summary Judgment Rejecting Fraud Penalties in Allegedly Abusive SCE Case; Some Background (4/14/24)

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #140 4/10/24), TA here and TC Dkt here*, a syndicated conservation easement (“SCE”) case, the Court (Judge Lauber) denied the petitioner’s motion for partial summary judgment. 

* This is an order and not an opinion of the Court. Hence there is no direct access to the Court’s order. Access through the Court (as opposed to a third party provider) is by using the Court website to access the docket entries for Case # 24703-21 and going to the particular docket entry (in this case entry 140 dated 4/10/24). Here there is a third party provider, Tax Analysts on its public site sponsored by Deloitte. I take this opportunity to state my appreciation to Tax Analysts and Deloitte for providing this service.

Judge Lauber opens (slip op. 1):

On February 16, 2024, petitioner filed a Motion for Partial Summary Judgment seeking a ruling that the civil fraud penalty, as a matter of law, does not apply because respondent has not alleged facts showing that NDLA “intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” Memorandum in Support of Motion for Partial Summary Judgment at 7 (quoting Parks v. Commissioner, 94 T.C. 654, 661 (1990)). In essence, petitioner contends that respondent cannot carry his burden of proving fraud by clear and convincing evidence because NDLA disclosed on its tax return the facts relating to the conservation easement transaction. Finding that there exist genuine disputes of material fact regarding the possible application of the fraud penalty, we will deny the Motion.

Judge Lauber starts the discussion of the facts as follows:

Sixty West, LLC (Sixty West), was a promoter of syndicated conservation easement transactions.n3 In March 2016 Reserve at Welsh, LLC (Welsh), an entity controlled by Sixty West, purchased 3,324 acres of land in Jefferson Davis Parish, Louisiana (Parent Tract). Sixty West allegedly purchased the Parent Tract for use in multiple syndicated transactions that would generate large charitable contribution tax deductions for investors. The total purchase price for the Parent Tract was $9,888,008, or $2,975 per acre.
   n3 “Promoter” is a loaded term in the syndicated conservation easement space because of the penalty imposed on “promoters” by section 6700(a). In this Order we use the term “promoter” in its ordinary sense, making no determination as to whether Sixty West was a “promoter” within the meaning of section 6700(a), a question that is not before us.

Judge Lauber’s recitation of the rest of the relevant facts then follows a recognizable pattern for those who have watched abusive SCE cases. Setting aside technical foot-faults, the core common pattern is the substantial overvaluations of the donated easements. Based upon the appraisal  of a frequent appraiser in abusive SCE cases (Claud Clark III), NDLA claimed a donation of $115,391,000 for a portion of the property originally purchased. (Order slip op. 2.) That contribution claim was based upon a “’before value’ of the property of $116,303,000, or $471,4561 per acre. Subtracting from the sum an “after value” of $912,000, Mr. Clark asserted that the easement was worth $115,391,000.’” (Slip op. 2-8.)

Timely disclosure Forms were filed as follows (Slip op. 30):

Litigation is About Persuasion Which Requires Credibility (4/12/24)

I write on the tax saga of Burt Kroner. The underlying saga goes back many years and has played out in three tax cases.

• Kroner v. Commissioner (Kroner I), T.C. Memo.  2020-73, here, sustaining the substantial penalty but denying the substantial penalty because of failure to obtain written supervisor approval required by § 6751(b)(1).
• Kroner v. Commissioner (Kroner II), 48 F.4th 1272 (11th Cir. 2022), here, reversing Kroner I on the § 6751(b) penalty issue (the Tax Court’s sustaining of the deficiency was not appealed); I previously wrote on Kroner II. Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (Federal Tax Procedure Blog 9/20/22), here. 
• Kroner v. Commissioner (Kroner III), T.C. Memo. 2024-41, TA here and GS here, applying the penalty on the merits on remand and rejecting Kroner’s reasonable cause defense. 

The holding in these cases that will likely be cited most in the future is the holding in Kroner II regarding the proper timing of the written supervisor approval requirement as courts further calibrate precisely what the requirement is (perhaps based in part on the Treasury proposed regulations when finalized).

I write today on the merits of the tax deficiency which the recitation of facts in the recent opinion in Kroner III suggested I should take a further look.

The deficiency issue was whether a series of transfers into Kroner’s accounts were gifts from a business associate (also an alleged friend), a David Haring, or taxable income. Kroner claimed the transfers were gifts which IRC § 102 excludes from taxable income; the IRS claimed that they were not gifts (or at least that Kroner had not shown on audit or at trial that they were gifts). The concept is that the Code taxes all income (generally all accretions to wealth presently subject to a realization requirement) unless the income is excluded by some Code section, in this case § 102. The taxpayer bears the burden of persuading the trier of fact that the transfers were gifts.

As an aside, the gift v. income issue can arise in many settings. See e.g., my trial and appellate war stories in Justice Thomas and Tax -- The Plot Sickens (Federal Tax Procedure Blog 10/29/23; 10/31/23), here.

Judge Marvel explains the Code’s gift meaning (Kroner I, slip op. 8):

District Court Rejects State End-Run of Federal Tax SALT Limitations with State Creditable "Charitable" Contribution (4/8/24)

In New Jersey v. Mnuchin, ___ F.Supp. 3d ___,  2024 WL 1386080, 2024 U.S. Dist. LEXIS 59122  (S.D. N.Y. 3/30/24), CL here and GS here, the Court rejected now familiar attacks, including APA and Chevron. This time the attacks come from the states rather than those who fear the administrative fear (either in reality or to stir the base). The complaint of the states (including New York and Connecticut components as named plaintiffs) is that Treasury failed both substantively (improper interpretation a la Chevron) and procedurally in promulgating the Final Rule interpreting § 170 (the charitable deduction provision). The Final Rule denies a charitable contribution deduction where the state gives a quid pro quo in the form of a state and local tax credit. The state tax credit was simply a state end-run around the 2017 Tax Act “SALT” (state and local tax) deduction limitation. 

The Court described the Treasury response to the state legislation (Slip Op. 2-3, footnotes omitted and cleaned up):

On June 13, 2019, the Treasury Department and the Internal Revenue Service ("IRS") promulgated a new regulation (the "2019 Final Rule") governing the availability of charitable contribution deductions for payments made to state and local governmental units where the taxpayer receives or expects to receive a state or local tax credit in return. The new regulation involves an interpretation § 170, which in part governs the deduction of charitable contributions on federal income tax returns.

The 2019 Final Rule provides that "the amount of the taxpayer's charitable contribution deduction under [S]ection 170(a) is reduced by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer's payment or transfer." 26 C.F.R. § 1.170A-1(h)(3)(i).

In this action, Plaintiffs seek a declaration that the 2019 Final Rule is invalid under the Administrative Procedure Act, 5 U.S.C. § 706. Plaintiffs contend that Defendants — Treasury, the IRS, and their officers (the "Government") — exceeded their statutory authority in promulgating the 2019 Final Rule, and that the issuance of the Rule was arbitrary and capricious.

The Court dispensed with threshold issues such as 

• Standing (Slip Op. 16-29), 
• Anti-Injunction Act (Slip Op. 29-32) , and 
• Violation of the Regulatory Flexibility Act (Slip Op. 32-36).

Moving to the Merits of the Claim under the APA (Slip Op. 35-59), The Court first holds that the Regulation easily passes Chevron’s two-step analysis.  Key points:

George Mason Law Review Symposium Articles on Chevron; My Discussion of Professor Bamzai's Article (4/4/24)

Readers of this blog interested in Chevron deference should consider the Chevron on Trial Symposium Law Review edition of the George Mason Law Review. See Megan Dill, The George Mason Law Review’s Chevron on Trial Symposium Issue (Yale J. on Reg.: Notice & Comment 4/2/24), here. The N&C article lists and links a number of articles in the Symposium Issue.

In the N&C list, I focused principally on Professor Aditya Bamzai’s On the Interpretive Foundations of the Administrative Procedure Act, 31 Geo. Mason L. Rev. 439 (2024), html here and pdf here. I previously blogged on a draft of Professor Bamzai’s article. See Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 1/24/24), here. I have now made a few short amendments to that earlier blog (indicated in red font) to address the Final Article; hence, the final date in blog title’s parenthesis has changed to 4/4/24, which is how I flag the latest change). Scholar Doubles Down on Erroneous Claim that APA § 706 Precludes Deference (Federal Tax Procedure Blog 1/23/24; 4/4/24). Suffice it to say here that I continue to disagree with Professor Bamzai.

3rd Circuit Holds Tax Court Has Jurisdiction to Determine Overpayments in CDP Proceedings (3/29/24; 3/30/24)

In Zuch v. Commissioner, ___ F.4th ___, 2024 U.S. App. LEXIS 6827, 2024 WL 1224410 (3rd Cir. 3/22/24), CA3 here and GS temporary * here, the Court starts the opinion of the Court as follows:

When Congress grants taxpayers the right to challenge what the Internal Revenue Service says is owed to the government, Congress's will prevails. The IRS cannot say that such a right exists only under the circumstances it prescribes. That ought to go without saying, but this case requires us to say it.

This signals that the rest of the opinion is not favorable to the IRS.

I infer from Judge Jordan’s Wikipedia page here and even this opinion with some hyperbole that Judge Jordan is not an IRS skeptic like some other judges; Judge Jordan’s appointment to the Court of Appeals was unanimous (91 for, 0 against, and 9 not voting (including then Senator Biden). See Senate Vote Summary, here.

So what is Judge Jordan’s disaffection with the IRS? The Court summarizes in the next two paragraphs:

The IRS sent Jennifer Zuch a notice informing her that it intended to levy on her property to collect unpaid tax. She challenged the levy, arguing that she had prepaid the tax. The IRS Independent Office of Appeals (the "IRS Office of Appeals") sustained the levy, and Zuch petitioned the United States Tax Court for review of that decision. While the issue was being litigated in that Court over several years, the IRS withheld tax refunds owed to Zuch and applied them to what it said was her unpaid balance, satisfying it in full. When, according to the IRS's accounting, there was no more tax to be paid, the IRS filed a motion to dismiss the Tax Court proceeding for mootness, and the Court granted the motion.

Because Zuch's claim is not moot, we will vacate the dismissal and remand this matter to the Tax Court to determine whether Zuch's petition is meritorious.

Tax Court Holds Conservation Easement Proceeds Regulation Invalid Consistent with Eleventh Circuit Holding in Hewitt (3/28/24; 4/6/24)

In Valley Park Ranch, LLC v. Commissioner, 162 T.C. ___ No. 6 (3/28/24) (reviewed opinion), JAT Google Docs here and GS temp link here (GS permalink to follow when available)*, the Court declares the “proceeds” conservation easement regulation invalid by reversing its prior holding in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022) and adopting the holding of Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). The Tax Court gets there with a thin one-judge majority because it drew only 7 agreements with the opinion of the Court (including the author, Judge Jones); there were two concurring opinions in result only and 4 dissenting opinions. (Note that the Tax Court has only 13 active judges, with six vacant positions per § 7443(a).)

I noted yesterday that the commotion about Chevron deference is just a battle in a “larger war to discredit what is perceived (or claimed for political purposes) to be an evil administrative state.” See Discussion with Reporter about Possible Demise of Deference, Now Often Called Chevron Deference (Federal Tax Procedure Blog 3/28/24), here (See Bryan Camp’s comment that, for APA issues, everything looks like a nail.) My initial reaction when I saw the positions of all the judges on this issue was to test whether some such bent may have been involved in Valley Park Ranch. Here is my breakdown (readers can click on the graphic of the spreadsheet for a cleaner view and download; NOTE THERE WAS A BUST IN THE CALCULATION IN THE ORIGINAL POSTING THAT UNDERSTATED THE OBAMA NOMINEES; I CORRECTED ON 3/29/24 @ 8:45AM):

The breakdown is interesting.

Discussion with Reporter about Possible Demise of Deference, Now Often Called Chevron Deference (3/28/24)

Yesterday, I spoke with a reporter about the effect of reversal or elimination of Chevron deference would have on tax administration. As readers of this blog will know, that issue is now before the Supreme Court in two cases. 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 thought some readers might like to engage with some of the points of the discussion. I will bullet point the key points starting with some predicate points to set up the issue of the effect of reversal or elimination of Chevron deference.

• The key predicate step is to define deference. Deference is a court applying an agency interpretation that the court does not believe is the best interpretation of the ambiguous statutory text. Based on my anecdotal research in significant datasets of courts of appeals opinions noising about Chevron, courts often are not concluding that there is a better nonagency interpretation. Best interpretations of otherwise ambiguous statutory text easily pass Chevron’s test that the interpretations be reasonable.
• I say that this is a predicate step, but it points to the final conclusion. If the Supreme Court says that deference is eliminated, that will only affect those cases where the court affirmatively determines that a nonagency interpretation is the best interpretation. Not affected are those cases where the court determines that, within the range of reasonable interpretations of the ambiguous statutory text, the agency interpretation is best reasonable interpretation or the court is in equipoise as to the best reasonable interpretation (unable to determine that any interpretation is best and agency interpretation is as good as nonagency interpretation).
• I did not discuss with the reporter how often a court might be in equipoise as to the best interpretation; some like the late Justice Scalia claimed that he was rarely if ever in equipoise in statutory interpretation; for present, I assume that legal realists know or intuit that a state of equipoise in statutory interpretation is at least a possibility.
• Chevron did not create deference. Deference existed long before Chevron, in Supreme Court cases describing deference as we now describe Chevron deference—(i) ambiguous statutory text; and (ii) reasonable agency interpretation within the scope of the ambiguity. See John A. Townsend, The Tax Contribution to Deference and APA § 706 (December 14, 2023 SSRN 4665227), here (showing these articulated features particularly in tax cases before the APA).
• Reversal or elimination of Chevron deference will affect only interpretations in Treasury regulations (both final and temporary) because (i) Treasury (IRS) and DOJ Tax do not claim Chevron deference (or any other deference) and (ii) courts do not “defer” to interpretations in IRS subregulatory guidance (Revenue Rulings, etc.). In this regard, Skidmore respect is often mislabeled as deference but is not deference. See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here.
• If I am right in my conclusion based on anecdotal research and my intuition that courts now do not commonly really defer to agency interpretation (see definition above), then I suspect that eliminating deference (whether called Chevron or not) will not affect many outcomes, certainly not as many as the commotion about Chevron would suggest.
• Eliminating Chevron deference will exponentially increase tax litigation. It has been observed that the mix of administrative law and tax administration is like a lawyer with a hammer who imagines that there are a lot of nails out there that he or she can profitably hammer through litigation at high billing rates. See Bryan Camp, The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here (“Kristin Hickman loves the APA. To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love. It’s her Hammer, her righteous Mjölnir. And when you have a hammer, everything looks like a nail. Including ALL Treasury regulations.).
• The question that should be asked is whether the burst of litigation attacking IRS interpretations in regulations will (or should) affect many final outcomes. I think not. But lawyers with this anti-Chevron hammer will certainly try and in the process charge their high fees. The IRS will underwrite those attempts by giving the taxpayers deductions for the high fees they pay their lawyers to go on what is often a quixotic adventure. (Part of the cost-benefit analysis for taxpayers is how many dollars are involved and the benefits of delay (including the audit lobby and the time benefit/cost of delay).)
• I pointed particularly to the commotion about the written supervisor approval requirement in § 6751(b) involving intersection of a poorly written statute (drafted in a highly partisan atmosphere surrounding RRA ’98 apparently without much thought about how it would actually work) and courts trying to make sense from nonsense. Sooner or later (much, much later), the courts will reach some consensus as to the various ambiguous (or nonsensical) terms in the statute or, more likely, either the courts will honor the IRS’s interpretations in final regulations (now in proposed form) or the Supreme Court will have to come in more than once to clean up the mess. See Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here.
• Section 6751(b) is just one instance where deferring to agency regulations will avoid a lot of unnecessary commotion. Another instance I like to use (although not mentioned to the reporter) are interpretations such as those “deferred to” in United States v. Correll, 389 U.S. 299 (1967) where the agency interpreted the statute’s “away from home” requirement to include sleep or rest, hardly compelled by the statutory text but reasonable for administering the tax system. What happens to the thousands, if not millions, of interpretations buried in Treasury regulations that may now seem to be in play to those with a high-priced hammer?
• Finally, I vented to the reporter my concern that deference is just a battle in the larger war to discredit what is perceived (or claimed for political purposes) to be an evil administrative state. That is a political issue that plays out in many contexts; deference is just one context where politics is disguised with legal and even constitutional overtones (lipstick on the pig). My point is that given the community we have in the United States and where we want to be in the world, a robust administrative state is required. That means that we should honor those who work in that administrative state (military, IRS agents, etc.) and strive to make them better rather promoting a narrative that administrative agencies are enemies, a narrative that can seep through our fabric, even for such things as Chevron deference. 

Added 3/30/24 @ 2:30 pm:

Government Files Petition for Cert on Issue of Whether 90-day Period for Tax Court Petitions is Jurisdictional (3/26/24)

The Government has filed a petition for certiorari with the following requested issues (see Petition in Commissioner v. Culp (S. Ct. No. 22-1789), here (Pet. (I):

1. Whether 26 U.S.C. 6213(a) grants the Tax Court jurisdiction to review an untimely petition for redetermination of a tax deficiency?

2. Even assuming that the Tax Court has jurisdiction to review some untimely petitions for redetermination of tax deficiencies, whether that jurisdiction extends to a petition filed after the Internal Revenue Service has already assessed the previously determined deficiency, as it is required to do under 26 U.S.C. 6213(c) “[i]f the taxpayer does not file a petition with the Tax Court within the time prescribed.”

Readers of this blog (and most others paying attention to tax procedure matters) will already be familiar with the first issue, so I won’t address that issue further here except to say that the Government requests Supreme Court review because the court of appeals decision (Culp v. Commissioner, 75 F.4th 196 (2023)) is: (i) wrong; and (ii) to resolve a conflict among the Circuits.

The second issue is apparently a new or at least newly articulated as a separate issue if the Court were to hold that the 90-day period is not jurisdictional. Specifically, it articulates a point in which an open-ended inquiry for equitable relief can apply based on the statutory mandate to assess the tax if the taxpayer does not file a petition. The Government makes its argument on this as a separate issue in a footnote under the heading B. The Decision Below Creates A Clear Circuit Conflict On An Important And Recurring Question (Pet. 28 n. 3):

    n3 Because every other court to have addressed the question has held that the 90-day deadline is itself jurisdictional, no circuit conflict exists on the second question presented, see p. i, supra, concerning whether a post-deadline assessment made in compliance with Section 6213(c) independently deprives the Tax Court of deficiency jurisdiction. But because that question is itself jurisdictional, is closely related to the first question presented, and could not arise in circuits that treat the 90-day deadline as jurisdictional, it should be considered in this case along with the first question presented.

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.