Designated Orders: 6/26 – 6/30/2017

Professor Patrick Thomas of Notre Dame Law School writes about  last known address, discovery and whistleblower issues in this week’s edition of Designated Orders. Les

 Last week’s designated orders were quite the mixed bunch: a number of orders in whistleblower cases; a last known address issue; and a discovery order in a major transfer pricing dispute between Coca Cola and the federal government. Other designated orders included Judge Guy’s order granting an IRS motion for summary judgment as to a non-responsive CDP petitioner; Judge Holmes’s order on remand from the Ninth Circuit in a tax shelter TEFRA proceeding; and Judge Holmes’s order in a whistleblower proceeding subject to Rule 345’s privacy protections.


Last Known Address: Dkt. # 23490-16, Garcia v. C.I.R. (Order Here)

In Garcia, Judge Armen addresses whether the Service sent the Notice of Deficiency to Petitioner’s last known address. As most readers know, deficiency jurisdiction in the Tax Court depends on (1) a valid Notice of Deficiency and (2) a timely filed Petition. Failing either, the Tax Court must dismiss the case for lack of jurisdiction. If the Petition is not timely filed in response to a validly mailed notice of deficiency, the taxpayer is out of luck; the Service’s deficiency determination will stick. The Service can also potentially deprive the Court of jurisdiction through failure to send the Notice of Deficiency to the taxpayer’s last known address by certified or registered mail under section 6212, though the Court will have jurisdiction if the taxpayer receives a Notice of Deficiency that is not properly sent to the last known address and timely petitions. While a petitioner could be personally served with a Notice of Deficiency, this rarely occurs.

Perhaps counterintuitively for new practitioners, the remedy for this latter failure is a motion to dismiss for lack of jurisdiction. Unlike a jurisdictional dismissal for an untimely petition, this motion can substantially benefit the taxpayer. A successful motion will require the Service to re-issue the Notice to the proper address—or else otherwise properly serve it on the taxpayer. If the Service fails to do so within the assessment statute of limitation under section 6501, no additional tax liability may be assessed. This motion is thus a very powerful tool for practitioners in the right circumstances.

Here, the Court dealt with two motions to dismiss for lack of jurisdiction: the Service’s based on an untimely petition, and Petitioner’s based on failure to send the Notice to the last known address. Petitioner had sent multiple documents to the Service, and the Service to the taxpayer, as follows:


Date Sender Document Address
February 25, 2015 Petitioner 2014 Tax Return Twin Leaf Drive
April 2015 Petitioner 2011 Amended Return Brownfield Drive
October 30, 2015 Petitioner Power of Attorney Twin Leaf Drive
November 10, 2015 IRS Letter 1912 re: 2014 Exam Brownfield Drive
February 12, 2016 Petitioner 2015 Tax Return Brownfield Drive
March 8, 2016 IRS 2014 Notice of Deficiency Brownfield Drive
October 17, 2016 IRS Collection Notice re: 2014 Brownfield Drive


Judge Armen held that the Service did send the Notice to the proper address, despite the ambiguities present here. Petitioner argued that because his attorney had filed a Form 2848 with the Twin Leaf Drive address after he filed his 2011 Amended Return, the Form 2848 changed the last known address to Twin Leaf. The Notice of Deficiency wasn’t sent to that address; ergo, no valid notice.

But Petitioner’s filed his 2015 return using the Brownfield Drive address, prior to issuance of the Notice of Deficiency. Petitioner argued that the regulations governing the last known address issue requires both (1) a filed and (2) properly processed return. Reg. § 301.6212-2(a). In turn, Rev. Proc. 2010-16 defines “properly processed” as 45 days after the receipt of the return. Because the Notice was issued before this “properly processed” date (March 28), the last known address, according to Petitioner, should have been the Twin Leaf Drive address as noted on the most recent document filed with the Service: the October 30, 2015 Form 2848.

Judge Armen chastises petitioner for “using Rev. Proc. 2010-16 as a sword and not recognizing that it represents a shield designed to give respondent reasonable time to process the tens of millions of returns that are received during filing season.” Further, Judge Armen assumes that the Service actually processed the return much quicker (“Here petitioner would penalize respondent for being efficient, i.e., processing petitioner’s 2015 return well before the 45-day processing period….”

I’m not sure that the facts from the order support that conclusion. There is no indication of when Petitioner’s 2015 return was processed by the Service such that they could use it to conclusively determine the last known address. Judge Armen seems to avoid this issue by assuming (perhaps correctly) that the return was processed before the Notice of Deficiency was issued. Unless certain facts are missing from the Order, this seems like an assumption alone.

If the Service did not have the 2015 return on file, or had sent the Notice prior to February 12, 2016, then they would have waded into murkier waters. As Judge Armen alludes to, the Service does not view a power of attorney as conclusively establishing a change of address. Rev. Proc. 2010-16, § 5.01(4). The Tax Court has disagreed with this position previously. See Hunter v. Comm’r, T.C. Memo. 2004-81; Downing v. Comm’r, T.C. Memo. 2007-291.

Discovery Dispute Regarding Production of Documents and Response to Interogatories: Dkt. # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

Judge Lauber denied a portion of the Service’s request to compel the production of documents and responses to interrogatories in the ongoing litigation regarding Coca-Cola’s transfer pricing structure. I’d do our reader’s a disservice by touching transfer pricing with a ten-foot pole. Rather, I’ll focus on the discovery issue at play.

Regarding the motion to compel production of documents, the Service had sought “all documents and electronically stored information that petitioner may use to support any claim or defense regarding respondent’s determination.” The parties had previously agreed to exchange all documents by February 12, 2018. Coca Cola argued that by demanding all such documents presently, the Service was attempting to get around the pretrial order.

Judge Lauber agreed with Coca Cola, especially because certain claims of privilege were unresolved, and expert witness reports and workpapers had not yet been exchanged. In essence, Coca Cola was unable to provide “all documents” upon which they might rely at trial, as they were unable to even identify all of those documents presently due to these unresolved issues. Judge Lauber cautioned Coca Cola, however, to avoid an “inappropriate ‘document dump’” on February 12, by continuing to stipulate to facts and to exchange relevant documents in advance of this date.

The motion to compel response to interrogatories centered on private letter rulings that Coca Cola received under section 367 (which restricts nonrecognition of gain on property transfers to certain foreign corporations). The Service wanted Coca Cola to “explain how the [section 367 rulings] relate to the errors alleged with respect to Respondent’s income allocations” and “identify Supply Point(s) [Coca Cola’s controlled entities] and specify the amount of Respondent’s income allocation that is affected by the transactions subject to the [section 367 rulings]”. While Coca Cola had already identified the entities and transactions relevant to the section 367 rulings, and had provided a “clear and concise statement that places respondent on notice of how the section 367 rulings relate to the adjustments in dispute”, the Service apparently wanted more detail on how precisely the private letter rulings were relevant to Coca Cola’s legal argument.

Coca Cola, and Judge Lauber, viewed this request as premature. Nothing in the Tax Court’s discovery rules require disclosure of legal authorities. Moreover, Judge Lauber cited other non-Tax Court cases holding that such requests in discovery are impermissible. Any disclosure of an expert witness analysis was likewise premature, at least before the expert witness reports are exchanged.

Whistleblower Motions: Dkt. # 30393-15W Kirven v. C.I.R. (Orders Here and Here)

Two orders came out this week in this non-protected whistleblower case. Unlike Judge Holmes’s order mentioned briefly above, we can actually tell what’s going on in this case, as Petitioner has apparently not sought any protection under Rule 345. Chief Judge Marvel issued the first order, which responded to petitioner’s request for the Chief Judge to review a number of orders that Special Trial Judge Carluzzo had previously rendered. Specifically, Petitioner desired Chief Judge Marvel to review the denials of motions to disqualify counsel, to strike an unsworn declaration from the Service, and to compel interrogatories and sanctions.

While the Chief Judge has general supervisory authority over Special Trial Judges under in whistleblower actions under Rule 182(d), Chief Judge Marvel denied the motion, given that these motions were “non-dispositive”.

The second order by Judge Carluzzo did resolve a dispositive motion for summary judgment. Perhaps we shall see a renewal of a similar motion before Chief Judge Marvel in this matter.

The Service had initially denied the whistleblower claim due to speculative and non-credible information. Additionally, however, an award under the whistleblowing statute (section 7623(b)) requires that the Service initiated an administrative or judicial proceeding against the entity subject to a whistleblowing complaint. Further, the Service needs to have collected underpaid tax from that entity for an award, as the award is ordinarily limited to 15% of the amount collected. Neither of those occurred in this matter, and on that basis, Judge Carluzzo granted the motion for summary judgment, upholding the denial of the whistleblowing claim.

This case again reminds pro se petitioners to attend their Tax Court hearings and respond to the Service’s motions for summary judgment. The Petitioner did not attend the summary judgment hearing, because (according to her) the hearing regarded both the Service’s motion for summary judgment as well as her motion to compel discovery. Whatever her reason for not attending the hearing or responding to the motion, all facts provided by the Service were accepted, and the Court assumed there was no genuine dispute as to any material facts: a recipe for disaster for the non-movant in a summary judgment setting.

D.C. Circuit Majority Opinion in Florida Bankers Not Consistent with Supreme Court’s Direct Marketing Decision (Part 2)

Pat Smith continues his discussion of the DC Circuit’s Florida Bankers decision. Les

In yesterday’s post I discussed the state of the law in Anti-Injunction Act cases as well as the Supreme Court’s Direct Marketing opinion. I described how the majority opinion is out of step with the law and is inconsistent with the narrow reading of the AIA as expressed in recent important developments. In today’s post, I will discuss Judge Henderson’s dissenting opinion in Florida Bankers, and describe why I think the dissent is the better reasoned opinion. Judge Henderson began by noting that while the bankers associations’ “challenge raises several difficult questions, the Anti-Injunction Act (AIA) is not one of them.” She correctly relied on the Direct Marketing decision as providing the applicable Supreme Court guidance for resolving the Anti-Injunction Act issue in Florida Bankers. As was the case in Direct Marketing, a challenge to an information reporting requirement does not relate to the assessment or collection of taxes under the Direct Marketing analysis because information reporting is a step in the overall revenue raising process that precedes the narrowly defined assessment and collection steps. Moreover, as she correctly notes, the information reporting requirement at issue in Florida Bankers is even farther removed from any assessment or collection of taxes than the reporting requirement in Direct Marketing because the interest income that is the subject of the Florida Bankers reporting requirement is not even subject to taxation by the U.S.


She then addressed the issue of whether the fact that the penalty for violation of the reporting requirement is treated as a tax for purposes of the Anti-Injunction Act has the consequence that the Florida Bankers challenge is barred by the Anti-Injunction Act. She concluded that this issue had already been decided by the D.C. Circuit in Seven-Sky. That case held that when a plaintiff challenges a regulatory requirement that is enforced by a penalty that is treated as a tax for purposes of the Anti-Injunction Act, such a challenge is not barred by the Anti-Injunction Act, because the challenge relates to the regulatory requirement rather than the penalty. Putting this in the terms of the Direct Marketing analysis, the challenge could not possibly relate to the assessment or collection of a tax because the act that would give rise to liability to pay the penalty, namely a violation of the reporting requirement, has not occurred.

Judge Henderson also concluded that Bob Jones and Americans United were factually distinguishable from Florida Bankers because there was a much closer connection in those cases between the challenge to the revocation of tax-exempt status and the effect a successful challenge would have on the tax liability of the contributors to the organizations than any connection between the challenge in Florida Bankers and actual tax liability. Thus, contrary to the argument made by the government in its footnote in its reply brief in Z Street, it is not necessary to conclude that Direct Marketing has implicitly overruled those cases in order to apply the reasoning in Direct Marketing in interpreting the Anti-Injunction Act.

Judge Henderson also concluded that the 1987 D.C. Circuit decision in Foodservice, which was cited in the district court opinion, is directly on point and supports the conclusion that the Anti-Injunction Act does not apply to the Florida Bankers challenge. Finally, she noted that it would be particularly inappropriate to hold that the only way to challenge the information reporting requirement at issue in Florida Bankers is for a bank to violate the requirement, pay the resulting penalty, and sue for a refund of the penalty, in light of the fact that section 7203 of the Code makes willful violation of reporting requirements such as this one a misdemeanor.

With respect to Judge Kavanaugh’s majority opinion in Florida Bankers holding that the Anti-Injunction Act does apply to bar the Florida Bankers challenge, I could have understood how a judge might have agreed with the position taken by the government in the footnote in it Z Street reply brief, namely, that since the Direct Marketing decision did not say anything explicit about what effect the decision might have on the Bob Jones and Americans United holdings, as a consequence, the more prudent course of action for a lower court judge would be to wait until the Supreme Court has explicitly addressed the issue. While I do not agree with that position, since the reasoning in Direct Marketing is so clear and so obviously applicable under the Anti-Injunction Act as well as under the Tax Injunction Act, nevertheless, I can at least understand how a reasonable judge might hold that position.

However, that is not the approach Judge Kavanaugh took in his majority opinion. He did not attempt to engage with the reasoning in Direct Marketing at all. Instead, he distinguished Direct Marketing based on a point that had played no role at all in either the briefing of the case or in the Supreme Court’s opinion, namely, the contention that the penalty for violation of the reporting requirement in Direct Marketing was not a tax for purposes of the Tax Injunction Act, whereas the penalty for violation of the reporting requirement in Florida Bankers clearly is a tax for purposes of the Anti-Injunction Act.

While it might at first seem very surprising that the same judge who wrote such a strong opinion invalidating a regulation issued by the IRS and Treasury in Loving v. IRS 742 F.3d 1013 (D.C. Cir. 2014).could write as weak and misguided an opinion as the majority opinion in Florida Bankers. This result seems somewhat less surprising, however, when viewed in the context provided by Judge Kavanaugh’s opinions in other cases involving the Anti-Injunction Act. He wrote dissenting opinions addressing the Anti-Injunction Act issues in both the panel and en banc decisions in Cohen as well as in Seven-Sky.

One final collateral issue that was addressed briefly by both Judge Kavanaugh and Judge Henderson is the issue of whether the restriction imposed by the Anti-Injunction Act is jurisdictional. As both judges note, prior D.C. Circuit opinions characterize the restriction as jurisdictional, but as Judge Henderson points out, a line of Supreme Court decisions in recent years has called into question the loose analysis that has traditionally been applied in deciding whether particular statutory requirements for bringing suit are or are not jurisdictional, and this line of authority would often result in characterizing as non-jurisdictional certain requirements that may traditionally have been viewed as jurisdictional.

While the Tax Injunction Act is clearly jurisdictional, the reason for that conclusion rests on one point on which the Tax Injunction Act and the Anti-Injunction Act differ, namely, the fact that the Tax Injunction Act explicitly restricts the ability of district courts to hear the type of cases the Act covers, whereas the Anti-Injunction restricts only the ability of parties to maintain such suits. This difference should lead to the conclusion that the Anti-Injunction Act is not jurisdictional. I developed this position at length in a Tax Notes article written in the context of the issue that was subsequently resolved by the Supreme Court in NFIB v. Sebelius.

As noted at the outset, in light of the weakness of Judge Kavanaugh’s majority opinion, the strength of Judge Henderson’s dissenting opinion, the clear conflict between the analysis and conclusion in the majority opinion and the Supreme Court’s Direct Marketing decision, and the conflict between the majority opinion and numerous prior D.C. Circuit decisions, such as Z Street, Cohen, Foodservice, and Seven-Sky, the Florida Bankers decision is a very strong candidate for en banc review.


D.C. Circuit Majority Opinion in Florida Bankers Not Consistent with Supreme Court’s Direct Marketing Decision (Part 1)

Frequent guest contributor Patrick J. Smith of Ivins, Phillips & Barker discusses the Florida Bankers decision that the DC Circuit handed down on Friday. The state of the law when it comes to the Anti-Injunction Act and its relationship to the IRS is far from clear, and courts seem to be taking views that are hard to reconcile. In this post, Pat, who has written more on these issues than just about anyone, provides the deep context for his dissatisfaction with the opinion. Tomorrow Pat will tell us why the Florida Bankers dissent got this one right. Les

On Friday of last week, a divided panel of the D.C. Circuit Court of Appeals issued its opinion in Florida Bankers Association v. Department of the Treasury, six months after the oral argument in the case was held. The majority held the suit was barred by the Anti-Injunction Act in the Internal Revenue Code, based on reasoning that is clearly inconsistent with the Supreme Court’s decision in Direct Marketing Association v. Brohl in March of this year. The weakness of the majority opinion in Florida Bankers, together with the strength of a dissenting opinion filed in the case, as well as the inconsistency of the majority opinion not only with the Supreme Court’s Direct Marketing decision but also with other D.C. Circuit opinions, all make the Florida Bankers case a strong candidate for en banc review. In this two-part post, I will first describe the issue in the case and provide the context for why I think the dissenting opinion is correct and the majority is wrong. Tomorrow, I will discuss in detail the dissenting opinion, and describe why I believe the dissent’s approach is consistent with the narrow reading of the Anti-Injunction Act that the Supreme Court and prior DC Circuit precedent requires.


Florida Bankers is a challenge by two bankers associations to the validity of regulations issued by the IRS and Treasury requiring U.S. banks to report to the IRS information concerning interest earned by non-resident aliens on accounts they hold in the banks. Although this interest is not subject to income taxation in the U.S., the IRS and Treasury claim the reporting requirement is necessary in order to make it possible for the U.S. to comply with information sharing agreements it has entered into with other countries that benefit the U.S. by providing information on bank accounts held by U.S. citizens in banks in those countries.

The bankers associations argue that in issuing the regulations, the IRS and Treasury violated the Administrative Procedure Act’s arbitrary and capricious standard under 5 U.S.C. § 706(2)(A) by failing to give sufficient weight to the likelihood that some non-resident aliens would respond to the information reporting requirement by withdrawing funds from U.S. banks, not because they wish to avoid paying tax to their home countries on the interest earned on the accounts, but instead because they fear the information either will be misused by their home country governments or will not be protected by those governments against misuse by others. In the district court, the government argued that the suit was barred by the Anti-Injunction Act, section 7421(a) of the Internal Revenue Code, which provides that, with certain exceptions, such as Tax Court deficiency actions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”

The government argued that even though the information that the banks were required to report related to interest that is not subject to income taxation in the U.S., nevertheless, the Anti-Injunction Act applied to bar the suit because of the penalty that banks would be subject to if they failed to comply with the reporting requirement that is imposed by the regulations, and because this penalty is treated as a tax for purposes of the Anti-Injunction Act, under section 6671(a) and the Supreme Court’s decision in NFIB v. Sebelius. The district court held that the Anti-Injunction Act did not apply for several reasons ( Les’ January 2014 post discussing the district court opinion, with links to that decision, can be found at APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius).    First, the penalty would be imposed only if one of the banks that are members of the associations that brought the challenge violated the reporting requirement, but none of these banks has either violated the requirement or threatened to do so. The challenge is not to the penalty but rather to the reporting requirement itself. Second, the D.C. Circuit, in a 1987 decision, Foodservice and Lodging Institute, Inc. v. Regan, had held that a challenge to the validity of another information reporting requirement that did not relate directly to the assessment or collection of taxes but, that was subject to the same penalty that applied to the information reporting requirement at issue in Florida Bankers, was not barred by the Anti-Injunction Act. Finally, in Seven-Sky v. Holder, the D.C. Circuit decision addressing the same issue subsequently decided by the Supreme Court in NFIB v. Sebelius, the D.C. Circuit had noted that the Anti-Injunction Act “has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement.” 661 F.3d 1, at 9 (D.C. Cir. 2011).

However, the district court rejected the challenge on the merits. I have explained in two Tax Notes articles here and here why I believe the district court’s decision on the merits was incorrect. However, the D.C. Circuit did not reach the merits. Instead, the majority opinion, written by Judge Kavanaugh, held the suit was barred by the Anti-Injunction Act, and while the dissenting judge, Judge Henderson, disagreed with that conclusion, nevertheless, she did not express a view on the merits.

As noted earlier, the majority opinion in Florida Bankers is incorrect because it is clearly at variance with a Supreme Court decision that was issued in March of this year. Less than a month after the February oral argument in Florida Bankers, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. As I noted in a post here soon after that decision was issued and at greater length in a subsequent Tax Notes article, while the Direct Marketing decision did not deal directly with the Anti-Injunction Act, but instead with a different provision, the Tax Injunction Act, in a different title of the United States Code, a provision that imposes restrictions similar to those in the Anti-Injunction Act on the jurisdiction of federal district courts to hear cases involving taxes imposed by the states, nevertheless, the strong similarities between the two provisions, and the nature of the Court’s reasoning in the Direct Marketing decision, support the conclusion that the Court’s analysis in Direct Marketing would be equally applicable with respect to the Anti-Injunction Act.

Like the Anti-Injunction Act, the Tax Injunction Act prohibits suits that would “restrain” the “assessment” or “collection” of taxes. In Direct Marketing, the Court held that because the two provisions are so similar, and because the Tax Injunction Act was modeled on the Anti-Injunction Act, the words in the Tax Injunction Act should be given the narrow, technical meaning those words have in the Internal Revenue Code. According to the Court, in the Internal Revenue Code, the words “assessment” and “collection” refer to well defined and specific phases of the overall process of obtaining tax revenue, and information reporting is not part of either of those phases, even where the information being reported bears directly on someone’s tax liability. In addition, according to the Court, the word “restrain” does not mean that any suit that might have the effect of “inhibiting” the collection of state tax revenue is barred by the Tax Injunction Act.

As a result of the foregoing reasoning, the Colorado statute that was being challenged in Direct Marketing, which required out-of-state retailers to provide the state with information reports on their sales to residents of the state, was not sufficiently closely connected with the collection or assessment of tax for the challenge to be barred by the Anti-Injunction Act. Although the Court had ruled in two cases in 1974, Bob Jones University 416 U.S. 725 (1974). and Americans United 416 U.S. 752 (1974), that suits challenging the IRS’s revocation of the tax-exempt status of an organization was barred by the Anti-Injunction Act because of the effect that the challenge would have, if it were successful, on the deductibility by contributors to the organization of their contributions, and although those decisions have been interpreted by the Courts of Appeals to mean that the Anti-Injunction Act bars any suit that, if successful, could have any sort of negative effect on the collection of tax revenue, nevertheless, the reasoning and the conclusion in Direct Marketing are clearly inconsistent with that type of broad reading of the Anti-Injunction Act.

Another recent D.C. Circuit decision involving the application of the Anti-Injunction Act is Z Street v. Koskinen 791 F.3d 24 (D.C. Cir. 2015). In this case, in contrast to Florida Bankers, both the oral argument and much of the briefing came after the Direct Marketing decision. I discussed the opinion in this case in an op-ed at TaxProf Blog, and I discussed the oral argument in this case in my Tax Notes article that discussed the Direct Marketing decision. (Les also wrote on the Z Street DC Circuit opinion here).

This case involved a challenge by an organization that had applied to the IRS for tax-exempt status to a delay in processing the application that the organization alleged was caused by an “Israel special policy” that the IRS allegedly applies in processing tax exemption applications by organizations with an interest in Israel. Under this alleged policy, organizations with views on Israel that do not coincide with those of the administration are treated less favorably, at least in terms of the speed with which the applications are processed, than organizations whose views on Israel coincide with those of the administration.

The government filed a motion to dismiss the case in the district court on the grounds that the suit was barred by the Anti-Injunction Act. The applicability of the Anti-Injunction Act was the only issue before the D.C. Circuit. Because of the procedural posture of the case, the court was required to assume the correctness of the organization’s allegations regarding the existence of an “Israel special policy.”

At the oral argument, the panel was clearly very hostile to the position taken by the government. The panel expressed unhappiness with the fact that the government’s reply brief, which was filed after the Direct Marketing decision, had referred to that decision only in a footnote. That footnote argued that since the Direct Marketing decision had not cited the Bob Jones or Americans United decisions, the Direct Marketing decision should not be read as overruling those decisions by implication. The questions and comments by the panel at oral argument suggested that they viewed the Direct Marketing decision as being centrally relevant to the issue in Z Street.

Based on the oral argument, it was no surprise that the D.C. Circuit opinion in Z Street held the Anti-Injunction Act inapplicable to the case. However, the tone of the opinion was considerably milder than might have been expected based on the oral argument. In addition, the decision that the Anti-Injunction Act did not apply was not based on the Direct Marketing decision, but rather on the Supreme Court’s 1984 decision in South Carolina v. Regan, 465 U.S. 367 (1984) which held that the Anti-Injunction Act does not apply in cases where the party challenging IRS action has no other mechanism for bringing its challenge than a suit in district court. The D.C. Circuit panel held that the suit Z Street had brought in district court was the only way the organization could challenge the alleged IRS delay in processing the application.

While the Z Street opinion did not rely on Direct Marketing for its conclusion that the Anti-Injunction Act did not apply, nevertheless, there is important dictum in the Z Street opinion bearing on the relevance of Direct Marketing for the interpretation of the Anti-Injunction Act. In response to the government’s argument that Bob Jones and Americans United require a broad application of the Anti-Injunction Act under which the only way tax issues can ever be litigated is through tax refund suits and Tax Court proceedings specifically authorized by provisions of the Internal Revenue Code, the Z Street opinion noted that the D.C. Circuit had previously rejected this position in 2011 in its en banc opinion in Cohen v. United States 650 F.3d 717 (D.C. Cir. 2011). In that case, the en banc D.C. Circuit held that a suit challenging the validity of a procedure adopted by the IRS for refunding taxes that had been improperly collected was not barred by the Anti-Injunction Act. I discussed the Cohen decision in a Tax Notes article in 2011. In Z Street, the court noted that “[I]n Cohen we rejected this view of ‘a world in which no challenge to [the IRS’s] actions is ever outside the closed loop of its taxing authority.’”

Z Street then had the following observations on Direct Marketing:

Our rejection of the Commissioner’s broad reading of the [Anti-Injunction] Act finds support in the Supreme Court’s recent decision in Direct Marketing Association v. Brohl. There, interpreting the Anti-Injunction Act’s cousin, the Tax Injunction Act, which serves a similar function for federal court challenges to state taxes, the Court read “restrain” in that statute as having a “narrow[] meaning…captur[ing] only those orders that stop…assessment, levy and collection” rather than “merely inhibit” those activities….Brohl’s holding is significant here because the Court “assume[s] that words used in both Acts are generally used in the same way.”

Against this background, it would have been expected that Direct Marketing would play a central role in the D.C. Circuit opinion in Florida Bankers. And, in fact, Direct Marketing plays a central role in Judge Henderson’s dissenting opinion. Much of this dissenting opinion is what I would have expected to read in a unanimous opinion for the panel. Judge Henderson’s dissenting opinion is nearly twice as long as Judge Kavanaugh’s majority opinion. In tomorrow’s second part to the post, I will discuss the dissenting opinion, and how in my view the dissent’s view is correct in light of the developments I have discussed today.

A Massive Loss and a Huge Rebuke for the IRS from the Tax Court in Altera Decision

We welcome back guest blogger, Patrick J. Smith of Ivins, Phillips & Barker.  Pat’s practice and writing have a strong focus on the intersection of tax and the Administrative Procedure Act.  Yesterday’s block buster Tax Court decision in this area receives careful analysis from him and a discussion of the potentially far reaching impact of the decision.  Keith

Ordinarily, when the Tax Court issues a decision that is reviewed by the full court, especially in a case involving a challenge to the validity of regulations, there are multiple opinions: a majority opinion, dissents, concurrences, sometimes even a lead opinion that is not the opinion that received the most votes. See, e.g., Lantz v. Commissioner,132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010); Intermountain Insurance Service of Vail, LLC v. Commissioner, 134 T.C. 211 (2010), rev’d, 650 F.3d 691 (D.C. Cir. 2011), rem’d, 132 S. Ct. 2120 (2012); Carpenter Family Investments, LLC v. Commissioner, 136 T.C. 373 (2011).  It is extremely rare, if not unprecedented, for the Tax Court to speak with complete unanimity in such a case.  However, the Tax Court was totally unanimous in its holding on Monday of this week in

Altera Corp. v. Commissioner that a provision of the regulations under section 482 dealing with cost-sharing agreements for the development of intangibles was invalid (please note that while my law firm does work for Altera, none of the lawyers in my law firm is among the group of lawyers representing Altera in this case.)  This unanimity surely was meant by the Tax Court to send a very strong message to the IRS and Treasury that business as the IRS and Treasury have usually conducted it in issuing regulations just won’t work any more.


The specific issue in the case was the validity of a provision in the current cost-sharing regulations requiring that the cost of stock-based compensation must be included among the costs that are shared under such arrangements. See Treas. Reg. §1.482-7(d)(2). This is clearly a very important issue in and of itself.  However, the significance of the Altera decision clearly goes far beyond that specific issue and encompasses the entire approach that the IRS and Treasury have traditionally taken in issuing regulations.

The taxpayer in Altera argued that, for a number of reasons, this provision in the cost-sharing regulations was invalid under the “arbitrary and capricious” standard in the Administrative Procedure Act.  Under the Supreme Court’s landmark 1983 State Farmdecision, in order for agency action to satisfy the arbitrary and capricious standard, the agency action must be the product of “reasoned decision-making,” and the agency must, at the time it takes the action being reviewed, provide a reasoned explanation for why it made the particular decision it did.

Although challenges to agency regulations and other agency action outside the tax context almost always include a challenge based on an asserted violation of the arbitrary and capricious standard, usually based on the failure of the agency to provide a satisfactory explanation of the reasons for its action, the invocation of this standard in challenges to tax regulations has traditionally been very rare.  The first case in which a court applied the arbitrary and capricious standard to invalidate a tax regulation was the 2012 decision of the Federal Circuit in Dominion Resources, a case in which two of my partners and I represented the taxpayer.

I have discussed the potential application of the arbitrary and capricious standard to challenge tax regulations and other IRS action in a number of articles (links can be found here, here, here, here, and here.)  As I have pointed out in those articles, many tax regulations are vulnerable to challenge under the arbitrary and capricious standard because the IRS and Treasury often do not provide the type of reasoned explanation for the decisions made in issuing regulations that State Farm requires.  As I have pointed out in those articles, and as the Tax Court opinion in Altera noted in a parenthetical quotation, until very recently, the provisions of the Internal Revenue Manual regarding the drafting of preambles to regulations explicitly stated that “[i]t is not necessary to justify the rules that are being proposed or adopted or alternatives that were considered,” assertions that are clearly inconsistent with the requirements of the arbitrary and capricious standard as interpreted in State Farm.

Before addressing the merits of the taxpayer’s challenge in Altera, the Tax Court addressed some extremely significant preliminary issues.  The first of these issues was whether the regulation that was being challenged was subject to the notice-and-comment requirements for rulemaking in section 553 of the APA.  These requirements apply to “substantive” regulations (the term the APA itself uses), which are often referred to as “legislative” regulations, the term the Tax Court used in Altera.  However, the notice-and-comment requirements do not apply to “interpretative” regulations.

The distinction between these two categories of regulations is not always clear, but one point that is clear is that legislative regulations have the force of law, while interpretative regulations do not.  The IRS has traditionally claimed that regulations issued under the general authority of section 7805(a) are interpretative regulations and as such are exempt from the APA’s notice-and-comment requirements.  However, the IRS also claims that these regulations have the force of law and are therefore entitled to Chevron deference, and this latter position was upheld by the Supreme Court in Mayo.  The Tax Court concluded that because the IRS and Treasury intended the regulation being challenged in Altera to have the force of law, the regulation was subject to the APA notice-and-comment requirements.  While this seems like an easy conclusion, it is very welcome to have it stated so forcefully by the Tax Court, repudiating one of the IRS’s many attempted departures from normal administrative law principles.

The second significant preliminary issue addressed by the Tax Court in Altera was whether State Farm was applicable to the challenge.  The IRS contended that the challenge was governed by Chevron and not by State Farm.  This was another completely untenable position, since numerous decisions by the D.C. Circuit make clear that both standards are applicable to challenges to the validity of agency regulations that involve the interpretation of statutory provisions, and the Tax Court resoundingly repudiated this position as well.  I have noted in my articles that the Supreme Court’s decision in Judulang v. Holder makes clear that State Farm and Chevron step two are essentially equivalent, and the Tax Court in Altera reached the same conclusion.  The Tax Court concluded that because of this equivalence, it was not necessary to decide between applying State Farm and Chevron.  However, the court phrased its reasoning in deciding the merits in terms of the State Farm requirements.

After deciding these preliminary issues, the Tax Court reached the merits of the taxpayer’s challenge.  Section 482 permits the IRS to allocate income, deductions, and other items between related commonly controlled parties where such an allocation is necessary to clearly reflect the income of the parties.  Section 482 does not itself refer to the arm’s length standard, but the long-standing regulations, much case law, and many treaties take the position that allocations under section 482 are appropriate only when those allocation are consistent with the results that would be reached between unrelated parties bargaining at arm’s length.  As the Tax Court phrased the ultimate issue, the validity of the provision in the cost-sharing regulations requiring that the cost of stock-based compensation must be included in the costs that are shared turns on whether the IRS and Treasury reasonably concluded that this position was consistent with the arm’s length standard.

The taxpayer contended that the regulation violated the reasoned decision-making standard because the IRS and Treasury had no evidence that unrelated parties would include the cost of stock-based compensation in the costs that are shared under a cost-sharing agreement and were provided with considerable evidence by the parties who submitted comments that unrelated parties would not in fact agree to share this type of cost.  The Tax Court agreed.  The Tax Court concluded that the issue of whether unrelated parties would share this type of cost was inherently an empirical issue and that it was unreasonable for the IRS and Treasury to rely on their unsupported belief that this type of cost would be shared by unrelated parties.  The Tax Court also agreed with the taxpayer’s argument that the IRS and Treasury acted unreasonably and improperly in failing to adequately respond to the comments that presented evidence that unrelated parties would not share the costs of stock-based compensation.

While Altera is not the first case in which a court has invalidated a tax regulation under the arbitrary and capricious standard, nevertheless, Altera represents a far more significant loss for the IRS than the first such case, Dominion Resources, not only because the particular provision of the regulations that was at issue in Altera had a much broader application than the provision at issue in Dominion Resources, but also because of the breadth of the IRS’s failings in Altera as compared to Dominion Resources.  The holding in Dominion Resources was based on the failure of the IRS and Treasury to provide an explanation of the reasons behind the rule at issue in the preamble to the regulations.  In contrast, the holding in Altera was based on the fact that the reasoning that was disclosed in the preamble was, in the Tax Court’s view, fundamentally flawed.

In the context of most challenges to actions by agencies other than the IRS that are based on the arbitrary and capricious standard, the challenge is, like the one in Dominion Resources, based on a claimed failure by the agency to provide an adequate explanation of the reasons for its action.  In contrast, when the preamble to a regulation discloses the nature of the reasoning process used by the agency in reaching its decision, and the reviewing court concludes that this reasoning process was defective, this represents a much more serious and fundamental flaw in the agency’s actions than a mere failure to explain its reasoning.  There is absolutely no doubt that the Tax Court’s holding in Altera will prompt other challenges to other tax regulations in contexts having nothing to do with section 482.  Hopefully, it will also prompt some rethinking by the IRS of its processes for issuing regulations.

Summary Opinions Grab Bag

Here are some items of interest from the past month or so that warrant attention. Keith

Tax Court Memorandum Opinions 

At the recent Tax Court judicial Conference, one panel was entitled “And What Weight Do They Have? Agency Guidance Not Eligible for Chevron Deference and Court Dispositions Not Selected for Publication.”  Judge Halpern moderated the panel which included two PT guest bloggers, Pat Smith and Andy Roberson, as well as Emily Lesniak from Chief Counsel Procedure and Administration and Mary Hevener from Morgan, Lewis & Bockius.  In addition to the lengthy and helpful handout for the session, Judge Halpern put his law clerk to work to create a historical stat sheet comparing the number of regular and memorandum opinions dating back to 1928.  The 1928 Court puts the current Tax Court to shame from a productivity perspective knocking out 1,438 TC opinions (compared to 38 in 2013).  A reasonable explanation for the difference in productivity no doubt exists but the panel did not focus on that issue.  Of course, in 1928 almost every opinion of the new Court set new precedent.


Janis Joplin

“O Lord won’t you buy me a Mercedes Benz.”  So far, the Lord has not bought me one but her husband did buy Ms. Tamra Hansen a Mercedes 300 SLK in 2011 for Valentine’s Day.  Aside from trying to make the rest of us look bad with a Valentine’s Day gift of that magnitude, one small problem existed – Mr. Hansen owed the IRS about $350K at the time of the purchase meaning that the federal tax lien existed at the time of the purchase meaning that the federal tax lien attached to the car meaning that the lien still existed when the IRS came to take the car away.  Ms. Hansen argued that she and her husband were having marital problems as that Valentine’s Day rolled around and he bought her the car to “buy her love” so she was a purchaser under the definition of the statute allowing her to defeat the unfiled federal tax lien.  For some reason the court did not “buy” her argument.  I am sure that the husband who bought the Mercedes at the IRS auction this year gave it to his wife for Valentine’s Day as well.  I hope that works out better.  Catch the details at 2015 TNT 73-18 or Doc. 2015-8922 D. Utah April 16, 2015 (No. 2:13-cv-00736).

Tax Procedure and Politics

It’s not often that tax procedure and politics mix; however, a state Senate race in central Virginia has caused the joinder of the two.  Senate candidate Dan Gecker, a tax lawyer, created a plan to promote historic tax credits.  After he had sold the plan to a number of clients, the IRS determined that the plan did not provide the tax benefits claimed on the return.  While the Tax Court agreed with Mr. Gecker, the 4th Circuit most decidedly did not.  Pretty routine tax stuff until Mr. Gecker decided to run for state Senate.  His opponent is featuring the tax decision prominently in his ads arguing that the electorate does not want a Senator who promotes bad tax deals.  Check it out here.  Who knew that a Tax Court case could lead to political ads.  The ads, however, did not succeed.  Mr. Gecker won the primary and his opponent running the ads came in a distant third in a three way race.

The Federal Circuit Rejects the Suit by the National Taxpayer Advocate Concerning Who is Essential Employee During a Government Shutdown

As we reported here, the National Taxpayer Advocate brought suit before the Merit System’s Protection Board stemming from the failure of the prior IRS Commissioner to designate her as an essential employee during the government shutdown in 2013.  The she sought to raise involved lines of authority rather than judgment over who was essential; however, the MSPB rejected the case as moot since following the shutdown, the NTA was restored to her position with full pay and benefits for the time off.  She appealed.  Oral argument occurred before the Federal Circuit on June 2 (a podcast of the argument is available here.)  On June 4, the Federal Circuit issued an unpublished order sustaining the decision of the MSPB.

Publication of Updated History of Tax Court

At the recent Tax Court Judicial Conference, Chief Judge Thornton announced the publication of “The United States Tax Court – An Historical Analysis.”  This publication is an expanded second edition of the seminal Tax Court history published by Professor Harold Dubroff in the late 1970s.  The Tax Court commissioned Professor Brant Hellwig, soon to be Dean Hellwig, of Washington and Lee to update Dubroff’s work.  All attendees to the conference received a thumb drive at the conference containing not only the conference materials but also a copy of the new publication

The announcement of the publication and details about acquiring a copy are available here.

For those practicing in the Tax Court the book provides valuable insights concerning the operation of the Tax Court today and how it came to that point.  The book includes a discussion of the ongoing argument concerning the constitutional status of the Court.  Professor Hellwig is writing a separate article on that issue and we hope to have a blog post from him describing that article and the current status of the Tax Court upon its completion.


The Implications of the Supreme Court’s Direct Marketing Decision for the Interpretation of the Tax Exception in the Federal Tort Claims Act

Today’s  guest post is from Patrick J. Smith of Ivins, Phillips & Barker. Pat builds on his earlier posts in PT and his other articles discussing the courts’ evolving approach to the Anti-Injunction Act. Here, Pat explores the developments’ possible implications to the tax exception in the Federal Tort Claims Act. Les

In a post here in March, I discussed the implications of the Supreme Court’s Direct Marketing decision for the interpretation of the Anti-Injunction Act. Although Direct Marketing dealt with the Tax Injunction Act rather than the Anti-Injunction Act, nevertheless, because of the strong similarities between the two provisions and the fact that the Court’s reasoning in Direct Marketing was based almost entirely on these similarities and on giving the terms “assessment” and “collection,” which appear in both provisions, the narrow technical meaning these terms have in the Internal Revenue Code, I argued that the narrow reading the Court gave to the Tax Injunction Act in Direct Marketing should mean that a similarly narrow reading will now be given to the Anti-Injunction Act, rather than the very broad reading this provision has been given since two 1974 Supreme Court decisions, Bob Jones University and “Americans United.” Recently I published an article in Tax Notes elaborating on that argument. On Friday of last week, Les had a post here about the recent D.C. Circuit oral argument in Z Street, Inc., where the application of the Anti-Injunction Act is the main issue, and during which the judges on the panel made clear that they believed that the Direct Marketing decision was centrally relevant to the resolution of that issue.

Earlier last week, in Snyder & Associates v US a district court in California issued an opinion in a case involving the “tax exception” to the Federal Tort Claims Act “FTCA.” This tax exception provides that the provisions of the FTCA do not apply to “[a]ny claim arising in respect of the assessment or collection of any tax.”


The district court decision is in a suit brought under the FTCA by Snyder & Associates Acquisitions LLC (“Snyder”), a financial lender that provides refund anticipation loans (“RALs”) to taxpayers, whereby Snyder lends money to taxpayers based on their expectation of receiving tax refunds. Snyder obtains prospective borrowers through referrals from tax return preparers.

Snyder determined that one of the referrals was using a fraudulent identity and issued stop payment orders on all the loan checks issued to customers referred by the same tax return preparer. When Snyder contacted that tax return preparer, she told Snyder that she was working with the IRS in an undercover sting operation to identify instances of fraudulent tax returns. The IRS agent with whom she was working asked Snyder to cancel the stop payment orders in order to assist the investigation and assured Snyder that it would not suffer any losses as a result of their cooperation with the investigation. However, the IRS did not make good on the $2.6 million in losses Snyder claimed to have suffered as a result of its cooperation with the investigation.

The district court agreed with the government that Snyder’s FTCA suit was barred by the tax exception to the FTCA (See Ama Sarfo, IRS Cooperator Left To Eat $2.6 Cost In Fraud Investigation, Law360, June 3, 2015). The district court agreed with the government that the interpretation of the tax exception was governed by cases such as Capozzoli v. Tracey 663 F.2d 654, 658 (5th Cir. 1981), which have held that the tax exception is applied broadly to “encompass any activities of an IRS agent even remotely related to his or her official duties.”

However, the connection to Direct Marketing is that cases such as Capozzoli v. Tracey clearly rely on the interpretation given to the Anti-Injunction Act by Bob Jones University as the basis for their interpretation of the tax exception to the FTCA:

The language of 28 U.S.C. § 2680(c) is identical to that of another U.S.Code provision, 26 U.S.C. § 7421(a), which prohibits any “suit for the purpose of restraining the assessment or collection of any tax” (emphasis added). In construing Section 7421(a), the Supreme Court in Bob Jones University v. Simon, 416 U.S. 740 (1974) interpreted the phrase “assessment and collection of taxes” broadly to preclude judicial interference with any phase of IRS activities. We believe that both 26 U.S.C. § 7421(a) and 28 U.S.C. § 2680(c) reflect the government’s strong interest in protecting the administration of its tax system from the burden of constant litigation. This interest would be completely frustrated if we were to read Section 2680(c) as providing an immunity for only certain narrowly defined activities of the IRS.

Capozzoli v. Tracey 663 F.2d 654, 657 (5th Cir. 1981).

If, as I believe, the Direct Marketing decision means that the Anti-Injunction Act will no longer be given the broad reading suggested by Bob Jones University, the same conclusion holds for the tax exception to the FTCA. Under the narrow interpretation of the tax exception to the FTCA that Direct Marketing would suggest, it seems very clear that the facts in the Snyder case would not come within the tax exception, since fraudulent tax returns do not involve the “assessment” or “collection” of any actual tax. However, neither the government nor the plaintiff in Snyder cited Direct Marketing in their briefs in the district court, and the district court opinion likewise did not cite Direct Marketing.

It is notable, however, that the plaintiffs’ brief did include a reference to the Wall Street Journal article reporting on the D.C. Circuit oral argument in the Z Street case, and their brief in fact included a copy of that article as an appendix. It is unfortunate that the plaintiffs apparently did not understand the full implications for their case of what was being discussed in that oral argument.

Perez v. Mortgage Bankers Association: Are There Now Four Votes on the Supreme Court to Overrule Auer?

Today we welcome back Patrick Smith of Ivins, Phillips & Barker who follows up on his post on Perez v Mortgage Bankers Association in light of this week’s Supreme Court opinion in the case. Pat walks us through the thicket of administrative law doctrine and in particular the possibly unsteady ground of Auer deference relating to agency views of its own guidance. Les

On Monday of this week, the Supreme Court issued its opinion in Perez v.Mortgage Bankers Association. In an earlier post on PT in October, I discussed this case. This case involves the issue of whether the D.C. Circuit has been incorrect in its Paralyzed Veterans line of cases. The Paralyzed Veterans rule involves the requirement in the Administrative Procedure Act (APA) that requires agencies to use notice-and-comment rulemaking to adopt “substantive” or “legislative” rules but not when they adopt “interpretative” rules, because substantive or legislative rules have the force of law, but interpretative rules do not.


The D.C. Circuit rule in Paralyzed Veterans said that an agency must use notice-and-comment rulemaking when it changes its interpretation of one of the agency’s substantive or legislative rules, even though the interpretation itself represents only an interpretative rule that would not otherwise be subject to the notice-and-comment requirements. When stated in this way, without any further context, the Paralyzed Veterans rule seems clearly inconsistent with the terms of the APA.

In my prior post, I argued that Paralyzed Veterans was nevertheless justified because of the Supreme Court’s line of cases holding that an agency’s interpretations of its own regulations must be given deference, without regard to whether those interpretations are embodied in regulations issued using notice-and-comment rulemaking. This deference is usually referred to today as Auer deference. I argued that giving deference to an agency’s interpretation of one of its own substantive regulations meant that the interpretation should be considered itself a substantive regulation because giving deference to an agency position is equivalent to giving that position the force of law.

The plaintiffs in the case had not made this argument in the D.C. Circuit or in their brief in opposition to the government’s petition for certiorari. However, in their merits brief in the Supreme Court, filed the day after my post, they made this argument as an alternative argument in support of the Paralyzed Veterans rule. In addition, a number of amicus curiae briefs subsequently filed in support of the plaintiffs also relied on Auer as support for the Paralyzed Veterans rule.

In the Supreme Court decision issued on Monday, the Court held unanimously, with a majority opinion by Justice Sotomayor, that the Paralyzed Veterans rule was incorrect because it was in conflict with the terms of the APA. The court held that the plaintiffs had waived the argument that the agency interpretation that was at issue should be considered a substantive rule for purposes of the APA notice-and-comment requirement as a result of the Auer principle because the plaintiffs had not raised this argument in the D.C. Circuit or in their brief in opposition to the petition for certiorari.

The holding in Mortgage Bankers Association is clearly significant in its direct application. What may be even more significant about the opinion is what the concurring opinions in the case say about Auer. Three justices wrote concurring opinions and all three focused on criticism of Auer. In several previous Supreme Court decisions over the past few years, there have been criticisms of Auer in either separate opinions or as dictum in the majority opinion. What is notable about Auer is that in this case a fourth justice has now joined the three who had previously written or joined separate opinions calling for Auer to be at least reconsidered if not overruled.

The first of these separate opinions in earlier cases was Justice Scalia’s concurring opinion in Talk America. The majority opinion in Talk America, written by Justice Thomas, applied the Auer principle without including any criticism of Auer. In Justice Scalia’s concurring opinion, he noted that he would reach the same result as the majority but without relying on Auer, and that he would be open to reconsidering Auer, based on the concept that letting an agency adopt authoritative interpretations of its own rules improperly combines the lawmaking and interpretative functions:

It seems contrary to fundamental principles of separation of powers to permit the person who promulgates a law to interpret it as well…. [D]eferring to an agency’s interpretation of its own rule encourages the agency to enact vague rules which give it the power, in future adjudications, to do what it pleases.

In Christopher v. SmithKline Beecham, Justice Alito’s majority opinion held the Auer principle inapplicable, but also echoed the criticisms from Justice Scalia’s Talk America concurrence. “Our practice of deferring to an agency’s interpretation of its own ambiguous regulations undoubtedly has important advantages, but this practice also creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit.”

In Decker, the majority opinion, written by Justice Kennedy, applied Auer without any criticism. Justice Scalia, in a lengthy opinion concurring in part and dissenting in part, went beyond what he had said in his concurring opinion in Talk America and flatly said Auer should be overruled. Not only did Justice Scalia move from favoring reconsideration of Auer to strongly advocating overruling it, but Chief Justice Roberts, in a concurring opinion joined by Justice Alito, noted that Justice Scalia’s separate opinion “raises serious questions about the principle set forth in” Auer. However, he concluded that this case was not an appropriate one for doing so because the issue was raised only in footnotes, not in the briefs. “The issue is a basic one going to the heart of administrative law….The bar is now aware that there is some interest in reconsidering [Auer], and has available to it a concise statement of the arguments on one side of the issue.” Thus, after Decker was decided, three justices were on record as favoring reconsidering Auer, if not overruling it outright.

In Mortgage Bankers Association, the majority avoided expressing any view on whether Auer is a sound principle, noting only in a footnote:

MBA alternatively suggests that interpretive rules have the force of law because an agency’s interpretation of its own regulations may be entitled to deference under Auer….Even in cases where an agency’s interpretation receives Auer deference, however, it is the court that ultimately decides whether a given regulation means what the agency says. Moreover, Auer deference is not an inexorable command in all cases.

As Justice Scalia’s concurring opinion observed, the majority opinion’s reasoning in this passage “would not withstand a gentle breeze.” It is somewhat odd that the majority opinion separates this reference to Auer in a footnote from its discussion at the end of the main text that the plaintiffs waived their argument that the interpretation should be viewed as a substantive rule, since the basis for this argument was the fact that the interpretation would be given Auer deference. However, it was reasonably clear from the oral argument that most if not all of the justice felt that the plaintiffs had not properly presented this argument and that as a result this argument would not be considered as a basis for deciding the case.

Three justices wrote separate concurring opinions in Mortgage Bankers. The theme of the concurring opinions was that the D.C. Circuit Paralyzed Veterans rule was a flawed attempt to deal with the genuine issues raised by Auer. Justice Scalia repeated his position from his concurring opinion in Decker that Auer should be overruled but here focused on a different reason, namely the requirement in the APA that “the reviewing court shall…interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” He notes: “The Act thus contemplates that courts, not agencies, will authoritatively resolve ambiguities in statutes and regulations.” Consistent with what I have argued, Justice Scalia notes that Chevron could be seen as being in conflict with the APA requirement that “the reviewing court shall…interpret…statutory provisions,” but for purposes of this case, he argues only that Auer is in conflict with the APA requirement that “the reviewing court shall… determine the meaning or applicability of the terms of an agency action.” He also fully endorses a central part of the argument I made in my prior post on this case. He says without reservation: “Interpretive rules that command deference do have the force of law.”

Justice Alito wrote a very brief concurring opinion that basically repeats the concurring opinion of Chief Justice Roberts from Decker that he joined. He noted that the other concurring opinions “offer substantial reasons why the [Auer] doctrine may be incorrect…. I await a case in which the validity of [Auer] maybe explored through full briefing and argument.”

What is most notable about the concurring opinions in Mortgage Bankers is the opinion by Justice Thomas. As noted earlier, he wrote the majority opinion in Talk America, where Justice Scalia’s concurring opinion first expressed his doubts about Auer, but Justice Thomas’s majority opinion in that case expressed no criticisms of Auer. In Mortgage Bankers, however, he wrote a concurring opinion that is substantially longer than the majority opinion and that while it does not explicitly state that he has concluded Auer should be overruled, leaves very little doubt that he would vote in favor of that result when the issue is presented directly.

Moreover, it is hard to see how much of the reasoning in his opinion would not be equally applicable against Chevron itself. He argues at great length that the constitutional structure requires that the courts exercise independent judgment in interpreting the law. If this precludes agencies from being the authoritative interpreters of their own regulations, it should likewise preclude agencies from being the authoritative interpreters of the statutes they enforce and administer.

However, while Justice Thomas might provide the only likely vote to overrule Chevron, it seems clear that after Mortgage Bankers, there are now at least four votes to consider overruling Auer.



Supreme Court’s Direct Marketing Case May Have Great Significance in Anti-Injunction Act Cases

We welcome back today as guest poster Patrick Smith of Ivins, Phillips & Barker. Pat discusses this week’s Supreme Court Direct Marketing Association case, which will likely influence how courts will interpret the reach of the Anti-Injunction Act.

On Tuesday of this week, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. This decision related to a suit that had been brought in U.S. district court to enjoin notice and reporting requirements that had been imposed by the state of Colorado on out-of-state internet retailers relating to sales to Colorado residents. The purpose of these requirements was to assist the state in collection of use tax on these sales.

The issue in the case was whether the district court was barred from hearing the suit by the Tax Injunction Act (TIA), which requires that certain suits relating to state taxes must be pursued in state courts rather than federal courts. The opinion held that the U.S. district court was not barred from hearing the case by the TIA.

While the decision obviously has considerable significance in its direct application, it may have equally great if not greater significance in its implications for the interpretation of the Anti-Injunction Act (AIA), section 7421(a) of the Internal Revenue Code, which imposes limitations on the types of suits relating to federal taxes that may be maintained in U.S. district courts that are quite similar to the limitations imposed by the TIA on suits relating to state taxes. The implications of the decision for the AIA are that as a result of this decision, the AIA may now be interpreted more narrowly than it has been since two significant Supreme Court decisions in 1974, Bob Jones University and Americans United.” These decisions held that a suit to enjoin revocation by the IRS of the tax-exempt status of the organization bringing the suit was barred by the AIA because of the effect the suit would have on tax revenues through the effect the suit would have on the ability of persons making contributions to the organization to claim tax deductions for the contributions.


The Direct Marketing Case Takes a Different View than Prior Supreme Court Cases

These two decisions could be read as standing for the proposition that any suit that could, if successful, have an adverse impact on the collection of federal tax revenue is barred from being heard in district court by the AIA except through the mechanism of a tax refund suit. The Direct Marketing decision clearly rejected such a broad reading of the TIA, and this rejection should be equally applicable for the AIA.

The texts of the two provisions are very similar. The TIA provides in relevant part that “[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” The AIA provides in relevant part that, with a number of listed exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.

The Court relied on the similarities between the AIA and the TIA in its interpretation of the TIA. In addition, the Court also relied on the historical relationship between the two provisions, noting that the AIA, which was enacted originally in 1867, was the model for the TIA, which was enacted in 1937.

The Court focused on the close relationship between the TIA and the Anti-Injunction Act to give a narrow, technical reading to the terms “assessment,” “collection,” and “restrain,” all of which appear in both the TIA and the Anti-Injunction Act. The Court relied on the fact that in the Internal Revenue Code, where the AIA is located, the terms “assessment” “levy” and “collection” have very narrow and precise technical meanings that “do not include informational notices or private reports of information relevant to tax liability.” While the TIA includes the term “levy” and the AIA does not, that should not result in any significant difference in interpretation for the terms that appear in both provisions.

As the Court noted,

the Federal Tax Code has long treated information gathering as a phase of tax administration procedure that occurs before assessment, levy, or collection. ‘Assessment’…refers to the official recording of a taxpayer’s liability, which occurs after information relevant to the calculation of that liability is reported to the taxing authority. Finally, ‘collection’ is the act of obtaining payment of taxes due. ‘[C]ollection’ is a separate step in the taxation process from assessment and the reporting on which assessment is based.

Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes….The TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.

The Tenth Circuit had relied on giving the term “restrain,” which appears in both the TIA and AIA, a broad meaning, basically, the sort of meaning that Bob Jones and “Americans United” might be read as giving to the AIA, namely, that “restrain” means any action that would have an adverse effect on the collection of tax revenue. The Court in Direct Marketing very clearly rejected that interpretation, in reasoning that is equally applicable to the AIA:

[A]s used in the TIA, “restrain” acts on a carefully selected list of technical terms—“assessment, levy, collection”—not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.”

Applying the correct definition, a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.

The fact that the Court in Direct Marketing interpreted terms in the TIA that appear in both the TIA and the AIA by reference to the precise meaning those terms have in the Internal Revenue Code should mean that in the context of the AIA, these precise meanings are if anything even more controlling. Thus, based on Direct Marketing, it seems very clear that the broad reading of the AIA that might be taken from Bob Jones and Americans United cannot be correct.

Impact on Other Cases: The Florida Bankers Case

Thus, for example, the Direct Marketing decision should be very relevant for the AIA issue in the Florida Bankers Association case, which is currently pending in the D.C. Circuit [Editor’s Note: for Les’ take last year in PT on the district court Florida Bankers case see APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius; for Pat’s prior articles in Tax Notes on Florida Bankers see here and here.]. This case involves a challenge to regulations requiring banks to report to the IRS information relating to interest earned on accounts held by non-resident aliens, even though such persons are not subject to U.S. tax on that interest. At oral argument on February 13 of this year, one of the judges on the panel, Judge Kavanaugh, the author of the D.C. Circuit opinion in Loving, focused his questioning on the possible applicability of the AIA to bar this challenge. Direct Marketing should provide strong support for the conclusion that the AIA does not apply in that case.

However, one very significant respect in which the TIA and the AIA are not similar is in the way they phrase their limitations. The TIA phrases its limitation in terms of the power of the district court to act but the AIA does not. In a recent post in this blog, Carl Smith discussed a recent Tax Court decision that represented the first time the Tax Court has acknowledged the line of Supreme Court cases in recent years that have made it clear that the courts must be more precise and analytical in their determination as to when statutory limitations on the ability to maintain an action in court are “jurisdictional” and when they are not than had been the case before this line of Supreme Court authority.

Justice Clarence Thomas, in his opinion for the Court in Direct Marketing, repeatedly referred to the TIA as jurisdictional. For more on this point see Arkansas v. Arkansas Farm Credit Services. This classification mattered in this case because the state of Colorado had not raised the TIA as an issue in the district court and in fact had affirmatively stated that the TIA did not apply. If the TIA were not jurisdictional, this would mean the TIA was waived. However, jurisdictional limitations can be raised at any stage of litigation.

I have argued previously that the AIA is not jurisdictional, based in part on the difference in the way the limitations in the two provisions are phrased. However, this issue remains to be definitively resolved by the courts.