Mayo Foundation Oral Argument Scheduled for November 8

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August 30, 2010

The Supreme Court has released the oral argument schedule for its November session.  The argument in Mayo Foundation is scheduled as the second case on Monday November 8, meaning it will begin around 11:00.  A decision is expected to issue in the spring, almost certainly no later than June 2011.  We will provide a report on the argument in November.

No Rehearing in Deloitte

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August 20, 2010

Confounding the expectations of this observer (and others), the government has allowed the deadline to pass without seeking rehearing of the Deloitte case in the D.C. Circuit.  That development does not mean, however, that the government has decided to live with the Deloitte decision.  To the contrary, the most likely explanation for the government’s inaction is that it plans to seek Supreme Court review and does not want to delay that process.  A petition for certiorari is currently due on September 27.  If the government files by that time, the Court will act on the petition in enough time for it to schedule oral argument in the spring and decide the case by June 2011 (assuming that the Court decides to grant certiorari).  If the government had sought rehearing, it would have lost control of the schedule.  Depending on how long the D.C. Circuit took to rule on the rehearing petition, it is possible that Supreme Court consideration then could have been pushed off until the 2011-12 Term.

So the government has until September 27 to figure out how to explain to the Court why the issue that it said was so unimportant last May in Textron suddenly requires Supreme Court intervention.  As noted in our previous post, one thing that the government will likely argue is that Deloitte has created a circuit conflict that did not previously exist, because it is the first court of appeals decision to find work product protection for tax accrual workpapers prepared as a routine part of the audit process.  In Textron, the government had argued that cases approving work product protection like United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006), and United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), did not actually conflict with Textron and El Paso because the tax documents in question were prepared in anticipation of litigation and not in the ordinary course of business for use by auditors.  (A copy of  the government’s brief in opposition to the certiorari petition in Textron is attached.)

U.S. Brief in Opposition in Textron

It’s No Fun Being a Legal Alien Either (If You Plead to a Tax Crime)

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August 18, 2010

On August 4, 2010, the Ninth Circuit denied panel and en banc rehearing in a case applying 8 U.S.C. § 1101(a)(43)(M)(i) to hold that a tax offense other than tax evasion is a crime involving fraud or deceit and thus an aggravated felony under the immigration laws (which allows for deportation).  Kawashima v. Holder, 2010 U.S. App. LEXIS 16125 (9th Cir. Aug. 4, 2010).  This is actually the fourth opinion issued by the Ninth Circuit in the case, appending a three-judge dissent from denial of en banc rehearing to the third panel opinion issued back in January 2010. Kawashima v. Holder, 593 F.3d 979 (9th Cir. 2010).  (The first two panel opinions (Kawashima v. Mukasey, 530 F.3d 1111 (9th Cir. 2008), and Kawashima v. Gonzalez, 503 F.3d 997 (9th Cir. 2007)), were withdrawn so that the panel could reconsider the case in light of new Ninth Circuit and Supreme Court decisions.)  The Ninth Circuit has now placed itself squarely in conflict with the decision of a divided panel of the Third Circuit (Ki Se Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004), in which then Judge (now Justice) Alito was the dissenter.  The Fifth Circuit, however, adopted the same basic reasoning as Kawashima in Arguelles-Olivares v. Mukasey, 526 F.3d 171 (5th Cir. 2008), cert. denied, 130 S. Ct. 736 (2009).

The primary question in these cases is one of statutory interpretation.  8 U.S.C. §1101(a)(43)(M) provides that an aggravated felony includes an offense that:

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $ 10,000; or

(ii) is described in section 7201 of the Internal Revenue Code of 1986 (relating to tax evasion) in which the revenue loss to the Government exceeds $ 10,000;

Mr. Kawashima pled guilty to section 7206(1), a tax crime that involves subscribing to a false statement on a tax return; his wife pled to section 7206(2), a tax crime involving aiding and assisting in the preparation of a false tax return.  Neither pled to section 7201, tax evasion.

The dispute between the circuits rests on how much the interpretation of (M)(i) should be guided by the existence of (M)(ii).  As the Third Circuit and a strongly worded dissent in Kawashima both note, “statutory text must be read in context.”  2010 U.S. App. LEXIS 16125 at *28.  When read in context, it appears that the only tax crime that was intended to be covered is tax evasion as set out in (M)(ii).  This is so because if tax crimes are governed by (M)(i), then (M)(ii) would be superfluous.  Superfluities are a red flag in statutory interpretation.  See, e.g., Market Co. v. Hoffman, 101 U.S. 112, 115 (1879) (“We are not at liberty to construe any statute so as to deny effect to any part of its language. It is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.”).

The majority in Kawashima evaded this reasoning on the basis that if Congress had not wanted (M)(i) to apply to tax offenses “Congress surely would have included some language in that provision to signal that intention.”  U.S. App. LEXIS 16125 at *13.  Apparently, the language in the next clause, (M)(ii), doesn’t count.  And the majority’s opinion does not convincingly address the problem of creating superfluities.  Merely because the language of (M)(i) is broad enough to cover tax offenses other than tax evasion when that subsection is read in isolation, that doesn’t mean that one can divine Congressional intent to actually do so when the statute is read holistically.  Regardless, two circuits have now adopted the view that a tax offense other than tax evasion can be an “aggravated felony.”

It is too early to tell if a petition for certiorari will be filed in Kawashima but given the split and the substantial number of amici involved in the circuit filings, one might reasonably expect one.  That said, the same conflict was presented in Arguelles-Olivares yet the Court denied certiorari, apparently persuaded by the Solicitor General’s suggestion that the Court “should wait for further developments.”  Having the Ninth Circuit join the Fifth Circuit in agreeing with the government may not be the kind of development the Supreme Court had in mind.  A petition for certiorari would be due on November 2, 2010.  The final Ninth Circuit opinion and the United States brief in opposition in Arguelles-Olivares are attached.

Taxpayers’ Brief Filed in Mayo Foundation

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August 16, 2010

The taxpayers have filed their opening brief in Mayo Foundation, a copy of which is attached.  They argue primarily that the statutory language of the exemption unambiguously includes medical residents, and therefore there is no occasion to consider the reasonableness of the IRS regulation.  Secondarily, they argue that the regulation is in any event arbitrary and unreasonable. 

With respect to the question of the correct deference analysis discussed in our previous post, the brief relies heavily on the National Muffler Dealers factors.  It identifies five factors that militate against the reasonableness of the regulation:  (1) does not harmonize with the origin and purpose of the statute; (2) not contemporaneous; (3) did not “evolve in an authoritative manner” because it was designed to overturn adverse judicial decisions; (4) has not been in effect for long; and (5) the government’s position has been inconsistent.  Although the first factor is basic to any analysis of the reasonableness of a regulation, the other four all come from National Muffler Dealers and are not commonly associated with the Chevron deference analysis applied to non-tax statutes. 

The taxpayers have not asked the Court to choose between Chevron and Muffler Dealers.  To the contrary, they have finessed the possible tension between two lines of cases by purporting to examine “the factors that indicate the reasonableness of a tax regulation under this Court’s decisions in Chevron and National Muffler” and observing that the “Court has given special consideration to several factors identified in National Muffler” “in determining the reasonableness of a regulation interpreting a revenue statute.”  As discussed in our previous post, this approach is entirely consistent with the way the Supreme Court has approached this issue in recent years – that is, citing to the National Muffler Dealers factors in tax cases without addressing whether the analysis is fully consistent with Chevron.  But the courts of appeals have begun to question whether the two approaches are compatible.  It will be interesting to see whether the government’s brief challenges the continuing vitality of the National Muffler Dealers analytical framework.  That brief is due on September 27.

Mayo Foundation – Taxpayers’ Opening Merits Brief

Xilinx AOD Straightforward but Finds the IRS Still Intent on Redefining the Arm’s Length Standard

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August 13, 2010

On July 28, 2010, the IRS released AOD 2010-33; 2010-33 IRB 1.  The AOD acquiesces in the result but not the reasoning of Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1196 (9th Cir. 2010) which held that stock option costs are not required to be shared as “costs” for purposes of cost sharing agreements under old Treas. Reg. §1.482-7.  For prior analysis of Xilinx see this.  The AOD in and of itself is relatively unsurprising.  New regulations (some might say “litigating regulations”) have been issued that explicitly address the issue, and those regulations will test the question of whether Treasury has the authority to require the inclusion of such costs.  The IRS surely realized that from an administrative perspective it was smart to let this one go.  The best move for most taxpayers is likely to grab a bucket of popcorn and watch the fireworks as a few brave souls test Treasury’s mettle by challenging the validity of the new regulations.  Including a provision in your cost sharing agreements that allow adjustments in the event of a future invalidation of the regulations might go well with the popcorn. 

The only really interesting item in the AOD is the gratuitous bootstrap of the Cost Sharing Buy-In Regs “realistic alternatives principle.”  The still warm “realistic alternatives principle” – the IRS assertion that an uncontrolled taxpayer will not choose an alternative that is less economically rewarding than another available alternative – “applies not to restructure the actual transaction in which controlled taxpayers engage, but to adjust pricing to an arm’s length result.”  AOD, 2010 TNT 145-18, pp.4-5.  That assertion appears to ignore that “arm’s length” is not some obscure term of art cooked up by the IRS, but rather an established concept that lies at the heart of most countries’ approach to international taxation. 

Still clinging to the withdrawn Ninth Circuit opinion, the AOD offers in support of this premise that “the Secretary of the Treasury is authorized to define terms adopted in regulations, especially when they are neither present nor compelled in statutory language (such as the arm’s length standard), that might differ from the definition others would place on those terms.”  Xilinx, Inc. v. Comm’r, 567 F.3d 482, 491 (9th Cir. 2009).    

In short, the IRS appears to have dusted off the rule book of the King in Alice and Wonderland: 

            The King: “Rule Forty-two. All persons more than a mile high to leave the court.” 

            “I’m not a mile high,” said Alice.           

            “You are,” said the King. 

            “Nearly two miles high,” added the Queen. 

            “Well, I shan’t go, at any rate,” said Alice: “besides, that’s not a regular rule: you invented it just now.” 

            “It’s the oldest rule in the book,” said the King. 

            “Then it ought to be Number One,” said Alice. 

Alice’s Adventures in Wonderland at 125 (Giunti Classics ed. 2002).  The IRS has often been disappointed with the real rule Number One (the arm’s length principle) when the results of real-world transactions do not coincide with the results the IRS desires.   Now the IRS looks to magically transform that rule into one that replaces those real-world transactions with the IRS’s revenue-maximizing vision.  Tax Wonderland is getting curiouser and curiouser.

Schizophrenic Application of Tax Penalties (Part II)

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August 12, 2010

The last post in this series discussed differences in procedural posture that cause differences in the application of penalties.  Court splits in how the various and sundry penalty provisions in the Code are applied is an even more confusing area.  The two principal confusions are in the areas of TEFRA and valuation misstatements.  We will deal with TEFRA in this post.

Partnerships are not taxpaying entities.  They flow income, losses, deductions, and credits through to their partners who pay the tax.  Nevertheless, since Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324, 648-71 (TEFRA), some partnerships have been subject to audit (and litigation of those audit adjustments in court) directly at the partnership level.  Because individual partners still have tax issues that are not related to the partnership, tax items have to be divided between those that are handled in the partnership proceeding (so-called “partnership items”) and those that are handled at the level of the partners (so-called “non-partnership items”).  (There is a third category of items that are affected by partnership items, appropriately named “affected items,” which we don’t need to address for purposes of this discussion.)  As one can imagine, dividing the partnership tax world up into these two sorts of items is not always the easiest thing to do where you have items that are factually affected both by actions taken by the partnership and by actions taken by the partners. 

In an apparent attempt to clarify this treatment in a small way, in 1997 Congress decreed that penalties that relate to partnership items are determined at the partnership level (i.e., the penalties themselves are partnership items).  Seesection 6221.  The difficulty implementing this provision is that, although partnerships are subject to audit, they are often owned and run by people and those people are often the partners.  When one takes this fact into account in the context of the various penalty defense provisions, such as section 6664, which protects against penalties if a taxpayer has “reasonable cause and good faith,” you have a dilemma.  Namely, if penalties are determined at the partnership (and not partner) level, whose conduct can you look at to determine if the partnership (and not the partners) had reasonable cause and good faith?

Regulations require that if an individual partner invokes section 6664 as a personal defense, that invocation has to be done in a partner level proceeding (generally, a refund action after the TEFRA proceeding is completed).  Treas. Reg. § 301.6221-1(d).  The IRS position as to how this applies in practice appears to be that the only conduct that is relevant for purposes of applying section 6664 in a TEFRA proceeding is what the partnership did through its own non-partner employees or, perhaps (it is unclear), the “tax matters partner” who manages the tax affairs of the partnership.  From the IRS perspective, if a partner asserts conduct for purposes of section 6664, that assertion has to be parsed to see if the partner intended his or her conduct to be attributed to the partnership or, rather, asserted it on their own behalf.  See Pet. for Rehearing at 8-10, Klamath Strategic Investment Fund v. United States, 568 F.3d 537 (5th Cir. 2009) (Docket No. 07-40861) (the petition was denied, it is included here to show the IRS position).  Exactly how one is to conduct this hair-splitting (some might say hare-brained) analysis is hard to fathom.  The best evidence of whether a partner’s conduct was on his or her behalf, or the partnership’s, will be the partner’s own statement.  Presumably, any well-advised partner will say that he or she intended the conduct on behalf of the partnership if the desire is to raise the defense on behalf of the partnership, and only badly advised partners won’t.  Surely, this is not a sustainable test. 

Courts are split.  The Fifth Circuit in Klamath rejected the IRS theory and looked to the actions of partners to impute reasonable cause and good faith to the partnership.  568 F.3d at 548.  The Court of Federal Claims had at least two competing views.  Stobie Creek Investments, LLC v. United States, 82 Fed. Cl. 636, 703 (2008) generally went the same way as Klamath, looking to the managing partners’ actions.  But in what has to be the most thorough analysis of the issue, Judge Allegra in Clearmeadow Invs., LLC v. United States, 87 Fed. Cl. 509, 520 (2009) ruled for the Government giving deference to: (i) the regulatory edict that actions of the partners are only to be considered in the later refund proceeding and not in the TEFRA proceeding; and (ii) the language of section 6664 and regulations thereunder, which focuses on “taxpayers” and distinguishes partnerships from taxpayers.  Based on the docket, Clearmeadow is not being appealed. 

Regardless of your persuasion, at least Clearmeadow seemed to have debunked the idea that it could somehow matter (and, even more strangely, somehow be determined by the judge) whether the partner intended the conduct on his or her own behalf or on behalf of the partnership.  Id. at 521.  Relying on the discretion of a litigant to determine jurisdiction does seem off-base.  Yet that is exactly what the Federal Circuit did on appeal in Stobie Creek, affirming on the basis that the Court had jurisdiction because the partnership “claim[ed] it had reasonable cause based on the actions of its managing partner.”  Stobie Creek Invs. LLC v. United States, 608 F.3d 1366, 1381 (Fed. Cir. 2010).  Given that the Court went on to find that there was no reasonable cause, a cynic might say that the Court was anxious to give itself jurisdiction so it could reject the penalty defense definitively and prevent the taxpayer from taking another bite at the apple in a later refund proceeding, perhaps in district court.  In any event, Stobie Creek has reignited the debate about whether a self-serving statement about intent controls jurisdiction and doesn’t seem to resolve the questions of: (i) when a partner is acting on his or her own behalf versus the partnership’s or (ii) whether the rules apply differently to managing versus non-managing partners.  The state of the law in this area of penalty application is indeed still schizophrenic.

The next post in the penalties series will skip past valuation allowances (where there is also a circuit split we will come back to) and deal with reasonable reliance on tax advisers (for which we will surely get some hate mail).

The Klamath Petition for Rehearing is available here.  Klamath Pet for Rehearing

State of Virginia Weighs in Against the IRS in Virginia Historic

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August 11, 2010

Virginia has filed an amicus brief in the Fourth Circuit in support of the taxpayers in the Virginia Historic case.  (See here and here for previous coverage of the appeal).  The brief focuses primarily on policy, arguing that Virginia created these tax credits to facilitate historic preservation and expected that partnership vehicles might be necessary for businesses and individuals to make use of the credits.  According to the Commonwealth, “the IRS’s aggressive position threatens the effectiveness of the program and its benefits for all Virginians.”  Although the amicus brief is light on analysis of the federal tax issues, it may well help persuade the Fourth Circuit that this is not a case where it needs to step in to prevent some kind of taxpayer “hanky-panky,” but rather that going along with the Tax Court would be “doing the right thing.”

Virginia Historic – Amicus Brief of Commonwealth of Virginia

Fifth Circuit to Consider Sourcing of Guarantee Fees

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August 6, 2010

The parties are poised to brief the appeal of Tax Court’s decision in Container Corp. v. Commissioner, 134 T.C. No. 5 (Feb. 17, 2010), in the Fifth Circuit.  The issue concerns the “sourcing” of income earned by a Mexican corporation from loan guarantee fees paid by its U.S. subsidiary.  Code sections 861-63 identify certain items of income and specify whether they should be treated as U.S-source or foreign-source income.  But there are items of income not specified in those sections, like loan guarantee fees, and it falls to the courts to determine how to source them, using analogies to items that are listed.

In Container, a U.S. subsidiary had to raise capital to finance corporate acquisitions, but needed the larger Mexican parent to guarantee the notes in order to make them marketable.  The parent charged a standard 1.5% annual fee for providing the guarantee.  The companies treated the fees as foreign-source income, analogizing them to “compensation for labor or personal services,” which are generally sourced to the location where the services are performed.  I.R.C. §§ 861(a)(3), 862(a)(3).  Therefore, the U.S. subsidiary did not withhold 30% from the fees, as would have been required if the fees were U.S.-source income.  I.R.C. §§ 881(a), 1442(a).  The IRS objected, arguing that the fees were better analogized to interest, which is sourced to the location of the interest payor.  I.R.C. §§ 861(a)(1), 862(a)(1).  The IRS also relied on one of the leading precedents, Bank of America v. United States, 680 F.2d 142 (Ct. Cl. 1982), which had ruled that acceptance and confirmation commissions paid in connection with letters of credit should be treated like interest for sourcing principles.

The Tax Court opted for the taxpayer’s analogy.  It distinguished Bank of America and the interest analogy by stating that the Mexican parent did not put its money “directly at risk”; it “was augmenting [the sub's] credit, not substituting its own.”  The Tax Court’s reasoning seems strained, as the proffered distinction does not come to grips with the reasoning in Bank of America or obviously relate to the policy underlying the sourcing rules.  Although the guarantee fees are not identical to interest, they have some similarities and also serve the same function of facilitating the subsidiary’s ability to obtain capital.  Without the guarantee, the subsidiary would surely have had to pay more interest to obtain the financing, and the guarantee fee thus is in some sense a substitute for interest.  Conversely, while the parent can be said to have provided a service in promising “to possibly perform a future act” through the guarantee, the Tax Court’s approach appears to approve a much broader reading of the concept of performing “labor or personal services” than did the Bank of America case.

Congress has introduced legislation to reverse the outcome of the case by specifically providing that guarantee fees are to be sourced like interest.  That legislation, contained in a provision of the Small Business Jobs Act that the Senate is expected to take up when it returns in September, would operate prospectively and is estimated to raise $2 billion over ten years.  The legislation is not intended to provide any inference for the treatment of guarantee fees before the date of enactment; the appeal in Container is the government’s route to relief for those earlier years.  And the Fifth Circuit’s decision may well provide more guidance beyond guarantee fees for how courts should approach the problem of sourcing analogies.  The government’s opening brief is currently due September 15, 2010.

Container Tax Court opinion

Supreme Court to Address Deference Owed to Regulation Governing FICA Taxation of Medical Residents

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August 2, 2010

In Mayo Foundation, et al. v. United States, No. 09-837, the Supreme Court will consider whether medical residents are exempt from FICA taxation, with the decision likely to turn on the level of deference the Court is willing to accord to a recent regulatory change.  Although the issue may seem obscure, there are 8,000 residency programs in the United States, and the government estimates that $700 million in taxes per year is at stake, with $2.1 billion in refund claims pending.  

The issue involves the meaning of the “student exemption” to FICA, which excludes from the definition of “employment” “service performed in the employ of a school” by a “student who is enrolled and regularly attending classes at such school.”  I.R.C. § 3121(b)(10).  The regulations implementing that statute long provided that “student” status depends on the relationship between the employee and the institution and that when the services are performed “incident to and for the purpose of pursuing a course of study,” the employee can qualify for the student exemption.  Beginning in the late 1990s, there have been several cases addressing whether this exception applies to medical residents, who work more than full-time and earn a $40,000-$60,000 stipend, but perform their duties as part of an educational process in which they also attend classes.

In 2003, a federal district court in Minnesota ruled that the Mayo Clinic’s residents qualified for the student exception under the statute and existing regulations.  The government responded by amending the regulations, effective April 1, 2005, to provide a bright-line rule that does not allow full-time employees to qualify for the exception.  Thereafter, four other courts of appeals ruled against the government, stating that the residents fell within the terms of the statutory exception.  All four of those cases, however, involved pre-2005 periods, and therefore the courts did not directly consider the impact of the amended regulation.   In this case, the first to address the new regulation, the Eighth Circuit held that it owed Chevron deference to the new regulation as a reasonable interpretation of an ambiguous statute.  Thus, contrary to the other four circuits, it sided with the government and held that the residents are subject to FICA taxation.

Most tax cases reach the Supreme Court on the strength of a request for further review by the government, but in this case the Court granted a petition filed by the taxpayers over the government’s opposition.  The taxpayers predictably argued that the circuit conflict, and dollars at stake, necessitated Supreme Court review.  In situations like this, the government often acquiesces in certiorari, because the IRS likes to get circuit conflicts resolved to promote its own institutional interest in uniformity.  In this case, however, the government sought to avoid taking its chances in the Supreme Court by arguing that there was no genuine circuit conflict, because the other four circuits had not considered the new regulation.  Evidently, the government hoped that it could build on this decision and use it to get the other circuits to retreat from their prior decisions and adopt a rule going forward under the new regulation that would subject medical residents to FICA taxation.  The Court, however, was apparently persuaded by the taxpayers that the new regulation is unlikely to lead to a different result in those circuits – because they had already indicated a view that medical residents qualify for the exception under the unambiguous statutory language, which would leave no room for Chevron deference to the new regulation.  

A decision by the Court will, of course, resolve the question of FICA taxation of medical residents — unless Congress steps in.  But the decision could have a much broader impact because it implicates the general topic of deference to IRS regulations, particularly the question whether Chevron deference principles have superseded the more specialized analysis developed over the years in tax cases dating back to National Muffler Dealers Ass’n v. United States, 440 U.S. 472 (1979).  In recent years, courts of appeals have begun to trend towards applying standard Chevron analysis in tax cases, but the Tax Court has resisted.  See, e.g., Swallows Holding Ltd. v. Commissioner, 126 T.C. 96 (2006), rev’d, 515 F.3d 162 (3d Cir. 2008).  The Supreme Court has not specifically addressed the issue.

There is not a huge difference in the two deference approaches, and, in most cases, choosing between them is not likely to affect the outcome.  Like Swallows Holding, however, this case could be an exception.  Among the factors listed in Muffler Dealers for determining deference that have been oft-applied in later cases are whether the regulation is contemporaneous with the statute and “the consistency of the Commissioner’s interpretation.”  440 U.S. at 477; see also, e.g., United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001); Cottage Savings Ass’n v. Commissioner, 499 U.S. 554, 561 (1991).  In this case, those factors support the taxpayers’ rejection of the regulation, as the government is arguing for reliance on a new regulatory approach that departs from a 65-year old regulation.  Contemporaneity and consistency, however, play no role in the Chevron analysis, which does not penalize the agency for inconsistency or for promulgating new regulations designed to overturn adverse court decisions.  Indeed, the Court has specifically ruled that prior contrary judicial constructions of a statute do not foreclose owing Chevron deference to a subsequent regulation, unless the court decision had determined that the statute is unambiguous.  National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967, 982-86 (2005).

The parties did not tee up this potential issue in the briefs filed at the certiorari stage.  The court of appeals’ opinion straddled the fence, purporting to apply Chevron but also stating that the Muffler Dealers factors were “instructive” on the second part of the Chevron inquiry – whether the regulation is a reasonable interpretation of the statute.  The certiorari petition focused mostly on the circuit conflict.  To the extent it discussed the merits of the case, it argued that the Eighth Circuit’s decision was inconsistent with Chevron and and did not cite the Muffler Dealers line of cases.  (The petition argued that the Eighth Circuit had “effectively eliminate[d]” the first step of Chevron analysis in tax cases when it stated that, when common words are found in “a provision of the Internal Revenue Code, a Treasury Regulation interpreting the words is nearly always appropriate.”)  The government’s brief was happy to embrace the notion that Chevron governs the deference inquiry.  It will be interesting to see whether the taxpayers try to get more mileage out of Muffler Dealers and its progeny at the merits stage.

The parties will be briefing the case over the summer, with the taxpayers’ opening brief currently due on August 6, 2010.  Oral argument is expected to be scheduled for November or December.  One important note is that this is one of the cases in which Elena Kagan has stated her intent to recuse because she participated in the case as Solicitor General.  That means the case will be decided by an eight-Justice Court, with the possibility of a 4-4 split.  If that occurs, the Court would issue a one-line order affirming the Eighth Circuit’s decision by an equally divided court.  The government’s victory in this case would stand, but the decision would have no precedential value, and the issue would remain in play outside the Eighth Circuit.

The opinion of the Eighth Circuit and the parties’ briefs at the certiorari stage are linked below.  We will provide the briefs on the merits after they are filed.

Mayo Foundation – 8th circuit opinion

Mayo Foundation – cert petition

Mayo Foundation – US brief in opposition

Mayo Foundation – Taxpayers’ reply brief at certiorari stage