Supplying Some Missing Links

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December 28, 2012

In addition to providing analysis and updates on pending tax appeals, this blog is intended to serve as a resource where readers can easily access the briefs and relevant opinions in those cases.  Because of the press of business and other reasons, the posting of a couple of the opinions in cases we have discussed has slipped through the cracks.  So we are providing links to those opinions here, even though the opinions are long past the point of “breaking news”:

The Second Circuit’s decision in TIFD (“Castle Harbour”), once again reversing the district court and holding that the banks did not qualify as partners under § 704(e)(1), and that the government could impose a penalty on the taxpayer for substantial understatement of income.

The Eleventh Circuit’s decision in Calloway, affirming the Tax Court and holding that the transaction in question was properly treated as a sale, not a loan, and upholding the penalties.  The decision approves the multi-factor approach employed by the Tax Court majority, and notes infirmities in the alternative analytical approaches suggested by Judges Halpern and Holmes in their respective concurring opinions.

The Supreme Court’s decision upholding the Affordable Care Act (linked below).  The opinion was eventually entitled NFIB v. Sebelius, although we had covered it using the caption of one of the companion cases, HHS v. Florida.  The discussion of the Anti-Injunction Act, the issue that was covered in the blog, is found at pages 11-15 of the Court’s slip opinion.  Our prior coverage (linked here only so that I can show off my against-the-mainstream prediction that the legislation would survive) can be found here and here.  The majority’s key holding that the individual mandate could be upheld as an exercise of the Taxing Power is found at pp. 33-44.

NFIB v. Sebelius Supreme Court decision (Affordable Care Act)


Supreme Court Review Sought in Union Carbide

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December 27, 2012

Union Carbide has filed a petition for certiorari, docketed as No. 12-684, asking the Supreme Court to review the Second Circuit’s rejection of its research credit claim.  See our prior reports describing the issue and reporting on the decision.

The petition articulates two questions presented:  1) the basic substantive tax question whether, in the context of a production process experiment, the research credit is limited to the costs of supplies that would not have been incurred but for the experiment; and 2) whether the court erred in deferring to the IRS’s proffered interpretation of its own research credit regulations.  These two questions are related, of course, as the taxpayer argues that the court’s error in deferring to the IRS’s interpretation led it to misapply those regulations and deny the credit.

With respect to the first question, the petition emphasizes the importance of the decision.  It states that production process experiments must be done in the production plant itself and create the risk that the output will be “off-grade scrap” if the experiment does not go well.  Therefore, the costs of the supplies that would not be incurred but for the experiment are “trivial in comparison to the supplies that must be placed at risk of loss when conducting this type of research.”  The result of the Second Circuit’s decision, the petition continues, “is that the credit is rendered trivial for the type of plant-scale production process research that is so important to manufacturing industries generally, and the chemical industry in particular.”  Absent this deference, the petition argues, the regulation is most reasonably construed in accordance with the taxpayer’s broader reading of the term “indirect” expenses.

With respect to the second question, the petition argues that the Second Circuit stretched the concept of “Auer deference” (that is, deference to an agency’s interpretation of its own regulations) too far.  The petition asserts that the court mistakenly applied Supreme Court precedent “as requiring a seemingly extraordinary deference to the government’s interpretation of a regulation in a case in which the government itself is a financially interested party, [which] amounts to affording a naked preference to a government litigant over its non-governmental adversaries — permitting the government to place its thumb on the scales of justice.”

As noted in our prior post, the Second Circuit’s opinion did extend the concept of Auer deference beyond the specific situations in which it has thus far been applied by the Supreme Court.  In Auer v. Robbins, 519 U.S. 452 (1997), the Court had deferred to an agency’s interpretation when it was set forth in an amicus brief filed by a non-party; here, the court deferred to the IRS’s interpretation presented in a brief in which the IRS was a litigant.  Justice Scalia has suggested that he would be open to reconsidering even Auer itself in an appropriate case (even though he authored the Auer opinion).  Union Carbide is hoping that other Justices share that view or that they will be troubled by the apparent expansion of the doctrine here, and that enough of them will believe that this is an appropriate case to revisit the question of agency deference to its own regulations.  Whether or not that turns out to be the case, the petition’s focus on the broadly applicable deference issue certainly gives the Court something to think about beyond whether it wants to hear the substantive tax issue.  Ordinarily, taxpayers have a hard time persuading the Court to hear a technical tax question on which there is no circuit conflict.

The government’s brief in response to the petition is currently due January 3.  The government often obtains at least a 30-day extension to file such responses.

Union Carbide – Petition for Certiorari (partial appendix)

Appeal Dismissed in Cadrecha

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December 27, 2012

The Federal Circuit yesterday dismissed the taxpayer’s appeal in Cadrecha.  As noted in our prior post, this was a formality after the parties agreed to settle the case.

Taxpayer Responds to Petition for Rehearing in Quality Stores

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December 20, 2012

Following up on the Sixth Circuit’s order, the taxpayer has now filed a response to the government’s petition for rehearing en banc in Quality Stores.  See our prior reports here.  The brief offers a point-by-point response to the government’s petition, arguing in particular that the Sixth Circuit was correct in relying on Coffy v. Republic Steel Corp., 447 U.S. 191 (1980), and disputing the government’s contention that the panel’s decision was inconsistent with earlier Sixth Circuit decisions.

The petition is now back in the lap of the Sixth Circuit, which could rule in the next few weeks on whether it will rehear the case.

Quality Stores – Taxpayer Response to Petition for Rehearing



Sixth Circuit Orders Response to Government’s En Banc Petition in Quality Stores

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December 5, 2012

The Sixth Circuit yesterday directed the taxpayer to file a response to the government’s petition for rehearing en banc in Quality Stores.  As we previously noted, the Federal Rules of Appellate Procedure prohibit responding to rehearing petitions unless ordered by the court, but such an order in this case was a strong possibility.  Courts of appeals frequently direct responses to rehearing petitions filed by the government, and the government’s petition highlights why this case is a strong candidate for the relatively rare action of rehearing en banc.  If the court’s order is surprising at all, it is that it took so long to issue it.

The order signifies that the Sixth Circuit is giving more than usual attention to this rehearing petition, but it does not necessarily mean that the petition will be granted.

The taxpayer’s response is due December 18.