Taxpayer’s Brief Filed in Intermountain

The taxpayer has filed its response brief in the D.C. Circuit in Intermountain.  The brief does not add much new to the debate, which is hardly surprising at this point.  It relies in the alternative on all of the different rationales advanced by the various Tax Court opinions for rejecting the IRS’s position (and adds an additional argument that the basis was adequately disclosed on the return).  The taxpayer does not jump into the National Muffler Dealers vs. Chevron debate, content to argue that there is no Chevron deference owed in these circumstances under the established rules for Chevron analysis.  The taxpayer does not directly address whether the issuance of final regulations changes that analysis, instead arguing that it is too late for the government to rely on the issuance of the final regs because it did not refer to them in its opening brief.

In the companion UTAM case, the briefing lags the Intermountain schedule by a month.  The government has just opened the briefing in that case, and the taxpayer’s response brief is due February 7, 2011.  Again not surprisingly, the government’s brief looks a lot like the brief it filed in Intermountain a month ago, though it does refer to the final regulations.  The new briefs in the two cases are attached below.

The cases are both scheduled for oral argument on April 5, 2011.

Intermountain – taxpayer’s response brief

UTAM – Government’s opening brief

Briefing Underway in Intermountain

We recently surveyed the nationwide litigation addressing the government’s efforts to apply a six-year statute of limitations to Son-of-BOSS cases, including its efforts to have the courts defer to a late-issued temporary regulation.  The government has now filed its opening brief in the D.C. Circuit in Intermountain, the case in which the Tax Court addressed the issue.  Of note, the brief contains an extensive argument for applying Chevron deference to the temporary regulation, rather than “the differing standards of pre-Chevron jurisprudence” (an apparent reference to National Muffler Dealers, though the brief declines to acknowledge that case by name), and notwithstanding the lack of opportunity for notice and comment.  As we have discussed before here and here, the Supreme Court may shed some light in the next few months on the extent to which Chevron deference applies to Treasury regulations.

The taxpayer’s response brief is due January 5, 2011.

Intermountain – US opening brief

Son-of-BOSS Statute of Limitations Issue Inundates the Courts of Appeals

The government has successfully challenged understatements of income attributable to stepped-up basis in so-called Son-of-BOSS tax shelters.  See, e.g., American Boat Co., LLC v. United States, 583 F.3d 471, 473 (7th Cir. 2009).  But it has been stymied in some cases by the three-year statute of limitations for issuing notices of deficiency.  Code section 6501(e)(1)(A) provides for a six-year statute “[i]f the taxpayer omits from gross income an amount” that exceeds the stated gross income by 25 percent.  Section 6229(c)(2) provides a similar six-year statute for cases governed by the TEFRA partnership rules.  The IRS has argued, unsuccessfully so far, that this section applies when there is a substantial understatement of income that is attributable not to a direct omission of income but rather to an overstatement of basis of sold assets.

The major obstacle to the government’s argument is that the Supreme Court long ago rejected essentially the same argument with respect to the predecessor of section 6501(e)(1)(A) (§ 275(c) of the 1939 Code).  The Colony, Inc. v. Commissioner, 357 U.S. 28, 32-33 (1958).  The IRS argued there that the six-year statute applies “where a cost item is overstated” and thus causes an understatement of gross income.  Id. at 32.  The Court agreed with the taxpayer, however, that the six-year statute “is limited to situations in which specific receipts or accruals of income items are left out of the computation of gross income.”  Id. at 33.  The Court added that, although this was the best reading, it did not find the statutory language “unambiguous.”  Id.  Accordingly, the Court noted that its interpretation derived additional support from the legislative history and that it was “in harmony with the unambiguous language of [the newly enacted] section 6501(e)(1)(A).”  Id. at 37.  Based largely on the precedent of Colony, the Tax Court and two courts of appeals have already rejected the government’s attempts to invoke the six-year statute of limitations in Son-of-BOSS cases.  See Salman Ranch Ltd. v. Commissioner, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), aff’g, 128 T.C. 207 (2007).

Seeking to rescue numerous other cases that were still pending in the courts or administratively, the government responded by issuing temporary regulations on September 24, 2009, that purported to provide a regulatory interpretation of the statutory language to which the courts would afford Chevron deference.  The temporary regulations provide that “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income for purposes of [sections 6229(c)(2) and 6501(e)(1)(A)].”  Temp Regs. §§ 301.6229(c)(2) – 1T, 301.6501(e)-1T. 

The Tax Court was the first tribunal to consider the efficacy of this aggressive (one might say, desperate) effort to use the regulatory process to trump settled precedent, as the IRS moved the Tax Court to reconsider its adverse decision in Intermountain Ins. Service v. Commissioner, T.C. Memo. 2009-195, in the wake of the temporary regulations.  The reception was underwhelming.  The Tax Court denied the motion for reconsideration by a 13-0 vote, generating three different opinions.  The majority opinion, joined by seven judges, was the only one to base its ruling on rejecting the substance of the government’s argument that courts should defer to the regulations notwithstanding the Supreme Court’s Colony decision.  (Four judges stated simply that the new contention about the temporary regulations should not be entertained on a motion for reconsideration; two judges stated that the temporary regulations are procedurally invalid for failure to submit them for notice and comment.)

The government’s deference argument rests on Nat’l Cable and Telecommunications Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005), which ruled that a “court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  (In a concurring opinion, Justice Stevens stated his view that this rule would not apply to a Supreme Court decision, since that would automatically render the statute unambiguous, but that remains an open question.).  The Tax Court majority ruled that the Supreme Court’s statement in Colony that the statute was ambiguous “was only a preliminary conclusion,” but “[a]fter thoroughly reviewing the legislative history, the Supreme Court concluded that Congress’ intent was clear and that the statutory provision was unambiguous.”  Accordingly, the majority concluded that Brand X did not apply, and “the temporary regulations are invalid and are not entitled to deferential treatment.”  (The two judges who found the regulations procedurally invalid questioned the majority’s reasoning and suggested that the Court should not have reached the substantive issue).

The Tax Court’s decision in Intermountain is just the first skirmish in what will be an extended battle over the temporary regulations.  The Justice Department has asserted that there are currently 35-50 cases pending in the federal courts that raise the same issue, with approximately $1 billion at stake.  Accordingly, the government is pursuing an appeal to the D.C. Circuit in Intermountain, and it is arguing for deference to the temporary regulations in other cases pending on appeal in other circuits, even where those regulations were not considered by the trial court.  The government seems determined to litigate the issue in every possible court of appeals, presumably hoping that it can win somewhere and then persuade the Supreme Court to grant certiorari and reconsider Colony.  The current map looks like this:

D.C. Circuit:  Briefing schedules have been issued in Intermountain, No. 10-1204, and in an appeal from another Tax Court case, UTAM Ltd. v. Commissioner, No. 10-1262.  The government’s opening brief is due in Intermountain on December 6, 2010, and in UTAM on January 6, 2011.  The panel assigned to both cases is Judges Sentelle, Tatel, and Randolph.

Federal Circuit:  Grapevine Imports, Ltd. v. United States, No. 2008-5090, is fully briefed and scheduled for oral argument on January 12, 2011.  The Federal Circuit has already rejected the government’s invocation of the six-year statute in Salman Ranch, but the government is arguing in Grapevine that the Federal Circuit should reverse its position in light of the temporary regulations, which were not previously before the court.

Fourth Circuit:  Home Concrete & Supply, LLC v. United States, No. 09-2353, is fully briefed and was argued on October 27, 2010, before Judges Wilkinson, Gregory, and Wynn.  In that case, the district court had ruled for the government, distinguishing Colony as limited to situations in which the taxpayer is in a trade or business engaged in the sale of goods or services.  That was the rationale of the Court of Federal Claims in the Salman Ranch case, but that decision was reversed by the Federal Circuit.

Fifth Circuit:  Burks v. United States, No. 09-11061 (consolidated with Commissioner v. MITA, No. 09-60827) is fully briefed and was argued on November 1, 2010, before Judges DeMoss, Benavides, and Elrod.  In its briefs on this issue in various courts, the government has often invoked the Fifth Circuit’s decision in Phinney v. Chambers, 392 F.2d 680 (1968), the only court of appeals decision that has applied the six-year statute in the absence of a complete omission of gross income.  In Phinney, the taxpayer on her return had mislabeled proceeds from payment of an installment note as proceeds from a sale of stock with basis equivalent to the proceeds, reporting no income from that sale.  The Fifth Circuit accepted the government’s contention that the six-year statute applied, finding that it applies not only in the Colony situation where there is “a complete omission of an item of income of the requisite amount,” but also where there is a “misstating of the nature of an item of income which places the Commissioner . . . at a special disadvantage in detecting errors.”  392 F.2d at 685.  The government has argued that Phinney essentially involved an overstatement of basis, and therefore strongly supports its position in the Son-of-BOSS cases.  Indeed, the district court in Burks ruled for the government based on Phinney.  The government therefore likely viewed the Fifth Circuit as the most favorable appellate forum for the current dispute. 

At oral argument, however, the panel appeared sympathetic to the taxpayer’s position that Phinney involved a situation where the taxpayer had taken steps akin to a direct omission that would make it difficult for the IRS to discover the potential tax liability.  Therefore, the taxpayer maintains, Phinney is fully consistent with the position that the six-year statute does not generally apply to overstatements of basis. 

In addition, the discussion of the temporary regulation at oral argument specifically addressed the debate over whether deference to Treasury regulations is governed by Chevron principles or by ­­the less deferential National Muffler Dealers standard.  As we have discussed elsewhere, the Supreme Court may resolve that question in the next few months in the Mayo Foundation case.

Seventh Circuit:  Beard v. Commissioner, No. 09-3741 is fully briefed and was argued on September 27, 2010, before Judges Rovner, Evans, and Williams.  Although the panel, particularly Judge Rovner, expressed skepticism about some of the IRS’s legal arguments, Judges Williams and Evans appeared troubled by the prospect of allowing the taxpayer to escape scrutiny on statute of limitations grounds.  Judge Williams suggested that the taxpayer still ought to have the relevant records and that there was no apparent reason why a misstatement should be treated different from an omission.  Judge Evans emphasized that the taxpayer’s position with respect to tax liability was very weak and suggested that Colony might be distinguishable because it involved a return that was much easier for the IRS to decipher than the complex return involved in Beard.  Thus, to some extent, the government seemed to have found a sympathetic ear in the Seventh Circuit, though that will not necessarily translate into a reversal of the Tax Court.

Ninth Circuit:  Reynolds Properties, L.P. v. Commissioner, No. 10-72406.  The court of appeals vacated the briefing schedule to allow the parties to participate in the court’s appellate mediation program.  The government, however, has indicated that the case is not suitable for mediation, and therefore a new briefing schedule is likely to be issued soon.  The Ninth Circuit has already ruled in Bakersfield that the six-year statute does not apply to overstatements of basis.  Presumably, the government will ask the court to reverse itself in light of the temporary regulations, which were not previously before the court.

Tenth Circuit:  Salman Ranch Ltd. v. United States, No. 09-9015, is fully briefed and was argued on September 22, 2010, before Judges Tacha, Seymour, and Lucero.  This case comes from the Tax Court, but involves the same partnership that prevailed in front of the Federal Circuit. 

Attached below as a sampling are the briefs filed in the Fourth and Seventh Circuit cases.

Home Concrete – Taxpayer’s opening brief

Home Concrete – United States response brief

Home Concrete – Taxpayer’s reply brief

Beard – United States opening brief

Beard – Taxpayer’s response brief

Beard – United States reply brief

Petition for Certiorari Filed in Kawashima

As we expected, a petition for certiorari has been filed in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010).  To review, that case involves the question of whether pleas by Mr. and Mrs. Kawashima to section 7206 offenses of subscribing to false statements (and assisting same) as to their corporation’s 1991 tax return could be “aggravated felonies” under the immigration laws.  As noted in our initial blog post, the relevant section of 8 U.S.C. §1101(a)(43)(M), if read holistically, would seem to preclude that conclusion but a divided panel of the Ninth Circuit (after changing its mind a few times in the interim) ultimately held that section 7206 offenses do provide a basis for deportation.

In addition to pointing out the circuit split (the Third Circuit – in another divided panel – previously adopted the Kawashimas’ position), the petition cites myriad statutory construction cases for the premise that (M)(i), involving “fraud or deceit,” cannot encompass section 7206 when M(ii) specifically references only section 7201 (the crime of tax evasion).  We were disappointed to see that our favorite case on this subject (United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988)) wasn’t cited:

Statutory construction . . . is a holistic endeavor.  A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme – because the same terminology is used elsewhere in a context that makes its meaning clear . . . or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.

Id. at 371.  Perhaps that gem will make it into a merits brief if certiorari is granted.

The petition also takes on the question of whether a section 7206 crime necessarily involves fraud, citing Considine v. United States, 683 F.2d 1285 (9th Cir. 1982) for the proposition that it doesn’t.  The petition also makes arguments based on rule of lenity as frequently applied in the immigration context.  See generally INS v. St. Cyr, 533 U.S. 289 (2001).

Finally, the petition presents a second question – an interesting procedural question of whether the Ninth Circuit acted outside of its authority under Federal Rule of Appellate Procedure 41 by amending its second opinion as to Mrs. Kawashima (which found she had not committed an aggravated felony on grounds that the loss amount has not been proven) after the date the mandate allegedly was required to issue as to her, because the petition for rehearing was filed only as to Mr. Kawashima.  This is a potential home-run argument for one of the petitioners, but the question lacks the broad applicability that would ordinarily interest the Supreme Court.  The Court is free under its rules to grant certiorari limited to one of the questions presented in the petition if it so chooses.  It will be interesting to see if it does so in this instance.

The government’s response is currently due on December 2, but the government routinely requests extensions of 30 days or more to respond to petitions for certiorari.  The Court can be expected to rule on the petition early in 2011.

Mayo Foundation Oral Argument Tilts Towards the Government and Raises Doubts About the Continuing Vitality of National Muffler Dealers

At oral argument on November 8, several Supreme Court Justices expressed skepticism regarding the claim that medical residents fall within the “student exemption” from FICA taxation.  Although it is always hazardous to predict the outcome of a case from the questions asked at oral argument, it is difficult to envision the taxpayer getting the five votes needed to overturn the court of appeals’ rejection of the exemption.

The Justices’ objections to the taxpayer’s position came from a variety of angles.  Justice Sotomayor focused on the essence of what a medical resident does, suggesting that a person working unsupervised for more than 40 hours per week, and for significant remuneration, is “really not a student.”  Justice Ginsburg focused more on Congress’s intent, suggesting that the exemption seemed directed at “the typical work/study program in a college.”  Chief Justice Roberts observed that the line between student and worker is a difficult one to draw and suggested that it was therefore appropriate to let the IRS draw the line in a categorical way and then defer to the IRS’s interpretation.  Justice Breyer took a different tack, arguing that the IRS’s position was a valid interpretation of a requirement that had been in the regulations for a long time – namely, that the employment has to be “incident” to the study.  Full-time employment, he suggested, would not be “incident” to the study because it is “so big in comparison to the study.”

Justice Alito seemed the most sympathetic to the taxpayer.  He rose to the taxpayer’s defense by offering an alternative reading of word “incident.”  Later, he challenged the government’s counsel to explain why medical residents should not be eligible for the exemption when law students who write briefs are eligible, arguing that the medical residents should be treated as students if their primary motivation is to complete a course of study rather than to earn money.  Justice Ginsburg and the Chief Justice also questioned government counsel, though not as sharply as they had questioned the taxpayer’s counsel.  Justices Scalia and Kennedy were uncharacteristically silent during the argument.  In accordance with his usual practice, Justice Thomas did not speak.  Justice Kagan is recused in the case because of her prior involvement when she was Solicitor General.

In our prior posts on this case (see here, here, and here), we discussed the possibility that this case could be a vehicle for the Supreme Court to address the correct standard for deference to Treasury regulations – that is, whether the more generic Chevron analysis has superseded the more specific, and in some respects less deferential, approach set forth in National Muffler Dealers Ass’n v. United States, 440 U.S. 472 (1979).  The Justices did not exhibit any independent interest in this issue, as their questions focused on the meaning of the statute, not on deference to the regulation.  At one point in his opening argument, taxpayer’s counsel noted that the new regulation was issued only after the government had repeatedly lost in court (a fact that would argue for less deference under the National Muffler Dealers approach), but that point did not elicit any reaction from the Justices.

Thus, the oral argument did not touch on the Chevron/National Muffler Dealers issue until the very end when taxpayer’s counsel affirmatively raised it during his few minutes of rebuttal time.  Counsel sought again to persuade the Court that the government’s position is suspect because it is a recent invention that seeks to overturn a series of adverse court decisions, and this time phrased the argument explicitly in terms of the standard for deferring to a regulation.  Taxpayer’s counsel argued that deference to the new Treasury Regulation is inappropriate under “[t]he National Muffler standards, which we understand still to be appropriate to evaluate deference given to an IRS regulation,” because the regulation “is not a contemporaneous regulation.”  Justice Sotomayor quickly objected, asserting that the Court has “said that agencies can clarify situations that have been litigated and positions that they have lost on.”  (She was referring here not to tax cases, but to decisions that apply the Chevron analysis.).  Shortly thereafter, Chief Justice Roberts zeroed in on the issue, asking:

Why are we talking about National Muffler?  I thought the whole point of Chevron was to get away from that kind of multifactor ad hoc balancing?

Taxpayer’s counsel tried to respond by arguing that the National Muffler Dealers factors were “sensible factors” that the Court should continue to apply in the case of a “regulation that pops up 65 years of the enactment of the statute, after the government has lost five cases.”  But the Chief Justice was dismissive, stating simply:  “If Chevron applies, those considerations are irrelevant, right?”

The outlook for the case therefore is that the Court will likely affirm the Eighth Circuit’s ruling that medical residents do not come within the student exemption from FICA.  Such a decision would not necessarily require a discussion of deference to Treasury regulations, but if there is such a discussion, the Court may well be ready to conduct the analysis explicitly in the Chevron framework and consign National Muffler Dealers to the dustbin of history.  As noted in our previous post, that would in some respects be an unfortunate outcome – giving too much deference to regulations that may well be unduly influenced by the IRS’s narrow interest in maximizing tax revenues rather than a neutral effort to implement the will of Congress.

Attached below are links to the taxpayer’s reply brief and to the transcript of the oral argument.  A decision is expected in the next few months.

Taxpayer Reply Brief in Mayo Foundation

Transcript of Oral Argument in Mayo Foundation

Government Argues for Abandoning the Muffler Dealers Test for Deference to IRS Regulations

In our initial post on the Mayo Foundation case pending in the Supreme Court, which concerns whether medical residents are exempt from FICA taxation, we noted that the case potentially raised a broad question that has surfaced in the courts of appeals and the Tax Court in recent years — namely, whether Chevron deference principles have supplanted the traditional Muffler Dealers approach to analyzing the deference owed to Treasury regulations.  Although that issue was not flagged by the parties at the certiorari stage, we later observed that the taxpayers’ opening merits brief served that ball into the government’s court by relying heavily on some of the Muffler Dealers factors that are not ordinarily part of the Chevron analysis.  The government has now responded by directly challenging the continuing vitality of Muffler Dealers.  (The government’s brief is attached below.)  As a result, there is a good chance that the Supreme Court will address the question and resolve the disagreement between the Tax Court and some courts of appeals on the proper analysis of deference to Treasury regulations.

The government’s brief does not mince words.  It states that Muffler Dealers “has been superseded by Chevron” and therefore “the considerations on which [taxpayers] rely are largely irrelevant.”  In particular, the government identifies three Muffler Dealers factors relied upon by the taxpayers that are allegedly irrelevant under Chevron:  (1) “the recency of [the] adoption” of the regulation; (2) that the new regulation “was enacted ‘to overturn judicial decisions’ interpreting the student exemption”; and (3) that “Treasury’s interpretation of the student exemption has purportedly been inconsistent.”

It is by no means a foregone conclusion that the Supreme Court will resolve the question of the proper deference standard, as there are many ways to resolve the ultimate question of the applicability of the FICA exemption without having to decide on a deference standard.  Nor is it as clear as the government would like that Chevron did or should supersede Muffler Dealers.  (If it were, the question probably would not still be open 26 years after Chevron was decided).  The IRS is often in an adversarial relationship with taxpayers; it has an inherent fiscal interest in interpreting the Internal Revenue Code in a way that maximizes tax revenues.  Therefore, there are good reasons for the courts to afford less deference to Treasury regulations that would determine the outcome of tax disputes than to regulations of more neutral agencies that are merely administering a federal statute.  Can the government really respond to an IRS defeat in court by promulgating a regulation to overturn the decision and then expect the courts to defer to that regulation without taking any account of how it came to pass?  Or can it reverse a regulatory interpretation simply because it determines that the reversal will benefit the public fisc, without paying some price in terms of judicial deference?  Perhaps the Supreme Court will answer those questions soon. 

Oral argument in the Mayo Foundation case is scheduled for November 8.

Mayo Foundation – United States Response Brief

Supreme Court in the Future for Kawashima?

On August 30, 2010, the Ninth Circuit granted Petitioner’s Motion to Stay the Mandate in Kawashima.  This stays the mandate in the case pending the filing of a petition for writ of certiorari and confirms our prior speculation that petitioner is going to try to make a run at the Supreme Court.  We will be watching the case with interest and will post the petition when it appears.

Mayo Foundation Oral Argument Scheduled for November 8

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.

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

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

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

« Previous Page — Next Page »