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December 2016 Changes to the Federal Rules of Civil and Appellate Procedure: Electronic Service and Word Counts

by Joshua D. Rogaczewski | Dec 1, 2016 | Appellate Courts, Court Procedure Matters, Trial Courts, Uncategorized

December 1 is an important day for federal litigators and for tax practitioners with cases pending in federal district and appellate courts. It brings with it changes to the rules governing their day-to-day practices. This year, those changes are few and simple but important.

First, electronic service no longer entitles litigants to three extra days to respond to something. Items not served personally have historically triggered what many practitioners referred to as a “mailbox rule” of three extra days to respond to the item, and the concept appears in Federal Rule of Civil Procedure 6(d) and Federal Rule of Appellate Procedure 26(c). For many years, items served electronically were inexplicably treated (contrary to fact) as if they were not delivered immediately. That is no longer the case. The rules have caught up to technology, and in district court and the courts of appeals serving an item by email or using the electronic case filing (ECF) system’s notice function will not give one’s adversary additional time to respond unless a local rule preserves the status quo, as Eastern District of Texas Rule of Civil Procedure 6 does.

Second, the courts of appeals have moved almost entirely to word-count limits for papers. For many years now, litigants did not have to comply with page limits for briefs if their papers complied with certain word-count limits. Other papers, however, such as motions and petitions had only page-count limits. Several applicable appellate rules (21 [mandamus petitions], 27 [motions], 29 [amicus briefs], 35 [rehearing en banc petitions], and 41 [rehearing petitions]) have been amended to include word-count limits. In addition, the word counts for briefs have been reduced from 14,000 to 13,000 for opening, response, and cross-appeal response-and-reply briefs; 16,500 to 15,300 for cross-appeal opening-and-response briefs; 7,000 to 6,500 for reply briefs. Please see McDermott’s modified table showing the applicable word limits for the most common pleadings. These reductions were controversial when proposed and many circuits have opted out of them, as indicated in their local rules. E.g., 7th Cir. R. App. P. 32(c).

Finally, appellate practitioners need to determine how courts are implementing the changes. Some courts are applying the old rules to appeals docketed before December 1, 2016, and the new rules to ones docketed on or after December 1, 2016. Others are using the setting of the briefing schedule as the line of demarcation, and some appear willing to modify the rules in the middle of a briefing schedule.

Practice Note: In light of these changes, now is a good time to review the local rules of the federal courts where your cases are pending or where you typically practice to ensure you are not dropping any deadlines or failing to meet your word counts.

Supreme Court Grants Certiorari in Case Involving Auer Deference

by McDermott Will & Emery and McDermott Will & Emery | Nov 1, 2016 | Appellate Courts, IRS Guidance, Uncategorized

On October 28, 2016, the US Supreme Court (Supreme Court) granted certiorari in the case of Gloucester County Sch. Bd. V. G.G., No. 16-273, which involves a dispute as to whether an unpublished letter by a Department of Education (Department) official purporting to interpret the agency’s regulatory interpretation relating to discrimination on the basis of sex is entitled to Auer deference. The petition for writ of certiorari specifically asked the Court to consider three questions: (1) whether the Court should retain the Auer doctrine; (2) if Auer is retained, whether deference extends to the unpublished agency letter; and (3) with or without deference, whether the Department’s interpretation of its own regulation should be given effect. The Supreme Court’s grant of certiorari was limited to Questions 2 and 3 presented by the petition.

We have previously discussed Auer deference in the tax context here and here. Although the Supreme Court has declined to address whether the Auer doctrine should be retained, it will be interesting to see if the Court follows its recent opinions in this area and further curtails the application of the doctrine given the unpublished form in which the Department’s interpretation was rendered in the Gloucester County case. The Internal Revenue Service (IRS) has taken the position in prior litigation that interpretations in unpublished IRS guidance are eligible for Auer deference. The Tax Court, on the other hand, has indicated that to be entitled to Auer deference an IRS pronouncement must be issued in published form so that taxpayers are aware of such guidance in preparing their tax returns. We will continue to follow this case and report on any future developments.

APA Challenge to Notice of Deficiency: QinetiQ Oral Arguments

by Jeffrey M. Glassman and Roger J. Jones | Oct 31, 2016 | Appellate Courts, IRS Guidance, Uncategorized

On October 26, 2016, the US Court of Appeals for the Fourth Circuit heard oral argument in QinetiQ U.S. Holdings, Inc. v. Commissioner, No. 15-2192. We previously wrote about the case here and here. To refresh, the taxpayer had argued in the US Tax Court (Tax Court) that the notice of deficiency issued by the Internal Revenue Service (IRS), which containing a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the notice of deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law. The taxpayer appealed to the Fourth Circuit.

The substance of the oral argument focused on two issues: (1) whether the IRS’s notice of deficiency in this case violated the APA and was invalid; and (2) whether, on the merits, the taxpayer was entitled to a particular deduction. We focus on the former issue here.

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Tax Controversy Options

by McDermott Will & Emery | Oct 11, 2016 | Alternative Dispute Resolution, Appellate Courts, Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Trial Courts, Uncategorized

Knowing your options for a US Federal tax controversy is helpful in creating a sound and efficient strategy. The attached chart depicts the typical options involved in a US Federal tax controversy, from the IRS’s examination of the return, through administrative appeals, litigation in Tax Court, Circuit Court appeal, and to ultimate assessment of tax.

Altera Corporation Files Answering Brief in Commissioner’s Ninth Circuit Appeal of Altera

by Roger J. Jones | Sep 19, 2016 | Appellate Courts, Court Procedure Matters, Transfer Pricing Resource, Uncategorized

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (“QCSA”) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because Treasury and the IRS did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. The Commissioner of Internal Revenue (“Commissioner”) appealed this holding to the Ninth Circuit Court of Appeals, Dkt. Nos. 16-70496, 16-70497. The Commissioner filed his opening brief on June 27, 2016. Two groups of law school professors filed amicus briefs in support of the Commissioner’s position. On September 9, 2016, Altera Corporation (“Altera”) filed its answering brief with the Ninth Circuit.

Altera begins with the observation that the Commissioner “has remarkably little to say” about the Tax Court’s rationale in holding the QCSA regulation invalid. According to Altera, the Commissioner either did not respond to the salient points in the Tax Court’s analysis or, more often, actually admitted that those points were correct. Instead, the Commissioner advanced a “new, litigation-driven position” that Section 482’s “commensurate with income” requirement is an independent “internal standard” that “does not require consideration of transactions between unrelated parties.” Indeed, Altera notes, the Commissioner now argues “that the arm’s-length standard may be applied without considering any facts at all.” Thus, rather than engage with the Tax Court’s reasoning, the Commissioner “mistakenly accuses the Tax Court of overlooking an argument that is missing from the administrative record.”

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Sixth Circuit Defines ‘Corporation’ for Purposes of Overpayment Interest

by Roger J. Jones | Aug 22, 2016 | Appellate Courts, Settlements, Tax Refunds, Uncategorized

The US Court of Appeals for the Sixth Circuit recently held in U.S. v. Detroit Medical Center that a nonprofit entity incorporated under state law falls within the definition of a ‘corporation’ for purposes of determining the interest rate applicable to tax refunds. The case is worth reading for its plain meaning analysis as well as its reliance on prior case law dating back hundreds of years.

In Detroit Medical, a not-for-profit corporation overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code (Code), ‘corporations’ receive lower interest rates on refund than other taxpayers. The taxpayer claimed that, as a not-for-profit corporation, it should not be treated as a ‘corporation’ and thus was eligible for the higher interest rate resulting in an extra $9.1 million in refunds. The Sixth Circuit found nothing in the relevant statute that excludes a not-for-profit corporation from the definition of “corporation.” In reaching its holding, the court relied on various statutory construction principles, including: (1) in the absence of any statutory definition to the contrary, courts presume that Congress adopts the customary meaning of the terms it uses; (2) the word “includes” is a term of inclusion, not exclusion; (3) dictionary definitions (both old and new) are appropriate tools to determine the meaning of a word used in the Code; and (4) when Congress uses particular language in one section of a statute but omits it in another part of the same Act, the general rule is that Congress acted intentionally and purposely in the disparate inclusion or exclusion.

As further support for its plain meaning analysis, the Sixth Circuit relied primarily on an 1819 opinion by Chief Justice Marshal in Dartmouth College that permitted charitable organizations to be treated as corporations. The court further noted that in 1612, Sir Edward Coke wrote in The Case of Sutton’s Hospital that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the essence of a corporation. Finally, the court cited to commentaries by William Blackstone from 1753 that charitable corporations are one of three basic kinds of corporations.

The Sixth Circuit’s approach of applying a strict plain meaning analysis is consistent with its approach in prior tax cases, including its interpretation of Code section 956 in The Limited and Code section 1256 in Wright Additionally, the opinion highlights the importance in tax litigation of not limiting one’s argument to just the most recent cases and searching for useful authority outside the tax context. In a recent opinion involving the interpretation of Code section 6662, the Tax Court in Rand employed a similar approach by applying the rule of lenity and relying on an 1820 Supreme Court opinion dealing with homicide at sea.

Inversions and Debt/Equity Regulations Top Treasury’s 2016–2017 Priority Guidance Plan

by Kevin Spencer | Aug 16, 2016 | Appellate Courts, IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

Yesterday, the US Department of the Treasury (Treasury) released the 2016–2017 Priority Guidance Plan (Plan) containing 281 projects that are priorities for Treasury and the Internal Revenue Service (IRS) during the period July 2016 through June 2017. The Plan contains several categories of topics, starting with consolidated returns and ending with tax-exempt bonds. The Plan also contains an appendix that lists more routine guidance that is generally published each year. Treasury and the IRS will update and republish the plan during the next 12 months to reflect additional items that have become priorities and guidance that has been published during the year. The public is invited to continue to provide comments and suggestions as guidance is written throughout the year. (more…)

Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

by Roger J. Jones | Aug 3, 2016 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Uncategorized

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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Supreme Court Issues Opinion Addressing Interplay between APA Procedural Compliance and Chevron Difference

by Roger J. Jones | Jul 6, 2016 | Appellate Courts, Court Procedure Matters, Uncategorized

In Encino Motorcars, LLC v. Navarro, Sup. Ct. No. 15-415 (June 20, 2016), the Supreme Court of the United States invalidated a regulation issued by the US Department of Labor (DOL) under the Fair Labor Standards Act (FLSA). In doing so, it affirmed long-standing precedent regarding the procedural requirements of the Administrative Procedures Act (APA) and addressed the effect of noncompliance with those requirements on the deference, if any, courts must afford agency pronouncements. Thus, even though it is not a tax case, it is likely to have an effect on cases in which taxpayers argue that a treasury regulation is invalid.

The Court’s holding here is based upon an agency’s unexplained change in a long-standing position. The FLSA requires employers to pay overtime compensation to covered employees who work more than 40 hours in a given week. It exempts from this requirement “any salesman, partman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. From 1978 to 2011, the DOL’s position was that such employees were exempt from the overtime-pay rule. This position was set forth in a number of published pronouncements, including proposed regulations in 2008. However, when the regulations were finalized in 2011, the DOL took the opposite position. In a suit brought by a number of service advisors against a dealership for overtime pay, the US Court of Appeals for the Ninth Circuit resolved the matter by giving Chevron deference to the DOL’s interpretation embodied in the 2011 regulations, holding for the plaintiff employees. The Supreme Court majority denied Chevron deference and remanded the case to the Ninth Circuit for further proceedings on the meaning of the underlying statutory language. (more…)

Commissioner Files Opening Brief in Ninth Circuit Appeal of Altera

by Roger J. Jones | Jul 5, 2016 | Appellate Courts, Court Procedure Matters, Transfer Pricing Resource, Trial Courts, Uncategorized

In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (QCSA) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because the US Deparment of Treasury and the Internal Revenue Service (IRS) did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. For a discussion of the Tax Court’s Altera opinion, see our prior On the Subject. The Commissioner of Internal Revenue (Commissioner) appealed this holding to the Ninth Circuit Court of Appeals; he filed his opening brief on June 27, 2016.

According to the Commissioner, the Tax Court’s holding was based on several related errors: (1) the Tax Court mistakenly concluded that promulgation of the QCSA regs required the IRS to engage in an “essentially empirical” analysis; (2) this led the court to apply the wrong standard; (3) in its analysis, the court relied heavily on its holding in Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005), that analysis of QCSAs must comport with the arm’s-length standard, meaning that a taxpayer can defend a QCSA by reference to comparable behavior between unrelated parties; and (4) the Tax Court failed to take into account that the finalization of the new QCSA regulations worked a “change in the legal landscape,” which should have altered the court’s analysis of the new regulations’ validity. Moreover, “the coordinating amendments [to the existing QCSA regulations] supersede [the Ninth Circuit’s] understanding of the arm’s-length standard as reflected in its own Xilinx opinion.” (more…)

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