If there are any tax attorneys in the courtroom today, I think they probably wrote down what you just said.” —Justice Alito, referring to Solicitor General Verrilli’s comments on the legislative grace canon.
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In a few weeks, we can expect the long-anticipated Supreme Court ruling in King v. Burwell. Much of the ensuing media coverage will focus on the ultimate holding: Do you get tax credits when you buy a policy on Healthcare.gov? But the Supreme Court’s method of reasoning, and not only its holding, may have significant implications for the tax system.
In King v. Burwell, one lurking issue relates to the Court’s handling of the so-called “legislative grace” canon of statutory construction. Under that canon, courts usually put a thumb on the scales against taxpayers when they claim tax benefits, concluding that Congress only reluctantly provides those benefits. Taxpayers must thus clearly establish their right to a credit or deduction, and tax benefits may not be inferred.
King v. Burwell reflects an interesting flip-flop. That is, the IRS, and not the taxpayers, argues that Section 36B should be read expansively. The government believes that Section 36B’s seemingly clear language, referring to credits for policies purchased on an Exchange “established by the State,” should be broadened by nontax statutes, like Section 1321 of the ACA.
This type of argument would be risky for a taxpayer to make. Courts actively employing the legislative grace canon are already hostile when something in the tax code itself supports the taxpayer’s position, and relying on a nontax statute would present additional dangers. Showing that a tax benefit comes implicitly via a nontax statute usually seems almost impossible, even if the nontax statute is part of the same Act as the tax provision.
If the Court finds for the government in King v. Burwell, it could be in the awkward position of dismissing the legislative grace canon while supporting a pro-taxpayer outcome. At oral arguments, there was an interesting exchange on this point, which I’ve edited down to focus on the relevant parts:
JUSTICE KENNEDY: [I]t seems to me our cases say that if the Internal Revenue Service is going to allow deductions . . . it has to be very, very clear.
GENERAL VERRILLI: Your Honor raised this point about the need for clarity in a tax deduction. [T]here is a learned treatise that describes that as a false notion.
JUSTICE ALITO: If there are any tax attorneys in the courtroom today, I think probably they wrote down what you just said. When we get future tax cases, the United States is going to argue that . . . there should be no presumption that a tax credit is [not] provided by that statute.
Justices Kennedy and Alito, at least, seem interested in addressing the relationship between the government’s arguments and the legislative grace canon. Because Justice Kennedy is likely to be in the majority, regardless of how the case turns out, this increases the chance that the controlling opinion will address the canon. If the Court holds against the government, the IRS might have received a taste of its own medicine — the Court might use the legislative grace canon to reject the government’s preferred position. But even if the Court holds for the government, it might explain why the legislative grace canon does not apply and it would therefore weaken the canon, hurting the IRS in future litigation.
The government’s merits brief offers a potential way out, but its approach doesn’t make much sense. At Page 58, the government argues that the legislative grace canon should not apply to Section 36B because a narrow reading of that statute would limit tax obligations under other statutes, like Sections 4980H and 5000A, relating to employer and individual penalties. In other words, the challengers’ reading would be consistent with construing benefit-granting provisions narrowly, but only insofar as Section 36B was concerned. Their reading would lead to reduced tax collections under other statutes and the canon should not apply.
But the government’s argument, if accepted, would eviscerate the legislative grace canon. Almost any time the IRS offers a narrow construction of a tax provision, some taxpayers will actually benefit. (I’ll leave the details to a footnote.)* Consequently, if a taxpayer can avoid the legislative grace canon by using the same device that the government uses — that is, by arguing that a favored interpretation would lead to mixed results — any good tax lawyer will be able to slay the canon.
As I’ve previously noted, I have no objections to the slaying of the legislative grace canon. Scalia & Garner, in Section 63 of their treatise on statutory interpretation, nicely explain how that canon has been stretched beyond its modest origins and has essentially become a tool to inappropriately load the dice against taxpayers. As much fun as it might be to see the canon thrown back in the IRS’s face, I don’t want the canon to be used to hold for the challengers. I’d rather the Court discard it entirely, and reach its result in King v. Burwell based on its good faith reading of all relevant statutes.
I don’t suspect, however, that the Court will definitively address the legislative grace canon in King v. Burwell. The current Justices seem quite adept at deferring on issues, and I don’t expect any broad statements on the canon’s validity. Nonetheless, the end-of-term cases, with their various concurrences or dissents, seem to address far more issues than the rifle-shot opinions we see issued early in the Term. Consequently, we might see a substantive footnote in a majority opinion or possibly some lengthy commentary in a secondary opinion.
Tax lawyers should follow Justice Alito’s advice and pay close attention here. They may find something to rebut the IRS’s aggressive invocation of the canon in other contexts.
By Andy Grewal
*Consider, for example, the tax treatment of expenses. Taxpayers usually prefer to deduct an expense rather than capitalize it, and the IRS thus frequently argues that deduction-granting provisions must be construed narrowly. But some taxpayers would benefit from capitalization. They may be in a low tax bracket in the year of any allowable deduction or might otherwise be unable to use the deduction. They might thus prefer that an amount be capitalized such that gains in some future year would be reduced. In other words, it’s not always the case that deduction is preferable to capitalization, and a narrow reading of Section 162 might actually benefit some taxpayers.