Notice & Comment

Seminole Rock in Tax Cases, by Steve R. Johnson

This article is not about the wisdom or lack thereof of Auer/Seminole Rock (“ASR”). Instead, it explores an aspect of ASR “on the ground.” Specifically, this article considers the considerable gaps between how the Supreme Court has framed the doctrine and how the United States Tax Court has applied (or not applied) it.

Some of the observations herein are discussed in greater detail in a 2013 article of mine. (Auer/Seminole Rock Defense in the Tax Court, 11 PITT. L. REV. 1 (2013); see also Steve R. Johnson, Deference to Tax Agencies’ Interpretation of Their Regulations, 60 STATE TAX NOTES 665 (May 30, 2011), part of a series of articles of mine for that publication on deference doctrines applied by the states in tax cases). This current article includes major post-2013 Tax Court ASR cases. These cases continue the Tax Court’s guerilla war against ASR deference described in the 2013 article.

Part I below sketches the escape hatches built into the doctrine (with a somewhat unsteady hand) by the Supreme Court, the exceptions under which deference need not be accorded to agencies’ interpretations of their regulations. Part II shows how the Tax Court, in evident hostility to the ASR doctrine, construes―indeed contorts—these exceptions ungenerously, rendering the doctrine a virtual dead letter in the Tax Court. Part III considers possible reasons for this behavior. It suggests that the culture of tax practice makes the Tax Court an inhospitable forum for deference generally and ASR deference in particular. Part IV concludes.

I. ASR Escape Hatches

Despite rumblings of discontent from some justices and despite mounting critical commentary, the Supreme Court still treats ASR as a viable doctrine. However, from the start and continuing today, the Court has recognized situations in which ASR deference is inappropriate.

The case law is not fully reconcilable as to the number and the contours of the exceptions. Support can be found in various decisions for six exceptions. Deference should not attach when (1) the agency’s interpretation is “plainly erroneous or inconsistent with the regulation” (Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)); (2) the regulation is unambiguous (e.g., Christensen v. Harris Cty., 529 U.S. 576, 588 (2000)); (3) the agency’s position is not settled or is not an authoritative expression of the agency’s position (e.g., Gose v. U.S. Postal Serv., 451 F.3d 831, 837-38 (Fed. Cir. 2006)); (4) the regulation merely parrots the statute (Gonzales v. Oregon, 546 U.S. 243, 255 (2006)); (5) regulated parties have not had fair warning of the conduct required or prohibited by the interpretation (Christopher v. SmithKline Beecham, 132 S. Ct. 2156, 2167-68 (2012)); and (6) the interpretation “does not reflect the agency’s fair and considered judgment on the matter in question” (Auer v. Robbins, 519 U.S. 452, 462 (1997)). This last exception may involve various circumstances, such as when the current interpretation conflicts with the agency’s prior interpretation of the same regulation (e.g., Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 513 (1994)) or when the interpretation is merely a “convenient litigating position” or a “post hoc rationalization” (Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212, 213 (1988)).

II. Tax Court’s Hostility to ASR

What is now the Tax Court originated in 1924 as an administrative agency. Congress made it a multi-member Article I trial court in 1969. The court’s “function and role in the federal judicial scheme closely resemble those of the federal district courts” (Freytag v. Comm’r, 501 U.S. 868, 891 (1991)). Because of the court’s “tax only” docket and the fact that the court’s judges nearly always had extensive tax experience before taking the bench, Congress believed that the Tax Court would bring special expertise to bear and that nationwide jurisdiction would promote uniform national application of the tax laws.

The Tax Court’s jurisdiction now embraces most kinds of civil tax controversies. As to some matters, it has exclusive jurisdiction. Other times, taxpayers may choose to litigate in one of several federal courts, usually choosing the Tax Court because it is a prepayment, not refund, forum. The clear majority of federal tax cases are litigated in the Tax Court. In the Tax Court, the IRS is represented by attorneys from the IRS Chief Counsel’s Office. In all other courts, the IRS is represented by the Department of Justice. (See generally Steve R. Johnson, Reforming Federal Tax Litigation: An Agenda, 41 FLA. ST. U.L. REV. 205 (2013)).

After the Internal Revenue Code (“IRC”), regulations promulgated by the Treasury and IRS are the most importance source of federal tax law. Unsurprisingly, taxpayers and the IRS often disagree as to what the regulations command. The great majority of the Tax Court’s opinions in these cases resolve the clash through traditional interpretation. Whether because the parties failed to argue ASR or because the Tax Court ignored such arguments, ASR is notable by its absence from most opinions in which it could have appeared.

In recent years, however, administrative law principles have breached the citadel of tax insularity. (See generally Steve R. Johnson, Preserving Fairness in Tax Administration in the Mayo Era, 32 VA. TAX REV. 269 (2012)). Since 2009, Tax Court decisions discussing ASR have increased. But increased discussion has not meant increased acceptance. From early days to today, the Tax Court has given lip service to ASR but has gone to lengths to neuter the doctrine.

Sometimes, the court obviously was aware of ASR and discounted it without even citing Auer or Seminole Rock. For example, the regulation at issue in General Dynamics was “couched in broad terms, leaving room for the parties to advance differing interpretations.” Citing traditional tax cases but neither Auer nor Seminole Rock, the court declared: the IRS’s “litigating position is not afforded any more deference than that of [the taxpayers] …. That is especially so here, where [the IRS] did not publish [its] position prior to this controversy. Accordingly, we proceed to decide which party’s approach harmonizes with the statutory intent.” (General Dynamics Corp. v. Comm’r, 108 T.C. 107, 120-21 (1997); to similar effect see Garnett v. Comm’r, 132 T.C. 368, 380-81 (2009)).

When the Tax Court has mentioned Auer or Seminole Rock, it typically has avoided them by invoking the exceptions noted in Part I—reading them aggressively when needed. My 2013 article exemplified this by decisions from 1980 to 2011. (See 11 PITT. TAX REV. at 14-24, discussing Southern Pacific, CSI, Phillips Petroleum, Honeywell, Woods, Lantz, Pierre, Intermountain Insurance, Carpenter, and NEA).

This pattern continues in more recent cases. For example, in an en banc decision (ten judges participating in the majority opinion), the IRS argued for ASR deference.
Although conceding that such deference can attach even when the agency’s interpretation appears on brief, the majority declared: “Judicial deference need not give way to judicial abdication. The regulations are silent on the issue before us, and [the IRS’s] position on brief is at least arguably inconsistent with the statute .… [We] do not in this instance defer to [the IRS’s] interpretation on brief.” (Rand v. Comm’r, 141 T.C. 376, 394 (2013)).

In a 2014 case, the IRS argued Bowles for the first time in its final summary judgment brief. The court again showed its preference for decision via interpretation over decision via deference. “We need not decide whether [the IRS] timely advanced [its] deference argument or whether we would defer to litigating positions that do not derive their support from regulations, rulings, or longstanding administrative practice .… [W]e are able to decide this case …. without according any deference to [the IRS’s] interpretation.” (Guardian Inds. Corp. v. Comm’r, 143 T.C. 1 at n.10 (2014) (citations omitted)).

III. Possible Explanations

George Bernard Shaw is supposed to have said that the English and Americans are two nations divided by a common language. Sometimes courts in the same system are divided by a common doctrine. So it is with the Supreme Court, the Tax Court, and ASR deference. Why?

The IRS often fails to advance ASR arguments in Tax Court cases in which they would seem appropriate. Perhaps in early years, this was explained by tax law’s general neglect of administrative law and IRS Counsel attorneys having less awareness of administrative law than did Justice attorneys. But, with the passage of time and dramatically more attention being paid by the tax community to administrative law in general and deference doctrine in particular, such explanations are harder to credit today.

Yet even today the IRS argues ASR only sporadically. For instance, in a 2014 case, neither party raised ASR explicitly. (Shea Homes, Inc. v. Comm’r, 142 T.C. 60, 99-10 (2014) (The IRS “does not claim that [its] position .… constitutes ‘fair and considered judgment on the issue’ rather than ‘a post hoc rationalization’ .… Thus, [it] does not argue [its] position is entitled to any special deference, and we accord it none.”) (citations omitted); see also Guardian Industries, supra)) There is a chicken-and-egg question: does the Tax Court often ignore ASR because IRS Counsel doesn’t press it or does IRS Counsel choose not to press it because it knows the Tax Court will be unreceptive?

Similarly, in a high-profile 2015 case involving transfer-pricing regulations, the IRS cited neither Auer nor Seminole Rock. The IRS lost 15-0 in the Tax Court. (Altera Corp. v. Comm’r, 145 T.C. 91(2015), on appeal, No. 16-70496 (9th Cir.)) On appeal, an amicus supporting the IRS raised Auer, but Justice did not, indeed perhaps could not. (E.g, Tibble v. Edison Int’l, 820 F.3d 1041, 1046 (9th Cir. 2016) (noting “a general rule against entertaining arguments on appeal that were not presented or developed [below].”))

The continued subversion of ASR by the Tax Court suggests that something deeper is at work: subcultural differences between the Supreme Court, a generalist court, and the Tax Court, a specialist court. Two such differences are key. First, deference doctrines apply most naturally to agencies making policy choices under statutory delegations. Many areas of tax do entail substantial administrative discretion.

Nonetheless, there is a lingering tradition in tax that the job of the IRS is not to make policy but to find the “right” answer “by correctly applying the laws enacted by Congress” (Rev. Proc. 64-22, 1964-1 C.B. 689; see also Manhattan Gen’l Equipment Co., Inc. v. Comm’r, 297 U.S. 129, 134 (1936)) and that the Tax Court is charged with the same mission (see, e.g., Theodore Tannenwald, Jr., Tax Court Trials: An Updated View from the Bench, 47 TAX LAW. 587, 588 (1994); cf. Comm’r v. Engle, 464 U.S. 206, 217 (1984)).

The “right answer” mission of the Tax Court is based in part on the language of a key jurisdictional statute: IRC section 6214(a). It provides: “the Tax Court shall have jurisdiction to redetermine the correct amount of the [tax] deficiency” (emphasis added). One Tax Court judge (and, previously, IRS Chief Counsel) explained:

This language is not the precise equivalent of a general grant of jurisdiction over a suit by the taxpayer against the [IRS]. The court is not charged with the task of arbitrating or resolving a controversy …. Rather, the court is directed to determine ‘the correct amount’ of a deficiency or an overpayment. In other words, the court does not simply determine which party wins the lawsuit, but instead determines the taxpayer’s correct tax liability. This is a different responsibility, for example, from that of the United States district court.

(Meade Whitaker, Some Thoughts on Current Tax Practice, 7 VA. TAX REV. 421, 437 (1988)).

Given this tradition, there is some truth in the observation that “the tax bar and the specialized tax bench form a closed community that has developed many characteristics of a Mandarin class, including a conviction of its own ability to interpret properly a document [the IRC] which ordinary mortals find impenetrable.” (John F. Coverdale, Text as Limit: A Plea for a Decent Respect for the Tax Code, 71 TUL. L. REV. 1501, 1504-1505 (1997)). A subcultural tradition of “we’re here to get this right” tends towards resolution on the merits, not deference.

Second, deference doctrines also are rooted partly in agency expertise. Generalist judges often confess their befuddlement in tax cases and consequent tendency to go along with the experts. (E.g., Flora v. United States, 362 U.S. 145, 198 (1960) (additional opinion of Frankfurter, J.)). In contrast, Tax Court judges, from their experience before and after taking the bench, often are more experienced than the IRS lawyers appearing before them and the Treasury/IRS lawyers who drafted the regulations. For the senior to defer to the junior goes against the grain.

IV. Conclusion

This article has suggested that considerations specific to context explain the stark gap between ASR deference in the Supreme Court and ASR deference in the Tax Court. This may have broader implications. Scholars in other fields can assess whether a similar gap exists in their areas and, if so, why it exists. If their conclusions differ from mine, my work should be reconsidered. If their conclusions are similar to mine, a useful general theory may emerge as to the “on the ground” implementation of commands from a central judicial authority.

Steve Johnson is the Dunbar Family Professor at Florida State University College of Law.


This post is part of an online symposium entitled Reflections on Seminole Rock: The Past, Present, and Future of Deference to Agency Regulatory Interpretations. You can read the entire series here.

Print Friendly, PDF & Email