Gorsuch’s Interpretation of Tax Code Unlikely to Favor IRS

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By Erin McManus and Jennifer McLoughlin

An appointment of Neil Gorsuch to the U.S. Supreme Court could further limit the IRS’s rulemaking leeway when it is already defending anti-corporate inversion and transfer pricing rules that were arguably not authorized by the tax code.

Gorsuch is seen as a strict constructionist, and his nomination for the Supreme Court by President Donald Trump is in keeping with that view. “No question about it, Gorsuch is a take-the-language-of-the-statute-seriously kind of guy regardless of the policy,” Steve Johnson, a tax law professor at Florida State University College of Law, told Bloomberg BNA.

Johnson, while noting that very few tax cases ever reach the Supreme Court, said Gorsuch is likely to interpret the tax code in favor of taxpayers and not the Internal Revenue Service. “Gorsuch isn’t big on legislative history or policy intent, and he tends to find statutes more clear than others might,” he added.

“Strict constructionists tend to use canons of statutory interpretation more often. Traditionally, canons were used to interpret the tax code narrowly in favor of the taxpayer. Then courts yielded to the idea that deductions are a matter of legislative grace to be interpreted narrowly. Strangely, after decades of pro-government decisions, we have seen the pendulum swinging back toward taxpayers,” Johnson said.

Gorsuch clerked for Justice Anthony Kennedy, who is most definitely not a strict constructionist, as evidenced by his dissent in Home Concrete & Supply, LLC v. United States, 132 S. Ct. 1836 (2012), in which Kennedy said “Our legal system presumes there will be continuing dialogue among the three branches of Government on questions of statutory interpretation and application.”

“Scalia went out of his way in the majority opinion in Home Concrete to say that is baloney. Gorsuch is clearly of Scalia persuasion,” Johnson said.

“Trump has applied litmus tests to his list of candidates for the Supreme Court, raising serious questions for Senators about the independence, impartiality and fairness of the nominee,” said Caroline Fredrickson, president of the American Constitution Society. “Trump’s finalists all seem to share a common record of putting corporate interest before consumer and worker issues. This is the opposite of draining the swamp.”

Death of ‘Chevron,' ‘Quill.'

For 33 years, courts have applied Chevron U.S.A., Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984) to determine whether a federal agency had the statutory authority to issue a regulation and whether it reasonably interpreted the statute. Johnson described Chevron as a “dead man walking” and believes Gorsuch would like to hasten its death. “The Supreme Court will never formally overturn it, but will decide around it,” he said.

Gorsuch may side with his former boss, however, if the opportunity arises to overturn Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which forbids states from imposing sales tax collection obligations on remote retailers without a physical presence in-state.

Kennedy expressed a desire to overturn Quill in his concurrence in the Supreme Court’s decision in Direct Mktg. Ass’n (DMA) v. Brohl, 135 S. Ct. 1124 (2015), which was an appeal of a 10th Circuit decision in which Gorsuch participated. On remand, Gorsuch noted in a concurrence the narrow scope of the Quill rule, which doesn’t prohibit states from imposing tax and regulatory burdens on out-of-state sellers that are comparable to sales and use tax collection duties.

With a “formalistic” and “artificial” distinction between tax collection obligations and other comparable regulatory and tax duties, Quill invited states to impose the latter, according to Gorsuch. Gorsuch also said Quill may “have attached an expiration date” to prior precedent protecting out-of-state sellers.

To contact the reporters on this story: Erin McManus in Washington at emcmanus@bna.com and Jennifer McLoughlin in Washington at jmcloughlin@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

Significant Gorsuch Tax Decisions
DecisionSubjectSummary
McNeil v. United States, 836 F.3d 1282 (10th Cir. 2016) TEFRA (partnership tax)Gorsuch ruled that a former energy company executive had the right to pursue at a partner level trial the argument that he wasn't liable for a penalty stemming from disallowed losses that he claimed from a tax shelter.
Feinberg v. Commissioner, 808 F.3d 813 (10th Cir. 2015) Marijuana business expense deductionsGorsuch found that owners of a Colorado marijuana dispensary couldn't get an order from the appeals court to prevent the U.S. Tax Court from ordering them to produce documents related to the nature of their business that were requested by the IRS.
Krause v. United States, 637 F.3d 1160 (10th Cir. 2011) Tax evasion; IRS lienGorsuch ruled that an IRS lien attached to property fraudulently conveyed to adult children and corporate entities. The court didn't need to consider “reverse veil piercing,” because state fraudulent conveyance law was sufficient.
Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. 2016) Constitutionality, state tax statuteGorsuch authored an opinion concurring with the decision finding that Colorado’s notice and reporting statute for out-of-state sellers didn’t violate the dormant commerce clause. The court was bound by the narrow ruling in Quill Corp. v. North Dakota, which prohibits states from requiring sales and use tax collection from remote retailers without an in-state physical presence—but doesn’t forbid states from imposing tax and regulatory burdens on out-of-state sellers that are comparable to sales and use tax collection duties.
Kerr v. Hickenlooper, 759 F.3d 1186 (10th Cir. 2014) Taxpayer Bill of Rights (TABOR)Gorsuch dissented from the court’s denial of rehearing en banc, finding there are no “judicially manageable standards” for deciding a dispute over whether Colorado’s Taxpayer Bill of Rights (TABOR) violates the guarantee clause of the U.S. Constitution. He noted that the plaintiffs hadn’t attempted to advance “workable legal standards for adjudicating their case despite many opportunities over the years,” opining that the case should be put to bed.

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