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October 17, 2001

• Boca Investerings Partnership v. U.S.A., No. CIV. A. 97-0602 (D.D.C. Oct. 5, 2001)

  U.S. District Judge Paul L. Friedman (D.D.C.) dealt a blow to the IRS on October 5 when he rejected its challenge to the utilization by American Home Products Corp. ("AHP") of a well known tax shelter for capital gains developed by Merrill Lynch. The Third Circuit and D.C. Circuit Courts of Appeals have previously considered and upheld IRS challenges to similar transactions in ACM Partnership v. Comm'r, 157 F.3d 231 (3d Cir. 1998), and ASA Investerings Partnership v. Comm'r, 201 F.3d 505 (D.C. Cir. 2000), respectively, although the Third Circuit decision was not unanimous. In a lengthy opinion, Judge Friedman painstakingly summarized the facts surrounding the transaction as executed by AHP and distinguished AHP's facts particularly from those of ASA Investerings. On the basis of his factual findings, Judge Friedman held that the IRS erred in determining that Boca was not a partner-ship and that Boca's ownership and sales of certain investments lacked economic substance for federal income tax purposes. Judge Friedman also rejected several alternative arguments raised by the IRS against the transaction. While there is little doubt that the government will appeal Judge Friedman's decision to the D.C. Circuit, the case nevertheless illustrates the hazards of the government's reliance upon the support of the courts in tax shelter cases and may cause the IRS and the Justice Department to rethink their approach to tax shelter litigation.
  

October 15, 2001

• U.S. Supreme Court Hears Oral Arguments in Key Electricity Case, TAPS v. FERC

   

• Gov. Gray Davis acted illegally when he seized more than $200 million worth of power contracts to keep the now bankrupt California Power Exchange from liquidating them, the 9th U.S. Circuit Court of Appeals has ruled. Judges O'Scannlain and Wood strike down the actions of California's governor in seizing more than $200,000,000.00 in power contracts to keep them from being liquidated during California's most recent energy crise. Judge Alex Kozinski wrote a strong eminent domain dissent. Read the case at: http://caselaw.lp.findlaw.com/data2/circs/9th/0155770p.pdf
  

• Randy May argues that the Federal Advisory Committee Act's open meeting requirements are not applicable to meetings the Administration's Energy Task Force may have held with private persons on an individual basis, and that if FACA were construed to be applicable to such meetings with private individuals, it would be unconstitutional as a violation of separation of powers. Representatives Dingell and Waxman and GAO have been arguing that this information concerning Energy Task Force meetings may be required to be made available under FACA.
  See: http://www.pff.org/RandysPOVsinLegalTimes/POV090601.htm.
  

• In United States v. Mead Corp., all eight members of the Supreme Court rejected Justice Scalia's view that Chevron deference should apply to all administrative interpretations that are deemed authoritative. Instead, the majority held that courts should infer that Congress intends that Chevron's "controlling weight" deference should be applied only when Congress "provides for relatively formal administrative procedure tending to foster the fairness and deliberation that should underlie a pronouncement of such force." In his July 9 column for Legal times entitled "Tug of Democracy", Randolph J. May agrees with Justice Scalia that the majority's opinion may lead to less certainty about the outcome of particular cases involving review of agency interpretations than would an across-the-board deference rule. But he says that the majority's decision "is more faithful to the constitutional structure envisioned by the Founders in which it is the function of the third branch, not the second, to, as John Marshall declared in Marbury v. Madison, "say what the law is." http://www5.law.com/lawcom/displayid.cfm?statename=DC&docnum=75298&table=nws&flag=full

• Ray Gifford: Price caps not solution to energy market woes http://www.denverpost.com/Stories/0,1002,158%7E60425,00.html

• United Dominion Industries, Inc. v. United States, Supreme Court Case No. 00-157

• In a recent article, Tom Sykes argues that serious issues arise under the Presentment lause and the separation-of-powers doctrine, as nterpreted by the majority and Justice Kennedy's concurring opinion, espectively, in Clinton v. New York, 524 U.S. 417 (1998), when the executive promulgates a regulation that trumps a federal statute in the course of the regulation's implementation of another federal statute. Sykes further argues that rule of statutory construction set forth inthe Supreme Court's recent decision in Solid Waste Agency v. Army Corpsof Engineers, 121 S.Ct. 675 (Jan. 9, 2001), requires the implemented statute to be construed so as to avoid the constitutional issue unless Congress clearly intended that the Executive promulgate a constitutionally questionable regulation. This rule of statutory construction will often result in the questionable regulation being held invalid as going beyond the authority conferred by the statute that the regulation is designed to implement. This rule of statutory construction will also often result in the regulation not receiving deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Sykes, Powerful New Arguments Against The Duplicated-Loss Provisions of the LDR, 20 Insurance Tax Review 1063 (June 2001) and 91 Tax Notes 465 (April 16, 2001).

• Bush Administration Budget Document.
  The Bush Administration’s latest budget document, a "A Blueprint for New Beginning," was released February 28, 2001. http://www.whitehouse.gov/news/usbudget/blueprint/budtoc.html. The document contains the following tax-related proposals:
  
• Social Security Reform:
  • Allow "individuals to keep some of their payroll taxes in personal retirement accounts."
  • "The Government itself must not invest Social Security funds in the private economy."
    
    
• Tax Incentives for Purchases of Health Care:
  • "[A] a new tax credit for individuals and families who do not have access to employer-sponsored insurance."
  • "[N]ew tax provisions to extend permanently Medical Savings Accounts, help those with long-term care costs, and improve flexible spending accounts."
    
    
• Other Tax Provisions:
  • Permanently extend the research and experimentation (R&E) Credit.
  • Eliminate the estate tax.
  • Reduce the marriage penalty.
  • Replace the current marginal income tax rates of 15, 28, 31, 36, and 39.6 percent with rates of 10, 15, 25, and 33 percent.
  • Expand the charitable deduction to non-itemizers.
    
    
• IRS Funding Initiatives:
  • $400 million over several years to modernize IRS computer systems.
  • Continued funding for IRS's Staffing Tax Administration for Balance and Equity (STABLE) initiative, begun in 2001, to hire new IRS staff.

• Ergonomics Rule Overturned under the Congressional Review Act
  On March 7, 2001, the U.S. House of Representatives voted 223 to 206 to overturn the Clinton Administration's stringent ergonomics rule. The day before, the Senate voted 56 to 44 to overturn the rule. The measure now goes to President Bush, who has indicated he will sign it. This is the first time the Congressional Review Act (CRA) has been used to overturn a major regulation. CRA is an appealing mechanism because it provides for review without hearings, committee approval, and amendments and limits debate to 10 hours. CRA also prohibits the issuance of any rule that is "substantially" the same as the rejected rule.

• Supreme Court Places Important Limits on EPA

• The Use and Misuse of Executive Orders and Other Presidential Directives

• Expanding Congressional Oversight Over Rulemaking.
  On October 17, 2000, President Clinton signed legislation, P.L. 106-312 (S. 1198), into law that is designed to improve congressional oversight of the rulemaking process. The new law creates a pilot program which a chairman or ranking member of a congressional committee with the proper jurisdiction could request that GAO review any federal regulation with a potential annual impact of $100 million or more on the national economy. Once such a request is made, and once a proposed regulation has been published in proposed form, GAO will have 180 days in which to submit a report containing an independent analysis to the appropriate congressional committee. GAO’s analysis must include an evaluation of the potential costs and benefits of the rule, alternative approaches in the rulemaking record, and various impact analyses. GAO would not perform a new cost-benefit analysis, but rather would examine the agency’s analysis of the new regulation. After three years, the pilot program created by the legislation will be evaluated in order to determine whether it should be extended permanently. Proponents of the measure claim that it will give Congress greater power to ensure that laws are being properly implemented.
  
• Plan to Challenge Ergonomics Rules Through Congressional Review Act.
  Republican leaders in Congress are now exploring the possibility of using the 1996 Congressional Review Act (P.L. 104-121) as a means of reversing various regulations, including ergonomics rules issued by the Clinton administration last December. The ergonomics standards, which require programs designed to prevent repetitive-motion injuries in the workplace, are strongly opposed by the business community. Although the Occupational Safety and Health Administration estimates that the rule will cost businesses $4.5 billion annually, industry groups claim that the true cost will be closer to $100 billion per year. The regulations are currently scheduled to take place in October.

• Open Competition and Fairness Act of 2001.
  Congress is also considering legislation to directly reverse the new so-called "blacklisting" regulations aimed at withholding federal contracts from companies that engage in certain labor practices. H.R. 99, introduced on January 3, 2001 by Rep. J.D. Hayworth (R-AZ), would amend the National Labor Relations Act to prohibit discrimination against any bidder on a federally-funded contract if the discrimination is based in whole or in part on a requirement that the bidder enter into a collective bargaining agreement. This legislation is being considered an alternative to the Congressional Review Act approach. Although H.R. 99 has been referred to the House Education and the Workforce Committee, no further action has been scheduled.
  
  
• On January 3, 2001, Rep. Gary Condit (D-CA) introduced legislation that would make it harder for Congress to pass legislation that imposes costly regulations on private business. H.R. 54 would require a Congressional Budget Office analysis and special procedures on legislation that would cost the private sector more than $100 million per year to implement. The bill would amend the Congressional Budget Act of 1974 to require the Director of CBO, in preparing estimates of the direct costs of a federal private sector mandate, to estimate the impact of the mandate on consumers, workers and small businesses, including any disproportionate impact in particular regions or industries. In addition to the CBO analysis, the bill would also allow members of Congress to raise a point of order against any covered bill, permitting a twenty-minute debate on the cost issue and a roll call vote. Similar measures are currently in effect for legislation that would cost state and local governments $50 million a year or more. Rep. Condit sponsored similar legislation, H.R. 350, in the 106th Congress. Although that bill passed the House in February 1999, it never came to a vote in the Senate.

• Overturning Clinton Rules Possible by Using The Congressional Review Act of 1996

• Bush’s Regulatory Review Plan Suspends Rulemaking

• Two new articles of interest on risk regulation:

THE EPA'S RADON RULE: A CASE STUDY IN HOW NOT TO REGULATE RISKS. Robert W. Hahn and Jason K. Burnett. Regulatory Analysis 01-01, January 2001. The Environmental Protection Agency has failed to demonstrate that the benefits of new federal regulations requiring reductions in radon exposure exceed the costs. http://www.aei.brookings.org/publications/abstract.asp?pID=108

DO FEDERAL REGULATIONS REDUCE MORTALITY? Robert W. Hahn, Randall Lutter and W. Kip Viscusi. November 2000. In some instances, regulations designed to reduce health, safety, and environmental risks can actually increase risk. A study of 24 of those regulations found that unintended risk is likely to result from a majority of them. http://www.aei.brookings.org/publications/abstract.asp?pID=98

• Supreme Court decides Gitlitz tax case.
  In Gitlitz v. Commissioner, the Supreme Court, in an 8-1 decision (Breyer dissenting) reversed the 10th Circuit and held that an S Corporation shareholder could increase the basis in his stock by the amount of discharge of indebtedness income received by the corporation, but excluded from the corporation's income under section 108(a). The Court held that the income was included in income under the general rule of section 61(a)(11), and therefore constituted an "item of income" under the terms of the S Corporation pass-through rules. The fact that, under certain circumstances involving insolvent taxpayers, this item of income was excluded from gross income did not mean that it ceased to be "an item of income." Therefore, it properly was treated as passing through to the shareholders and increasing their basis under the ordinary S Corporation rules. In dissent, Justice Breyer wrote that the terms of the Code were capable of being interpreted either as the petitioner or as the respondent asserted, but that ambiguities in the tax code should be resolved in favor of closing loopholes, not maintaining them.
  
• CRS Issues Brief on Tax Issues. On January 5, 2001, the Congressional Research Service published a paper on the major tax issues that might face the 107th Congress. The paper summarizes tax proposals that arose recently in Congress, but were not passed. It also summarizes the tax ideas proposed by Bush during the presidential campaign.
  
• 12/29/00. Treasury issues report on taxation of foreign subsidiaries of U.S. corporations. The Treasury Department, on December 29, 2000, released a 226-page report, "The Deferral of Income Earned Through U.S. Controlled Foreign Corporations: A Policy Study." The report concluded that the "subpart F" tax regime should be kept around. Subpart F attempts to impose immediate U.S. tax on the income of foreign subsidiaries of U.S. parent companies, rather than deferring such tax until the subsidiary pays a dividend to the U.S. parent. Critics of Subpart F argue that immediate taxation impairs the competitiveness of U.S.-based multinationals who compete with foreign companies in low-tax countries.