Last week the Ninth Circuit decided the consolidated cases of Voss v Commissioner and Sophy v Commissioner, involving the debt limitations under Section 163 relating to qualified residence interest, and in particular whether the limitations are on a per-taxpayer basis or on a per-residence basis when involving unmarried co-owners of a qualified residence. The Ninth Circuit held that the limitations are on a per-taxpayer basis, reversing the Tax Court, which had held that the statute’s limits were tethered to the residence when unmarried taxpayers co-own a qualified residence.
Sophy is a high-profile case, and when the Tax Court decided this in 2012 (pre-Windsor when the landscape was quite different for same-sex couples) many commentators noted its significance. See, for example, Tony Nitti in Forbes referring to the case as one of the most significant in 2012, and that how the Tax Court dealt “a blow to wealthy gay or unmarried couples. …”
The statute is a significant individual income tax case, but it also has interesting procedural implications in that the majority minimized the importance of an IRS Chief Counsel advisory opinion, which had (not surprisingly) supported the IRS’s litigating position. In this post, I will discuss the majority’s approach to minimizing deference to the CCA.
The statutory thicket under Section 163 is challenging, as the Ninth Circuit accurately explains:
This section of the Tax Code, like much of the Code, is complex—it requires attention to definitions within definitions and exceptions upon exceptions.
There is in Section 163 debt limitations that prevent taxpayers from deducting an unlimited amount of interest on residences that would otherwise qualify as a primary residence. The Ninth Circuit accurately summarizes the dispute at issue in the case as follows:
Although the statute is specific with respect to a married taxpayer filing a separate return, the Code does not specify whether, in the case of residence co-owners who are not married, the debt limits apply per residence or per taxpayer. That is, is the $1.1 million debt limit the limit on the qualified residence, irrespective of the number of owners, or is it the limit on the debt that can be claimed by any individual taxpayer? That gap in the Code is the source of the present controversy.
Much of the majority and dissenting opinion involves how best to resolve that gap. The majority essentially spends about 25 pages looking at the statute in detail, concluding that “a per-taxpayer reading of the statute’s debt limit provisions is most consistent with § 163(h)(3) as a whole.”
I will not go through the 25 pages in detail this post, but one of the issues the majority grappled with was the import of the Chief Counsel advisory opinion from 2009, CCA200911007.The CCA’s analysis was about a paragraph long and the Ninth Circuit limited its importance in resolving the dispute:
As the dissent acknowledges, the IRS’s Chief Counsel Advice is only entitled to the “measure of deference proportional to the ‘thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.’” Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2168–69 (2012) (quoting United States v. Mead Corp., 533 U.S. 218, 228 (2001)); see also Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000) (“Interpretations such as those . . . in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law—do not warrant Chevron-style deference.”).
In other words, the majority pegs deference to the informal guidance as dependent on context. Here is I think the most important procedural aspect of the opinion, when the Ninth Circuit applies those standards to the case, essentially minimizing the value of a one-paragraph internal IRS memo that barely scratched the surface of the complex issue:
A review of these factors suggests the 2009 Chief Counsel Advice should be given limited weight. To start, the 2009 Chief Counsel Advice is hardly thorough or exhaustive—its analysis interpreting how the statute should apply to unmarried co-owners consists of just one paragraph. It treats the question as one governed by the “plain language of the statute,” IRS Chief Counsel Advice No. 200911007, at 4, yet as our exchange, the briefs of the parties, the Tax Court’s decision, and the statute itself demonstrate, it is anything but “plain.” The Chief Counsel Advice does not grapple with the statute’s taxpayer-specific definition of “qualified residence” or repeated references to a taxpayer’s taxable year, nor does it explain how the married-person parenthetical is anything but surplusage under a per-residence reading of the statute. (emphasis added).
Moreover, the Ninth Circuit distinguished the situation in Sophy from Hall v US involving intersection of the bankruptcy code and IRC (whether a post-petition farm sale is “incurred by the estate” under the Bankruptcy Code) where the Supreme Court had noted that the IRS’s informal interpretation was consistent over a longer period, was found in multiple informal sources and supported by commentators:
The situation here is a far cry from that in Hall v. United States, 132 S. Ct. 1882, 1890 (2012), a case the dissent cites. See Dissent at 38 n.2. In Hall, the Supreme Court “s[aw] no reason to depart from those established understandings” of bankruptcy courts, bankruptcy commentators, and the IRS’s consistent position for over a decade in an IRS Chief Counsel Advice memorandum, the Internal Revenue manual, and an IRS Litigation Guideline Memorandum. See Hall, 132 S. Ct. at 1889–90. Here, by contrast, there is no comparable consensus. Aside from the IRS’s litigation position in this case, it appears that the 2009 Chief Counsel Advice—which is just six years old—is the IRS’s only The agency’s guidance is closer to a “mere[] . . . litigating position” than to an “agency interpretation of ‘longstanding’ duration.” Dissent at 43 (quoting Alaska Dep’t of Envtl. Conservation v. EPA, 540 U.S. 461, 487–88 (2004)).
The dissent, while noting and agreeing with the majority that the CCA’s were not precedential, stated that in the absence of regulations on point the court should have deferred to the IRS position as reflected in the CCA. Moreover, the dissent cited Skidmore (which the majority did not cite) and noted that courts should “consider the specialized and technical expertise of the agency.”
Its differing view of deference was in part based on its view that the majority’s approach “would result in a windfall to unmarried taxpayers.” In other words, under the majority approach unmarried taxpayers co-owning residences could have a larger mortgage interest deduction than married taxpayers:
There is no basis to infer that Congress intended to allow unmarried co-owners of a qualified residence filing separately to deduct interest on up to $2.2 million of debt, while limiting married co-owners of a qualified residence to deduct interest on only half that (only up to $1.1 million of debt). A more logical inference is that the deduction was aimed at promoting home ownership for ordinary folks, not to help wealthy individuals purchase mansions that are encumbered with more than $1.1 million of debt.
The majority was not troubled by the marriage penalty incumbent in its interpretation:
Congress may very well have good reasons for allowing that result, and, in any event, Congress clearly singled out married couples for specific treatment when it explicitly provided lower debt limits for married couples yet, for whatever reason, did not similarly provide lower debt limits for unmarried co-owners.
Some Parting Thoughts
Practitioners should be mindful of informal guidance such as Chief Counsel advisory opinions and their role in resolving ambiguous issues. Despite some high-profile cases invalidating regs, it is much less likely that under Chevron a court will disagree with the IRS’s views as expressed in formal guidance. Sophy is a useful reminder that while the IRS has a much easier time issuing informal guidance courts are much less likely to defer to less formal agency interpretations like CCA’s or other guidance. This is especially true when there is a lack of multiple informal pronouncements and none of the sources thoroughly reviews the issue.
Labels attached to differing standards of deference are to me often frustratingly unhelpful. Despite lip service given to some deference given to informal guidance (expressed often as Skidmore deference), the sliding scale of deference to agencies is generally tilted toward “no deference” when the agency view is found in only one informal memo with a limited discussion of the issue. Court should reward an agency for a more transparent and thorough discussion of issues.
Judges face a more challenging issue when their views may differ from multiple informal agency sources, or if one source itself thoroughly discusses the issue. For example, if the CCA implicated in Sophy had a 20-page discussion of the issue along the lines found in the Tax Court and dissenting opinion would the Ninth Circuit have decided this case differently?
In part because of staffing problems, the IRS these days seems to be issuing less formal guidance. Its inability to issue formal guidance will have an impact in cases such as this. This is perhaps yet another cost of Congress’ decision to underfund the IRS. With more IRS positions staked out in informal guidance, I suspect we will be considering these often abstract deference questions in differing settings.