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June 09, 2016 At Court

Missing Scalia?

By Jasper L. Cummings, Jr., Alston & Bird, LLP, Charlotte, NC

So are we missing Scalia?

A. Not So Much (but Cert Petitions)

Speculation abounds on the impact on pending cases and major issues, such as abortion and the Second Amendment, of Justice Scalia’s departure from the Supreme Court. News reports have stated that several big cases, including one involving Dow Chemical, have been settled due to Justice Scalia’s death.1 Some have tried to focus that speculation on tax issues, but that effort faces two hurdles: first, Justice Scalia was not a featured author of majority tax opinions, and second, the Supreme Court has mostly gone out of the business of deciding tax cases, at least federal tax cases.2

For example, in the term that ended in 2015 the Court did not decide any federal tax case, and the current term is on track to repeat. Of course state tax cases fare somewhat better, because almost every good state tax dispute worth its SaLT (pun intended) presents a constitutional issue when it reaches the Supreme Court.3

Perhaps Scalia’s absence might have a more discernible impact on the Court’s decisions to grant the writ of certiorari in tax cases, which require four votes. But we can’t know how Scalia voted on those decisions in the past because the votes are not published, except when a Justice registers a rare dissent to a cert denial.

After his death the Court declined to hear three appeals from losses by banks and an insurance company in cases involving foreign tax credits in similar cross border transactions.4 It is regrettable that the Court did not choose to hear those cases because the lower courts are in dire need of guidance on the economic substance doctrine. Unfortunately, no professional association was willing to support the taxpayers in obtaining review and the only amici that asked the Court to review the taxpayer losses were The Chamber of Commerce of the United States and the Cato Institute.

Had Scalia voted on the petitions he might have been persuaded by those amici. In addition to their legal arguments, both of those organizations have long histories of praising Justice Scalia. The managing editor of The Cato Supreme Court Review wrote immediately after his death that “Unquestionably, Scalia’s ideas will still be discussed in 100 years, much in the same way we still discuss Joseph Story, Oliver Wendell Holmes, Jr., or Learned Hand.”5 The Chamber of Commerce has several times employed Justice Scalia’s son to represent it in litigation against federal regulations.6

So that leaves us to review what Scalia has said in his tax opinions, and some other, and to speculate on the effects of the removal of his dynamic from whatever tax cases the Court may choose to hear.

B. Not the “Tax Wreath” Wearer

Some Justices have been said to wear the Court’s “tax wreath,” symbolizing their special expertise and frequent appearance as writers of tax opinions, with Justice Brandeis being the most prominent.7 Some Justices had a professional expertise in tax before they joined the Court (Justice Jackson was IRS General Counsel and Assistant Attorney General for the Tax Division). Some Justices argued tax cases before the Court for clients (Charles Evans Hughes).8 Sometimes Justices wrote a lot of tax opinions but thought it meant they were in the dog house with the Chief (Justice Blackmun).9 Some so-called conservative Justices regularly ruled for the IRS (Justice Sutherland).10

Justice Scalia fit in none of those categories. To whatever extent Justice Scalia had an outsized impact on the law, it did not extend to tax laws. He authored relatively few tax opinions for the majority, and those that he did author were not of major significance. Rather, because he was an ideologue in areas that did not include tax, he probably was disinclined toward tax cases, except when they engaged his special interest in strict construction. The noted legal writer Jeffrey Toobin perceptively wrote of Scalia after his death:

Justice Scalia’s views—passionately felt and pungently expressed though they were—now seem like so many boats against the current, borne back ceaselessly into the past.11

C. The Majority Tax Opinions

Justice Scalia’s most useful majority opinion in a tax case was Commissioner v. Bollinger, 485 U.S. 340 (1988). The Court had gotten itself into a bind through its earlier opinion in National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949). That opinion purported to establish the “six National Carbide factors” for determining when to treat a corporation as the agent of its shareholders. Inevitably the 1949 opinion could not foresee all possibilities, and the 1988 opinion had to loosen up the factors.

Scalia wisely stated: “ … we decline to parse the text of National Carbide as though that were itself the governing statute.” Unfortunately, most lower court judges and the Service do not have the same understanding, and so tend to hang on every word of Supreme Court opinions, often leading to surprising results that the Court never intended.

More recently Scalia wrote the opinion most readers probably remember in United States v. Woods, 134 S. Ct. 557 (2013). Writing for a unanimous Court, Scalia gave the Service a total victory, holding (1) that the trial court had jurisdiction in a TEFRA partnership audit proceeding to impose the 40% valuation/basis misstatement penalty (on the partners), and (2) the penalty applies to a basis misstatement without regard to whether it was the result of a legal or factual error. In Woods, the legal error was that the partnership was found not to exist for tax purposes. 

Many have noted the unusual rise in the number of unanimous Supreme Court opinions generally, at least outside the politically charged cases. Woods fits into that pattern. It is possible that the rest of the Justices simply were not that interested, once they realized the taxpayer had pursued a “tax shelter,” and so they let Scalia have fun with statutory interpretation, one of his favorite hobbies. That was unfortunate, however, because Scalia so focused on statutory interpretation as it related to the precise penalty issue that his opinion reflected no understanding of, or interest in, the substantive law of the case.

Instead, Scalia reasoned that the trial court had jurisdiction over the 40% penalty issue under section 6226(f) (an issue the Court interjected into the appeal) because the penalty “relates to” the adjustment of the partnership item. Focusing on that statutory phrase (which Scalia said was “essentially indeterminate”) set Scalia off to the races with statutory interpretation. This is the opinion in which Scalia dissed Joint Committee Bluebooks as aids in interpretation.

Along the way the opinion made random references to shams and the economic substance doctrine in footnotes that indicate either a profound disinterest in those substantive subjects, or ignorance of the substantive tax law; they did not bode well for his future involvement in an economic substance case. Indeed, returning to the speculation about cert petitions above, Justice Scalia might have provided the necessary fourth vote to hear those foreign tax credit cases this term if he had remained on the court, based on his brush with analogous issues in Woods.

Woods illustrates the problems faced by a Justice who is Larger than Life. Because he was famous for knowing so much about statutory interpretation (he had just published a 500-plus page book on the subject), he tended to focus on that part of a case, while at the same time assuming he did not need to understand the other aspects of the case. Of course that can also be an aspect of appellate judging, but he took it too far in Woods.

Beyond these, Scalia wrote the majority opinion in only three other federal tax cases that are not memorable.

D. Concurrences

It is no surprise that not being a majority tax opinion writer, Scalia turns up often in concurrences and dissents. Frequently concurring with Justice Thomas, Scalia liked to disagree with the interpretive tools used by the majority to reach a result that he was willing to support for reasons satisfactory to himself.

Scalia did his best service in concurring in United States v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012) and providing the fifth vote for the taxpayer, although it would have been better if he had joined Justice Breyer’s plurality opinion. Scalia’s heart was in the right place, in that he correctly viewed the current case to be the same as The Colony Inc. v. Commissioner, 357 U.S. 28 (1958), on which taxpayers should have been able to rely. But he could not stomach Justice Breyer’s refinement of the Chevron Doctrine, mainly because Scalia seemed to be done with Chevron. He knew how to interpret statutes and did not need any doctrines to tell him what to do. After all, he wrote the book.

Breyer said Chevron deference was not due to the Treasury regulation that had tried to overturn the Supreme Court’s construction in Colony, because—wait for it—the Supreme Court had already interpreted the statute. Even though Scalia was not a fan of Chevron, he on occasion had expressed some willingness to give deference to the IRS interpretation of tax laws.12

Justice Scalia also wrote or joined concurrences declining to find a Commerce Clause violation in state tax cases, but complaining that there is no negative Commerce Clause.13 And he wrote concurrences to restate his distaste for reliance on legislative history and worse (mere testimony).14

E. Dissents and State Tax Cases

Justice Scalia dissented in Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787 (2015). The majority opinion is a deeply flawed ruling that a county tax could not apply to all of the income of its residents, without apportionment or tax credit. 15 It applied the “negative Commerce Clause.” Justice Scalia said he could not find a negative Commerce Clause in the Constitution. Better still, he joined Justice Ginsburg’s dissent, which was the only one of the opinions that accurately discussed the relevant precedents. This case, among all of those mentioned here, may best explain why Ginsburg and Scalia were “best buddies.” He would follow his convictions wherever they led, which sometimes coincided with Justices not appointed by Ronald Reagan.

But his record on the negative Commerce Clause was mixed. Scalia ruled for the taxpayer in New Energy Co. v. Limbach, 486 U.S. 269 (1988) where he cited and apparently relied on the negative Commerce Clause. Likewise in Ala. Dep’t of Revenue v. CSX Transp., Inc., 135 S. Ct. 1136 (2015), he cited “our negative Commerce Clause” cases. Again it is likely that the CSX opinion was assigned to him because it seemed to be a tedious technical statutory construction case, and Scalia resolved it that way, inventing a twist on ejusdem generis: it should not be applied to an “asymmetrical statute.”

The issue was whether CSX was discriminated against under the test of a peculiar federal statute and peculiar facts. Scalia uttered a phrase that may come back to haunt the Court: “There is simply no discrimination when there are roughly comparable taxes.” The Court has taken exactly the opposite view when evaluating allegedly compensatory taxes at the state level, and has never found any to be truly compensating but the sales and use taxes.16

Harper v. Va. Dep’t of Taxation, 509 U.S. 86 (1993) was a case involving an alleged state tax violation of intergovernmental immunity. The Court had decided the substantive issue in 1989 and the question was whether to apply its ruling retroactively to other states, which was projected to (and did) require states to cough up billions of dollars in refunds. Justice Scalia joined the majority approving retroactive application of its decision and wrote a concurrence. It appears that the concurrence was sparked by a desire to refute Justice O’Connor’s dissent. O’Connor was more sympathetic to the plight of the states. Scalia would have none of it and viewed prospective-only decisions as judicial activism.

Recently commentators have said that Chief Justice Rehnquist kept Justice Scalia from writing some majority opinions in earlier years just because he was trying to head off disagreements with Justice O’Connor. Evidently Justice Scalia did not have the same problems with Justice Ginsburg, an unlikely friend.

F. Conclusion

There are two principal characteristics of Justices that can be identified and may help predict how they might rule on particular cases: (1) interpretational style, and (2) political/policy ideology. As to the first, if a taxpayer had a 1 + 1 = 2 tax argument to make in the Supreme Court, Justice Scalia might be counted on to agree with the taxpayer. If the taxpayer was looking for equity, or for a purposive reading of the statute, probably not. As to the second, if the taxpayer was looking for a Justice sympathetic to taxpayers, Scalia was not necessarily your man; but if you could show administrative overreach, he might be with you.

The problem with so called strict construction and ignoring of legislative history and other interpretational tools and focusing on the text is that its appearance of value-free judging is a charade. It always involves a choice, only the choice is easier to hide. The best example is Justice Thomas’ opinion in PPL Corp. v. Commissioner, 133 S. Ct. 1897 (2013). He looked at a British tax and concluded surely it was an income tax because income was mentioned somewhere in the formula. But it could as well have been a tax on an income-producing property’s value, with the value determined with reference to the income produced, a standard technique for valuing property.17

The charade of objectivity is revealed by the fact that the Thomas opinion referred three times to the “Conservative government” that privatized PPL’s subsidiary, and 14 times to the “Labour government” or “Labour Party.” Perhaps Thomas was only copying the terminology used by the taxpayer, whose brief referred to “Labour” 15 times. In contrast, the United States’ brief referred to “Labour” only five times. So Justice Thomas (joined by all Justices but Sotomayor, who concurred) purported to argue that the Devil made me follow the facts, ma’am, just the facts.

At the end of the day, you would think that formalism of the Scalia and Thomas varieties would aid taxpayers, because taxpayers usually rely on form and technical compliance with the law. After all, that’s what Mrs. Gregory relied on. But at the real end of the day, a tax law cannot run on pure formalism. There are just too many things that can go wrong (see the section 367 regulations for a master class in administrative error). Therefore, while Justice Scalia might have been your man for a given tax appeal, he was not the tax law’s man. 

1 Apple's Antitrust Anticlimax, Wall St. J. (Mar, 8, 2016); Robert Cyran, Justice Scalia’s Death Prompts Dow Chemical to Settle Lawsuit, N.Y. Times (Feb. 26, 2016).

2 See Jasper L. Cummings, Jr., The Supreme Court's 2014 Term in Tax, 148 Tax Notes 1005 (Aug. 31, 2015); The Supreme Court's 2013 Term in Tax, 145 Tax Notes 65 (Oct. 6, 2014); Tax Decisions of the Supreme Court's 2012 Term, 141 Tax Notes 635 (Nov. 11, 2013); Tax Decisions of the Supreme Court's 2011 Term, 2012 Tax Notes Today 190-9 (Oct. 1, 2012); 222 Years of the Supreme Court, the Constitution and Federal Tax, 133 Tax Notes 1151 (November 28, 2011).

3 An exception is cases involving possible state violations of federal statutes limiting state taxes, such as the recent CSX decisions on the 4-R Act. Ala. Dep’t of Revenue v. CSX Transp. Inc., 135 S. Ct. 1136 (2015).

4 Petitions of Salem Financial, Inc., for which The Chamber of Commerce of the United States filed an amicus brief; American International Group, Inc., for which The Chamber of Commerce of the United States and Cato Institute filed amici briefs; The Bank of New York Mellon Corp., for which The Chamber of Commerce of the United States and Cato Institute filed amici briefs.

5 Trevor Burris, RIP: Was Justice Scalia the Last Great Supreme Court Justice?, Cato at Liberty (Feb. 13, 2016).

7 See Jasper L. Cummings, Jr., The Supreme Court’s Federal Tax Jurisprudence 79 (2010).

9 Resolution in Tribute to Harry A. Blackmun, 1999 J. Sup. Ct. U.S. 241, 254 (1999-2000) (large number of tax opinions indicated he was “in the dog house with the Chief”).

10 See, e.g., Gregory v. Helvering, 293 U.S. 465 (1935). Sutherland was one of the Four Horsemen who regularly ruled against New Deal legislation.

11 Jeffrey Toobin, Comment, Looking Back, The New Yorker (Feb. 29, 2016).

15 For discussion of why the ruling was wrong, see Jasper L. Cummings, Jr., Internal Consistency and the Federal Income Tax, 148 Tax Notes 99 (July 6, 2015).

17 See Jasper L. Cummings, Jr., Form, Substance, and PPL, 140 Tax Notes 365 (July 22, 2013).