Okay, number 12-1364. Petal Luma, ethics partners, LLC, Ronald Scott Vanderbite, a partner other than the tax matters partner versus commissioner of the Internal Revenue Service. Miss Openheimer, for the appellate, Mr. Robbins, for the appellate. Okay. I'll read it. I'll read it. One, two, three, four, five, six. Miss Openheimer, Joe Navarri. Joe Navarri. Joe Navarri. And I'm going to move to the commissioner. This is now the third appeal in this case. And it's the second set of briefs in this case. After was was decided, the government filed a motion for summary reversal. And Petal Luma didn't really object to that. They simply wrote a one paragraph response saying they agree that was his controlling. And they don't agree that it requires the resolution. We in statement of the tax court's decision, which is otherwise replete with faulty analysis and erroneous legal conclusions, but they never specified what they were
. So essentially, they agreed with us that the Petal Luma, that was decision is controlling. And now since there was new briefs were ordered, they have come up with two arguments that were not in either of their briefs in the prior two appeals or in the original briefs in this case. It's our position that their first argument, I mean, merely a jurisdictional challenge to a regulation is fired by the law of the case. And that their second argument, a challenge to validity of a regulation on the gross valuation, misstatement penalty, that they waive that argument by failing to raise it below. So can I ask you a framing question first? So for the second argument, you say waiver, but the first argument, you say law of the case. Correct. I take it the reason you don't say waiver is to the first argument because it too wasn't raised is that you believe that the validity of the regulation goes to jurisdiction. I believe that the validity of the regulation under 62, 33 does go to jurisdiction. I don't believe that the validity of the regulation under 66, 62 goes to jurisdiction. So that's why we're talking about law of the case for the first regulation. Why does that first regulation go to jurisdiction? And here's my question in particular. As I read Woods, and as I read the government's argument to the Supreme Court, I would, jurisdiction came from 6226F. Period. Correct. 62233 doesn't have anything to do with jurisdiction over the determination of chance partnership or the applicability of the penalty. And as 6233, as I read Woods, and as I read the statute, this would be the argument, I think, doesn't have anything to do with jurisdiction. And the regulation doesn't have anything to do with jurisdiction either. And if the regulation doesn't have anything to jurisdiction because jurisdiction already existed by virtue of 6226F, then the argument has to the reg have been raised
. Well, your argument would make my case a lot easier. 6233 basically adopts the provisions of Tafra in the case of a sham partnership. In other words, the question 6233 addresses is, so what rules apply if a partnership return is filed and is determined that then fact there's no partnership? Well, then the statute says that Tafra applies to the extent the commissioner's regulation, so provide it. But one of the provisions of Tafra is 6226F, which is a jurisdictional provision. I guess I understand that, but when you look at what the government argued that the Supreme Court was, which was a sham partnership case. Correct. 6233 just not even in the field of vision, nor is the regulation. And the Supreme Court never mentions 6333 in talking about jurisdiction. And the reason I think is because the argument we've made, if you look at 6226F, it already tells you that there's jurisdiction as to a couple things. One is the determination of whether it's a sham partnership because that's a partnership item. And the second is the applicability of the penalties because the applicability of penalties relate to an adjustment to a partnership item, namely the adjustment being that this is actually a sham partnership. And once you have that, you don't even look to 6333 or any regulations. Those might matter for other things that ensue from a determination of sham partnership. But just on the question of whether there's subject matter jurisdiction, 6226F already hits you all the way home. And the Supreme Court's decision in woods and the government's Supreme Court brief in woods seemed to support that line of thinking. Well, I mean that makes my case a lot easier if this. But you must have thought that there's a problem with that because you didn't make the argument. I don't know how you get to jurisdiction over jurisdiction
. It's true that whether something is a sham partnership is a partnership item and 6226F gives the court jurisdiction to determine partnership items. Okay, so far so good. So as to the determination that there's a sham partnership, you didn't even talk about 6333. You think that is done by 6226F? Right. In other words, to say that a partnership is a sham that is that's a partnership item and this court decided that in Petaluma too. And then, okay, so if you have, if you're with the line of reasoning at that point, then all that's left is the applicability of the penalty. And as to the applicability of the penalty, woods just says and I think it's just reading the text and it's basing it up if the United States is an argument in Supreme Court that that's 6226F2 because it's related to an adjustment to a partnership item. Well, to talk about the applicability of the penalties, it was never a position that that. If you're asking me now about the regulation under 6662. I'm asking you about the first issue. I can't keep the numbers straight in the line. The first regulation is three or one. 6333, the 6333 regulation. Why does that have anything to do with jurisdiction? And if it doesn't, the argument has been waived. Well, if it doesn't, the argument has been waived. It seems to me that it is arguable that it has something to do with jurisdiction simply because 6233 is like an umbrella. It's sort of like an umbrella statute that brings that applies all of the taprists' statutes in the case of a sham partnership. Do you know of any other situation in which the existence of subject matter jurisdiction for a court turns on whether an agency decides that it exists? No
. So it seems like we're already in a position where we're sort of in an odd, odd place. If we buy into the notion that the question whether a court has jurisdiction is up to the IRS to determine by regulation and they could just turn it on and off as they want to, by regulation. It seems like an odd. It seems somewhat odd to me. And if it doesn't exist anywhere else than as I understand your argument or at least back before that we're having now, you agreed that 6333 doesn't have anything to do for jurisdictional purposes with a predicate determination of whether there's a sham partnership that 6266 already does all the work on that. Well, the regulations on it actually it's the regulations under 60. It's the regulations under 6231 that determine what is the partnership item and the regulations under 6231 specify that certain legal and factual determinations are partnership items. And so this court, the eighth circuit and I believe the ninth circuit have determined that whether a partnership item is a sham partnership or not is the partnership item. So that is really done by regulation and not by statute. But it's the plenty of terms of the statute. Say that it says 6226F says that there's jurisdiction over partnership items. Right. It says that there's jurisdiction over partnership items and the applicability of any penalty. And if that language just seems to cover the jurisdictional issue here. Well, as your honor said, we have no objection to a holding of this court that the first regulation challenge does not a jurisdictional statute in the taxpayer waived it or the Pellum waived it by not raising it in one of the preceded. It's also our position that it's also our position that the second statute is a non jurisdictional statute and that that was waived by by now haven't been raised in the previous appeals. If the court is on board, I mean, I'm prepared to discuss the merits of the challenge to either of these regulations. Regulations if this court wishes me to do so
. Or I can or if this court is fully on board with the waiver argument, I can simply conclude my argument. Thank you. Thank you. The I.S. is never going to get to argue his reasonable cause he could fake. That's why we've been doing this litigation for the last I don't know how many years. The system is set up and I brief this on one or more of the briefs down below. The IRS has set the system up to include the taxpayers from ever making that argument. The way they do it is very simple. The individual reasonable cause and good faith defense is a partner item. It's dealt with at the partner level. And when the partnership determination is complete, the IRS will do a computational assessment. A computational adjustment. They will summarily assess the penalty. No statutory notice of deficiency. No prepayment form. No tax court
. No nothing. It's assessed and collected. The taxpayer has six months from the time of the computational adjustment to fully pay the 40% penalty and then bring a refund plan. They don't have the normal prepayment stuff. My guy can't afford it. He's never going to be able to challenge it. It has been suggested and other arguments. Oh well, he can do a collection due process. Right. He gets assessed and he does his collection due process under 630. No, he can't. Because once again, the commissioner has written out the code through regulations. Any ability by the taxpayer to make a merits challenge to the tax. So that's why we're here. Because if we can't get some kind of judicial determination prepayment judicial determination on that penalty, now we'll never get to do it. To your honest question. Following around here with my tax thing, the 63 6233 section I think is jurisdictional and it's not finessed by 622F. And I think the reason is and I can't put my fingers on it because I need a date
. 6226233 came into effect around 1986. It was two years after. Yeah. After I questioned is the version of 6226 after looking at a 1986 version. I suggest the answer to no. I haven't able to pull it up. You think 6226F changed in some material respect. Sure. And that's what 6233 was designed to do. It allowed the commissioner to change the existing state of the law. It was then. Sham partnership non-existent partnerships imaginary partnerships. The test was a very elaborate statute designed to cover real partnerships and real transactions. It was never contemplated that it would cover both. And how do you explain the fact that Woods was decided by the Supreme Court and there's no reference to 6233 at all. No one brought it up. But there is all kinds of references to 6226F. Sure
. That was the regulation that was in play. No one saw it. But there's a statute. The 6226F is a statute. And the Supreme Court, as I look at Woods, reads that statute to confer jurisdiction. It doesn't think that you did anything else. So the fact that 6233 comes along later and has some stuff in it. As I read Woods, the Supreme Court didn't think that that mattered. They thought you got jurisdiction already by the virtue of 6226F. Yes. And then they would be correct if in fact 6226F were in place in the time frame we're dealing with. So you think if 6226F did not change in a material respect. I'll concede report. You think that I didn't think of that. But that'd be my answer. But I can't prove it because I need to look at historical picture. But I'd be surprised if the word sham appeared back in 1985 for 6226F. But it could be wrong
. Well, I don't think sham's ever appeared. Has it the word sham? No. Well, they do. Word sham appears when you're dealing with partnership items. And I believe when they list them in the reds, they flag that. But in terms of the stash of language, right? No, right. 6226F didn't before and doesn't now use the word sham. But your position is that if 6226F didn't change in any material respect, then the reading that I'm suggesting is a possible reading. Well, you have to use the. Assuming that the underlying regulations are the same as well. Because I guess I should verify. If 6226F were identical at the time, it clearly didn't cover sham transactions. Sam partnerships. It didn't. That for did not apply to sham partnerships prior to 6233. Just did. And then I get back to my question. The Supreme Court authors would see an anonymous decision
. 6233 just doesn't even. It isn't even in the decision. All that's in there is 6226F. Right. So they're looking at the same words. Let's just assume that they're the same words. 6226F has the same words. Okay. The position you're taking is that if you look at those words, it just doesn't deal with sham partnerships. For right, if you look at woods, it does deal with sham partnerships. Because they're going to get the exact same words and they're saying there's your stations to determine a whether this is a sham partnership and be the applicability of penalties that ensue from the determination of a sham partnership. All they're looking at is the words of 6226F. Okay. And then I circle back to my original comment. Is nobody brought it up? And they can bring it up in any time. Is the way I read it. I don't understand how bringing it up even matters. Because if you bring up another statute, 6233, I think if you read this course of sitting in woods, what they would say is, I don't even care about 6233. Because I'm looking at this one permit in 6226F, which is the organic and interstictional statute. I'm reading these words and I'm finding that interstiction exists. Unless you're telling me that 6233 turns off to a section, which nobody's making that argument. Then we don't even care about 6233. All we care about is 6226F. You have to care about 6223, 6233 because it's the only vehicle in the tempera that allows the courts to deal with imaginary, sham, non-existent partnerships. Without that, you can't do it. I understand that you're saying that. I guess all I'm saying is, I don't read the Supreme Court of Woods to have thought that. Because they don't even refer. Woods was a sham partnership case. Yes. Right. And then holding a woods is that there's your restriction. Yes. They never looked at 6233. But they thought there was your restriction based on 6226F and a sham partnership case. So how can it be that you have to have 6233 to get your restriction? Because that's what the historical evolution of tetra plainly shows
. Because I'm looking at this one permit in 6226F, which is the organic and interstictional statute. I'm reading these words and I'm finding that interstiction exists. Unless you're telling me that 6233 turns off to a section, which nobody's making that argument. Then we don't even care about 6233. All we care about is 6226F. You have to care about 6223, 6233 because it's the only vehicle in the tempera that allows the courts to deal with imaginary, sham, non-existent partnerships. Without that, you can't do it. I understand that you're saying that. I guess all I'm saying is, I don't read the Supreme Court of Woods to have thought that. Because they don't even refer. Woods was a sham partnership case. Yes. Right. And then holding a woods is that there's your restriction. Yes. They never looked at 6233. But they thought there was your restriction based on 6226F and a sham partnership case. So how can it be that you have to have 6233 to get your restriction? Because that's what the historical evolution of tetra plainly shows. That's why. Without 6233, I'm going to have to say, hold it up here. If I have to say, hold on. Without 6233, you can't do it. You cannot do what we're doing here. I guess the Supreme Court seemed to think otherwise. Well, it's unless somebody... They didn't know. They missed that one. They caught the slide by zero. But they didn't catch that one. That's not surprising. This is tricky stuff. Well, I had the government. I think even also, importantly, the government never relied on 6233 and it's reached to the Supreme Court. So it never suggested that 6233 was relevant to jurisdiction in a sham partnership case
. That's why. Without 6233, I'm going to have to say, hold it up here. If I have to say, hold on. Without 6233, you can't do it. You cannot do what we're doing here. I guess the Supreme Court seemed to think otherwise. Well, it's unless somebody... They didn't know. They missed that one. They caught the slide by zero. But they didn't catch that one. That's not surprising. This is tricky stuff. Well, I had the government. I think even also, importantly, the government never relied on 6233 and it's reached to the Supreme Court. So it never suggested that 6233 was relevant to jurisdiction in a sham partnership case. It said all the work was being done by 6226F. And assuming that 6233, which is the enabling statute, the last effort to deal with sham partnerships and imaginary partnerships and so forth, that triggers the ability of 6226F to deal with them. In the absence of 6233, you couldn't do it. So then, under your view, the agency could decide that there isn't jurisdiction to deal with sham partnerships. Today, sure. Just by issuing a regulation that says there's no longer any jurisdiction to do that. Even though there has been. So, currently there is jurisdiction to deal with sham partnerships and there's regulations on it. Right. So under your reading of it, the agency tomorrow could adopt a regulation that says, yeah, we've had jurisdiction. We've allowed for jurisdiction over sham partnerships by a regulation, but now we're turning that switch off. There's no longer any jurisdiction to deal with sham partnerships. I think Congress commands them under 6233 to provide regulation. No, it says subject to regulation. And I think the government agrees with this that if you think that 6233 is germane to jurisdiction, then it's a jurisdictional switch that can be turned on and off by the IRS. They can turn it on if they want to. They can turn it off if they want to. Well, yes, but I don't think they've ever ignored a command like that
. It said all the work was being done by 6226F. And assuming that 6233, which is the enabling statute, the last effort to deal with sham partnerships and imaginary partnerships and so forth, that triggers the ability of 6226F to deal with them. In the absence of 6233, you couldn't do it. So then, under your view, the agency could decide that there isn't jurisdiction to deal with sham partnerships. Today, sure. Just by issuing a regulation that says there's no longer any jurisdiction to do that. Even though there has been. So, currently there is jurisdiction to deal with sham partnerships and there's regulations on it. Right. So under your reading of it, the agency tomorrow could adopt a regulation that says, yeah, we've had jurisdiction. We've allowed for jurisdiction over sham partnerships by a regulation, but now we're turning that switch off. There's no longer any jurisdiction to deal with sham partnerships. I think Congress commands them under 6233 to provide regulation. No, it says subject to regulation. And I think the government agrees with this that if you think that 6233 is germane to jurisdiction, then it's a jurisdictional switch that can be turned on and off by the IRS. They can turn it on if they want to. They can turn it off if they want to. Well, yes, but I don't think they've ever ignored a command like that. There's no command that says to us. Well, they, it's quite clear Congress wants them to do regulations. But those regulations can point in any direction. Sure. So the regulation could say there's no jurisdiction. In the specific areas, I could say that, sure. I don't think they can just blatantly, it would be very unpolite, unpolitec for them to blatantly say, ah, we're not going to do it. Congress said, bitch, they don't do that. They will try to do what they can do to bring the sham partnerships under the Tefer umbrella. And it's kind of a difficult thing to do because it's not designed to sham partnerships with, you know, they plug them in here and there. Anyway, where was I? That 6233, if you're correct, there's no argument there for me, but it seems pretty clear to me that that is a condition preceded to our case here. And they, and it's also when you look at 6233, it also seems clear to me that it's what used to be called a legislative regulation. But it's not an interpretive regulation. It's the legislative regulation, which prior to Mayo was sort of a higher level regulation. And here it requires additional acts by the IRS and the APA, which they didn't do. And that's pretty fairly clearly set out. And it just seems to me that it's always interesting to me that when the IRS doesn't follow the law, it's like, oh, well, who cares what donors make? Why are we talking about this? If there were a taxpayer making arguments like that, they would be crucified. Why doesn't the IRS have to follow the law? They didn't
. There's no command that says to us. Well, they, it's quite clear Congress wants them to do regulations. But those regulations can point in any direction. Sure. So the regulation could say there's no jurisdiction. In the specific areas, I could say that, sure. I don't think they can just blatantly, it would be very unpolite, unpolitec for them to blatantly say, ah, we're not going to do it. Congress said, bitch, they don't do that. They will try to do what they can do to bring the sham partnerships under the Tefer umbrella. And it's kind of a difficult thing to do because it's not designed to sham partnerships with, you know, they plug them in here and there. Anyway, where was I? That 6233, if you're correct, there's no argument there for me, but it seems pretty clear to me that that is a condition preceded to our case here. And they, and it's also when you look at 6233, it also seems clear to me that it's what used to be called a legislative regulation. But it's not an interpretive regulation. It's the legislative regulation, which prior to Mayo was sort of a higher level regulation. And here it requires additional acts by the IRS and the APA, which they didn't do. And that's pretty fairly clearly set out. And it just seems to me that it's always interesting to me that when the IRS doesn't follow the law, it's like, oh, well, who cares what donors make? Why are we talking about this? If there were a taxpayer making arguments like that, they would be crucified. Why doesn't the IRS have to follow the law? They didn't. Their regulation is no good. Temporary regulation is no good. It's sat around for 14 years before they finally finalized it. And that is the regulation that enables Tethra to apply to sham partnerships, not existing partnerships, imaginary partnerships. And so it was just my point. I've realized that there's not a single case I can find where the courts have torqued a tax statute for failure to comply with the APA, although they've certainly said that things about that kind of behavior. But I just make the point that why shouldn't they be required? They didn't do it. So the regs know good, the temporary regs know good, and we're out of it completely under Tesla. I think the more fun argument, which is the clever argument, and I didn't think it out, Professor Grul, who's in the audience thought about, is the divide by zero argument on the 400%. The code states a formula that simply does not apply to a zero value. How do you overcome the government's waiver argument there? You acknowledge and you breathe. This is the first time you brought that up. Yes, I agree with this the first time. My response to that is it's jurisdiction. Let me explain that. The IRS has no jurisdiction to impose a 40% penalty without that section in 622, 622. I'm sorry. Whatever the third section
. Their regulation is no good. Temporary regulation is no good. It's sat around for 14 years before they finally finalized it. And that is the regulation that enables Tethra to apply to sham partnerships, not existing partnerships, imaginary partnerships. And so it was just my point. I've realized that there's not a single case I can find where the courts have torqued a tax statute for failure to comply with the APA, although they've certainly said that things about that kind of behavior. But I just make the point that why shouldn't they be required? They didn't do it. So the regs know good, the temporary regs know good, and we're out of it completely under Tesla. I think the more fun argument, which is the clever argument, and I didn't think it out, Professor Grul, who's in the audience thought about, is the divide by zero argument on the 400%. The code states a formula that simply does not apply to a zero value. How do you overcome the government's waiver argument there? You acknowledge and you breathe. This is the first time you brought that up. Yes, I agree with this the first time. My response to that is it's jurisdiction. Let me explain that. The IRS has no jurisdiction to impose a 40% penalty without that section in 622, 622. I'm sorry. Whatever the third section. The 40% penalty section without that they can't do it. They couldn't just pop up and start imposing a 40% penalty. They need that statute 6662. They need that statute to do it. Without a statute they have no jurisdiction to do it. Period. They put this statute in 40% penalty, and it does not cover a zero situation. There's no jurisdiction for them to have a 40% penalty with a zero value asset, if you will. So if they had an asset of $1, though it kicks in. That doesn't that seem sort of like being so- The code is replete with outcomes. It seems silly, but they're there to be followed. You know, that doesn't shock me one bit. Well, we do have cannons of interpretation to talk about absurd results and things like that. It's not absurd. It's true. It's not absurd. If you had somebody who had claimed a $25 million value and it turned out that it was worth $1, it's supposed to zero that those two would be treated differently. That's not an absurd result
. The 40% penalty section without that they can't do it. They couldn't just pop up and start imposing a 40% penalty. They need that statute 6662. They need that statute to do it. Without a statute they have no jurisdiction to do it. Period. They put this statute in 40% penalty, and it does not cover a zero situation. There's no jurisdiction for them to have a 40% penalty with a zero value asset, if you will. So if they had an asset of $1, though it kicks in. That doesn't that seem sort of like being so- The code is replete with outcomes. It seems silly, but they're there to be followed. You know, that doesn't shock me one bit. Well, we do have cannons of interpretation to talk about absurd results and things like that. It's not absurd. It's true. It's not absurd. If you had somebody who had claimed a $25 million value and it turned out that it was worth $1, it's supposed to zero that those two would be treated differently. That's not an absurd result. That's not an absurd result. I don't have a absurd result to me because it's true. All the, in fact, the government obviously knew that there were a problem here because they tried to backstop it with a regulation. They said, oh, well, if it's zero, we'll consider it to be 400%. That was their response to that. So they thought it was a problem. They didn't think it was ridiculous. They tried to carve it up. Well, that doesn't work. Why doesn't it work? Because it's not true. You can't have a situation where something is not true in the statute and try to make it true with the regulation. For example, suppose there was a statute that regulated chickens and they decided they wanted to use it to regulate automobiles. They couldn't say an automobile would be considered a chicken because it's not. And they, in a similar way here, they can't say that a zero value will be considered 400% of something because it's not. All right, Mr. Robbins, we have your argument. Thank you. Okay
. That's not an absurd result. I don't have a absurd result to me because it's true. All the, in fact, the government obviously knew that there were a problem here because they tried to backstop it with a regulation. They said, oh, well, if it's zero, we'll consider it to be 400%. That was their response to that. So they thought it was a problem. They didn't think it was ridiculous. They tried to carve it up. Well, that doesn't work. Why doesn't it work? Because it's not true. You can't have a situation where something is not true in the statute and try to make it true with the regulation. For example, suppose there was a statute that regulated chickens and they decided they wanted to use it to regulate automobiles. They couldn't say an automobile would be considered a chicken because it's not. And they, in a similar way here, they can't say that a zero value will be considered 400% of something because it's not. All right, Mr. Robbins, we have your argument. Thank you. Okay. Business, up and high, but have any time. The regulation under 66, 62 is not a jurisdictional regulation. It doesn't go to jurisdiction when we refer to a jurisdictional statute. We mean something going to the power of the court, not the power of the IRS. So, Pateluma incorrectly characterizes Section 66, 62 as a jurisdictional statute. It doesn't go to the power of the court to decide a case. It simply goes to the right of the IRS to impose the penalty. Since 66, 62 is not a jurisdictional statute. The regulations under it have nothing to do with jurisdiction. And we go back to our original argument that Pateluma waived any challenge to the regulation by failing to rely on it, by failing to challenge the validity of the regulation and either of its two priorities. So, you address the merits of the argument nonetheless? Yes, I will. The merits of the argument. The regulation under Chevron, the regulation is entitled to Chevron deference if it's a reasonable interpretation of statute. And I guess I would say that perhaps the situation of zero basis is a gap in the statute that under Chevron, Treasury was authorized to fill by regulation. And it did fill it by saying that if there's a situation where an adjusted basis or value is zero, it shall be considered to be a substantial, a gross valuation of the statement penalty within the meaning of the regulation. And I think this regulation is consistent with the congressional intent to penalize those overstatements that are greater in amount. In other words, there are three possible scenarios, a situation where, where, well, is it three possible situations, or two, or maybe more possible situations, a statute penalizes, but it was a 20% penalty where there's over stated basis of 200% that applies the gross valuation of the statement penalty. So, are we to assume that in the situation of zero basis Congress intended there to be no gross over valuation penalty at all? I think that's not consistent with what the statute said
. Business, up and high, but have any time. The regulation under 66, 62 is not a jurisdictional regulation. It doesn't go to jurisdiction when we refer to a jurisdictional statute. We mean something going to the power of the court, not the power of the IRS. So, Pateluma incorrectly characterizes Section 66, 62 as a jurisdictional statute. It doesn't go to the power of the court to decide a case. It simply goes to the right of the IRS to impose the penalty. Since 66, 62 is not a jurisdictional statute. The regulations under it have nothing to do with jurisdiction. And we go back to our original argument that Pateluma waived any challenge to the regulation by failing to rely on it, by failing to challenge the validity of the regulation and either of its two priorities. So, you address the merits of the argument nonetheless? Yes, I will. The merits of the argument. The regulation under Chevron, the regulation is entitled to Chevron deference if it's a reasonable interpretation of statute. And I guess I would say that perhaps the situation of zero basis is a gap in the statute that under Chevron, Treasury was authorized to fill by regulation. And it did fill it by saying that if there's a situation where an adjusted basis or value is zero, it shall be considered to be a substantial, a gross valuation of the statement penalty within the meaning of the regulation. And I think this regulation is consistent with the congressional intent to penalize those overstatements that are greater in amount. In other words, there are three possible scenarios, a situation where, where, well, is it three possible situations, or two, or maybe more possible situations, a statute penalizes, but it was a 20% penalty where there's over stated basis of 200% that applies the gross valuation of the statement penalty. So, are we to assume that in the situation of zero basis Congress intended there to be no gross over valuation penalty at all? I think that's not consistent with what the statute said. And the second circuit in the case of Gilman versus Commissioner said the application of penalty in a sham transaction situation is consistent with the congressional objective of listening tax shelter abuse. In this situation, the overstated basis amounted to $25 million. If the basis stated on the return was one, you would have had an overstated basis of 25 million%. So, I think the facts of this case illustrate the reasonableness of the commissioner's interpretation. As this court said in the case of Lee's summit, there is no perfect solution to the problem of multiplying by zero. Likewise, there's no perfect solution to the problem of dividing by zero. I urge this court to conclude that the interpretation of Treasury was a reasonable interpretation that, and that the regulation is entitled to Shabron de France. Thank you.
Okay, number 12-1364. Petal Luma, ethics partners, LLC, Ronald Scott Vanderbite, a partner other than the tax matters partner versus commissioner of the Internal Revenue Service. Miss Openheimer, for the appellate, Mr. Robbins, for the appellate. Okay. I'll read it. I'll read it. One, two, three, four, five, six. Miss Openheimer, Joe Navarri. Joe Navarri. Joe Navarri. And I'm going to move to the commissioner. This is now the third appeal in this case. And it's the second set of briefs in this case. After was was decided, the government filed a motion for summary reversal. And Petal Luma didn't really object to that. They simply wrote a one paragraph response saying they agree that was his controlling. And they don't agree that it requires the resolution. We in statement of the tax court's decision, which is otherwise replete with faulty analysis and erroneous legal conclusions, but they never specified what they were. So essentially, they agreed with us that the Petal Luma, that was decision is controlling. And now since there was new briefs were ordered, they have come up with two arguments that were not in either of their briefs in the prior two appeals or in the original briefs in this case. It's our position that their first argument, I mean, merely a jurisdictional challenge to a regulation is fired by the law of the case. And that their second argument, a challenge to validity of a regulation on the gross valuation, misstatement penalty, that they waive that argument by failing to raise it below. So can I ask you a framing question first? So for the second argument, you say waiver, but the first argument, you say law of the case. Correct. I take it the reason you don't say waiver is to the first argument because it too wasn't raised is that you believe that the validity of the regulation goes to jurisdiction. I believe that the validity of the regulation under 62, 33 does go to jurisdiction. I don't believe that the validity of the regulation under 66, 62 goes to jurisdiction. So that's why we're talking about law of the case for the first regulation. Why does that first regulation go to jurisdiction? And here's my question in particular. As I read Woods, and as I read the government's argument to the Supreme Court, I would, jurisdiction came from 6226F. Period. Correct. 62233 doesn't have anything to do with jurisdiction over the determination of chance partnership or the applicability of the penalty. And as 6233, as I read Woods, and as I read the statute, this would be the argument, I think, doesn't have anything to do with jurisdiction. And the regulation doesn't have anything to do with jurisdiction either. And if the regulation doesn't have anything to jurisdiction because jurisdiction already existed by virtue of 6226F, then the argument has to the reg have been raised. Well, your argument would make my case a lot easier. 6233 basically adopts the provisions of Tafra in the case of a sham partnership. In other words, the question 6233 addresses is, so what rules apply if a partnership return is filed and is determined that then fact there's no partnership? Well, then the statute says that Tafra applies to the extent the commissioner's regulation, so provide it. But one of the provisions of Tafra is 6226F, which is a jurisdictional provision. I guess I understand that, but when you look at what the government argued that the Supreme Court was, which was a sham partnership case. Correct. 6233 just not even in the field of vision, nor is the regulation. And the Supreme Court never mentions 6333 in talking about jurisdiction. And the reason I think is because the argument we've made, if you look at 6226F, it already tells you that there's jurisdiction as to a couple things. One is the determination of whether it's a sham partnership because that's a partnership item. And the second is the applicability of the penalties because the applicability of penalties relate to an adjustment to a partnership item, namely the adjustment being that this is actually a sham partnership. And once you have that, you don't even look to 6333 or any regulations. Those might matter for other things that ensue from a determination of sham partnership. But just on the question of whether there's subject matter jurisdiction, 6226F already hits you all the way home. And the Supreme Court's decision in woods and the government's Supreme Court brief in woods seemed to support that line of thinking. Well, I mean that makes my case a lot easier if this. But you must have thought that there's a problem with that because you didn't make the argument. I don't know how you get to jurisdiction over jurisdiction. It's true that whether something is a sham partnership is a partnership item and 6226F gives the court jurisdiction to determine partnership items. Okay, so far so good. So as to the determination that there's a sham partnership, you didn't even talk about 6333. You think that is done by 6226F? Right. In other words, to say that a partnership is a sham that is that's a partnership item and this court decided that in Petaluma too. And then, okay, so if you have, if you're with the line of reasoning at that point, then all that's left is the applicability of the penalty. And as to the applicability of the penalty, woods just says and I think it's just reading the text and it's basing it up if the United States is an argument in Supreme Court that that's 6226F2 because it's related to an adjustment to a partnership item. Well, to talk about the applicability of the penalties, it was never a position that that. If you're asking me now about the regulation under 6662. I'm asking you about the first issue. I can't keep the numbers straight in the line. The first regulation is three or one. 6333, the 6333 regulation. Why does that have anything to do with jurisdiction? And if it doesn't, the argument has been waived. Well, if it doesn't, the argument has been waived. It seems to me that it is arguable that it has something to do with jurisdiction simply because 6233 is like an umbrella. It's sort of like an umbrella statute that brings that applies all of the taprists' statutes in the case of a sham partnership. Do you know of any other situation in which the existence of subject matter jurisdiction for a court turns on whether an agency decides that it exists? No. So it seems like we're already in a position where we're sort of in an odd, odd place. If we buy into the notion that the question whether a court has jurisdiction is up to the IRS to determine by regulation and they could just turn it on and off as they want to, by regulation. It seems like an odd. It seems somewhat odd to me. And if it doesn't exist anywhere else than as I understand your argument or at least back before that we're having now, you agreed that 6333 doesn't have anything to do for jurisdictional purposes with a predicate determination of whether there's a sham partnership that 6266 already does all the work on that. Well, the regulations on it actually it's the regulations under 60. It's the regulations under 6231 that determine what is the partnership item and the regulations under 6231 specify that certain legal and factual determinations are partnership items. And so this court, the eighth circuit and I believe the ninth circuit have determined that whether a partnership item is a sham partnership or not is the partnership item. So that is really done by regulation and not by statute. But it's the plenty of terms of the statute. Say that it says 6226F says that there's jurisdiction over partnership items. Right. It says that there's jurisdiction over partnership items and the applicability of any penalty. And if that language just seems to cover the jurisdictional issue here. Well, as your honor said, we have no objection to a holding of this court that the first regulation challenge does not a jurisdictional statute in the taxpayer waived it or the Pellum waived it by not raising it in one of the preceded. It's also our position that it's also our position that the second statute is a non jurisdictional statute and that that was waived by by now haven't been raised in the previous appeals. If the court is on board, I mean, I'm prepared to discuss the merits of the challenge to either of these regulations. Regulations if this court wishes me to do so. Or I can or if this court is fully on board with the waiver argument, I can simply conclude my argument. Thank you. Thank you. The I.S. is never going to get to argue his reasonable cause he could fake. That's why we've been doing this litigation for the last I don't know how many years. The system is set up and I brief this on one or more of the briefs down below. The IRS has set the system up to include the taxpayers from ever making that argument. The way they do it is very simple. The individual reasonable cause and good faith defense is a partner item. It's dealt with at the partner level. And when the partnership determination is complete, the IRS will do a computational assessment. A computational adjustment. They will summarily assess the penalty. No statutory notice of deficiency. No prepayment form. No tax court. No nothing. It's assessed and collected. The taxpayer has six months from the time of the computational adjustment to fully pay the 40% penalty and then bring a refund plan. They don't have the normal prepayment stuff. My guy can't afford it. He's never going to be able to challenge it. It has been suggested and other arguments. Oh well, he can do a collection due process. Right. He gets assessed and he does his collection due process under 630. No, he can't. Because once again, the commissioner has written out the code through regulations. Any ability by the taxpayer to make a merits challenge to the tax. So that's why we're here. Because if we can't get some kind of judicial determination prepayment judicial determination on that penalty, now we'll never get to do it. To your honest question. Following around here with my tax thing, the 63 6233 section I think is jurisdictional and it's not finessed by 622F. And I think the reason is and I can't put my fingers on it because I need a date. 6226233 came into effect around 1986. It was two years after. Yeah. After I questioned is the version of 6226 after looking at a 1986 version. I suggest the answer to no. I haven't able to pull it up. You think 6226F changed in some material respect. Sure. And that's what 6233 was designed to do. It allowed the commissioner to change the existing state of the law. It was then. Sham partnership non-existent partnerships imaginary partnerships. The test was a very elaborate statute designed to cover real partnerships and real transactions. It was never contemplated that it would cover both. And how do you explain the fact that Woods was decided by the Supreme Court and there's no reference to 6233 at all. No one brought it up. But there is all kinds of references to 6226F. Sure. That was the regulation that was in play. No one saw it. But there's a statute. The 6226F is a statute. And the Supreme Court, as I look at Woods, reads that statute to confer jurisdiction. It doesn't think that you did anything else. So the fact that 6233 comes along later and has some stuff in it. As I read Woods, the Supreme Court didn't think that that mattered. They thought you got jurisdiction already by the virtue of 6226F. Yes. And then they would be correct if in fact 6226F were in place in the time frame we're dealing with. So you think if 6226F did not change in a material respect. I'll concede report. You think that I didn't think of that. But that'd be my answer. But I can't prove it because I need to look at historical picture. But I'd be surprised if the word sham appeared back in 1985 for 6226F. But it could be wrong. Well, I don't think sham's ever appeared. Has it the word sham? No. Well, they do. Word sham appears when you're dealing with partnership items. And I believe when they list them in the reds, they flag that. But in terms of the stash of language, right? No, right. 6226F didn't before and doesn't now use the word sham. But your position is that if 6226F didn't change in any material respect, then the reading that I'm suggesting is a possible reading. Well, you have to use the. Assuming that the underlying regulations are the same as well. Because I guess I should verify. If 6226F were identical at the time, it clearly didn't cover sham transactions. Sam partnerships. It didn't. That for did not apply to sham partnerships prior to 6233. Just did. And then I get back to my question. The Supreme Court authors would see an anonymous decision. 6233 just doesn't even. It isn't even in the decision. All that's in there is 6226F. Right. So they're looking at the same words. Let's just assume that they're the same words. 6226F has the same words. Okay. The position you're taking is that if you look at those words, it just doesn't deal with sham partnerships. For right, if you look at woods, it does deal with sham partnerships. Because they're going to get the exact same words and they're saying there's your stations to determine a whether this is a sham partnership and be the applicability of penalties that ensue from the determination of a sham partnership. All they're looking at is the words of 6226F. Okay. And then I circle back to my original comment. Is nobody brought it up? And they can bring it up in any time. Is the way I read it. I don't understand how bringing it up even matters. Because if you bring up another statute, 6233, I think if you read this course of sitting in woods, what they would say is, I don't even care about 6233. Because I'm looking at this one permit in 6226F, which is the organic and interstictional statute. I'm reading these words and I'm finding that interstiction exists. Unless you're telling me that 6233 turns off to a section, which nobody's making that argument. Then we don't even care about 6233. All we care about is 6226F. You have to care about 6223, 6233 because it's the only vehicle in the tempera that allows the courts to deal with imaginary, sham, non-existent partnerships. Without that, you can't do it. I understand that you're saying that. I guess all I'm saying is, I don't read the Supreme Court of Woods to have thought that. Because they don't even refer. Woods was a sham partnership case. Yes. Right. And then holding a woods is that there's your restriction. Yes. They never looked at 6233. But they thought there was your restriction based on 6226F and a sham partnership case. So how can it be that you have to have 6233 to get your restriction? Because that's what the historical evolution of tetra plainly shows. That's why. Without 6233, I'm going to have to say, hold it up here. If I have to say, hold on. Without 6233, you can't do it. You cannot do what we're doing here. I guess the Supreme Court seemed to think otherwise. Well, it's unless somebody... They didn't know. They missed that one. They caught the slide by zero. But they didn't catch that one. That's not surprising. This is tricky stuff. Well, I had the government. I think even also, importantly, the government never relied on 6233 and it's reached to the Supreme Court. So it never suggested that 6233 was relevant to jurisdiction in a sham partnership case. It said all the work was being done by 6226F. And assuming that 6233, which is the enabling statute, the last effort to deal with sham partnerships and imaginary partnerships and so forth, that triggers the ability of 6226F to deal with them. In the absence of 6233, you couldn't do it. So then, under your view, the agency could decide that there isn't jurisdiction to deal with sham partnerships. Today, sure. Just by issuing a regulation that says there's no longer any jurisdiction to do that. Even though there has been. So, currently there is jurisdiction to deal with sham partnerships and there's regulations on it. Right. So under your reading of it, the agency tomorrow could adopt a regulation that says, yeah, we've had jurisdiction. We've allowed for jurisdiction over sham partnerships by a regulation, but now we're turning that switch off. There's no longer any jurisdiction to deal with sham partnerships. I think Congress commands them under 6233 to provide regulation. No, it says subject to regulation. And I think the government agrees with this that if you think that 6233 is germane to jurisdiction, then it's a jurisdictional switch that can be turned on and off by the IRS. They can turn it on if they want to. They can turn it off if they want to. Well, yes, but I don't think they've ever ignored a command like that. There's no command that says to us. Well, they, it's quite clear Congress wants them to do regulations. But those regulations can point in any direction. Sure. So the regulation could say there's no jurisdiction. In the specific areas, I could say that, sure. I don't think they can just blatantly, it would be very unpolite, unpolitec for them to blatantly say, ah, we're not going to do it. Congress said, bitch, they don't do that. They will try to do what they can do to bring the sham partnerships under the Tefer umbrella. And it's kind of a difficult thing to do because it's not designed to sham partnerships with, you know, they plug them in here and there. Anyway, where was I? That 6233, if you're correct, there's no argument there for me, but it seems pretty clear to me that that is a condition preceded to our case here. And they, and it's also when you look at 6233, it also seems clear to me that it's what used to be called a legislative regulation. But it's not an interpretive regulation. It's the legislative regulation, which prior to Mayo was sort of a higher level regulation. And here it requires additional acts by the IRS and the APA, which they didn't do. And that's pretty fairly clearly set out. And it just seems to me that it's always interesting to me that when the IRS doesn't follow the law, it's like, oh, well, who cares what donors make? Why are we talking about this? If there were a taxpayer making arguments like that, they would be crucified. Why doesn't the IRS have to follow the law? They didn't. Their regulation is no good. Temporary regulation is no good. It's sat around for 14 years before they finally finalized it. And that is the regulation that enables Tethra to apply to sham partnerships, not existing partnerships, imaginary partnerships. And so it was just my point. I've realized that there's not a single case I can find where the courts have torqued a tax statute for failure to comply with the APA, although they've certainly said that things about that kind of behavior. But I just make the point that why shouldn't they be required? They didn't do it. So the regs know good, the temporary regs know good, and we're out of it completely under Tesla. I think the more fun argument, which is the clever argument, and I didn't think it out, Professor Grul, who's in the audience thought about, is the divide by zero argument on the 400%. The code states a formula that simply does not apply to a zero value. How do you overcome the government's waiver argument there? You acknowledge and you breathe. This is the first time you brought that up. Yes, I agree with this the first time. My response to that is it's jurisdiction. Let me explain that. The IRS has no jurisdiction to impose a 40% penalty without that section in 622, 622. I'm sorry. Whatever the third section. The 40% penalty section without that they can't do it. They couldn't just pop up and start imposing a 40% penalty. They need that statute 6662. They need that statute to do it. Without a statute they have no jurisdiction to do it. Period. They put this statute in 40% penalty, and it does not cover a zero situation. There's no jurisdiction for them to have a 40% penalty with a zero value asset, if you will. So if they had an asset of $1, though it kicks in. That doesn't that seem sort of like being so- The code is replete with outcomes. It seems silly, but they're there to be followed. You know, that doesn't shock me one bit. Well, we do have cannons of interpretation to talk about absurd results and things like that. It's not absurd. It's true. It's not absurd. If you had somebody who had claimed a $25 million value and it turned out that it was worth $1, it's supposed to zero that those two would be treated differently. That's not an absurd result. That's not an absurd result. I don't have a absurd result to me because it's true. All the, in fact, the government obviously knew that there were a problem here because they tried to backstop it with a regulation. They said, oh, well, if it's zero, we'll consider it to be 400%. That was their response to that. So they thought it was a problem. They didn't think it was ridiculous. They tried to carve it up. Well, that doesn't work. Why doesn't it work? Because it's not true. You can't have a situation where something is not true in the statute and try to make it true with the regulation. For example, suppose there was a statute that regulated chickens and they decided they wanted to use it to regulate automobiles. They couldn't say an automobile would be considered a chicken because it's not. And they, in a similar way here, they can't say that a zero value will be considered 400% of something because it's not. All right, Mr. Robbins, we have your argument. Thank you. Okay. Business, up and high, but have any time. The regulation under 66, 62 is not a jurisdictional regulation. It doesn't go to jurisdiction when we refer to a jurisdictional statute. We mean something going to the power of the court, not the power of the IRS. So, Pateluma incorrectly characterizes Section 66, 62 as a jurisdictional statute. It doesn't go to the power of the court to decide a case. It simply goes to the right of the IRS to impose the penalty. Since 66, 62 is not a jurisdictional statute. The regulations under it have nothing to do with jurisdiction. And we go back to our original argument that Pateluma waived any challenge to the regulation by failing to rely on it, by failing to challenge the validity of the regulation and either of its two priorities. So, you address the merits of the argument nonetheless? Yes, I will. The merits of the argument. The regulation under Chevron, the regulation is entitled to Chevron deference if it's a reasonable interpretation of statute. And I guess I would say that perhaps the situation of zero basis is a gap in the statute that under Chevron, Treasury was authorized to fill by regulation. And it did fill it by saying that if there's a situation where an adjusted basis or value is zero, it shall be considered to be a substantial, a gross valuation of the statement penalty within the meaning of the regulation. And I think this regulation is consistent with the congressional intent to penalize those overstatements that are greater in amount. In other words, there are three possible scenarios, a situation where, where, well, is it three possible situations, or two, or maybe more possible situations, a statute penalizes, but it was a 20% penalty where there's over stated basis of 200% that applies the gross valuation of the statement penalty. So, are we to assume that in the situation of zero basis Congress intended there to be no gross over valuation penalty at all? I think that's not consistent with what the statute said. And the second circuit in the case of Gilman versus Commissioner said the application of penalty in a sham transaction situation is consistent with the congressional objective of listening tax shelter abuse. In this situation, the overstated basis amounted to $25 million. If the basis stated on the return was one, you would have had an overstated basis of 25 million%. So, I think the facts of this case illustrate the reasonableness of the commissioner's interpretation. As this court said in the case of Lee's summit, there is no perfect solution to the problem of multiplying by zero. Likewise, there's no perfect solution to the problem of dividing by zero. I urge this court to conclude that the interpretation of Treasury was a reasonable interpretation that, and that the regulation is entitled to Shabron de France. Thank you