Tax Policy – Potential Supreme Court Nominees on Taxpayer Rights, State Taxes, and Interstate Commerce
President Donald Trump is expected to announce his nomination today for the U.S. Supreme Court seat vacated by the retirement announcement of Justice Anthony M. Kennedy, who has served as a justice since 1988. While President Trump lists 25 individuals on his Supreme Court short list, speculation has focused on five: Indiana-based Judge Amy Coney Barrett of the Seventh Circuit Court of Appeals, Pittsburgh-based Judge Thomas M. Hardiman of the Third Circuit Court of Appeals, D.C.-based Judge Brett M. Kavanaugh of the D.C. Circuit Court of Appeals, Michigan-based Judge Raymond M. Kethledge of the Sixth Circuit Court of Appeals, and Kentucky-based Judge Amul R. Thapar of the Sixth Circuit Court of Appeals.
Journalists, legal scholars, and political pundits will peruse the nominee’s legal opinions, judicial writings, and speeches to examine how he or she might alter the high court’s political tilt. While a nominee’s prior voting record or political affiliation is not always a guarantee as to how he or she will decide cases as a Supreme Court justice, it can provide insight. Consequently, we have reviewed the past decisions of these judges on an area of law often overlooked: the scope of state tax overreaching.
The Commerce Clause of the U.S. Constitution grants power to the federal government to regulate interstate commerce, and early on Chief Justice Marshall ruled that this implies that states cannot interfere with interstate commerce unless Congress explicitly permits them to do so. This “dormant” or “negative” Commerce Clause allows the U.S. Supreme Court to overturn state tax laws that discriminate against interstate commerce or otherwise impede it, a power Justice Kennedy (as well as Chief Justice Roberts and Justice Alito) have exercised on occasion. Justices Thomas and Gorsuch, like Justice Scalia before them, reject the whole theory of it, believing that discriminatory state taxes should be overturned by Congress and not the courts. Hence Scalia and Thomas siding with Justices Ginsburg and Kagan in 2014 to let Maryland impose double taxes on residents with out-of-state investments. (After that case, I suggested a law Congress could pass to address Scalia’s concerns while continuing to limit state tax overreaching.) The majority in this year’s Wayfair internet sales tax case was a mixture of justices who generally side with states on tax disputes (Justice Ginsburg), justices who reject judicial enforcement of the dormant Commerce Clause on state laws (Justices Gorsuch and Thomas), and justices who support judicial enforcement of the dormant Commerce Clause but felt the South Dakota law in question was valid under it (Justices Kennedy and Alito).
Judge Barrett is very new to the bench–she joined the Seventh Circuit only last October–but has academic writings analyzing some constitutional issues. Because she is relatively new to the bench, Justice Barrett lacks the substantial record of appellate decision-making that most nominees possess. However, because she was a law professor, Barrett has academic writings that shed light on her views about a variety of issues. The most applicable writings deal with the subject of stare decisis and precedent. In one 2013 article, then-Professor Barrett warns that judges seeking to overturn a case must be “sure enough of that approach to warrant unsettling reliance interests.” In the same article, Barrett writes that a side benefit of stare decisis is mediating a clash of methodologies, since every past case need not be relitigated in every subsequent one. In a 2017 article, then-Professor Barrett critiqued Justice Scalia’s claim that he was a “faint-hearted originalist,” finding that he often expressed a willingness to overturn precedent on originalist grounds but would side with a Court majority if it reached the same result in the case at hand. In that article, Barrett discusses, but does not insert her own commentary on, Justice Scalia’s dormant Commerce Clause cases.
Judge Hardiman has written less on tax issues but has not rejected courts’ role in preventing state tax overreaching while carefully considering taxpayer claims in cases. Even though Hardiman did not personally author cases in which he laid out his beliefs on the Commerce Clause, he did sign on to a majority opinion which laid out an interpretation of the dormant Commerce Clause. In Tri-M Group, LLC v. Sharp a three-judge panel struck down a Delaware law requiring differential prevailing wages as violating the Commerce Clause. The court panel rejected Delaware’s argument that they were a mere market participant since they also regulated other participants, and rejected the claim that Congress had authorized Delaware’s action since there was no “unmistakably clear” congressional direction. Hardiman’s lack of dissent in this detailed opinion can give insight into his thoughts. At the very least, he is more likely to line up with how Justices Kennedy and Scalia voted on the issue of the dormant Commerce Clause, than with Justices Thomas and Gorsuch. If Hardiman is asked to evaluate whether a state statute violates the dormant Commerce Clause, he will probably be very skeptical of the state’s argument.
In Freeman v. Corzine in 2010, Judge Hardiman was on a Third Circuit panel which held that multiple provisions of New Jersey’s wine laws were unconstitutional for discriminating against out-of-staters. The laws at issue permitted in-state wineries only to sell to retailers and consumers and prohibited the importation of more than a gallon of out-of-state wine for personal use without a special permit from the state of New Jersey.
Hardiman has multiple times evaluated FCC regulations under the arbitrary and capricious standard. In Council Tree Investors Inc. v. FCC, he wrote that an agency’s regulation is not arbitrary and capricious when “the agency examined the relevant data and articulated a satisfactory explanation for its action.” He also emphasized the need for a rational connection between the facts found and choices made. However, Hardiman does not just uphold agency decisions without any justification. In the older but more interesting case, Council Tree Communications, Inc v. FCC, he evaluated multiple rules and concluded one not arbitrary and capricious while two others were. Hardiman emphasized that the rule which passed the test had been enacted through the proper public notice and comment process which is required by Congress. In comparison, the rules which were deemed arbitrary and capricious either did not go through this procedure at all, or a substantial and inseverable part did not.
Most of the tax cases which Hardiman judged involved affirming the decision by the district or tax court against the taxpayer for the IRS in regards to tax fraud. An interesting case to look at is his analysis in In re Calabrese on whether third-party retail sales taxes in New Jersey are excise taxes or trust fund taxes under the state’s Bankruptcy Code. He found the statutory language to be ambiguous, because both the excise and the trust fund tax sections were written to apply to these third-party retail sales taxes. He went on to look at the Code’s Legislative History and concluded that they should be classified as trust fund taxes. Hardiman states that these sales taxes were even closer to trust fund taxes than other sales taxes, because such taxes are not owed to the debtor, merely held by the debtor on behalf of the party that owes tax. Hardiman’s opinion in this case does not give us an indication regarding his tax policy, but it indicates that if he finds ambiguities in tax codes, he will attempt to resolve them using outside indicators.
In another interesting case, Crisci v. United States, Hardiman affirmed the district court’s ruling in favor of the government regarding a company’s outstanding trust fund taxes, for which an individual can be held personally liable. The Criscis voluntarily liquidated an insolvent company, using the proceeds to satisfy tax obligations. IRS agents directed them to do so instead of proceeding into bankruptcy, using the proceeds to satisfy corporate tax liabilities first and then trust fund tax liabilities. The IRS did not explain that the corporate tax liability could be wiped out in the bankruptcy proceedings but trust fund taxes could not, thus arguably misleading the Criscis as to their best course of action. Later realizing they still owed money for trust fund taxes, the Criscis sought to avoid the taxes, blaming the IRS’s deception. Hardiman held that the officer was at most negligible, and that silence on its own cannot constitute affirmative misconduct, so the taxpayer was not entitled to relief. This opinion indicates that Hardiman may not easily find misconduct by the IRS or its officers.
Judge Hardiman was also involved in a 2013 case involving the scope of the federal income tax exemption for residents of the U.S. Virgin Islands. Naturally, taxpayers sought to establish residence, raising questions as to what constitutes “bona fide residence.” In Vento v. Director of Virgin Islands Bureau of Internal Revenue, Judge Hardiman’s opinion for the Court held that prior to 2004, taxpayers could establish “bona fide residence” regardless of whether their intent was to avoid tax liability or not. Rather, residence was determined by a taxpayer’s intent to remain for a “substantial period” using a subjective facts and circumstances test.
Another tax-related case is Ruscitto v. United States in 2015, where Judge Hardiman affirmed a lower court’s holding that a wife could not recover her portion of a tax refund that was used to pay her husband’s tax penalties, because she could not demonstrate that she contributed to the earlier tax overpayment.
Judge Kavanaugh has rejected taxpayer due process claims and has been willing to “tweak” statutory text to save laws from being found unconstitutional. Kavanaugh has not ruled directly on the dormant Commerce Clause. However, he participated in deciding Gordon v. Holder. In Gordon, the court addressed a challenge to the Prevent All Cigarette Trafficking Act (PACT Act). The challenge to the law was not brought under the Commerce Clause, but the majority explained the distinctions between the Due Process and Commerce Clauses, which Kavanaugh joined in. (Judge David Sentelle, dissenting in the case, complained that the discussion of the dormant Commerce Clause was unnecessary.) Kavanaugh wrote separately to uphold federal jurisdiction over internet cigarette sellers on grounds that federal law requires that they pay their state cigarette taxes.
In both We the People Foundation v. United States and Florida Banker Assn. v. United States, he wrote the majority opinion in favor of the government. This was largely because the claims in both cases were barred by the Anti-Injunction Act, which prohibits challenges to tax statutes and regulations before they are enforced.
Kavanaugh sought to avoid declaring the Affordable Care Act (ACA) unconstitutional in Seven-Sky v. Holder, taking the same approach ultimately taken by Chief Justice Roberts. The Seven-Sky case addressed the individual mandate of the Patient Protection and Affordable Care Act. Rather than dissent on the merits, Kavanaugh wrote separately that the court could not even hear the case until someone paid the individual mandate and then sued for a refund. In argument, Kavanaugh hinted at his reluctance to challenge the ACA head-on, observing “we’re courts of judicial restraint. It’s a delicate act to declare an Act of Congress unconstitutional.” Kavanaugh also foreshadowed Chief Justice Roberts’ decisive opinion in the case by stating that a “minor tweak to the current statutory language would definitively establish the law’s constitutionality under the Taxing Clause (and thereby moot any need to consider the Commerce Clause).”
Kavanaugh has sometimes struck down agency regulations as arbitrary and capricious, and sometimes upheld them. In National Fuel Gas Supply Corporation v. Federal Energy Regulation Commission, a trade group challenged a FERC order that expanded the agency’s Standard of Conduct. These rules regulated the natural gas pipelines’ relationship with producers, gatherers, processors, and traders. Kavanaugh, writing for the majority, held that the FERC’s order was arbitrary and capricious because the FERC did not present adequate justification by giving a plausible threat of anticompetitiveness and a vast record of abuse. In Energy Future Coalition v. EPA, a challenge was brought to the EPA’s fuel regulation. Kavanaugh, in this case, sided with the EPA and wrote that the regulation was reasonable under the Clean Air Act and was not arbitrary and capricious.
In Park v. Commissioner, a married couple from South Korea requested a redetermination of income tax from unreported gambling income. The taxpayers believed that their gambling income should be determined on a per-session basis, while the IRS believed that it should be determined on a per-bet basis. In the case, Kavanagh sided with the taxpayers’ methodology of calculating the gambling wins and losses by determining that “gains” from gambling were per-session, rather than per-bet.
In a speech at Notre Dame School of Law, Kavanaugh emphasized the importance of the direct text of the Constitution, which he called “the most important factor that directs and explains much of constitutional law.”
Judge Kethledge has expressed skepticism of courts’ role in preventing state tax overreaching, while being willing to protect taxpayers from abuse by tax authorities. In Fednav, Ltd. v. Chester in 2007, Judge Kethledge, writing for the Sixth Circuit, dismissed a dormant Commerce Clause claim challenging a Michigan law limiting Coast Guard ballast dumping in a manner more stringent than federal law. Kethledge wrote that “[t]he Commerce-Clause power belongs to Congress, not the courts,” explaining that a court can only engage in a dormant commerce clause review when Congress has not acted or appeared to be acting. He stated that the dormant Commerce Clause can only be applied to safeguard Congress’ latent power from encroachment by several states. Kethledge’s description of the dormant Commerce Clause, such as labeling it the “so-called” dormant Commerce Clause, indicates that he would not easily agree to limit a state’s power if this were a petitioner’s only argument for doing so. However, he did spell out that it had a legitimate purpose even if it is a narrow one. If Congress has not spoken at all on a topic and multiple states started encroaching on a latent power that Kethledge cared about, an argument involving the dormant Commerce Clause might convince him to strike down a state statute.
During his time as Judge, Kethledge has ruled both for and against agency regulations. He laid out his standard for deferring to agency decisions in Meister v. U.S. Dep’t of Agriculture in 2010. He started his opinion by explaining that an agency is not entitled to deference simply because it is an agency, despite agencies being more specialized than courts. For a court to defer, agencies “must do more than announce the fact of their comparative advantage, they must actually use it.” This means that it must apply the relevant statutory and regulatory criteria, which the U.S. Forest Service failed to do in this case. Kethledge has been on panels upholding regulations such as a challenge to Medicare reimbursement rates in Owensboro Health v. Sec’y of HHS in 2017. Nevertheless, he requires that agencies use their specialized knowledge, apply it, and follow the requirements they and Congress set. If an agency’s regulation is not supported by procedure and evidence, Kethledge is unlikely to uphold it solely because it comes from an agency.
Most of the tax cases which Kethledge judged involved affirming the decision by the district or tax court against the taxpayer for the IRS in regards to tax fraud. The more interesting cases are the rare rulings against the tax collectors. For example, Kethledge wrote a scathing dissent in Wayside Church v. Van Buren Cnty. in 2010, comparing the county’s action to theft. In the case, Van Buren County took property worth $206,000 to satisfy a $16,750 debt. The majority in the case held that the taxpayer must seek a remedy in state court. Kethledge’s dissent argued that the federal court was the appropriate venue, because the taxpayer alleged that a State violated the federal Takings Clause, and state law would not provide a “reasonable, certain, and adequate remedy.” He defended the taxpayer by stating that when a State takes the absolute right to a property in satisfaction of a tax obligation, the state “effects a taking to the extent the property is worth more than the taxes.” Another interesting case is United States v. NorCal Tea Party Patriots in 2016, in which Kethledge wrote the majority opinion regarding the IRS’ use of political criteria when judging tax-exempt status filings by tea-party groups. The allegations in the case were based on the U.S. Treasury Department’s Inspector General’s findings. The taxpayers claimed that the IRS took longer to process applications and that the applicants were served with “crushing demands” for “unnecessary information.” The case turned on the IRS’ refusal to produce court-ordered documents by claiming that the information was confidential. Kethledge’s opinion concluded that the IRS was not entitled to keep secret every internal IRS document that would reveal its mistreatment, in the name of taxpayer privacy.
These opinions indicate that even though Kethledge did affirm a lot of decisions in favor of the IRS, he does not tolerate taxpayer abuse. He will not just take the side of the government if its policies are applied with bias or are closer to theft than tax collection.
Judge Thapar has been an appellate judge for only a short time but has not automatically sided with the government in tax disputes in his time on the bench. Thapar, a trial judge for nine years before becoming an appellate judge in March 2017, is known for writing opinions that use ordinary language understandable to the layperson before applying legal precedents and tests. For example, in Bentley v. Highlands Hospital Corp., Judge Thapar tells a frightening story of a medical patient enduring indifference from doctors and nurses as her paralysis symptoms worsen, in a case where he ruled that the plaintiff’s claims could go forward to trial despite uncertainty as to whether it was filed on time.
In International Dairy Foods Ass’n v. Boggs in 2010, then-District Judge Thapar was part of a three-judge panel that summarized dormant Commerce Clause analysis as first evaluating the state enactment for protectionism and striking down if it is, and if not, analyzing it under “the deferential Pike balancing test.” Enactments violate the dormant Commerce Clause, the panel wrote, if “(1) the statute clearly discriminates against interstate commerce in favor of in-state commerce; (2) it imposes a burden on interstate commerce that outweighs any benefits received; or (3) it has the practical effect of extraterritorial control of interstate commerce.”
In denying a trucking company’s tax refund claim–the company argued the trucks on which it paid tax were substantially impaired from carrying loads but sought to exclude evidence of the truck’s performance after the sale–Judge Thapar ordered the evidence in, colorfully writing “[i]f you see a horse running through a field, there’s a good chance that he was not substantially impaired from running the day before.” In another opinion in the same trial, Worldwide Equipment of Tn. v. United States, Judge Thapar derided the terms “specially” and “substantially” as “nebulous.”
In a discussion at the University of Virginia Law School this past February, Judge Thapar argued that “it is not the responsibility of the judiciary to amend poor legislative drafting, even if judges would personally prefer a different outcome than what is required by a statute’s text.”