More on the Successful Challenge to the Anti-inversion Regulations

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Today Professor Bryan Camp shares with us some of his views on the government’s loss in Chamber of Commerce v IRS, the challenge to Treasury’s anti-inversion regs that I discussed here.The case has been generating significant comment. For example, Professor Andy Grewal on the Notice & Comment blog nicely summarized the outcome and gave some additional context.

Below Professor Camp discusses why the court’s approach may be out of sync with traditional views of the Anti-Injunction Act. As Bryan suggests, the AIA battle is likely to be one where the Treasury may be able to circle the wagons and fend off early challenges to its rulemaking procedures. Les

I know everyone is chomping at the bit to get to the cool APA stuff, but I think the Anti-Injunction Act is the big issue here.  Or at least should be.  If I read the decision correctly (a big if), this appears to be a suit by an Association and they get standing only because one of their members believed that the regulation under attack would deny them a tax benefit they believed they would get absent this section 7874 regulation on inversion.

The court took an extremely narrow view of the Anti-Injunction Act, seeming to say that it only applies when a particular taxpayer seeks to contest an already assessed tax.  The court believed that ANY attack on the procedural validity of ANY regulation is permissible under the anti-injunction act.   The court says “Here, Plaintiffs do not seek to restrain assessment or collection of a tax against or from them or one of their members.  Rather, Plaintiffs challenge the validity of the Rule so that a reasoned decision can be made about whether to engage in a potential future transaction that would subject them to taxation under the Rule.”

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That statement reflects a poor understanding of tax administration.  You could say that about ANY substantive tax reg.  Is the court really saying that ANY tax regulation can be attacked by any taxpayer whose taxes are potentially affected by the regulation???  That cuts against loads of precedent going at least as far back at Fleet Equipment Co. v. Simon, 76-2 U.S. Tax Cas. (CCH) P16,231 (D.D.C. 2976).  This is exactly the kind of suit that the Anti-Injunction Act is supposed to stop.

In contrast to substantive regs the courts have allowed suits to restrain implementation of regulations that go to tax administration, such as return preparer regulations or information reporting regulations.  Those cannot be attacked in a refund suit and they do not affect the self-reporting taxpayers of the taxpayers subject to them.  But the time and place to attack a substantive tax regulation is in a refund suit.  Gosh and golly.

If the TP here wanted to attack the regulation, it could do so in a refund suit if it takes a different position, gets audited, and wants to fight.  Sure, the regulation would be in place, but the TP would argue that the regulation gets zero deference because it was (allegedly) invalidly promulgated.  Without the regulation, the IRS would still take the same position on the return item but the court would be faced with the TP’s position and the IRS position, unsupported by the authority of a valid regulation.  Just like an assessment is not valid when not properly done.

 

Comments

  1. Joe Erwin says:

    I respectfully disagree with Professor Camp’s view that the court’s interpretation of the Anti-Injunction Act “reflects a poor understanding of tax administration.” While Judge Yeakel probably does not have as sophisticated understanding of tax administration as Professor Camp, I have no doubt that plaintiffs and counsel for plaintiffs understand what happens when a large corporation is audited by the IRS. And that understanding of tax administration is what led to the pre-emptive suit. As the professor correctly points out, refund suits and petitions to Tax Court are the only ways to challenge taxes. But that is the problem.
    Most tax cases arise because a taxpayer has entered into a transaction that the IRS, after a delay of some several years, believes has a different consequence than the taxpayer does. The years-long delay is always problematic for individuals and businesses. But consider the greater magnitude of the consequences when the taxpayer is a multi-national enterprise with tens of thousands of employees, operating in numerous jurisdictions, making a fundamental change in the structure of the business. The challenged regulation in this case is reported to have ended a cross-border merger of two pharmaceutical giants. No level-headed CFO and CEO would buy into a decade-long battle with the IRS, so the prudent thing to do is walk away from the deal.
    Consider whether a couple of deep state bureaucrats should have so much authority and power without any kind of review by the affected and interested constituencies. Professor Hickman and others have well documented the Treasury’s and IRS’ disdain for the Administrative Procedure Act. The plaintiffs do understand how the Code is administered and that is the very reason for the challenge to the regulation. As to whether this is a valid end run around the Anti-Injunction Act is a different question.

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