We have followed the CIC Services case for years, starting with the first district court opinion through the recent Supreme Court opinion. Following the unanimous Supreme Court opinion, the case has been remanded to the district court, and CIC Services has filed a motion for a preliminary injunction.
There are a few important issues at the intersection of tax procedure and administrative law that the court will address. For example, is the Notice a legislative rule under the APA, and if it is, do the regulations that allow the IRS to define reportable transaction through other IRB guidance satisfy the notice and comment requirements? (For brief background, see my post here.)
There is another issue that has received less attention in the tax community lurking in the CIC Services case. That issue pertains to the nature of the relief that a court can grant when it finds that the IRS (or another agency) has failed to comply with the procedural requirements under the APA. That gets to the scope of an injunction that a court may issue if it finds that CIC Services is correct on the merits.
read more...The IRS in the briefing following the remand has argued that if CIC Services prevails on getting the court to issue an injunction, any injunction should be limited to CIC Services and not have universal application. CIC Services, however, has argued for a broader sweep, and has asked that the court set aside the Notice not only for it specifically, but for everyone.
This an issue that is hot among some administrative law scholars. I flagged the issue in a post earlier this summer. In that post I discussed the terrific Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Associate Dean and Professor Mila Sohoni of the University of San Diego Law School provides context on the debate within administrative law and argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.
Essentially Professor Sohoni notes that the Supreme Court in CIC Services views the request for injunctive relief and the request to set aside the Notice as two sides of the same coin. Professor Sohoni has written more extensively on the broader topic concerning the remedy of universal vacatur in APA challenges. See, for example, a 2020 George Washington Law Review article, The Power to Vacate a Rule.
As the briefing on the preliminary injunction has concluded, the court is likely to issue an order soon.
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Of course a nationwide injunction should issue in this case, for several reasons. The Supreme Court has said that the Notice can be challenged despite the AIA, so every taxpayer that is affected can challenge it. Why multiply litigation? This is an area where nationwide uniformity is important because the crushing effect of a Notice like this on taxpayers should not prevail in one district and region and not others, or for some taxpayers and not others.
In addition, there are two issues of “reverse regulatory capture” at work here. (By that term I mean that the legal practice has been coopted by the government.) First is the issue of “tax exceptionalism”; too many in tax practice and academia assert or accept that in the interest of keeping the gears turning, the Treasury and IRS do not have to follow the APA. Second, Ad Law as a discipline is premised on the expansion of the administrative state, and much of the Ad Law crowd have never met a regulation that they do not like and are perturbed that courts would have the temerity to tell the “expert” agencies that they have to follow the APA and not act as an unappointed super-Congress. It is time for courts to set matters right and tell Treasury and the IRS that they must follow the APA. More generally, it is high time to get rid of Chevron and Auer deference, in view of the fact that in many instances, (i) private practitioners have more expertise than the government and (ii) there are far too many instances of overreach in writing regulations and timidity of courts in invalidating them in the face of Chevron and Auer.
Couldn’t agree more that Auer deference is bad. The Supremes have already started to pull back from their holding in Auer. The power of Auer is declining by the hour.
Auer deference is bad because it rewards sloppy drafting by those who write regulations. There should be no deference at all to an agency in interpreting a regulation when the agency has complete control over the contents of the regulation. If courts interpret ambiguities against the drafting agency, it encourages agencies to do their job better.
Auer deference allows agencies to take different positions in different cases and makes it very difficult for the public to keep track of an agency’s interpretations of its own regulations. There is no central registry where the agency lists its various “interpretations” of its regulations set forth in its briefs in litigation to which the agency argues courts should defer. If agencies take conflicting positions or changes their thinking about how a regulation should be interpreted (cf. Home Concrete), allowing court deference to the agency’s interpretations creates and allows all sorts of mischief.
Having bashed and thrashed Auer (ask me how I really feel about Auer), I think that abolishing Chevron deference would be gigantic mistake. ( Judge Homes eloquently spoke about the benefits of Chevron deference a couple of years ago to a gaggle of tax professionals in San Diego. )
Consider the following possibility. IRS enacts a regulation defining the word “student” for purposes of the FICA laws. (Sounds like Mayo, right? ) After the regulation is promulgated, 25 different tax refund suits are filed in 25 different district courts, in 8 different Circuits. None of the judges are required to defer to IRS’s interpretation of the statute. We end up multiple judicial interpretations of the word student at the trial level. We end up with multiple judicial interpretations of the word student at the Court of Appeals level. Circuit conflicts require Supreme Court action. Multiply this scenario by many, many times to deal with all of the regulations issued by the government.
Trial attorneys will rejoice. Their clients will be really unhappy, because the sane clients want predictability. They don’t want to spend 20% of their work time dealing with attorneys handling litigation over the meaning of regulations. The dockets of trial judges will be clogged with suits challenging regulations. Same goes for appellate Judges. The Supremes will have to quadruple their yearly case load.
The regulatory scheme can be improved, but it won’t be improved by getting rid of Chevron deference.
My personal proposal: Regulations lose Chevron deference unless re-promulgated periodically, perhaps every 5 years? every 7 years? Keeps the regulation writers busy, but, done correctly, the agencies can’t just stick their head in the sand and leave a problematical reg in place forever. Tt gives the public a chance to comment after a reg has been in effect for a period of time.