A district court in Texas has struck down Treasury’s anti-inversion regulations for violating the APA’s notice and comment requirements. The opinion can be found here and a brief Reuters story on the background and opinion can be found here
Given the subject, the opinion is major news. It is also a significant tax procedure case, addressing at least 6 issues, each which could take up a post or article.
read more...- Standing-it concludes that the Chamber of Commerce and the Texas Association of Business had standing to bring the suit;
- Anti-Injunction Act-it concludes that the APA claims (that the rules were arbitrary and capricious and issued without required notice and comment) were not barred by the AIA, finding that the suit was not for the purpose of restraining assessment and collection of tax;
- Statutory Authority-it concludes that the issuance of rules on the subject was within Treasury’s statutory authority;
- Arbitrary and Capricious- it concludes that the Treasury reg, as buttressed by the preamble’s explanation, demonstrated that the rule was not arbitrary and capricious;
- Interpretive Rules-it concludes that the regulations are legislative and not interpretive, an important conclusion because interpretive rules are exempt from the APA notice and comment regime; and
- No Notice and Comment Exception for Temporary Regulations-it concludes that Section 7805(e) does not authorize the issuance of binding temporary regulations without notice and comment in the absence of an explicit notice-and-comment exception found in the APA or the Code itself; given that the regs were issued in temporary form without notice and comment, the court concluded that the regs were invalid.
The last point is the main APA issue in the case. As a brief refresher, the APA generally provides that in the absence of an exception (like for good cause, not argued here, or if a rule is merely interpretive, argued here but a loser in this case and likely others involving Treasury regs), an agency must give the public notice and the right to comment as per 5 USC § 553.
Treasury has argued that Section 7805(e), which provides that temporary regulations must be accompanied by a notice of proposed rule making and sunset after three years, is evidence of Congressional intent to exclude temporary regs from the main APA notice and comment regime. No controlling opinion had addressed that issue directly, though in Intermountain Insurance v Commissioner a concurring opinion by Tax Court Judges Holmes and Halpern makes the strong case that the 7805(e) was not sufficient to give Treasury a free pass on notice and comment.
Commentators, including persuasively Professor Kristin Hickman in her 2013 Vanderbilt law review article Unpacking the Force of Law, argue that Treasury’s practice of issuing temporary regulations without notice and comment likely violates the APA. (A 2012 National Tax Journal article by Professor Ellen Aprill also gives a careful look at APA and other procedural requirements accompanying Treasury rule making, including some great admin law context on Treasury temporary reg practice). Looking to other instances where Congress has exempted agencies from notice and comment, Professor Hickman notes that nontax legislation is more explicit in carving out the agency’s rule making from notice and comment, and that the Supreme Court has generally required there to be an explicit legislative pass on APA requirements. Moreover, Section 7805(e) is, in her (and my) view better seen as a provision that should be read in light of notice and comment requirements, rather than excepting the agency from it altogether.
I suspect that there will be an appeal here though this issue is a political hot potato. I believe the district court gave short shrift to the AIA issue (one that I have recently discussed in the updated IRS Practice and Procedure and an issue that Professor Daniel Hemel also discussed for us in a guest post on PT here) so there is a real possibility that an appellate court may not even reach the APA. Yet this opinion should be a wake up call to the Treasury practice of issuing Temporary Regulations without a safer exemption from notice and comment. Where there is the demonstrated need to promulgate a rule without going through notice and comment, the APA provides a good cause exception. In this post-Mayo world, taxes, while vital, are not enough to justify an agency practice that seems out of sync with the rest of administrative law.
About Leslie Book
Have been waiting for this one!
THE BREXIT LEGAL NETWORK
Geoffrey V. Morson
Harvard Law School (JD, 1969)
California (Bar # 51191)
New York (Bar #1924786)
US Tax Court (1974), US Court of Federal
Claims (1974), US Court of Appeals
for the Federal Circuit (1975) etc., etc.
Cambridge, England
District Court Judge Lee Yeakel, 71, a Marine veteran with a J.D. from the University of Texas and an LL.M. from the University of Virginia, is a 2003 G. W. Bush appointee. He is perhaps best known for his 2014 injunction against enforcement of Texas abortion laws enacted in 2013. He was mostly reversed by the Fifth Circuit in 2015 but then upheld by the Supreme Court in 2016.
Hi Les, respectfully, I think the Anti-Injunction Act is the big issue here. Or at least should be. This is a suit by an Association and they get standing only because one of their members believed that the regulation they attack would deny them a tax benefit they believed they would get absent the regulation. The court took an extremely narrow view of the anti-injunction act, saying 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. 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). If the TP here wanted to attack the regulation, it could do so in a refund suit. Without the regulation, the IRS would still take the same position on the return item and taxpayer would still have to litigate it court. This is exactly the kind of suit that the Anti-Injunction Act is supposed to stop. Regulations that go to tax administration, such as return preparer regulations or information reporting regulations are more of the type of regulations that the Anti-Injunction Act does not cover. But the time and place to attack a substantive tax regulation is in a refund suit. The argument then would be that the regulation is not entitled to deference because of its improper issuance. So then, if successful, you just have the court 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.
This case deserves reversal on that ground alone, and no need to get into the Angels Dancing On Pins argument about temporary regulations.