APA Challenges to Treasury Regulations: Partly Cloudy with a Chance of Success

Transcription

1 DID YOU GET YOUR BADGE SCANNED? APA Challenges to Treasury Regulations: Partly Cloudy with a Chance of Success

2 Panelists Starling Marshall, Covington & Burling LLP Gil Rothenberg, Department of Justice, Tax Division Moderator Jim Gadwood, Miller & Chevalier Chartered -2-

3 Agenda 1. Introduction 2. When to Challenge a Regulation 3. How to Challenge a Regulation 4. Judicial Remedies -3-

4 1. Introduction -4-

5 A. Administrative Actions Administrative Actions Rulemaking Adjudication Formal Rulemaking Informal Rulemaking Formal Adjudication Informal Adjudication -5-

6 B. Why Challenge a Regulation? If a statute is silent or ambiguous as to the issue at hand, then a court will defer to a regulatory interpretation of the statute unless that interpretation is arbitrary, capricious, or manifestly contrary to the statute. See Chevron U.S.A. Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837 (1984). A successful administrative-law challenge to a Treasury regulation allows a taxpayer to overcome this Chevron deference. -6-

7 2. When to Challenge a Regulation -7-

8 A. Introduction Two common routes: 1. Violate the rule, wait to be audited, ask for a statutory notice of deficiency, and file a petition in the U.S. Tax Court; or 2. Follow the rule, pay the tax due, file a refund claim, wait six months, and bring a refund suit. Is there another alternative? Sometimes referred to as a pre-enforcement challenge. Potential obstacles: (1) standing and (2) the Anti-Injunction Act. -8-

9 B. Standing Standing requires a plaintiff to establish that: 1. the plaintiff has suffered an injury in fact; 2. the injury is fairly traceable to the defendant s action; and 3. a favorable ruling is likely to redress the injury. In pre-enforcement challenges, standing disputes tend to focus on whether the plaintiff has suffered an injury in fact. An injury in fact is an invasion of a legally protected interest that is (1) concrete and particularized and (2) actual or imminent, not conjectural or hypothetical. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). -9-

10 B. Standing (cont d) Chamber of Commerce v. IRS (W.D. Tex. 2017) Pre-enforcement challenge to a temporary Treasury regulation issued under I.R.C Court held that the Chamber had associational standing because Allergan, one of the Chamber s members, had standing to sue in its own right. Government has appealed to the Fifth Circuit. -10-

11 C. Anti-Injunction Act The Anti-Injunction Act ( AIA ) prohibits any suit to restrain the assessment or collection of any tax. I.R.C. 7421(a). There is an exception for Tax Court petitions filed in response to a statutory notice of deficiency. A refund suit doesn t implicate the AIA because the IRS has already assessed and collected the disputed tax. -11-

12 C. Anti-Injunction Act (cont d) Florida Bankers Ass n v. Treasury (D.C. Cir. 2015) Banking associations challenged a Treasury regulation requiring U.S. banks to report interest earned by non-u.s. accountholders or face a penalty. None of the associations members had yet been subject to the penalty (via statutory notice of deficiency or otherwise). D.C. Circuit held that the AIA barred the challenge. -12-

13 C. Anti-Injunction Act (cont d) Chamber of Commerce v. IRS (W.D. Tex. 2017) District court held that the AIA did not bar the Chamber s pre-enforcement challenge to a temporary Treasury regulation issued under I.R.C The district court stated the following: [T]he Rule is not a tax, but a regulation determining who is subject totaxation under provisions of the Internal Revenue Code. Although the Rule may improve the government s ability to assess and collect taxes, enforcement of the Rule does not involve assessment or collection of a tax. The government has appealed to the Fifth Circuit. -13-

14 3. How to Challenge a Regulation -14-

15 A. Introduction Administrative law challenges to agency rulemaking generally fall into one of three categories: (1) procedure, (2) process, or (3) outcome. -15-

16 B. Procedure Challenges The APA s notice-and-comment procedures apply to the IRS. Those procedures require an agency to (among other things): publish a notice ofproposed rulemaking in the Federal Register; allow the public to submit written comments; and consider the relevant matter presented by any such comments. But there are exceptions for: interpretative rules ; and situations where an agency for good cause finds that the procedures are impracticable, unnecessary, or contrary to the public interest. -16-

17 B. Procedure Challenges (cont d) The IRS regularly asserts that Treasury regulations are interpretative rules and so not subject to the APA s notice-and-comment procedures. But the IRS also regularly follows those procedures before issuing final Treasury regulations, so a procedure challenge is unlikely to succeed. What about temporary Treasury regulations, which the IRS issues without pre-promulgation notice and comment? -17-

18 B. Procedure Challenges (cont d) Chamber of Commerce v. IRS (W.D. Tex. 2017) District court held that a temporary Treasury regulation was invalid because Treasury had not satisfied the APA s notice-and-comment procedures. In particular, the court held that: I.R.C. 7805(e) does not authorize Treasury to promulgate temporary Treasury regulations without pre-promulgation notice and comment; and the temporary Treasury regulation at issue was a legislative rule and so was not exempted from the APA s notice-and-comment procedures. The government has appealed to the Fifth Circuit. -18-

19 C. Process Challenges Agency action is unlawful if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. 706(2)(A). To avoid acting arbitrarily or capriciously, an agency must engage in reasoned decision making. This requires an agency to examine the relevant data and explain a rational connection between the facts found and the choice made. Determining whether an agency has engaged in reasoned decision making is known as State Farm or hard-look review. See Motor Vehicle Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). -19-

20 C. Process Challenges (cont d) Altera Corp. v. Commissioner (T.C. 2015) Treasury regulation required cost-sharing participants to share stock-based compensation costs. Altera asserted that the regulation was arbitrary and capricious because Treasury did not engage in reasoned decision making. The U.S. Tax Court agreed with Altera and held the regulation invalid. 1. The regulation lacked a basis infact. 2. There was no rational connection between the choice made and the facts found. 3. The regulation was contrary to the evidence before Treasury. 4. Treasury didn t respond to significant comments to the proposed regulations. The government has appealed to the Ninth Circuit. -20-

21 D. Outcome Challenges A reviewing court will defer to Treasury s interpretation of an ambiguous statute unless that interpretation is arbitrary, capricious, or manifestly contrary to the statute. Chevron, 467 U.S. at 844. If a Treasury regulation is manifestly contrary to the statute, then Treasury has reached an impermissible outcome and the regulation is invalid. -21-

22 D. Outcome Challenges (cont d) Mayo Found. for Med. Educ. and Research v. United States (S. Ct. 2011) The two-step Chevron analysis applies to Treasury regulations. Treasury regulation relating to FICA withholding on wages paid to medical residents was entitled to Chevron deference because (1) the statute was ambiguous and (2) Treasury s interpretation was reasonable. -22-

23 D. Outcome Challenges (cont d) Dominion Res. Inc. v. United States (Fed. Cir. 2012) Treasury regulation under I.R.C. 263A was held to be invalid. Although the statute was ambiguous, the Treasury regulation was an impermissible interpretation of the statute. -23-

24 4. Judicial Remedies -24-

25 A. Refund and Deficiency Cases Refund and deficiency cases challenge the IRS s determination of a particular taxpayer s tax liability for a particular tax year. Although a regulation s validity may affect the outcome, the suit does not directly challenge the regulation itself (the AIA generally prohibits that). If a court finds that a regulation is invalid, then the court will apply that conclusion in determining the taxpayer s tax liability. While the invalidation may have broad practical ramifications, the invalidation is technically limited to the case at hand. -25-

26 B. Injunctive Relief The AIA generally prevents courts from vacating a Treasury regulation or enjoining the IRS from enforcing a Treasury regulation. But if the assessment or collection of tax is not at issue, then the AIA does not apply and vacatur or injunctive relief may be appropriate. Chamber of Commerce v. IRS (W.D. Tex. 2017): Court vacated a temporary Treasury regulation that failed to satisfy the APA s notice-and-comment procedures. The government has appealed to the Fifth Circuit. -26-

27 C. Availability of IRS Corrective Action If a court invalidates a regulation based on procedure (i.e., notice and comment) or process (i.e., State Farm) grounds, then the IRS could in theory remedy any shortcomings and reissue the regulation. But if a court invalidates a regulation based on an outcome challenge, then the regulation is per se impermissible and cannot be remedied by the IRS. Dominion Resources held that a regulation impermissibly interpreted the statute. That means the government can never re-promulgate the challenged regulation. (Clevenger, J., concurring in part and concurring in result). -27-

28 Conclusion -28-