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Editor: Paul L. Caron, Dean
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Friday, June 24, 2011

Smith: Life After Mayo

Patrick J. Smith (Ivins, Phillips & Barker, Washington, D.C.) has posted Life after Mayo: Silver Linings, 131 Tax Notes 1251 (June 20, 2011), on SSRN. Here is the abstract:

Most tax practitioners interpreted the Supreme Court's Mayo decision to mean that it is now virtually impossible for taxpayers to prevail in challenges to tax regulations and that the IRS can therefore do almost anything it wants. However, nothing in Mayo suggests the Supreme Court intended that result.

To the contrary, the Supreme Court's clear message in Mayo is that tax law and the IRS are governed by the same rules that apply to every other area of federal administration. That provides a powerful tool for taxpayers to use in challenging IRS actions based on administrative law rules providing limits on agency discretion that taxpayers have traditionally not even attempted to invoke against the IRS. Those limitations include the Administrative Procedure Act's arbitrary and capricious standard and its requirements for reasoned decision-making and reasoned explanations of agency decisions, the general presumption against retroactivity in regulations, the Supreme Court's recent case law narrowing the classification of requirements for bringing suit that are put in the restrictive category of being jurisdictional, the law providing for exceptions to exhaustion of administrative remedies requirements, and the principle that agency guidance other than regulations is given weight only according to its power to persuade.

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Good article! This would be good for someone wanting to know about Chevron deference even if they weren't interested in tax. It will be illuminating for people like me who come to Tax Law from outside, knowing lots about Chevron already and wondering why Mayo is such a big deal when what seems the obvious: the courts should interpret a Congressional Act that has no exception for Treasry as applying to Treasury regulations just like any other regulations.

Posted by: Eric Rasmusen | Jun 24, 2011 9:58:50 AM

My interest is in understanding better which Treasury regulations will survive because the Treasury did not follow the APA. The process to issue temporary regulations, for example, may have to change because of Mayo. The Treasury can expect myriad challenges to regulations as tax lawyers study the APA. Revenue Rulings may also be subject to the APA as well. This will be an interesting time for tax administration.

Posted by: James Leet | Jun 24, 2011 8:05:07 PM

Mayo is full of sound and fury, signifying nothing. So now all tax regulations -- whether issued under a specific grant of authority by Congress (legislative) or a general grant (interpretive -- go through Chevron. Guess what? The courts will find ambiguity when they want to so that prong of Chevron is and always has been meaningless. As for deference, in reality whatever the standard is courts can find regulations to be arbitrary, capricious, or without sound basis in fact or law just like they did under the lesser standards of National Muffler and Skidmore. They may have to work a little harder to explain their reasoning when applying Chevron vs. Skidmore, but they can get there.

Look, the Tax Court held a Treasury Regulation, which was a specific grant of authority (leg. reg.) to be invalid essentially because it was "unfair" (the 2-year innocent spouse rule, twice overruled). Not only was it overruled twice, but the Court had previously held in a T.C. opinion that when there was only a Rev Proc, not a Reg, that the Rev Proc with the 2-year rule was valid. That may be why the Rev Proc was turned into a Reg (to make sure it solidified the deference to thee). But is a court is willing to reverse its own precedent and find a regulation invalid when applying Chevron when the early precedent applied to a lesser form of guidance subject to a lower standard than Chevron, Mayo is all a song and dance.

The REAL important stuff is in Mead. Mead clarifies that you need notice and comment to get Chevron deference. Ignoring what I said above (that Chevron deference is meaningless because courts will do as they will), do you think the IRS is willing to take the chance of not getting Chevron deference because it did not have the Reg go through notice and comment? Mead forces the IRS's hands.

Im reality, few cases go to court and a miniscule of those cases involve what deference is due to thee. Notice and Comment, however, is going to be there for every Reg Treasury issues. the ability to comment on regs and see them before they are final (even if the Reg does not change you get a decent amount of time to get ahead of the curve because you know where the IRS/Treas. is going. So rather than getting a surprise you have time to plan for you clients and comment on the Reg. even a small comment can make a difference, or a hypothetical Q&A that is not in the prop regs but is answered in the final Regs.

Mayo does not do this. Mead did. And Mead was the sign of things to come. Mead told you that one day there would be Mayo, the Court just needed the right case to reach it. But Mead told you it was going to reach it and what the result was going to be. And Mead was about a decade ago.

Sure, Mayo means Chevron. But APA was already the deal after Mead. I just don't think anyone paid much attention to it. Whatever you think of Scalia, I find him to be a good writer. Read his dissent (or maybe concurring in part) in Mead. It is all there. If not explicitly, implicitly.

Posted by: tax guy | Jun 26, 2011 3:39:36 AM