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Monday, October 2, 2017

U.S. District Court Strikes Down Obama-Era Anti-Inversion Regulation, Limiting IRS's Power To Make Rules That Skirt The APA

Chamber of Commerce v. IRS, No. 1:1 6-CV-944 (W.D. TX Sept. 29, 2017) (citations omitted):

In April 2016, the Internal Revenue Service and the United States Department of the Treasury (the "Treasury Department") (together, the "Agencies") issued a rule identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to categorization for federal-tax purposes because the stock is attributable to prior domestic-entity acquisitions. 26 C.F.R. § 1 .7874-8T (the "Rule"). The Rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. 26 C.F.R. § 1.7874-8T(j); Prop. Treas. Reg. § 1.7874-8.

Plaintiffs, the Chamber of Commerce of the United States of America (the "Chamber") and the Texas Association of Business, now bring this lawsuit asserting Defendants, the Internal Revenue Service, Treasury Department, John A. Koskinen, and Jacob J. Lew, violated the Administrative Procedures Act (the "APA") by promulgating the Rule.

Plaintiffs argue the Rule exceeds the Agencies' statutory jurisdiction and that promulgation of the Rule was arbitrary and capricious and done without notice and opportunity for comment in violation of the APA. Plaintiffs move for summary judgment on their claims. Defendants move to dismiss this case, arguing Plaintiffs lack standing to challenge the Rule, and that this suit is barred by the Anti-Injunction Act. ...

The court concludes Plaintiffs have standing to challenge the Rule. ... The court concludes that Plaintiffs' claims are not barred by the Anti-Injunction Act. ...

IV. VIOLATION OF THE APA

Plaintiffs argue the Agencies violated the APA in issuing the Rule because the Rule exceeds the Agencies' statutory jurisdiction, the Agencies engaged in an arbitrary and capricious rulemaking, and the Agencies failed to provide affected parties with notice and an opportunity to comment on the Rule. ...

Based on the broad authority granted by Congress, the court concludes the Rule does not exceed the statutory jurisdiction of the Agencies. ... ... [T]he court concludes the Agencies did not engage in an arbitrary and capricious rulemaking in issuing the Rule.

Plaintiffs argue the Agencies violated the APA in issuing the Rule because they failed to provide affected parties with notice and an opportunity to comment on the Rule. The Rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. Plaintiffs do not assert that Defendants have failed undergo the notice-and-comment procedure required by the APA with regard to the Rule as a proposed regulation, but argue the Rule as a temporary regulation became effective without a 30-day notice period or opportunity for comment as required by the APA. The court's analysis with regard to the APA's notice-and-comment requirements is therefore confined to the Rule as a temporary regulation. ...

Defendants do not assert the Agencies complied with the APA's notice-andcomment requirements. Instead, they argue the Rule is a temporary regulation, which the Agencies have authority to issue without notice and comment. See 26 U.S.C. § 7805(e). Alternatively, Defendants argue notice and comment is not required with regard to the Rule because it is an interpretive regulation. See 5 U.S.C. § 553(b).

1. Exception for Temporary Regulations

The Rule was issued both as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. Defendants argue the Agencies may issue temporary regulations without subjecting them to notice and comment before they become effective if the regulation is simultaneously issued as a proposed regulation subject to notice and comment. ... The statute does not expressly exempt temporary regulations from the APA's requirement that publication be made not less than 30 days before a rule's effective date. ... The court concludes that the temporary nature of the Rule does not excuse the Agencies from the notice-and-comment procedure required by the APA.

2. Interpretive Exception

The APA permits agencies to issue interpretative rules without subjecting them to notice and comment. ...

Defendants argue the Rule is interpretive because it clarifies terms in the statute and provides additional detail to advise the public how the Treasury Department construes the statute. The court disagrees. The statute authorizing the Treasury Secretary to promulgate the Rule states that the regulations may "provid{e] for ... adjustments to the application of this section." 26 U.S.C. § 7874(g). Permitted regulations under the statute include "regulations to treat stock as not stock." 26 U.S.C. § 7874(c)(6). Adjustments to application and treating stock as if it were not stock are not mere interpretations of the statute, but substantive modifications to the application of the statute. ... The Rule therefore changes the computation for determining whether a corporation shall be treated as a surrogate foreign corporation by directing that certain stock that would otherwise be included in the calculation is excluded.

The court concludes the Rule is a substantive or legislative regulation, not an interpretive regulation, and the Agencies are therefore not excused from the notice-and-comment procedure required by the APA.

(Hat Tip: Linda Jellum.)

http://taxprof.typepad.com/taxprof_blog/2017/10/us-district-court-strikes-down-obama-era-anti-inversion-regulation-limiting-irs-power-to-make-rules-.html

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Comments

What are the options now for the US Treasury? Thanks

Posted by: Rosie | Oct 3, 2017 3:13:40 AM