Hickman: Dismayed by Mayo? Check Out the Mannella Dissent

Following up on my prior posts (links below) on Mayo Foundation for Medical Education & Research v. United States, No. 09-837 (U.S. Jan. 11, 2011); and . Mannella v. Commissioner, No. 10-1308 (3d Cir. Jan. 19, 2011): Kristin Hickman (Minnesota), Dismayed by Mayo?  Check Out the Mannella Dissent:

The majority opinion in Mannella offers a rather straight-forward and unremarkable application of Chevron review to uphold Treas. Reg. § 1.6015-5(b)(1), save for two minor observations:

• Like the Seventh Circuit in Lantz, the Mannella majority reserves consideration of legislative history to the more deferential Chevron step two.  At least part of the argument against a two-year limitations period for equitable relief claims under § 6015(f) relies upon legislative history.  Consistent with a number of Supreme Court opinions, other circuits are more willing to consider legislative history at Chevron step one. 
• The Mannella majority, in so many words, finds § 6015(f) ambiguous for its silence regarding a potential limitations period.  Numerous judicial opinions applying Chevron caution courts against automatically equating statutory silence with ambiguity. 

In short, the circuit courts do not always agree on the proper scope of Chevron step one, and those who support the Tax Court’s conclusion that Treas. Reg. § 1.6015-5(b)(1) fails at Chevron step one may yet find a sympathetic panel in another circuit.

Particularly for members of the tax community lamenting the demise of the National Muffler standard from last week’s Supreme Court decision in Mayo, however, the Mannella dissent is worth a careful read.  After agreeing with his colleagues regarding the ambiguity of § 6015(f), Judge Ambro nevertheless would have invalidated Treas. Reg. § 1.6015-5(b)(1) at Chevron step two on the ground that Treasury failed in promulgating the regulation to explain why it felt a two-year limitations period was necessary.  In so doing, Judge Ambro relied on two key lines of administrative law jurisprudence worth noting.

• In Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983), the Supreme Court held that the arbitrary and capricious standard of Administrative Procedure Act § 706(2)(A) requires agencies to articulate their reasons for choosing the particular interpretation adopted instead of another permissible alternative.  Parties often argue, and courts sometimes agree, that agency regulations are arbitrary and capricious under State Farm irrespective of whether the interpretation in question is substantively permissible under Chevron.  In other cases, however, as Judge Ambro has done here, courts have folded the State Farm inquiry into Chevron step two analysis and declined to defer to a potentially reasonable interpretation for lack of sufficient explanation.  In the words of Judge Ambro, “Here, however, the IRS has not advanced any reasoning for its decision to impose a two-year limitations period on taxpayers seeking relief under subsection (f), leaving us no basis to conduct the analysis mandated by Chevron step two. … Because the IRS has not articulated its reasoning, we cannot discern whether the two-year limit falls into the permissible, or the arbitrary and capricious, category.”
• In SEC v. Chenery Corp., 318 U.S. 80 (1943), the Supreme Court held that courts should not create their own justifications for an agency’s choices and instead should limit their evaluation to the reasons offered by the agency in the administrative record.  Judge Ambro criticized the Seventh Circuit in Lantz particularly for offering its own justifications for Treas. Reg. § 1.6015-5(b)(1) rather than merely evaluating Treasury’s reasons (or lack thereof) articulated in the administrative process.

It is perhaps notable that Judge Ambro was on the panel in the Swallows Holding case, in which the Third Circuit also rejected the Tax Court’s application of Chevron and upheld another Treasury regulation; he does not seem reflexively inclined to apply Chevron aggressively to invalidate Treasury regulations.  Rather, Judge Ambro’s opinion is entirely consistent with mainstream Chevron jurisprudence, and also with the Supreme Court’s suggestion in Mayo that tax cases are not an exception from general administrative law norms.