Hickman: Chamber of Commerce v. IRS — The Post-Mayo Shake Out Continues

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

TaxProf Blog op-ed:  Chamber of Commerce v. IRS:  The Post-Mayo Shake Out Continues, by Kristin Hickman (Minnesota):

Here we go again.  In 2011, the Supreme Court in the Mayo Foundation case declared that it was “not inclined to carve out an approach to administrative review good for tax law only.”  Since then, courts and scholars have been engaged in an ongoing enterprise of debating just how far to take that suggestion.  Last week, in Chamber of Commerce v. IRS, a federal district court in Texas offered up the latest installment in the ongoing post-Mayo shake out when it invalidated a set of Treasury regulations —this time, Temp. Treas. Reg. 1.7874-8T regarding inversion transactions — on Administrative Procedure Act (APA) grounds.  The court’s opinion addressed several issues concerning the relationship between the IRC and general administrative law principles.  And, as with Cohen, Home Concrete, Altera, and other cases in this line, the Chamber of Commerce decision has inspired cheers from some, hand wringing by others, and a great deal of curiosity as tax specialists and administrative law generalists again try to understand one another.

Treasury adopted Temp. Treas. Reg. § 1.7874-8T as part of a more extensive set of temporary regulations for the purpose of shutting down a wave of inversion transactions, including the Allergan-Pfizer merger mentioned in the court’s opinion.  The Chamber of Commerce challenged Temp. Treas. Reg. § 1.7874-8T as exceeding the scope of Treasury’s statutory authority under Internal Revenue Code (IRC) § 7874, as arbitrary and capricious under APA § 706 for inadequate explanation, and as procedurally invalid under APA § 553 for lack of notice and comment.  The court upheld the Temp. Treas. Reg. § 1.7874-8T against the first two challenges, thus signaling that Treasury possesses the authority to and likely can adopt these very same regulations if only it follows the proper procedures.  But the court invalidated Temp. Treas. Reg. § 1.7874-8T on procedural grounds and, in doing so, squarely addressed an issue that has been simmering on the back burner for a long time:  the procedural validity of temporary Treasury regulations. 

Like many government agencies, Treasury issues temporary regulations without notice and comment quite frequently.  Unlike most government agencies, however, Treasury does not typically assert the good cause exception of APA § 553 as the basis for foregoing those procedures.  Temp. Treas. Reg. § 1.7874-8T was no exception.  Rather, the government defended its lack of notice and comment by claiming that IRC § 7805 expressly authorizes Treasury to issue temporary regulations without notice and comment.  The court rejected that argument, holding instead that IRC § 7805 “does not expressly exempt temporary regulations” from APA procedural requirements.  A few other cases have suggested the possibility of this outcome — in particular, Tax Court Judges Halpern and Holmes concurring in the Intermountain case.  Chamber of Commerce is the first decision to hold as much.

The government also claimed that Temp. Treas. Reg. § 1.7874-8T was exempt from APA notice and comment procedures as an interpretative rule.  Despite the Mayo Court’s decision that general as well as specific authority Treasury regulations carry the force of law, and notwithstanding the Tax Court’s unanimous conclusion in its Altera decision that general as well as specific authority Treasury regualtions are legislative rules, the government continues to claim that most Treasury regulations are interpretative rules.  The Chamber of Commerce court joined those earlier courts in rejecting the government’s characterization of its regulations, holding instead that the provisions of Temp. Treas. Reg. § 1.7874-8T “are not mere interpretations of the statute, but substantive modifications to the application of the statute,” and thus that Temp. Treas. Reg. § 1.7874-8T “is a substantive or legislative regulation.” 

Before getting to the merits of the case, the Chamber of Commerce court addressed two further issues, both regarding whether the case was justiciable in the first instance.  First, the court rejected the government’s argument that the plaintiffs lacked standing, finding that the Chamber of Commerce had associational standing because its members, Allergan and Pfizer, had an announced-but-not-closed merger agreement that was “thwarted by” and “a targeted object of” Temp. Treas. Reg. § 1.7874-8T.  Also, the court rejected the government’s claim that the Anti-Injunction Act (AIA), IRC § 7421(a), precluded judicial review of the plaintiff’s claims.  The AIA bars suits “for the purpose of restraining the assessment or collection of any tax” except as otherwise permitted by the IRC.  Drawing from the Supreme Court’s 2015 decision in Direct Marketing Association v. Brohl interpreting the similarly-worded Tax Injunction Act, the court construed the AIA narrowly as limited to the enforcement context and, thus, as permitting pre-enforcement judicial review of APA-based challenges to Treasury regulations. 

The Chamber of Commerce decision should be considered with caution.  For now, it is only a single district court opinion.  The issues it addresses have been debated to varying degrees in the scholarly literature and in court briefs, and disagreements over the correct application of the law abound.  The government will likely appeal.  Even if the Fifth Circuit affirms, the government presumably will continue to maintain the same litigating position on at least some of these issues for quite some time, hoping to persuade other courts to its views.  Indeed, a Fifth Circuit affirmance of the AIA’s inapplicability to pre-enforcement challenges to Treasury regulations will simply add to a growing circuit split on that issue. 

Moreover, for all of claims of this being a taxpayer victory, the case represents at least a partial win for the government.  Again, the court held that Treasury possesses the statutory authority to adopt the regulations at issue and that its justifications for doing so were reasonable, not arbitrary or capricious.  These conclusions bode well for the final inversion regulations one assumes are coming.  Maybe a few inversions will occur before Treasury manages to finalize its proposed regulations, at some cost to the fisc.  But considering that Treasury at one time disclaimed the regulatory authority to stop inversion transactions, the pro-Treasury aspects of the Chamber of Commerce decision are significant. 

Still, the Chamber of Commerce decision is big news.  As desperately as some in the tax community might wish to confine the Mayo decision to its narrow holding regarding Chevron deference for Treasury regulations, the lower courts just are not going along with those wishes.  Quite simply, Mayo has changed how courts look at the relationship between the IRC and the APA.  Courts are willing to consider that the IRC’s provisions authorize deviations from APA requirements.  The government wins some of these cases even as it loses others.  But courts are no longer taking “tax is different” arguments at face value.  Meanwhile, the Chamber of Commerce court reached a pro-APA,  anti-tax exceptionalist set of conclusions that, if adopted widely, would fundamentally alter tax administration.  Standing doctrine may prove a bigger obstacle in some cases, but interpreting the AIA to permit pre-enforcement judicial review of Treasury regulations would inevitably lead to more such challenges.  Curtailing Treasury’s authority to issue temporary regulations would force Treasury to reorient how it uses its regulatory authority. 

The post-Mayo uncertainty surrounding longtime tax administrative practices is unsettling, particularly at a time when the IRS is grappling with a number of other administrative difficulties.  Some observers may anticipate and lament some cost to the fisc of requiring Treasury to adhere more closely to the same general administrative law requirements, doctrines, and norms that other federal government agencies must follow.  But the APA serves important systemic goals as well.  Other commentators will anticipate greater transparency and accountability in tax administration — qualities that are essential for maintaining public perceptions that the tax system is legitimate, fair, and worthy of voluntary compliance.

See also Sam Brunson (Loyola-Chicago), Appealing Chamber of Commerce v. IRS?