In response to the Blog Question: "What will be the impact of the U.S. Supreme Court decision of Mayo Foundation on tax law? For instance, how will it change tax legislation, the regulatory process, tax return disclosures and regulation challenges?
Before getting to Mayo, we must recall that in Chevron v. Natural Resources Defense Council, Inc. (1984), the Supreme Court, in a non-tax case, stated a two part test:
"First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." The Supreme Court held that the EPA's "interpretation represents a reasonable accommodation of manifestly competing interests, and is entitled to deference." The Chevron two-part test effected an expansion in agency authority not only by creating greater latitude for agencies to change their interpretations, but also by granting increased deference.
The January 11, 2011, U.S. Supreme Court decision in Mayo Foundation for Medical Education and Research v. United States indicated that the higher Chevron deference now seems appropriate "when it appears that Congress delegated the authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority." Analysis of a regulation does not depend upon whether the delegation from Congress was general or specific - the difference between an "interpretive" reg and a "legislative" reg was abandoned - and on whether the regulation was issued by the IRS or some other administrative agency (the idea of "tax exceptionalism" was rejected).
Making it even worse for taxpayers was the March 11, 2011, Federal Circuit decision in Grapevine Imports, Ltd. v. U.S. This involved a "Son of Boss" shelter and the issue of whether an overstatement of basis was an omission of gross income that would allow the IRS to use the Section 6501(e) six year statute of limitations. The case is interesting in its own right, especially due to the contrary decision in the Ninth Circuit won by Steve Mather of Kajan, Mather & Barish in Bakersfield Energy Partners v. Commissioner (June 17, 2009). However, in the deference realm, this case is stunning because the IRS--during the pendency of the case--issued its own "self-help" regulations: 301.6229(c)(2)-1(a)(1)(ii)-(iii) and 301.6501(e)-1(a)(1)(ii)-(iii). The taxpayer "argues that the government is trying to change the rules in the middle of the game." The court indicates that it "understand[s] Grapevine's disappointment, [but] disagree[s] that this is an improper outcome. This case highlights the extent of the Treasury Department's authority over the Tax Code." The court cites a 1996 U.S. Supreme Court decision approving a regulation issued during the course of litigation, and is comforted by the fact that IRC Section 7805(b) itself provides that "The Secretary may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect." Will Grapevine be appealed?
So, at last, what is the impact of Mayo? Certainly it will make it more difficult for taxpayers to successfuly challenge IRS interpretive regulations. Will all regulations be more difficult to overcome, even those that do not undergo a notice and hearing process as required by the Administrative Procedures Act? Will the IRS tend to issue fewer Revenue Rulings and other forms of guidance since it is virtually guaranteed the highest level of deference with regulations? Or will the courts expand the types of guidance entitled to the high level of deference to include Revenue Rulings and other guidance (obviously not PLRs) originating from the IRS? Is there any reason to doubt that retroactive regulations, specifically including those issued during the course of litigation, will be given great deference?
The court's decision in Mayo can be viewed as eliminating the distinction between interpretive and legislative regulations. It also simplifies the number of factors courts must consider in reviewing an IRS regulation. Unfortunately, in the future, taxpayers may be in the position of having to argue, under the Chevron two-part test, that the statute is unambiguous in order to even have a chance to invalidate a regulation.
Comments