Several notable court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post – Tax Controversy 360 Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.
On October 28, 2016, the US Supreme Court (Supreme Court) granted certiorari in the case of Gloucester County Sch. Bd. V. G.G., No. 16-273, which involves a dispute as to whether an unpublished letter by a Department of Education (Department) official purporting to interpret the agency’s regulatory interpretation relating to discrimination on the basis of sex is entitled to Auer deference. The petition for writ of certiorari specifically asked the Court to consider three questions: (1) whether the Court should retain the Auer doctrine; (2) if Auer is retained, whether deference extends to the unpublished agency letter; and (3) with or without deference, whether the Department’s interpretation of its own regulation should be given effect. The Supreme Court’s grant of certiorari was limited to Questions 2 and 3 presented by the petition.
We have previously discussed Auer deference in the tax context here and here. Although the Supreme Court has declined to address whether the Auer doctrine should be retained, it will be interesting to see if the Court follows its recent opinions in this area and further curtails the application of the doctrine given the unpublished form in which the Department’s interpretation was rendered in the Gloucester County case. The Internal Revenue Service (IRS) has taken the position in prior litigation that interpretations in unpublished IRS guidance are eligible for Auer deference. The Tax Court, on the other hand, has indicated that to be entitled to Auer deference an IRS pronouncement must be issued in published form so that taxpayers are aware of such guidance in preparing their tax returns. We will continue to follow this case and report on any future developments.
Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.
One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”
Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.
The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”
A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]
As we previously discussed, the issue of deference is a hot topic in the tax arena. Unfortunately, the Supreme Court of the United States recently passed on the opportunity to address the continuing validity of what is commonly known as Auer deference. This level of deference sometimes applies when an agency interprets its own regulations.
In United Student Aid Funds, Inc. v. Bryana Bible, S.Ct. No. 15-861, the Supreme Court denied a petition for writ of certiorari, leaving in place an opinion by the Court of Appeals for the Seventh Circuit that deferred to the Department of Education’s interpretation in an amicus brief of the regulatory scheme that it enforces. In a scathing dissent from the denial of certiorari, Justice Thomas stated that the Auer doctrine “is on its last gasp” and that the Court should have taken the opportunity to reconsider and re-evaluate the doctrine. The Supreme Court’s rules require that at least four Justice must vote to accept a case. Although Chief Justice Roberts and Justice Alito have recently acknowledged that the doctrine should be reconsidered, the other vocal member in favor or reconsideration was the recently deceased Justice Scalia. It remains to be seen whether another current Justice will join these three Justices in the future to vote to revisit the issue.