US Court of Appeals for the Ninth Circuit

The Internal Revenue Service (IRS) had broad examination authority to determine the correct amount of tax owed by taxpayers. In addition to seeking information directly from a taxpayer, the IRS is also authorized to seek information from third parties. However, Internal Revenue Code (Code) Section 7602(c)(1) requires that the IRS provide “reasonable notice in advance

In Encino Motorcars, LLC v. Navarro, Sup. Ct. No. 15-415 (June 20, 2016), the Supreme Court of the United States invalidated a regulation issued by the US Department of Labor (DOL) under the Fair Labor Standards Act (FLSA). In doing so, it affirmed long-standing precedent regarding the procedural requirements of the Administrative Procedures Act (APA) and addressed the effect of noncompliance with those requirements on the deference, if any, courts must afford agency pronouncements. Thus, even though it is not a tax case, it is likely to have an effect on cases in which taxpayers argue that a treasury regulation is invalid.

The Court’s holding here is based upon an agency’s unexplained change in a long-standing position. The FLSA requires employers to pay overtime compensation to covered employees who work more than 40 hours in a given week. It exempts from this requirement “any salesman, partman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. From 1978 to 2011, the DOL’s position was that such employees were exempt from the overtime-pay rule. This position was set forth in a number of published pronouncements, including proposed regulations in 2008. However, when the regulations were finalized in 2011, the DOL took the opposite position. In a suit brought by a number of service advisors against a dealership for overtime pay, the US Court of Appeals for the Ninth Circuit resolved the matter by giving Chevron deference to the DOL’s interpretation embodied in the 2011 regulations, holding for the plaintiff employees. The Supreme Court majority denied Chevron deference and remanded the case to the Ninth Circuit for further proceedings on the meaning of the underlying statutory language.
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