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Eighth Circuit Holds the Mayo in Tax Regulation Invalidity Case

by and | May 17, 2021 | , , ,

In the latest tax regulation deference case, the Eighth Circuit provided guidance to taxpayers and tax practitioners on the “analytical path” to resolve the question of whether a tax regulation is a valid interpretation of the Internal Revenue Code. The court held that the regulation was invalid in part because it unreasonably added conditions to the statutory requirements for qualified educational organizations, however, it was valid as to its interpretation regarding the permissible scope of the taxpayer’s activities to fit within the applicable statute. The opinion is noteworthy for its detailed examination of statutory and legislative history, judicial interpretations and agency position during legislation in its analysis of Congress’ intent.

Deference is one topic that captivates many, and tax cases referencing Chevron, Skidmore and Auer (and more recently Kisor) always grab attention. The latest deference case in the tax area is Mayo Clinic v. United States, No. 19-3189 (8th Cir. May 13, 2021). For some background on deference, including the district court proceedings in the Mayo Clinic case, see here.

In the Mayo Clinic case, the question was whether the taxpayer was a “qualified organization” exempted from paying unrelated business income tax (UBIT) on unrelated debt-financed income under Internal Revenue Code (Code) Section 514(c)(9)(C)(i). Answering this question required determining whether the taxpayer was an “educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activity are regularly carried on” within the meaning of Code Section 170(b)(1)(A)(ii). Relying in part on Treasury Regulation Section 1.170A-9(c)(1), the government asserted that the taxpayer was not a qualified organization because it was not an educational organization because its primary function was not the presentation of formal instruction (primary-function requirement) and its noneducational activities were not merely incidental to the educational activities (merely-incidental requirement). The district court – Mayo Clinic v. United States, 412 F.Supp.3d 1038 (D. Minn. 2019) – held in favor of the taxpayer and invalidated the regulation, holding that the primary-function requirement and the merely-incidental requirement were not intended by Congress to be included in the statute. The Eighth Circuit reversed and remanded the decision. Implementing the longstanding two-pronged deference test under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) and acknowledging recent precedent in Kisor v. Wilkie, 139 S.Ct. 2400 (2019), the Mayo Clinic court emphasized that the question before it was whether the government “stayed within the bounds of its statutory authority.” To answer this question, the court stated that to determine whether the statute was unambiguous required examining the statutory history and applying traditional tools of statutory construction. This led the Eighth Circuit to trace the evolution of the Code over more than a century, focusing on changes to statutory language, legislative history, agency positions during the legislative process and judicial interpretations of the law.

Based on this exhaustive analysis of the evolution of [...]

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The (Potential) Demise of Auer Deference?

by | Dec 12, 2018 | , ,

On December 10, 2018, the Supreme Court granted certiorari in the case of James L. Kisor v. Peter O’Rourke, Acting Secretary of Veteran Affairs, S.Ct. Dkt. No. 18-15. Although this is not a tax case, it has significant implications for taxpayers and tax practitioners. The reason: the Court will finally squarely address the issue of whether it should overrule its controversial opinions in Auer v. Robbins, 519 US 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 US 410 (1945). Those opinions held that an agency is uniquely positioned to interpret any ambiguity in its own regulations and, therefore, such interpretations should be afforded controlling deference so long as reasonable. The Court’s decision to grant certiorari in Kisor is significant because the sole question to be considered is “[w]hether the Court should overrule Auer and Seminole Rock” and not how to apply that doctrine.

In the tax context, the Internal Revenue Service (IRS) and the Department of Justice (DOJ) Tax Division have both argued that interpretations taken in unpublished guidance are eligible for Auer deference, even if such positions are articulated for the first time on brief in a pending case in which the agency is a party. Courts have not been uniform in their application of Auer. For example, the Tax Court has indicated that to receive deference the IRS’s position should be in published guidance while some courts have given deference to statements made on brief.

The death of Justice Scalia, who ironically wrote Auer but later advocated for its demise, seemed to strike a blow to those seeking to overrule it. However, with the recent additions of Justices Gorsuch and Kavanaugh, it appears that the Supreme Court many now have a majority of Justices in the anti-Auer camp given that Chief Justice Roberts and Justices Thomas and Alito have all expressed doubts about the doctrine in the past. Additionally, the continuing role of Chevron deference has been questioned and, if Auer is overruled, Chevron could be the next deference battleground.

We will continue to follow this case closely and provide updates in the future. In the meantime, the links below contain prior discussions on Auer and other forms of deference in the tax context.



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Senior Tax Court Judge Robert A. Wherry, Jr. Retires

by | Jan 8, 2018 | , ,

On January 3, 2018, Chief Judge Marvel of the US Tax Court (Tax Court) announced that Senior Judge Robert A. Wherry, Jr. fully retired as of January 1, 2018, and would no longer be recalled for judicial service.

Judge Wherry was appointed on April 23, 2003, by President George W. Bush. In 2014, Judge Wherry took senior status and continued to try cases. By statute, the Tax Court is composed of 19 presidentially appointed judges. Judges are appointed for a term of 15 years and after an appointed term has expired, or they reach a specified age, may serve as a “senior judge” if recalled by the Tax Court. The Tax Court also has several special trial judges, who generally preside over small tax cases. (more…)



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Tax Court: Mailbox Rule Can Apply with Stamps.com Postage Label

by and | Dec 5, 2017 | , , ,

Within the Internal Revenue Code (Code) is a rule commonly known as the “mailbox rule” or the “timely mailed, timely filed rule.” Under Code Section 7502(b), the date that an item—including a Tax Court petition—is postmarked and mailed can also be the date the item is considered filed. When an item is received after the filing deadline, the mailbox rule can make all the difference. There are, however, procedural requirements which must be satisfied. In Pearson v. Commissioner, the Tax Court, in a court-reviewed opinion, held that a Tax Court petition mailed with a Stamps.com postage label was timely filed under the mailbox rule.

Taxpayers generally have 90 days to file a petition with the Tax Court after receiving a notice of deficiency. In Pearson, the Tax Court received the taxpayers’ petition one week after the 90-day period expired, but the envelope in which the petition was mailed bore a Stamps.com postage label dated within the 90-day period. The administrative assistant who created the Stamps.com postage label supplied the court with a declaration under penalty of perjury stating that she went to a US Post Office the same day as the postage label date and mailed the petition. (more…)



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Senate Attempts to Repeal Chevron Deference

by and | Jul 31, 2017 | , ,

In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 467 US 837 (1984), the Supreme Court of the United States established a framework for assessing an agency’s interpretation of statutory provisions. First, a reviewing court must ask whether Congress “delegated authority to the agency generally to make rules carrying the force of law,” and whether the agency’s interpretation was promulgated under that authority. United States v. Mead Corporation, 533 US 218, 226–27 (2001). Delegation may be shown in a variety of ways, including “an agency’s power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent.” Id. at 227. If an agency has been delegated the requisite authority, the analysis is segmented into two steps.

Under step one, the reviewing court asks whether Congress has clearly spoken on the precise question at issue. See Chevron, 467 US at 842. If so, both the court and agency must follow the “unambiguously expressed intent of Congress,” and the inquiry ends. Id. at 842–43.

If the statute under review is ambiguous or silent, the reviewing court moves to step two: whether the agency’s interpretation is based on “a permissible construction of the statute.” Id. at 842. This inquiry asks whether the interpretation is reasonable and not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 US at 843; see also Judulang v. Holder, 565 US 42, 53 n.7 (2011); Encino Motorcars, LLC v. Navarro, 579 US ____, 136 S. Ct. 2117, 2125 (2016). If the agency’s interpretation passes muster, then the agency’s interpretation is given Chevron deference, and afforded the force of law. The Chevron two-part analysis applies to tax regulations issued by the United States Department of the Treasury and the Internal Revenue Service. Mayo Foundation for Medical Education & Research v. United States, 562 US 44, 55 (2011). (more…)



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Tax Court Rejects IRS Reliance on “Cursory” Analysis in Revenue Ruling

by | Jul 19, 2017 | , ,

We have previously discussed, in March and October of 2016, the various levels of deference given to Internal Revenue Service (IRS) guidance, whether it is in published or private form. For revenue rulings, courts traditionally apply Skidmore deference, which essentially looks at the persuasiveness of the ruling. Under this standard, and the IRS’s position in its procedural regulations, if a ruling contains the same material facts and its analysis is persuasive, courts will generally defer to it.

The Tax Court’s recent opinion in Grecian Magnesite Mining, Industrial & Shipping Co., SA, v. Commissioner, 149 TC No. 3 (July 13, 2017), is a friendly reminder that just because a revenue ruling addresses the same material facts present in a taxpayer’s case does not automatically mean that courts will side with the IRS. In Grecian, a revenue ruling contained three fact patterns which were essentially the same as the taxpayer’s facts. The ruling held that gain realized by a foreign partner upon disposing of its interest in a United States partnership should be analyzed on an asset-by-asset basis, and that to the extent the partnership’s assets would give rise to effectively connected income (ECI) if sold by the partnership, the departing partner’s pro rata share of such gain should be treated as ECI. Despite this conclusion, the Tax Court rejected the IRS’s argument that the ruling was entitled to deference and required upholding the IRS’s deficiency determination. Rather, the court noted that the ruling’s discussions of the relevant partnership provisions was “cursory in the extreme” and it criticized the ruling’s treatment of the United States taxation of international transactions. As a result, the court declined to accord any deference to the ruling and ultimately found that the taxpayer’s position was correct as to the issue addressed in the ruling.

Practice Point: Although many revenue rulings contained detailed discussions and analysis of the tax laws, some are based on blanket statements of law that are not supported by relevant authorities. In these situations, taxpayers and their advisors should carefully consider whether a court would afford any deference to such a blanket statement.



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Deference Denied to IRS Notice Issued Post-Litigation

by | Oct 10, 2016 | , ,

Sometimes a loss in a discovery battle is really a win. That is certainly the outcome in Sunoco, Inc. v. United States, 2016 WL 334578 (Fed. Cl., No. 1:15-cv-00587, 10/6/16). In Sunoco, Judge Wheeler of the Court of Federal Claims denied Sunoco’s motion to compel production of the background file documents for Notice 2015-56 (Aug. 15, 2015). The court, however, denied the motion on the grounds that the requested documents are unnecessary because the Notice is not entitled to Skidmore deference.

Under Skidmore v. Swift, courts may give deference to an agency’s interpretation of its governing laws even when the agency does not use its rulemaking powers. In deciding whether to give deference to the agency’s interpretation, courts consider the interpretation’s “thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.”  323 U.S. 134, 139-140 (1944).

In June 2015, Sunoco filed a complaint seeking refunds for federal income taxes relating to the tax treatment of the alcohol fuel mixture credit. Sixty-five days after the complaint was filed, the Internal Revenue Service (IRS) issued Notice 2015-56 taking a position contrary to Sunoco’s. The parties filed cross-motions for judgment on the pleadings and partial summary judgment. In its filings, the government claimed, among other things, that Notice 2015-56 was entitled to Skidmore deference. In response, Sunoco sought internal IRS documents relating to the issuance of Notice 2015-56 that it contended would assist the court in determining whether Skidmore deference was appropriate.

In denying Skidmore deference to Notice 2015-56, the court identified three factors – the timing of the Notice, the lack of authority and the inconsistency with prior IRS advice. The court found the Notice to be self-serving because it was issued when “it was actually litigating.” Additionally, the Notice provided no authority for its position, which the court would have expected considering its finding that the position conflicted with the Internal Revenue Service’s position in a Chief Counsel Advice issued two years earlier. Thus, the court denied Sunoco’s motion to compel on the ground that it was moot because Notice 2015-56 is not entitled to deference.

In situations where the government is claiming deference to agency pronouncements, taxpayers should consider requesting the background files. These files might shed light on the matters considered by the government and provide a defense to the deference argument.



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Auer Deference Debate Remains Unresolved

by | May 20, 2016 | , ,

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.



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Update on Deference to IRS Positions

by , and | Apr 20, 2016 | , , ,

As we discussed here, and in our recent article in The Federal Lawyer, deference to Internal Revenue Service (IRS) pronouncement is an important issue for taxpayers and their advisors. Our prior writings dealt generally with the three levels of deference in tax cases and how they have been applied by the courts. A recent Tax Court case looks at the level of deference owed to statements in preambles to tax regulations.

In Estate of Morrissette v. Commissioner, 146 T.C. No. 11 (Apr. 13, 2016), the taxpayer cited to the preamble to regulations dealing with split-dollar life insurance arrangements. Those regulations dealt with two mutually exclusive regimes for taxing these types of arrangements entered into after September 17, 2013. The preamble to the regulations included an example that was structurally identical to the arrangements at issue in the Tax Court case. In reviewing the preamble, the court noted that while it had previously been unpersuaded by a preamble, it believed that the preamble was a statement of the IRS’s interpretation of the statute and therefore should be judged under the “power to persuade” standard in Skidmore v. Swift & Co., 323 US 134, 140 (1944). The Tax Court found that the preamble was consistent with the taxpayer’s interpretation of the statute and contrary to the IRS’s position, and found the logic of the preamble to be sound.

The Tax Court’s statements regarding Skidmore deference are important for taxpayers, both in planning and defending transactions. In prior cases, the Tax Court has held that the IRS is “obligated to follow” its “published administrative position” and treated such positions as a concession as to the proper result, e.g., Dixon v. Commissioner, 138 T.C. 173, 188 (2013). A preamble to a regulation could be viewed as a published administrative position, given that it is part of a Treasury Decision that is published in the Internal Revenue Bulletin and the IRS’s position is that the Internal Revenue Bulletin is the “authoritative instrument of the Commissioner.” Treas. Reg. § 601.601(d). It is unclear whether the taxpayer in Estate of Morrissette argued that the IRS was obligated to follow the preamble.

Taxpayers that wish to rely on preambles to regulations, or that are defending against an IRS position based on a preamble, need to be aware of these arguments in planning and defending their transactions. To the extent the preamble is supportive of a position and contains a persuasive and sound analysis, one could argue that Skidmore deference applies. Under this argument, the IRS should not be able to disavow its interpretation of a statute or regulation. Additionally, taxpayers may wish to argue that under the principle announced in Dixon and prior Tax Court cases, the statements in a preamble constitute a concession by the IRS to which it is bound. A similar analysis should be undertaken if the preamble is contrary to the taxpayer’s position.



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Deference Principles in Tax Cases and the Unique Challenges of Auer Deference

by and | Mar 28, 2016 | , ,

The Federal Lawyer recently published an article we wrote which discusses how deference principles are applied in tax cases. The article can be accessed here. The Supreme Court of the United States, in Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55 (2011), confirmed that tax laws are subject to the same deference principles as other federal laws.

In general, these deference principles can be grouped into three levels, commonly referred to as Chevron, Skidmore, and Auer deference.  Chevron is often regarded as the strongest level of deference, and can apply where Congress explicitly leaves a gap for an agency to fill and the agency intends for its interpretation to have the force of law. Tax regulations can be entitled to Chevron deference. Skidmore deference, which is limited to an interpretation’s persuasive power, can apply to other IRS interpretations that are thoroughly considered, well-reasoned, and consistent with earlier and later IRS pronouncements.  Skidmore deference, which is generally considered a lesser level of deference than Chevron, can apply to revenue rulings and revenue procedures. The last level of deference, Auer, is a special level of deference that can apply when an agency interprets its own regulations. In Auer v. Robbins, U.S. 452, 461 (1997), the Supreme Court accorded deference to an agency’s amicus brief. The theory behind Auer is that an agency is uniquely positioned to interpret any ambiguity in its own regulations.  Courts have increasingly placed limitations on Auer and its continuing validity has been questioned by sitting members of the Supreme Court.

When we wrote the article, Justice Scalia was the leading member of the Supreme Court advocating for the abandonment of Auer. But he was not alone. Other justices have openly either written about the risks of Auer or indicated a willingness to reconsider the principles of Auer. In addition, all current justices have either written or joined in an opinion that casts serious doubts about Auer or expressed an indication to revisit the deference standard in an appropriate case. With Justice Scalia’s passing, it remains to be seen whether the Court will continue to seek such a case. But considering the increasing wave of limitations being placed on Auer, it would not come as a surprise if further limitations were issued.



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