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The “Major Questions Doctrine”: Another Tool to Challenge Tax Regulations?

by and | Jul 1, 2022 | ,

Debates have raged in recent years over the future of Chevron deference, particularly given the change in the makeup and views of the Supreme Court of the United States. We have written extensively on Chevron deference in the past (see here, here and here, for example). Although the Court has not addressed the continuing viability of Chevron, it has recently found ways to avoid applying Chevron deference to questions involving the interpretation of agency regulations.

In West Virginia v. EPA, No. 20-1530 (June 30, 2022), the Supreme Court did not address Chevron deference directly. However, it reconfirmed and applied what is known as the “major questions doctrine.” Under this judicial doctrine, which originated in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), a federal agency must point to clear congressional authorization for the authority it claims. Meaning, when a statute confers authority upon an agency to promulgate rules, a court must determine whether US Congress wanted to give the agency the power to make decisions of vast economic and political significance. Accordingly, “[a]gencies have only those powers given to them by Congress and it must be presumed that major policy decisions are left with Congress, not agencies.”

The Supreme Court’s recent decision is not limited to a particular agency. Indeed, the major questions doctrine has been applied in a tax context before. In King v. Burwell, 576 U.S. 473 (2015), for example, the Court applied the major questions doctrine in declining to defer to tax regulations interpreting the Affordable Care Act (internal references omitted):

In extraordinary cases … there may be reason to hesitate before concluding that Congress has intended [] an implicit delegation [to the agency to fill in the statutory gaps]. … This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep economic and political significant that is central to this statutory scheme; had Congress wished to assign that question to the agency, it surely would have done so expressly. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

Thus, it appears that the major questions doctrine is now firmly entrenched as another tool of statutory construction and should be considered in any analysis of whether tax regulations have been validly promulgated and are entitled to deference.

Practice Point: It will be interesting to see how the Supreme Court’s recent decision will impact future challenges to tax regulations. In the not too distant past, Administrative Procedure Act challenges to tax regulations and other published guidance were rare, but the Court’s 2011 decision in Mayo Found. for Med. Educ. & Research v. United [...]

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Late CDP Petitions May Still Be Entitled to Tax Court Review

by and | Apr 22, 2022 | , , ,

In a unanimous decision in Boechler, P.C. v. Commissioner issued on April 21, 2022, the Supreme Court of the United States reversed the US Court of Appeals for the Eighth Circuit’s ruling (which affirmed the US Tax Court) and held that the 30-day time limit to file a petition with the Tax Court in a collection due process (CDP) case is a non-jurisdictional deadline subject to equitable tolling. The Supreme Court remanded the case to determine whether the taxpayer is entitled to equitable tolling.

The one-day-late showdown started in 2015, when the Internal Revenue Service (IRS) notified Boechler, P.C. (Boechler), a North Dakota law firm, of a tax discrepancy. Boechler did not respond, which triggered the assessment of an “intentional disregard” penalty along with a notice that the IRS intended to seize Boechler’s property to satisfy the penalty. Boechler requested a CDP hearing before the IRS Independent Office of Appeals (IRS Appeals), arguing that: (1) there was no discrepancy in its tax filings and (2) the penalty was excessive. IRS Appeals rejected these arguments and sustained the proposed levy. Boechler then had 30 days to file its Tax Court petition but missed the deadline by one day. The Tax Court dismissed the petition for lack of jurisdiction, holding that the 30-day filing deadline is jurisdictional and cannot be equitably tolled. The Eighth Circuit affirmed.

The Supreme Court granted certiorari. The US government argued that the deadline was jurisdictional and the Tax Court lacks the power to accept a tardy filing by applying the doctrine of equitable tolling. Boechler argued that equitable tolling applied, and the Tax Court had jurisdiction over its case. The Supreme Court, continuing a trend of distinguishing between claim processing rules and jurisdictional rules, agreed with Boechler.

Internal Revenue Code (Code) Section 6330(d)(1) states, “[t]he person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” The Supreme Court explained that a procedural requirement is treated as jurisdictional “only if Congress ‘clearly states’ that it is” Arbaugh v. Y & H Corp., 546 U. S. 500, 515 (2006), although US Congress need not “incant magic words.” Sebelius v. Auburn Regional Medical Center, 568 U. S. 145, 153 (2013).

The Supreme Court clarified that the question was whether the statutory language limits the Tax Court’s jurisdiction to petitions filed within that timeframe. That answer turned on the meaning of the phrase “such matters.” The first independent clause explains what a taxpayer may do, (“The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination.”) However, the phrase “such matters” does not clearly mandate the jurisdictional reading and lacks clear antecedent. In addition, the Supreme Court also explained that Code Section 6330(d)(1) lacked in comparable clarity as to other tax provisions enacted around the same time. Finally, the Supreme [...]

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Supreme Court Justice Breyer Announces Upcoming Retirement—A Look Back at His Tax Opinion in Home Concrete

by and | Jan 31, 2022 | , , ,

On January 27, 2022, Supreme Court of the United States Justice Stephen Breyer formally announced his retirement, effective when the Supreme Court breaks for summer recess in June or July later this year—after his successor has been nominated and confirmed. Justice Breyer has served on the Supreme Court since 1994 and is the second-most senior justice after Justice Clarence Thomas.

Although Justice Breyer did not author a substantial number of tax opinions, the ones he did author are extremely important and include:

This post focuses on the Home Concrete case.

Home Concrete involved a challenge to the validity of US Department of the Treasury (Treasury) regulations issued during litigation that purported to overrule existing case law. In a 5-4 opinion authored by Justice Breyer, the Supreme Court rejected both the government’s statutory interpretation of the “substantial omission from gross income” exception to the normal three-year statute of limitations and the interpretation advanced in retroactive regulations issued during pending litigation. In doing so, the Court first applied principles of stare decisis and adhered to its prior opinion in Colony, Inc. v. Commissioner, which interpreted almost identical statutory language from the predecessor statute. It then held that, because it already interpreted the statute, there is no longer any different interpretation that is consistent with that precedent and available for adoption by the agency.

The history and procedural background are fascinating, and some of the issues highlighted in the case, but not directly decided, have been—and continue to be—developed. Further background on the case can be found in our 2012 Tax Executive article, “Home Concrete: The Story Behind the IRS’s Attempt to Overrule the Judiciary and Lessons for the Future.”

Practice Point: Home Concrete remains important today as there are several cases in the administrative and judicial pipeline involving challenges to tax reform and transfer pricing regulations. It is a must-read for any taxpayers who are currently, or are considering in the future, challenging the validity of Treasury regulations.

Andrew Roberson was one of the lawyers representing Home Concrete before the Supreme Court.



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Supreme Court Grants Certiorari in One Tax Case, Denies it in Several Others

by and | Oct 6, 2021 | , ,

Historically, the Supreme Court of the United States rarely grants petitions for certiorari in tax cases, and it appears this trend continues in the current term.

On September 30, 2021, the Supreme Court granted the petition for certiorari in Boechler, P.C. v. Commissioner. The case presents the question of whether Internal Revenue Code Section 6330(d)(1), which establishes a 30-day time limit for filing a petition in the US Tax Court to review a notice of determination by the Internal Revenue Service (IRS) in a collection due process matter, is a jurisdictional requirement or a claim-processing rule subject to the equitable tolling doctrine.

On October 4, 2021, the Supreme Court denied petitions for certiorari in Healthcare Distribution Alliance v. James and Taylor Lohmeyer Law Firm PLLC v. United States. The former involved a challenge to a US Court of Appeals for the Second Circuit decision that held that an opioid stewardship surcharge was a tax within the meaning of the Tax Injunction Act. The Court also found that the district court lacked subject matter jurisdiction to rule on the challenge to the payment. The latter case involved a law firm’s challenge to the US Court of Appeals for the Fifth Circuit’s decision that the IRS could use a “John Doe” summons to seek the identifies of taxpayers who it believed may have taken the firm’s advice to hide income offshore.

The Supreme Court also denied petitions for certiorari in the following cases:

  • Perkins v. Commissioner: A case regarding the taxability of income derived from the sale of land and gravel mined from treaty-protected land by an enrolled member of the Seneca Nation
  • Kimble v. United States: A case focused on Report of Foreign Bank and Financial Accounts penalties and
  • Razzouk v. United States: A case involving restitution for tax and bribery convictions

Still pending are petitions in Willis v. United States (which involves the value of collectible coins seized by the government and deposited into an IRS account) and Clay v. Commissioner (which deals with a dispute over whether to follow guidance from the Bureau of Indian Affairs or the IRS).

Practice Point: Although the Supreme Court rarely reviews tax cases, when it does, the decision is usually important because it’s applicable to numerous taxpayers. For example, cases such as Mayo Found. for Med. Educ. & Research v. United States and United States v. Home Concrete & Supply LLC both provided significant guidance for taxpayers regarding the IRS’s scope of regulatory authority. Additionally, non-tax cases from the Supreme Court can contain general principles that are also applicable and impact tax positions taken, or being considered, by taxpayers. Thus, it is important that taxpayers and their representatives stay abreast on what is happening at the Supreme Court.



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Ninth Circuit Holds Tax Form is Substance

by and | Jun 4, 2021 | , ,

The substance over form doctrine (and related step transaction and economic substance doctrines) are often invoked by courts to disallow tax consequences that seem too good to be true. Courts have struggled for years with how to properly apply these doctrines. Those advocating against application usually rely on the famous passage by Judge Learned Hand in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934): “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Those advocating for this position seek shelter in cases like Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945), in which the Supreme Court of the United States stated, “the incidence of taxation depends upon the substance of a transaction. …. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” But ultimately, as the Supreme Court explained in Gregory v. Helvering, 293 U.S. 465, 469 (1935), “the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended.”

However, what the statute intended is not always easy to determine. In Mazzei v. Commissioner, No. 18-82451 (9th Cir. June 2, 2021), the US Court of Appeals for the Ninth Circuit answered this question in the context of tax motivated transactions involving the since-repealed foreign service corporation (FSC) regime that was complied with all the formalities required by the Internal Revenue Code but which the Internal Revenue Service (IRS) asserted should nonetheless be recharacterized under the substance over form doctrine. The Court noted it is a “black-letter principle” and courts follow “substance over form” in construing and applying the tax laws. However, this doctrine is not a “smell test” but rather a tool of statutory construction that must be applied based on the statutory framework at issue. Thus, in appropriate situations where Congress indicates that form should control, the substance over form doctrine is abrogated.

That is exactly what happened in Mazzei. Agreeing with the First, Second and Sixth Circuits, which had previously addressed similar issues, the Ninth Circuit found that the statutory framework and history indicated that Congress did not intend for the substance over form doctrine to apply to the FSC regime. While “[i]t may have been unwise for Congress to allow taxpayers to pay reduced taxes” under the statutory scheme, “it is not our role to save the [IRS] from the inescapable logical consequence of what Congress has plainly authorized.”

Practice Point: The distinction between tax avoidance (permissible) and tax avoidance (impermissible) is not always an obvious line. Taxpayers should be able to rely on the words used by Congress when enacting tax laws, but courts [...]

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Supreme Court Opens Door to APA Challenge of Overreaching IRS Information Reporting Regime

by , and | May 28, 2021 | , , , ,

In CIC Services, LLC v. Internal Revenue Service, a unanimous US Supreme Court allowed CIC, a tax advisor, to proceed with a pre-enforcement challenge to the Internal Revenue Service’s (IRS) “reportable transaction” regime. CIC alleged that the IRS violated the Administrative Procedure Act (APA) when it issued Notice 2016-66 (Notice), deeming certain micro-captive insurance transactions as “reportable transactions” and sought an order enjoining enforcement of the Notice. The IRS sought to avoid judicial review by hiding behind the Anti-Injunction Act’s (AIA) bar on suits brought “for the purpose of restraining the assessment or collection of any tax.” Disagreeing with the trial and appellate courts, the Supreme Court allowed CIC’s suit to proceed, finding that CIC was challenging a regulatory mandate separate from any tax. As the Court explained, “The tax appears on the scene – as criminal penalties do too – only to sanction that mandate’s violation.” By choosing to address their concerns about micro-captive transactions by imposing a non-tax reporting obligation, Congress and the IRS “took suits to enjoin their regulatory response outside the Anti-Injunction Act’s domain.”

On remand, the Court’s decision leaves open questions that the lower courts must now address while also providing meaningful clues about how the Court may approach future disputes over IRS enforcement strategies. Such questions include: (1) does the reportable transaction regime as the IRS currently administers it violate the APA (See: Mann Construction, Inc. v. United States, No. 1:20-cv-11307 (E.D. Mich. May 13, 2021) (holding that IRS Notice requiring disclosure of listed transactions was not subject to APA’s notice-and-comment requirement); (2) would the AIA bar a suit to enjoin enforcement of a reporting obligation brought by a taxpayer, as opposed to an advisor; (3) how onerous must the challenged requirement be; (4) how disconnected from the tax penalty must the challenged requirement be and (5) is the existence of criminal penalties sufficient and/or necessary to exempt a challenge from the AIA?

Practice Point: APA challenges in tax cases have steadily increased since the Supreme Court’s rejection of tax exceptionalism 10 years ago in Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011). As tax law continues to get more complicated and the IRS issues additional guidance, we can expect this trend to continue. Understanding how to use the APA to challenge the overreaching of the IRS is an important tool for taxpayers and tax advisors alike. In the absence of a clear congressional mandate, any new enforcement policy issued by the IRS may be fair game for an APA challenge. The Supreme Court has opened the door to judicial review of unsanctioned IRS programs that place unfair burdens on taxpayers. And, this issue extends beyond the reportable transaction regime, including to the information reporting proposals recently announced by the Biden Administration.



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Let’s All Stop and Reflect for a Moment

by | Dec 21, 2020 | , ,

In a recent article for the American Bar Association’s ABA Tax Times, McDermott partner Andrew R. Roberson reflected on 2020 and the importance of giving back.

“From COVID-19 to the Black Lives Matter movement; from home office and Zoom to remote learning for students; and so on—these events have impacted us all, both on professional and personal levels.”

Access the article.



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2020’s Key Tax Controversy Developments

by and | Dec 16, 2020 | , , , , , ,

In the face of the pandemic and all the challenges that came with 2020, tax controversy marched on. In this article, we explore several important cases, including one of the most closely watched Supreme Court cases, CIC Services LLC v. Internal Revenue Service, which raises important questions regarding the scope of the Anti-Injunction Act and impacts the ability of taxpayers to engage in preenforcement challenges to regulations.

We also look into the latest updates in the transfer pricing area, changes to the Compliance Assurance Process, what to expect during the audit of a campaign issue and more.

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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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