By Dustin Covello & Phil Karter
As Tax Blawg readers know, after the Supreme Court’s Mayo decision adopted the deferential Chevron standard for determining the validity of Treasury regulations (instead of the less deferential National Muffler standard that taxpayers preferred), taxpayers and practitioners have speculated that seeking to invalidate a regulation may be a fool’s errand. Since Mayo, many of the U.S. Circuit Court of Appeals (but not all) have shown a proclivity towards deference. Extrapolating from these precedents, on the heels of the Mayo decision, it appears that the pendulum has swung heavily toward courts routinely deferring to Treasury regulations. The question thus arises: is there a litigating forum where a challenge to regulatory deference might be more favorably received? Surprisingly, the answer may be the U.S. Tax Court.
As reported in Tax Notes yesterday (subscription required), Judge Holmes of the Tax Court recently shared with practitioners a list of rarely utilized strategies for challenging the validity of Treasury regulations. While the content of the Judge’s speech is useful information regardless of the litigating forum, the speech also reinforces a pattern that has emerged this year. Despite the decision in Mayo, the Tax Court has exhibited a stubborn streak in resisting the routine deference towards Treasury Regulations that other courts now seem to prefer.
The Tax Court’s resistance to regulatory deference has been demonstrated in at least two opinions issued this year since Mayo. In April, the Tax Court stuck to its guns in Carpenter Family Investments, LLC v. Commissioner by striking down for the second time Treasury regulations promulgated under section 6501(e), even though two Circuit Courts that deferred to the regulations did so while criticizing the Tax Court’s first opinion in Intermountain Insurance Services v. Commissioner. Likewise, last month, in Pullins v. Commissioner, the Tax Court struck down regulations imposing an uncodified, two-year statute of limitations on innocent spouse cases under section 6015(f), even though the Seventh Circuit had reversed a 2009 opinion in which the Tax Court reached the same result.
Moreover, further reflecting the Tax Court’s general reluctance to defer to the IRS, Judge Holmes’ remarks were not limited solely to challenging the validity of Treasury Regulations. In his speech, he also criticized so-called Auer deference, under which courts will generally defer to an agency’s interpretation of its own rules. Although Auer has historically been accepted as well-settled, Judge Holmes cited a recent concurring opinion by Justice Scalia in Talk America, Inc. v. Michigan Bell Telephone Co., in which the Justice wrote that he would consider overturning Auer on separation-of-power grounds.
Challenging the validity of Treasury regulations has always been an uphill battle. Nonetheless, Judge Holmes’ comments, coming on the heels of these recent decisions, demonstrates the Tax Court’s apparent reluctance to follow the trend of regulatory deference, which is important information to consider when choosing a litigating forum involving a regulatory challenge.
A final word of caution is that taxpayers would be well-advised to consider the law of the circuit to which an appeal of a favorable Tax Court result may lie, as reversals in cases such as Intermountain demonstrate. Despite these concerns, the recent Tax Court developments suggest that, like any pendulum that has swung too far in one direction, the deference pendulum may eventually swing back the other way. Perhaps the Tax Court is where it is swinging back first.