Pat Smith Continues Mapping the Path to Successful Challenges to IRS Regulations

         As noted in a previous IPB Business Insider, the Ivins Phillips & Barker team of Eric Fox, Les Schneider and Pat Smith successfully represented the taxpayer in the recently decided Dominion Resources case in the Federal Circuit. Dominion Resources was the first Court of Appeals decision ever to hold an IRS regulation invalid under the APA arbitrary and capricious standard. In the attached recently published articles from Tax Notes, Pat Smith continues his exploration of the post-Mayo world by examining the arbitrary and capricious standard as it applies to income tax regulations, and by lamenting the fact that the Supreme Court failed to provide more guidance in its Home Concrete decision. Specifically, in The APA’s Arbitrary and Capricious Standard and IRS Regulations, Tax Notes, July 16, 2012, he explains that the Supreme Court's Mayo decision and the D.C. Circuit’s Cohen decision have made clear that principles of administrative law generally, and the Administrative Procedure Act (APA) in particular, apply to tax law and the IRS just as they do to all other federal agencies. He argues that the APA’s arbitrary and capricious standard provides a powerful but seldom-used tool for taxpayers in challenging IRS regulations, because the IRS seems unaware of the requirements imposed by the standard and even instructs its personnel to draft preambles to regulations in a way that is inconsistent with what the standard requires. The Dominion Resources decision suggests that courts may be receptive to challenges to IRS regulations based on the APA's aribtrary and capricious standard.

         In What We Didn’t Learn from Home Concrete, Tax Notes, June 25, 2012, Pat points out that the case raised several significant issues concerning the application of the Chevron test for evaluating the validity of regulations, the scope of the Brand X rule for when agencies are permitted to overrule court decisions on issues of statutory interpretation, and the IRS’s authority to issue retroactive and temporary regulations. However, the decision provided authoritative guidance on none of those issues, because of the lack of a majority opinion on the reason the regulation was substantively invalid and because the holding of substantive invalidity made it unnecessary to reach the retroactivity and procedural issues.

         We hope you find these of interest.