Pat Smith quoted in Tax Notes on a potential Altera-type case in the D.C. Circuit

Ivins attorney Pat Smith was quoted in a Tax Notes article on a case that is currently pending in the D.C. Circuit on appeal from the Tax Court, Good Fortune Shipping v. Commissioner, that, based on the questioning by the judges at the oral argument, could apply the same type of reasoning that the Tax Court previously applied in Altera v. Commissioner to invalidate a tax regulation under the Administrative Procedure Act’s arbitrary and capricious standard based on the failure of the IRS and Treasury to provide a satisfactory explanation for why they were adopting the rule in the regulation. Another Altera May Be Waiting in the Wings of the D.C. Circuit.

“If the opinion comes out in the way that the oral argument suggested, I think it’s going to be very, very significant. . . . It’s along the lines of Altera,” Patrick J. Smith of Ivins Phillips and Barker Chtd. said. If the D.C. Circuit, the court of appeals with the most expertise in administrative law, “were to come out with a decision that these regulations violated the arbitrary and capricious standard because they didn’t have an adequate explanation for what they were doing, that would be absolutely huge,” Smith said.

Smith said it was striking that the court appeared to be “extremely sympathetic” to the argument that the regs made no attempt to explain the government's position.

Smith also argued that the IRS’s position of limited applicability [for the arbitrary and capricious standard] was wrong, adding that he was unaware of any cases that had made such a distinction in drawing the line where the APA was pertinent.

“But clearly that is an argument that the government has made,” Smith said. “That’s their defense . . . and if the decision in this case comes out in the way the oral arguments seem to suggest, that would totally refute the idea that State Farm and arbitrary and capricious are limited to factual and empirical kinds of determinations.”

According to Smith, Altera has already started to change the landscape, with better APA compliance in regulation writing since the Tax Court’s unanimous decision, but that won’t remedy the noncompliance of regs previously drafted under the old standard.

“The Tax Court intended [Altera] to be a wake-up call. But still that leaves a lot of regulations out there that were written in a way that they’d be vulnerable,” Smith said.