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By Peter A. Lowy
Shell Oil Company, Houston, TX
Tax litigation typically involves legitimate disagreements about the interpretation of the tax laws which are notorious for their gray areas. Courts, charged with interpreting the law, typically arbitrate between the taxpayer's interpretation and the government's interpretation. But wait. Are the rules different if the case involves a dispute over the interpretation of a Treasury regulation? Well, according to the Federal Circuit in Abbott Labs,1 they are dramatically different: the government's position, even if proposed for the first time in a brief to the court, controls. Thus the taxpayer loses automatically any time the case turns on the interpretation of a Treasury regulation.
At least that is what the Federal Circuit's three-judge panel in Abbott Labs appears to have said. Abbott Labs involved a dispute over the proper interpretation of Regs. §1.925(a)-1T(e)(4). The government's interpretation there was not contained in any published guidance. It was contained only in the government's briefs – representing its litigating position – and in an unpublished IRS FSA.2 The three-judge panel considered whether the government's position was entitled to deference. In doing so, it looked to the Supreme Court case Auer v. Robbins, 519 U.S. 452 (1997), which said in the context of that case that courts should generally defer to an agency's interpretation of its own regulations.3 After all, the agency that drafted the regulation presumably knows what it means. Extrapolating from this principle, the Abbott Labs Court concluded that "[t]he IRS internal FSA memoranda and the position articulated in the government's briefs are the types of considered determinations that would normally be entitled to deference."4 The court accordingly accepted the government's position, without needing to evaluate the soundness of its analysis. Case over. Taxpayer never had a chance.
The notion that the government can dictate the outcome of cases by simply telling a court in its brief the correct interpretation of law is a radical departure from the customary view.5 Customarily in tax cases, courts are reluctant to accept the government's position even in published rulings, let alone a position merely stated in a brief. The Tax Court for example appears to flatly reject the notion that a position in the government's brief may be entitled to deference,6 and interposes that before the Auer line of precedent even potentially applies the agency position for which the government requests deference must be published in a manner that notifies affected persons of the agency's official position.7 Even then, one is hard pressed to find Tax Court cases in which the Auer line of precedent was controlling, despite the frequency of cases the Tax Court hears that involve the interpretation of regulations. The notion is also at odds with the back-of-the-hand treatment courts have historically given IRS interpretations issued during litigation.8
Arguably, the Abbott Labs Court's application of Auer stretches its principles on judicial deference beyond their breaking point. The situations in which the Supreme Court has typically applied the Auer line of precedent are markedly different than most tax cases. In general, the Supreme Court has applied the doctrine when the agency that is interpreting the regulation is a neutral third party with no pecuniary interest in the dispute. For example, in Auer v. Robbins,9 the Court asked the Department of Labor to appear as amicus to receive its view on labor regulations that affected a dispute between an employer and employee.10 Similarly, in Long Island Care,11 the dispute involved labor regulations relevant to employer-employee disputes. There, the Department of Labor, the agency to which the Court deferred, was interpreting a provision that regulated third parties, it was not opining on the proper construction of a regulation that would impact the outcome of a case in which the Department of Labor had a financial stake. In Seminole Rock, where the principles discussed in Abbott Labs appear to have been spawned, the regulation at issue related to price ceilings relevant to the sale of crushed stone between buyers and sellers. There, the Office of Price Administration to which the Court referred was not a buyer or seller but merely an agency with responsibility for regulating pricing between private parties under the Emergency Price Control Act of 1942. Extending the Auer principles to tax cases would, in contrast, permit the party in interest – the very party that stands to gain or lose money – to dictate the outcome of the case.
Notably, the Supreme Court has never applied Auer deference to tax cases, and in fact the Court on several occasions has had the opportunity but did not. For example, in U.S. v. Swank, 451 U.S. 571 (1981), the Court dealt with the interpretation of the percentage depletion regulations under §611. The dissent argued that under the Auer line of precedent (specifically, Seminole Rock, above) the Court should defer to a revenue ruling that interprets relevant regulations. The majority, in a 7-2 decision, did not follow the path that the dissent suggested and decided the case in contradiction to the IRS's published rulings, other administrative interpretations, and the position the government advocated on brief. Arguably, the fact the Court reached an outcome at odds with the Auer line of precedent implies that body of authority is inapplicable to tax cases. At a minimum, there may be friction between Abbott Lab's deference to a position set forth in the government's brief and the Supreme Court declining to defer to even published rulings.
Notwithstanding questions about Abbott Lab's consistency with existing case law, tax practitioners must contend with the Abbott Labs precedent if they litigate or are contemplating litigation in the Court of Federal Claims and Federal Circuit.12
The notion set forth in Abbott Labs is a potential game-changer. If the government is always right when it comes to an interpretation of a Treasury regulation, then the taxpayer can never win. For now, this is the law only according to a three-judge panel in the Federal Circuit. But potential litigants considering the Federal Circuit as a forum for a tax case need to be aware of this decision if contemplating a dispute that involves the interpretation of a Treasury regulation. While there are many factors litigants should consider in selecting the optimal forum to litigate a tax dispute, the Abbott Labs case may override any other considerations if the case turns on an ambiguous Treasury regulation or other agency pronouncement.
For more information, in the Tax Management Portfolios, see Levine, Peyser, and Weintraub, 630 T.M., Tax Court Litigation, Peyser, 631 T.M., Refund Litigation, and Lowy, 100 T.M., U.S. Federal Tax Research, and in Tax Practice Series, see ¶3880, Tax Court Litigation.
6 See, e.g., Intermountain Insurance Service of Vail, LLC v. Comr., 134 T.C. No. 11, 16-20 (2010) (rejecting Commissioner's interpretation of effective date provision in temporary regulation, even though interpretation contained in Chief Counsel Notice and trial briefs). At times the court has seemed to reject the Auer line of precedent altogether. Cf. Green Forest Mnfg, Inc. v. Comr., T.C. Memo 2003-75 (applying Skidmore to an IRS interpretation of Treasury regulations).
7 See, e.g., Pierre v. Comr., 133 T.C. No. 2, *36 (2009) (concurring); CSI Hydrostatic Testers, Inc. v. Comr., 103 T.C. 398, 409 (1994), aff'd 62 F.3d 136 (5th Cir. 1995); Phillips Petroleum Corp. v. Comr., 101 T.C. 78, 97 (1993), aff'd without published opinion 70 F.3d 1282 (10th Cir. 1995); Southern Pacific Transportation Co. v. Comr., 75 T.C. 497, 451 (1980).
8 See, e.g., Cottage Sav. Ass'n v. Comr., 499 U.S. 554 (1991) ([This] is not [a matter] on which we can defer to the Commissioner. For the Commissioner had not issued an authoritative, prelitigation interpretation …); Fribourg Navigation Co. v. Comr., 383 U.S. 272 (1966) (chastising a revenue ruling issued on the eve of trial as "a sudden and unwarranted volte-face" from prior positions); AMP Inc. v. U.S., 185 F.3d 1333, 1338-39 (Fed. Cir. 1999) ("[a] revenue ruling issued at a time when the I.R.S. is preparing to litigate is often self-serving and not generally entitled to deference by the courts."); Niles v. U.S., 710 F.2d 1391, 1393 (9th Cir. 1983) ("We do not rely on the … revenue ruling … since it was promulgated during the audit … [We] cannot allow the IRS to take advantage of self-serving rulings"); General Dynamics Corp. v. Comr., 108 T.C. 107, 120 (1997) ("revenue rulings are generally not afforded any more weight than that of a position … on brief … especially so here, where … not publish[ed] … prior to this controversy"); Tandy, Inc. v. Comr., 92 T.C. 1165, 1170 (1989); Ludwig v. Comr., 68 T.C. 979, 986 n.4 (1977) ("Revenue ruling was "a thinly veilied attempt to influence this litigation.").
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