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By Erin McManus
Oct. 5 — The Administrative Procedure Act—once relegated to the distant memories of law school for most attorneys—is garnering the attention of tax practitioners as a way to challenge disputed tax assessments.
An Oct. 5 panel of private practice and government attorneys explained the nuts and bolts of challenging regulations under the APA, which was intended to regulate the regulators by imposing requirements on federal agencies for issuing rules and providing means for the regulated to challenge those agency actions.
Wynne Kelly of the U.S. Attorney's Office for the District of Columbia said the federal district and appeals courts in Washington “take an expansive view of the APA,” referring to the U.S. District Court for the District of Columbia and the U.S. Court of Appeals for the District of Columbia Circuit.
Andrew Strelka, counsel at Miller & Chevalier in Washington, told the panel session—hosted by the Tax Section of the District of Columbia Bar Association—that the bench in Washington “is very familiar with the APA.” Prior to joining Miller & Chevalier, Strelka was with the Department of Justice Tax Division.
Emily Lesniak of the Internal Revenue Service's Office of Chief Counsel and Christian Vergonis, a partner at Jones Day in Washington, agreed that APA litigation proceeded more smoothly in the D.C. federal courts.
“Relief under the APA will be injunctive or declaratory,” Strelka said. He added that a complaint “must craft the requested relief very specifically.”
The court will “compel agency action unlawfully withheld or it will hold unlawful and set aside agency action found to be unlawful,” Vergonis said.
Neiland Cohen, after many years of litigation, never did get a refund of long-distance telephone excise tax despite several federal courts determining that the IRS illegally collected the tax, because the U.S. Court of Appeals for the District of Columbia Circuit decided it couldn't order the IRS to issue rules enabling Cohen to file for a refund (92 DTR K-4, 5/13/14).
Kelly said, “if you claim more than $10,000 in damages, you will get Tucker Acted and sent to” the U.S. Court of Federal Claims, which is less familiar with the APA. The Tucker Act puts most claims in excess of $10,000 under the exclusive jurisdiction of that court.
Vergonis said “failure to participate in the rulemaking process can be deemed a waiver of the right to challenge the resulting rules.” However, he added that “generally, as long as someone made the argument” during the rulemaking process—not necessarily the plaintiff—the plaintiff can make the argument when challenging the resulting rules in court.
Lesniak said that “if the agency was never aware of the problem, it can't respond to it.”
Both the private and government attorneys agreed that mass mailings of form letters from trade association members or at the instigation of an interest group didn't enhance the weight of a particular argument.
The panel didn't touch on the issues in the pending appeal by the IRS to the U.S. Court of Appeals for the Ninth Circuit of a U.S. Tax Court decision invalidating a transfer pricing rule for violating the APA in Altera Corp. v. Commissioner (177 DTR K-1, 9/13/16).
The Tax Court found that the IRS violated the “reasoned decision-making” standard of the APA when the agency adopted a rule that requires related companies to share the cost of stock-based compensation.
The IRS ignored extensive testimony of taxpayers who argued that unrelated parties don't share stock-based compensation costs, the Tax Court found. The court noted that in adopting the final rules, the Treasury Department never responded to those comments and never explained its basis for concluding otherwise.
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