Altera Corp. Petition for Rehearing Denied (11/12/19)

I have written before about the cause célèbre that is the Altera case.  Altera Corp. v. Commissioner, 145 T.C. 91 (2015), here, rev'd 926 F.3d 1061 (2019), here.  Today, the Ninth Circuit denied the petition for rehearing en banc.  See here.

The denial of the petition for rehearing is cursory, as usually the case with denials of petitions for rehearing en banc.

My prediction is that Altera will seek certiorari.  There is no direct conflict.  Altera will urge, I presume, the importance of the issue and conflict in principle with Supreme Court authority regarding interpretation and application of the arbitrary and capricious/State Farm (Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) standard).

There is a significant dissent by Judge Milan Smith (see Wikipedia, here), joined by Judges Callahan and Bade.  Judge Smith does not offer much new there that had not been said by the Tax Court and the Ninth Circuit panel (panel opinion and dissenting opinion).  Basically, Judge Smith claims that the Treasury Regulations failed procedural regularity under the § 706(2)(A) arbitrary and capricious standard, also called the State Farm standard.  The key for Judge Smith is that, in his view, the IRS justified the regulations on the arm's length standard alone rather than the commensurate with income standard and failed to adequately consider the comments in making the final decisions.

I have dealt with this genre of argument in discussing the panel opinions, so I just point to those discussions:  Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/20/19; 7/2/19), here.

I note that Judge Smith avoids the interpretive/legislative rule morass that the Tax Court jumped into (unnecessarily and erroneously) and that the Ninth Circuit panel majority avoided.  Judge Smith does, however, rightly note that an interpretation that fails the arbitrary and capricious standard is not entitled to Chevron deference.  (Slip Op. 22.)  Also, Judge Smith notes in passing (Slip Op. 24) Auer and Skidmore deference, neither of which apply (although he does not seem to recognize it) because (i) Auer applies, if at all, only to agency subregulatory interpretations of regulations (not involved in Altera) and (ii) Skidmore has no practical meaning because it supposedly defers to an interpretation of a statute that is persuasive, meaning that the interpretation needs no deference).

I also note that one of the supposed "practical" problems that Judge Smith raises (Slip Op. 26) is that the Ninth Circuit's reversal (whether by panel opinion or by en banc opinion) opens the possibility that the interpretation adopted by the Ninth Circuit may not be uniformly applied because the Tax Court reviewed opinion will continue to be applied by the Tax Court in cases appealable to other Circuits.  That possibility is just a feature of our tax system and the Tax Court's application of the Golsen rule.  I just don't think that favors in any way reconsideration of the Ninth Circuit's panel decision in Altera.  If anything, the Tax Court should reconsider its decision when presented with the issue in a case appealable to another circuit.