Eaton Wins Big on Appeal in Long-Running Contentious Litigation Over APAs (8/27/22)

In Eaton Corp. v. United States, 47 F.4th 434 (6th Cir 8/25/22), here and GS here, the Court gave Eaton a victory on all points of contention in long-running and highly contentious litigation over the Advance Pricing Agreement (APA). The APA is an advance agreement as to how the taxpayer will report its covered transfer pricing products or intangibles in future years so that, provided the taxpayer reports pursuant to the agreement, the IRS will not audit except to confirm reporting consistent with the agreement. (At least in earlier audits I handled, the APA methodology could be spread to past open years, if appropriate, but past years were not in issue in Eaton.)  The Court signals its holdings in its opening short paragraph:

            Taxes may well be “what we pay for civilized society,” Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting), but that doesn’t mean the tax collector is above the law. This case arises from the IRS’s efforts to circumvent basic contract law.

Not an auspicious start for the IRS.

In holding for Eaton, the Court resolved the following issues.

1. In a section captioned “Wrongful Cancellation: Burden of Proof,” the Court resolved a burden of proof issue. (Slip Op. 8-12.) The IRS argued that, since it made the § 482 adjustments in the notice of deficiency because Eaton violated the APA agreement, the standard was “arbitrary and capricious.”  The Court held that, because the predicate issue was whether Eaton violated the APA, the issue is one of contract interpretation as to whether Eaton breached the contract. (Under that notion, only If Eaton breached the contract, would Eaton then have the burden to prove that the IRS’s § 482 adjustments were arbitrary and capricious.)  As to the contract interpretation issue, the IRS bore the burden of proving that Eaton had breached the contract.

2. On the issue of whether Eaton violated the contract, the Court held (Slip Op. 12), applying contract law, that Eaton had not breached the agreement and therefore the IRS did not have the right to cancel the contract and issue the notice of deficiency with § 482 adjustments.

Legislative Rules And Chevron Deference An Oxymoron? (1/31/20; 2/10/20)

Today, I address courts frequent statements about Chevron deference applying to legislative rules.  I was reading the decision in Renewable Fuels Ass'n v. U.S. EPA (10th Cir. 1/24/20), here.  In the decision the Tenth Circuit says (cleaned up):

Legislative rules and formal adjudications are always entitled to Chevron deference, while less formal pronouncements like interpretive rules and informal adjudications may or may not be entitled to Chevron deference. 

This blog entry concentrates on the claim that legislative rules are always entitled to Chevron deference.  I claim that legislative rules are never entitled to Chevron deference because they are not interpretations of law; rather, legislative rules are the law, which means deference simply is not meaningful (just as courts do not defer to a statute).  (Caveat I do note one possible nuance in that, since the scope of a legislative rulemaking authority delegation is an interpretation, it is possible that the scope could be subject to agency interpretation and deference to that interpretation, although I argue that even as to scope deference is not appropriate.)

I start with an acknowledgement that the judges and scholars often claim that legislative rules (which must be regulations) are entitled to Chevron deference or some variant thereof.  E.g., Guedes v. Bureau of ATF, 920 F.3d 1, 17 (D.C. Cir. 2019), here (“Legislative rules generally Chevron deference,” quoting  Nat'l Mining Ass'n v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014)); Kristin E. Hickman, Unpacking the Force of Law, 66 Vand. L. Rev. 465, 509 (2013) (“Where an agency employs notice-and-comment rulemaking under clear congressional authority to adopt rules and regulations, there is little doubt that the courts will treat the rule both as legislative and as eligible for Chevron deference.”).  I could go on and on and on with variants of this claim.

Contrary to the this claim that legislative rules (regulations) are subject to Chevron deference, I claim that Chevron deference has a limited, if any, role for legislative rules.  I address this and other similar claims about Chevron in my article.  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN: https://ssrn.com/abstract=3400489.  Because my claim is laid out in more detail in the article, I just set forth here my reasoning for the claim.

1.  Legislative rules which the APA commands be promulgated by notice and comment regulation and be prospective only are the law if within the scope of the legislative authority Congress delegated to the agency.  Courts say that such legislative rules are like statutes and have the force of law.

2.  Deference is a concept of deferring to an interpretation of ambiguous statutory text rather than deferring to the statutory text itself.  So, too for a legislative rule which has the effect of a statute.  Courts do not defer to statutes or their equivalent, legislative rules.

3.  There is a theoretically possible place for Chevron deference to legislative rules in the agency's interpretation of the scope of the legislative rulemaking authority in the statutory text.  (I discuss below in paragraph 7 why I don't think Chevron is applicable to the scope issue, so I flag here that that is the only possible application of Chevron to legislative rules.)  Once it is determined that the legislative rule is within the scope, the legislative rule is the law and deference to the law is an oxymoron.

4,  Of course, agencies can in other interpretive documents interpret the legislative rule and, if appropriate, have Chevron, Skidmore-type, or Auer deference apply to the interpretation of the legislative rule.  But the legislative rule within the scope of the delegation is the law without any deference whatever.  Indeed the concept of deference to the law -- whether the law is in a statute or a legislative rule -- is an oxymoron (except possible as to scope of the legislative authority delegation).

Cert Petition Filed in Baldwin re Timely-Mailing, Timely Filing Regulations and Chevron (10/30/19)

Some conservative/libertarians who claim loudly to fear the administrative state are now worked up over a tax case.  In Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019), here, which I discuss in my Federal Tax Procedure 2019 Practitioner edition (p. 188 n. 832).  Baldwin applied the dreaded Chevron and Brand X, feared as tools of the dreaded administrative state.

The background is the timely mailing timely filing rule of Section 7502.  Baldwin held that, because of changes in the regulations (through the filters of Chevron and Brand X), the requirements of 7502 pre-empt the field of timely mailing-timely filing.  Here is the discussion in the text and footnote of the practitioner edition.

2. Common Law Mailbox Rules.
    a. General. 

The Supreme Court has summarized the common-law mailbox rule:  

The rule is well settled that if a letter properly directed is proved to have been either put into the post office or delivered to the postman, it is presumed, from the known course of business in the post office department, that it reached its destination at the regular time, and was received by the person to whom it was addressed.  

This rule may apply in tax cases, although the decisions are varied as to how and if it applies (i.e. some courts hold that § 7502 pre-empts the field, particularly in light of changes to the underlying regulations n832 ).
   n832 Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019). Regs. § 301.7502-1(e)(2) provides that, if there is no actual delivery (which would set the latest date), proof of proper use of the USPS methods or the designated PDS methods “are the exclusive means to establish prima facie evidence of delivery.” DOJ (and thus the IRS’s) position, accepted by the Court in Baldwin, is currently arguing that these regulations to limit mailing as delivery to the prescribed method are exclusive under the authority of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) on the basis that the statute itself is ambiguous as to the application of the mailbox rule. As such, not only is the regulation valid, it pre-empts earlier judicial authority to the contrary under Nat’l Cable & Telecomms.  ss’n v. Brand X Internet Servs., 545 U.S. 967 (2005) (which hold that Chevron qualified interpretive regulations can pre-empt judicial authority except where the judicial authority precludes the interpretation).

The Cato Institute, NFIB and some scholars have filed an amicus brief on the Baldwin petition for cert. See William Yeatman, Baldwin v. United States Is Ideal Vehicle to Revisit Reflexive Deference, 36 Yale J. on Reg.: Notice & Comment (10/29/19), here.  I recommend the article, although it uses APA-speak which may not be familiar to many tax procedure types who spend their time wallowing around in the IRC.  The linked article has further links to the amicus brief.  A key excerpt from the article:

Cancellation of APA for Failure to Meet Terms and Conditions Reviewed on Abuse of Discretion Standard (7/10/13)

One of the major IRS initiatives for a number of years is to enter Advance Pricing Agreements ("APAs) with taxpayers to determine, in advance, transfer pricing methodologies.  APAs require taxpayer representations as to underlying facts and conditions and taxpayer economic studies justifying the methodology requested.  The IRS reviews the presentations, performs such testing and economic studies as it deems appropriate, and then attempts to reach an agreement with the taxpayer.  Those agreements are contracts, but do incorporate the terms of the relevant Revenue Procedure (currently Rev. Proc. 2006-9, 2006 IRB 1).  Among the provisions of the Rev. Proc. is the IRS authority to terminate the APA is the terms and conditions are not met.

In Eaton Corp. v. Commissioner, 140 T.C. No. 18 (2013), here, the IRS revoked the taxpayer's Advance Pricing Agreement.  Tax Court was presented the following arguments:

Taxpayer argument:  The APA is a contract and, if the IRS terminates for failure to meet the terms and conditions, the IRS bears the burden of establishing that the taxpayer failed to meet the terms and conditions.

IRS argument:  The taxpayer must show abuse of discretion for the IRS decision to terminate the APA.

Holding:  For the IRS.  Taxpayer must establish abuse of discretion.

Here are the key excerpts that show the line of reasoning (some footnotes omitted):