Page 2 - Altera: Why the Government Can't Count on Chevron Step Two

COMMENTARY / SPECIAL REPORT
• the regulation is a legislative rule and thus subject to the notice and comment require- ments of the Administrative Procedure Act (APA);8
• the commensurate with income standard un- der the transfer pricing rules, as interpreted by Treasury, is an insufficient basis for requiring CSA parties to share the cost of stock-based compensation;
• the regulation lacks any basis in fact;
• Treasury failed to engage in reasoned decision-
making under State Farm;9
• Treasury, after engaging in the notice and com- ment process, promulgated the regulation without responding to significant comments filed by commentators; and
• the regulation is contrary to the evidence sub- mitted to Treasury.
On appeal, one should expect the government to again assert that the commensurate with income standard provides an independent basis for up- holding the regulation. That is perhaps the govern- ment’s strongest argument. Also, the government will undoubtedly contend that the Tax Court’s findings of fact on the APA violations and the lack of reasoned decision-making under the State Farm standard are clearly erroneous.
The Ninth Circuit will likely align itself with the Tax Court again — perhaps on multiple grounds — and decline to give the CSA regulation Chevron deference. If that holds true, the Chevron doctrine will have lost much of its power when the APA notice and comment requirements are violated or when a relied-on exemption from them is im- proper.10 Countless Treasury regulations could be exposed to APA-based attacks, and Chevron defer- ence could be confined to non-APA interpretative regulations that can pass muster under Chevron step two, which isn’t a sure bet for the government.
85 U.S.C. sections 553 and 701-706.
9463 U.S. 29.
10See 5 U.S.C. section 553(d) (exceptions from the APA’s
notice and comment procedures are provided for (1) a substan- tive rule that grants or recognizes an exemption or relieves a restriction; (2) interpretative rules and statements of policy; and (3) as otherwise provided by the agency for good cause found and published with the rule). But see 5 U.S.C. section 706, which provides that a rule will not be overturned when the reviewing court finds that the APA violation constitutes harmless error. See Niki R. Ford, ‘‘Easy on the MAYO Please: Why Judicial Defer- ence Should Not be Extended to Regulations That Violate the Administrative Procedure Act,’’ 50 Duq. L. Rev. 799 (Fall 2012).
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II. Chevron and State Farm
A. The Chevron Doctrine
In Chevron, the Supreme Court established a
two-part test for judicial review of an agency’s interpretation of a statute it administers. Under Chevron step one, the inquiry is whether Congress has directly spoken on the precise question at issue. If it has, the court will interpret the statute without deferring to the agency, and it will reject a regula- tion that’s contrary to clear congressional intent. If, however, the statute is silent or ambiguous on the issue before the agency, the court will proceed to step two.
Under Chevron step two, the court determines whether the agency’s prescription in its regulation is based on a permissible construction of the statute. The Supreme Court announced the considerable weight to be given to an agency’s permissible administrative rule:
If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than ex- plicit. In such a case, a court may not substi- tute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.11
The Court thus recognized that in a step two setting, the administrative agency, not the judiciary, is the expert in the field and should be using its wisdom and policy objectives in interpreting the statutory language and in filling any gaps.
The Chevron doctrine has a third facet, referred to by some commentators as Chevron step zero.12 This inquiry goes to whether the Chevron doctrine should apply at all.
In Mead,13 for example, the Supreme Court held that a tariff classification in a U.S. Customs Service ruling was not entitled to Chevron deference. The Court found that the ruling did not carry the force of law required for Chevron deference because it was unclear whether Congress had delegated rulemak- ing authority to the agency in this area. Still, the Court held that tariff classification rulings are best
11Chevron, 467 U.S. at 843-844.
12See Cass Sunstein, ‘‘Chevron Step Zero,’’ 92 Va. L. Rev. 187 (2006); and Mary Holper, ‘‘The New Moral Turpitude Test: Failing Chevron Step Zero,’’ 76 Brook. L. Rev. 1241 (2011).
13United States v. Mead Corp., 533 U.S. 218 (2001).
TAX NOTES, June 6, 2016