On September 29, 2017, a federal district court in Texas granted a motion for summary judgment and set aside as unlawful the government’s anti-inversion temporary regulation because the temporary nature of the rule did not excuse the government from the notice-and-comment procedure required by the Administrative Procedures Act (APA).1 The court also found that the temporary regulation was substantive, not an interpretive regulation, and thus the government was not excused from the procedural requirement of the APA.
In April 2016, the Internal Revenue Service and the United States Department of the Treasury (together, the agencies) issued a rule identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to categorization for federaltax purposes because the stock is attributable to prior domestic-entity acquisitions. 26 C.F.R. § 1.7874-8T (the rule). The rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. 26 C.F.R. § 1.7874-8T(j); Prop. Treas. Reg. §1.7874-8, 81 Fed. Reg. 20,588-591.
Plaintiffs, the Chamber of Commerce of the United States of America (the Chamber) and the Texas Association of Business, sued asserting defendants, the Internal Revenue Service, Treasury Department, John A. Koskinen, and Jacob J. Lew, violated the Administrative Procedures Act (the APA) by promulgating the rule.2 Plaintiffs argue the rule exceeds the agencies’ statutory jurisdiction and that promulgation of the rule was arbitrary and capricious and done without notice and opportunity for comment in violation of the APA.3 Plaintiffs moved for summary judgment on their claims. Defendants moved to dismiss this case, arguing plaintiffs lacked standing to challenge the rule, and that the suit was barred by the Anti-Injunction Act.
Defendants argued that plaintiffs’ claims were barred by the Anti-Injunction Act, which provides that “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.”5 The court considered the meaning of the terms “assessment” and “collection,” and concluded that the Anti-Injunction Act did not bar plaintiffs’ suit because the “plaintiffs do not seek to restrain assessment or collection of a tax against or from them or one of their members.”6 The court found that the plaintiffs challenged the validity of the rule “so that a reasoned decision can be made about whether to engage in a potential future transaction that would subject them to taxation under the rule.”7 In addition, the court noted that although the purpose of the rule may be to improve the government’s ability to assess and collect taxes, enforcement of the rule does not involve assessment or collection of a tax
Violation of the APA
Plaintiffs argued that the agencies violated the APA in issuing the rule because (i) the rule exceeds the agencies’ statutory jurisdiction, (ii) the agencies engaged in an arbitrary and capricious rulemaking, and (iii) the agencies failed to provide affected parties with notice and an opportunity to comment on the rule. The court considered the rule in light of the requirements of the APA and concluded that the rule did not exceed the statutory jurisdiction of the agencies and that the agencies did not engage in an arbitrary and capricious rulemaking in issuing the rule.8 However, the court held that the rule violated the APA because the agencies failed to provide affected parties with notice and an opportunity to comment on the rule.9
The rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. Plaintiffs did not challenge the notice and comment procedure required by the APA with regard to the rule as a proposed regulation, but rather argued that the rule as a temporary regulation became effective without a 30-day notice period or opportunity for comment as required by the APA. The general notice of proposed rulemaking requires that: After notice required by this section, the agency shall give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity for oral presentation. After consideration of the relevant matter presented, the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose. The required publication or service of a substantive rule shall be made not less than 30 days before its effective date. . . . 10 The government conceded that the agencies did not comply with the APA’s notice-and-comment requirements. Instead, they argued that (i) the rule is a temporary regulation, which the agencies have authority to issue without notice and comment,11 and (2) alternatively, the notice-and-comment requirement did not apply because the rule is an interpretive regulation.12 The court did not agree. The court concluded that section 7805(e), which permits the Secretary of the Treasury to issue temporary regulations, does not expressly exempt temporary regulations from the APA’s requirement that publication be made not less than 30 days before a rule’s effective date.13 The court rejected the government’s argument that Congress’s intent to make a substantive change to the APA is clear in the wording of section 7805 for temporary regulations. But the court found that the statute “neither expressly states nor suggestscongressional intent to allow a regulation [including a temporary regulation] to become effective earlier in relation to publication than provided for in the APA.”14 Accordingly, the court concluded that the temporary nature of the rule did not excuse the agencies from the notice-and-comment procedures required by the APA.
The court also rejected the government’s argument that the rule is interpretive because it merely clarified terms in the statute and provided detail to advise the public how the Treasury Department construed the existing statute. The court concluded that the temporary regulation, which provided adjustments to treat stock as if it were not stock “are not mere interpretations of the statute, but substantive modifications to the application of the statute.”15 Therefore, the court held that the agencies were not excused from the notice-and-comment procedure required by the APA.
Accordingly, the court denied the government’s motion to dismiss and granted the plaintiffs’ motion for summary judgment, holding that the temporary regulation was unlawful and must be set aside