Altera v. Commissioner: Heads the IRS Wins, Tails the Taxpayer Loses?
Last year, in Altera v. Commissioner, the Tax Court dealt the IRS a major blow on rulemaking issues. In that case, the court held that some highly-controversial international tax regulations were invalid and thus could not apply in determining Altera’s tax liabilities for the years at issue. As discussed in a prior post, Altera essentially “closed the door on tax exceptionalism,” at least in the Tax Court.
The IRS has appealed that case to the Ninth Circuit and briefing is underway. The IRS’s opening brief naturally argues that the Ninth Circuit should reverse the Tax Court. Practitioners have written that the IRS’s arguments are mostly specific to the international tax regulations at issue, so they will not “have any direct application to cases involving the validity of other regulations.”
However, an argument made in an amicus brief filed by 19 academics supporting the IRS could have broader consequences. That brief argues that even if the court concludes that the issuance of the regulation did not comply with the Administrative Procedure Act, the court “should remand the regulation to Treasury without vacating it, so that Treasury can clarify its explanation.” (See Pages 29-30 of the brief.)
In some circumstances, courts will follow this “remand without vacatur approach.” As the Administrative Conference of the United States explains, “[r]emand without vacatur is a judicial remedy that permits agency orders or rules to remain in effect after they are remanded by the reviewing court for further agency proceedings.” The ACUS report details various controversies and conceptual difficulties associated with remand without vacatur.
Whether or not remand without vacatur reflects an appropriate practice, it should not apply in Altera. The case does not involve a direct challenge to any regulations but instead involves a dispute over Altera’s tax liabilities for its 2005-2007 tax years. Consequently, when the Tax Court declared the international tax regulations invalid, it did not actually vacate them. Rather, it disregarded them in deciding the matter in front of it (Altera’s tax liability).
Because Altera is about a taxpayer’s tax liability, rather than a direct challenge to regulations, the Ninth Circuit should disregard the invitation to remand without vacating. The academics’ amicus brief cites a couple cases in support of its approach, but those cases deal with pre-enforcement challenges to regulations.
It’s not even clear how, exactly, the court would remand the Altera case, because the taxpayer has (presumably) exhausted its administrative remedies. That is, on some occasions, a taxpayer might suffer from an infirm IRS hearing and ask the Tax Court to remand its controversy to the IRS for a new hearing. However, in Altera, the administrative process is complete. The question for the court is to determine whether Altera’s tax liability was properly determined. The Ninth Circuit is not being asked determine whether the agency level audit and appeals process was fair.
Pehaps the court could remand the taxpayer’s case back to the IRS and instruct the agency to suspend Altera’s dispute until new regulations are issued (and then apply the new regulations to Altera). Yet that seems strange, if not perverse. Under this approach, a taxpayer who establishes the invalidity of regulations will have its proceeding delayed for months, maybe years, until the agency can cure those regulations and will then have those new regulations retroactively applied against it. This “Heads the IRS wins, Tails the taxpayer loses” approach does not comport with sound principles of tax administration.
I’m also skeptical that remand-without-vacatur of the international tax regulations would serve the IRS’s interests. When a federal court remands or vacates a regulation, that command will operate globally. That is, in every circuit, the relevant regulation will be considered remanded or vacated. But under current law, the IRS can lose on the validity question in one circuit and stand by the regulation in other circuits.
Unless the government, in its reply brief, asks the Ninth Circuit to consider the remand-without-vacatur approach, it’s doubtful that the court will consider that remedy. Even then, arguments raised anew in a reply brief are not favored. Also, the precise standards for applying remand-without-vacatur, as opposed to simply vacating a regulation, are not a model of clarity. And even if remand-without-vacatur appeals to the court, attempting to apply it to a deficiency case will present conundrums. So, the risk that the Ninth Circuit will erroneously adopt a remand-without-vacatur approach seems low. However, if taxpayers obtain further ability to raise pre-enforcement challenges to tax regulations, as opposed to presenting those challenges in deficiency or refund cases, courts may need to examine the remand-without-vacatur approach in the tax area. Altera, however, would provide a bad case through which to examine that approach.