The Next Level of Agency Deference?

by Andy Grewal — Thursday, May 14, 2015

Before it collapsed, Lehman Brothers engaged in various tax-motivated transactions, including ones to earn foreign tax credits. Last week, a federal judge addressed the merits of one of those controversies, holding against the defunct bank.

The court tucked in a footnote a potentially interesting twist on agency deference. It noted that a so-called IRS Advisory “appears unequivocally” to answer the merits question “in the Government’s favor.” The court then noted that “neither party seems to have cited to, much less discussed, this Advisory in its briefs,” and that while it was not binding on the court, it was “certainly instructive.” It then went on to use some of the reasoning in the Advisory to hold against the taxpayer.

An IRS Advisory (formally, a “Chief Counsel Advisory”) is a memo from an IRS attorney in the DC headquarters to an attorney out in the field (in this case, in New York). When a field attorney faces a complicated question, he can consult the head office for written advice, and that written advice, after redaction, is subject to public disclosure.

The Advisory in question appears to relate to Lehman’s controversy. That is, in 2006 (the date of the Memo), the IRS head office attorney explained the agency’s view to a field attorney regarding the foreign tax credit issues in the Lehman dispute. It was thus hardly coincidental that the Advisory decided the issues “in the Government’s favor.”

I suspect that the district court did not understand the history and role of the Advisory, and hence its apparent confusion over the parties’ failure to discuss it. If it understood that the Advisory was drafted in connection with the Lehman dispute, it might have concerns about offering deference.

But maybe those concerns don’t matter. Agencies sometimes obtain deference for views initially expressed in a brief, and regulations that are prompted by a given controversy may also enjoy deference, even when later applied to that controversy.

Such deference, however, contemplates that the agency’s view, whether reflected in a brief or regulation, reflects the agency’s considered and fair judgment on the interpretive question at issue. Judged by this standard, it seems like a bit of a stretch to offer deference to, or even take judicial notice of, an internal memo from one IRS attorney to another that stakes out a litigating position.

Still, given the direction that we are headed in terms of agency deference, I wouldn’t be surprised if Advisories eventually earned some level of explicit deference from a court. Auer deference might have once seemed unimaginable to those concerned with the principles of the separation of powers, and one day Lehman deference might take things to the next level.

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