In early 2011, the U.S. Supreme Court stated that it was “not inclined to carve out an approach to administrative review good for tax law only” and seemingly rejected the generally accepted view that tax regulations were subject to different administrative procedures than rules and regulations promulgated by other administrative agencies. See Mayo Foundation for Medical Ed. v. United States, 131 S. Ct. 704, 713 (2011). Although not explicit on this point, many believe that Mayo’s implicit holding is that tax regulations are subject to the Administrative Procedure Act (APA) -- a belief which has left tax practitioners scrambling to become familiar with a large body of APA guidance that has rarely been applied to tax rules and regulations. After Mayo, it seems increasingly likely that courts will begin to review tax regulations under the same standards (including the APA) that have long been applied to other administrative pronouncements. In this context, the U.S. Court of Appeals for the Federal Circuit’s recent holding in Dominion Resources is particularly noteworthy because it is one of the first cases after Mayo to consider how the APA should be applied to tax regulations within the framework set by the Supreme Court in Chevron. See Dominion Resources, Inc. v. Commissioner, ___ F.3d ___, 2012 WL 1948995 (Fed. Cir. 2012).
In Motor Vehicles Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983), the Supreme Court held that an agency’s actions will be considered arbitrary and capricious under section 706(2) of the APA if the agency has not “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” One year later, in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the Court adopted a two-part test for assessing the validity of an agency’s action. Under Chevron step one, the court must determine whether Congress has specifically addressed the question at issue. If Congress has not addressed the issue, or if the statute is ambiguous, Chevron step two requires the court to determine whether the agency’s interpretation is based on a “reasonable” or “permissible” construction of the statute.
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