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Tax Notes

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Tax Notes



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Of the heady early days of the French Revolution, Wordsworth wrote: “Bliss it was in that dawn to be alive. But to be young was very heaven.” Those of us interested in the intersection of tax law and administrative law may be excused if we feel similar exhilaration about the time in which we live.

In terms of the intersection, this is the most exciting moment in the tax history of the United States. Recent cases have tested – and cases still in progress continue to test –- the validity of several Treasury regulations:

1. On January 11 the Supreme Court decided Mayo, the culmination of controversy over the validity of a regulation dealing with employment taxes for medical residents and other student-employees.

2. Section 6015 prescribes a two-year limitations period for claims for spousal relief under section 6015(b) and (c), but it is silent as to a limitation period for claims for spousal relief under section 6015(£). By regulation, Treasury established a two-year limitations period for section 6015(f).2 The Tax Court has repeatedly held that regulatory provision invalid. Thus far, the Tax Court has been reversed on this issue by the Third Circuit and the Seventh Circuit, and the Sixth Circuit is expected to weigh in soon.

3. Section 6501(e) creates a six-year limitations period for income tax assessments when a return omits income exceeding 25 percent of reported income. The IRS maintains that this extended period also applies when overstatements of basis lead to the requisite understatement of income. Treasury promulgated a temporary regulation, now replaced by a permanent regulation, enshrining the IRS's interpretation. The temporary regulation was invalidated by the Tax Court, whose decision is now on appeal to the D.C. Circuit, with oral argument scheduled for April 5. Four other circuit courts have already weighed in on the issue. On January 26 the Seventh Circuit held for the IRS on the issue (although it did so as a matter of statutory construction, with only dicta as to the validity of the regulation). On February 7 and February 9 the Fourth Circuit and the Fifth Circuit, respectively, held against the IRS, refusing to accord Chevron deference because the section was seen as unambiguous. On March 11 the Federal Circuit held for the IRS, according the regulation deference under Chevron. The issue remains pending in the Tenth Circuit.

4. The section 263 Uniform Capitalization regime is implemented in part by a regulation setting forth the so called “associated property” rule. In a case of first impression, the Court of Federal Claims considered the validity of the regulation. The court found discrepancies in the regulation and saw it as stretching the boundaries of reasonableness. Nonetheless, on February 25, the court reluctantly upheld the regulation.

This report is about Mayo. As a Supreme Court decision, it is the most authoritative of the recent cases, and it has been cited in arguments in other recent cases challenging tax regulations. When relevant, this report also addresses these other cases.

Mayo is a helpful case in that it clarifies the analytical process to be used when taxpayers challenge the validity of Treasury regulations. In general, Mayo confirms directions in which the administrative rules of tax have been moving, and it clears out much of the accreted debris of outdated thinking.

Part I describes the facts of Mayo and the Supreme Court's decision. Part II explains the ways in which Mayo clarifies the law governing challenges to the validity of tax regulations. Part III seeks to allay the fear that Mayo fundamentally shifts the balance in a pro-government direction in cases in which Treasury regulations are challenged. Finally, Part IV discusses some likely post-Mayo battlegrounds.


© 2011 Steve R. Johnson


First published in Tax Notes.

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