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SCOTUS Case Denial Is Treasury’s Win in Tax-Rule Scrutiny Era

June 24, 2020, 8:45 AM

The Supreme Court’s decision not to review a major Ninth Circuit ruling that went against tech companies gave the Treasury Department a win, and could offer the department some hope as it faces increasing scrutiny of its tax regulations.

The circuit court’s decision in Altera v. Comm’r upheld regulations that Apple, Google, and Facebook claimed would cost U.S. companies billions of dollars. That high-stakes win for Treasury demonstrates a potential limit to lawsuits alleging that the department didn’t follow proper procedures when issuing regulations. Experts still caution, though, that Treasury should be careful at a time when it faces increasing oversight.

Intel-owned Altera Corp. had wanted the high court to review a ruling by the U.S. Court of Appeals for the Ninth Circuit upholding 2003 Treasury regulations that resulted in a higher tax bill for the company. The regulations required Altera to include stock-based compensation in the costs shared with its foreign subsidiary for tax purposes when the company shifted the anticipated benefits of intangible property produced through those costs over to the subsidiary.

Altera reflects the Ninth Circuit “saying that what the Treasury Department did was sufficient,” said Leandra Lederman, a tax law professor at the University of Indiana Bloomington.

The company argued that Treasury violated the Administrative Procedure Act when it didn’t respond to comments saying it failed to support its proposed regulations with an analysis of comparable transactions involving parties that weren’t part of the same multinational company. The APA requires federal agencies to give notice and respond to significant comments for certain rules.

The lawsuit is part of a trend of administrative law challenges to tax regulations, Lederman said.

But the Ninth Circuit said the commenters were overlooking Treasury’s decision to forgo analyzing comparable transactions in the first place, a decision the circuit said was made clear in the notice of proposed rulemaking and in the preamble to the final rule.

“In sum, we cannot find a failure in Treasury’s refusal to consider comments that proved irrelevant to its decisionmaking process,” Judge Sidney R. Thomas wrote in a panel decision that the full circuit let stand.

Growing Scrutiny

Multiple tax specialists traced the scrutiny Treasury is under back to a 2011 decision in Mayo Foundation for Medical Education and Research v. United States, where the Supreme Court said it wasn’t inclined “to carve out an approach to administrative review good for tax law only” without justification.

The ruling led to a more widespread view that courts will review tax regulations under the same administrative law norms and principles that they apply to other regulatory fields. As more cases arise in this new context, their outcome provides insight into what the increased scrutiny could mean—not only for new Treasury regulations, but also for regulations issued at a time when Treasury may not have anticipated the judicial scrutiny it now faces.

The Altera result provides one example in which a circuit court upheld regulations that were issued before the new era of scrutiny.

If the Supreme Court had overturned that result, it could have created “a new incentive for well-resourced taxpayers of all sorts, both large corporations and wealthy individuals, to flood the notice-and-comment process with arguments that are irrelevant, but Treasury would then have to respond to those when making its regulations just to show that it had taken them into account and had responded,” said Chye-Ching Huang, a senior director of economic policy at the Center on Budget and Policy Priorities.

That outcome could slow down the process of issuing rules and jeopardize Treasury regulations in court even if they reflected a sound interpretation of tax law, she said.

Stephen Shay, a senior lecturer at Harvard Law School and former Treasury official, cautioned, however, not to read too much into Treasury’s win. He pointed to Altera as well as a decision dealing with Treasury regulations from the 1960s in SIH Partners, LLLP v. Comm’r, as demonstrating that Treasury can win against challenges to regulations that were issued before the more modern understanding of how the APA applies.

“But I’d be leery—I think agencies should be careful in what they would say is irrelevant,” he said. “One of the things that’s induced by this whole emergence, or reenforcement, of the Administrative Procedure Act process is that you’re better off at least touching most comments unless you’re very clear they’re off the wall.”

Issue Still Live

Cases from outside the Ninth Circuit aren’t bound by that circuit’s ruling.

The U.S. Tax Court, which previously ruled unanimously in Altera’s favor, could be asked by another taxpayer whether to change its mind or stick to its guns in a case appealable to a different circuit. However the Tax Court ruled, the losing party could appeal to a different circuit court, leading to a possible split between circuits that could induce the Supreme Court to take up the issue later.

There’s reason to think the Tax Court may reconsider its position, according to Clinton Wallace, a professor at the University of South Carolina School of Law who focuses on tax issues.

“I suspect that now the Tax Court is more calibrated to some of the administrative law precedent that was new to them in 2015,” he said.

A brief that 19 law professors, including Wallace, submitted to the Ninth Circuit said the Tax Court had “rarely dealt with this area of administrative law,” referencing a limited number of times before the 2011 Mayo decision when that court had cited the precedent at the heart of Altera’s case.

In its petition to the Supreme Court, Altera said it could be years before another appeals court might consider the issue given that the government and other taxpayers were waiting to see what happened for the Intel-owned company.

Lederman said she expects other taxpayer challenges.

“The IRS has won the battle, but I would predict that the war would continue,” she said.

—With assistance from Jeffery Leon.

To contact the reporter on this story: Aysha Bagchi in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at; Kathy Larsen at