In January, Cause of Action Institute released a report highlighting IRS exemptions from various regulatory oversight mechanisms. This report kicked off a flurry of activity, and Treasury and OMB are now in talks about whether and how the IRS should continue to be functionally exempt from White House review of IRS rulemakings. A recent development in a closely watched Fifth Circuit case challenging an Obama-era rulemaking on inversions shows the effort may be bearing fruit.
In April 2016, the Obama Administration issued a controversial rule attempting to block inversions, a business reorganization technique designed to provide relief from high U.S. corporate taxes. The IRS made this rule by issuing a Notice and publishing a proposed rule in the Federal Register. Because IRS rules are effective from the date of the Notice, the agency was in no hurry to complete the Administrative Procedure Act (“APA”) rulemaking process that it had begun with the proposed rule and request for comment. The Obama Administration ended without the rule ever being finalized but the Notice continued to be in effect.
The Chamber of Commerce sued the IRS over the inversion rule, claiming that the agency failed to comply with APA rulemaking procedures and that the substantive rule was in excess of its statutory authority. The IRS tried to use the Anti-Injunction Act (“AIA”) to block the suit, as it often does. But, in October 2017, a district court in Texas ruled that the AIA did not deny the court jurisdiction over the case and that the IRS did indeed violate the APA. The court than invalidated the temporary rule. The IRS promptly appealed to the Fifth Circuit.
IRS Moves to Stay Appeal of Inversion Rule Decision
But, in a twist, last week the IRS moved the appellate court to stay the proceedings because it was restarting the long-dormant APA process and finalizing the underlying rule. In its motion seeking a stay (or a 45-day extension), counsel for the IRS wrote that it needs “to reevaluate whether [the IRS] should proceed with th[e] appeal[.]” The IRS also told the Fifth Circuit that:
Having completed notice and comment, Treasury and the IRS plan to finalize the proposed regulation. That process is nearly complete. A draft of the final regulation has been prepared, and it has been submitted to the Office of Management and Budget for review. The final regulation would replace the temporary regulation that is at issue in this case, which will be removed.
Accordingly, we respectfully request that briefing of this case be stayed until a final regulation is published in the Federal Register, during which time the Government will evaluate whether it should proceed with this appeal or dismiss it.
This is an interesting development. The inversion rule remains controversial and whether it is still necessary, following the recent changes to the corporate tax rate, is an open question. But it now appears that Treasury and IRS are rethinking whether it is wise to press the government’s current disadvantage on the AIA and APA compliance in the Fifth Circuit. This case could provide a clear circuit split with the D.C. Circuit (following Florida Bankers, which held the AIA blocked pre-enforcement review in APA challenges to IRS rules) on the proper application of the AIA. So we may be seeing a strategic retreat by the IRS trying to limit the damage from its earlier loss in the district court. But it is good to see that the agency is involving OMB in this finalization process.
We’ll have to wait to see what OMB says about the rule, whether the IRS does indeed finalize the rule, what form that final inversion rule will take, whether the Fifth Circuit grants the stay, and, ultimately, whether the IRS will back out of this appeal. Stay tuned.
Update: The Fifth Circuit did not act on the stay motion before the deadline for the IRS to file its opening brief, which it timely did on March 16.
Update 2: On March 22, the Fifth Circuit denied the stay motion and the case is proceeding.
James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute. He is the principal author of Evading Oversight. You can follow him on Twitter @JamesValvo.
