This document summarizes a recent Tax Court case (Altera Corp. & Subs., 145 T.C. No. 3) that invalidated portions of a Treasury regulation related to transfer pricing. The Tax Court found that Treasury failed to follow proper Administrative Procedure Act procedures during the notice-and-comment rulemaking process, rendering the final regulation arbitrary and capricious. Specifically, Treasury did not adequately consider or respond to public comments opposing the regulation. This case establishes that Treasury regulations are not automatically entitled to deference if the rulemaking process was flawed, and provides taxpayers an avenue to challenge regulations based on alleged Administrative Procedure Act violations.

1. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1
Journal of Taxation
**1 December, 2015
Procedure
Copyright (c) 2015 RIA
Michael Duffy a1
ALTERA LEAVES TREASURY REGULATIONS OPEN TO APA-BASED CHALLENGES IN TAX COURT
In Altera, the Tax Court indicates that Treasury's use of the notice-and-comment rulemaking procedure does not necessarily
guarantee that a regulation will be entitled to Chevron deference upon subsequent review. An important takeaway is that
regulations promulgated with careless notice-and-comment process may be especially vulnerable to taxpayer challenges.
*265 In its recent decision in Altera Corp. & Subs., 145 T.C. No. 3, the Tax Court invalidated portions of Reg. 1.482-7(d)
on the grounds that Treasury employed flawed logic and procedure during the requisite Administrative Procedures Act (APA)
§ 553(b) 1
‘notice-and-comment‘ process. Specifically, the Tax Court concluded that the regulation was not valid because
Treasury's final rule was not the product of ‘reasoned decisionmaking.‘ In addition to being relevant to the field of transfer-
pricing, what is notable about Altera is that the case provides a clear articulation of the Tax Court's reasoning in considering
APA-based challenges to Treasury Regulations and impressively reconciles various administrative law paradigms into a
coherent and workable framework.
Critically, Altera concludes that, when a regulation promulgated under the Treasury's Section 7805(a) 2
authority provides
the basis for an adjustment to a taxpayer's income that is contrary to judicial precedent, such regulation is inherently not an
interpretative rule as defined in APA § 553(b)(A). The case also reconciles important administrative law standards promulgated
in major Supreme Court cases Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) and Motor
Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (State Farm) with the APA's § 706 3
judicial review standard.
Because Section 7805(a) encompasses Treasury's general authority to create rules and regulations, the applicability of the
holding is potentially very broad. Although Altera can be read narrowly, a reasonable reading of the case suggests that taxpayers
may have a greater chance of success *266 in the Tax Court attacking a wide variety of Treasury regulations on APA procedural
grounds. 4
BACKGROUND
**2 Altera dealt with the fallout from Xilinx, Inc., 125 TC 37 (2005), aff'd 598 F.3d 1191, 105 AFTR2d 2010-1490 (CA-9,
2010). In upholding the decision of the Tax Court, the Ninth Circuit held in Xilinx that, under the 1995 version of the Section
482 ‘cost-sharing‘ regulations, controlled entities entering into qualified cost-sharing agreements need not include stock-based
compensation costs in determining their relevant ‘intangible development cost pool.‘ The Tax Court reasoned that the 1995
cost-sharing regulations were contrary to the arm's-length standard, which is codified in the text of Reg. 1.482-1(b)(1) and
implicit in Section 482's legislative history. 5
The Ninth Circuit agreed with the Tax Court in finding that the 1995 cost-sharing
regulations did not meet the arm's-length standard because unrelated parties would not normally share stock-based compensation
information with each other in figuring their costs.

2. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2
During the course of the Xilinx litigation, Treasury proposed amendments to the 1995 cost-sharing regulations that expressly
required taxpayers to share stock-based compensation information with each other and consider these costs in implementing
their cost-sharing agreements. The proposed cost-sharing regulation was finalized in 2003. 6
Although the preamble to the 2003 final cost-sharing rule provided that Treasury did not think that the change to the regulations
was subject to the notice-and-comment rulemaking process found in APA § 553(b), Treasury issued a notice of proposed
rulemaking and solicited comments from industry anyways. 7
During the notice-and-comment period, various parties expressed
that they knew of no transactions between unrelated parties where one party would be responsible for reimbursing another
party's stock-based compensation costs.
Despite the comments, the final 2003 cost-sharing regulation provided that a qualified cost-sharing agreement produced an
arm's-length result only if the parties shared stock-based compensation costs consistent with the final rule. The preamble to
the final rule responded to some comments, but did not justify the change in law on the basis of departing from the arm's-
length standard. Otherwise, Treasury did not respond to the evidence provided by commentators that unrelated parties would
not share stock-based compensation costs with each other and would not use those costs in drafting cost-sharing agreements.
The Tax Court observed that Treasury's files with respect to the regulation were devoid of ‘expert opinions, empirical data, . . .
published or unpublished articles, papers, surveys, or reports supporting a determination that the amounts attributable to stock-
based compensation must be included in the cost pool of [qualified cost-sharing agreements]
to achieve an arm's length result.‘
Altera dealt with a notice of deficiency premised on the Service's reallocation of stock-based compensation costs to the taxpayer
in accordance with the 2003 final cost-sharing rule. The taxpayer contended that Treasury did not follow the requisite APA
standards in promulgating the final rule, and that the rule was therefore arbitrary and capricious.
**3 Ultimately, the Tax Court agreed with the taxpayer, finding ‘the final rule lacks a basis in fact, Treasury failed to rationally
connect the choice it made with the facts found, Treasury failed to respond to significant comments when it issued the final
rule, and Treasury's conclusion that the final rule is consistent with the arm's-length standard is contrary to all of the evidence
before it . . . .‘ The 2003 final cost-sharing rule was found to be invalid because it thus ‘fail[ed] to satisfy State Farm's reasoned
decisionmaking standard . . . .‘ The Tax Court also concluded that Treasury's procedural failures did not constitute ‘harmless
error.‘
ALTERA REJECTS IRS CHARACTERIZATION OF
TREASURY REGULATION AS AN ‘INTERPRETATIVE RULE‘
The Tax Court rejected the Service's contention that the use of notice-and-comment rulemaking made the legislative versus
interpretative status of a regulation irrelevant under the APA
Overview of APA Informal Rulemaking Process
In considering APA-based challenges, courts are directed by APA § 706(2)(A) to ‘hold unlawful and set aside agency action,
findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law . . . .‘ 8
The critical analysis of a reviewing court in considering the validity of an agency rulemaking action under this
standard is thus whether the agency ‘engaged in reasoned decisionmaking.‘ 9
Generally, the procedure must *267 comport
with the other guidelines provided in the APA.

3. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3
An agency promulgating regulations through the informal 10
rulemaking process found in APA § 553(b) 11
is required to publish
a notice of proposed rulemaking in the Federal Register. APA § 553(c) requires the agency to afford ‘interested persons an
opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity
for oral presentation,‘ and ‘[a]fter consideration of the relevant matter presented . . . incorporate in the rules adopted a concise
general statement of their basis and purpose.‘ Collectively, these provisions are commonly known as the notice-and-comment
process.
The premise behind the notice-and-comment process is to encourage ‘an exchange of views, information and criticism between
interested persons and the agency. ‘ 12
Therefore, the reviewing agency is required to respond to the commentary it receives
and is required to articulate a response to all significant points. 13
The notice-and-comment framework is ‘intended to assist
judicial review as well as to provide fair treatment for persons affected by a rule.‘ 14
Interpretative vs. Legislative Rulemaking
APA § 553(b)(A) provides an important exception to the notice-and-comment format, however. These procedures ‘[do] not
apply . . . to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice . . . .‘
Accordingly, if a rule or regulatory promulgation is deemed ‘interpretative‘ in APA nomenclature, the agency is not required
to issue a notice of proposed rulemaking and otherwise comply with the notice-and-comment procedures. 15
**4 The tradeoff between the legislative and interpretive rule designations is that when a court reviews the agency's
construction of a statute when it issues a regulation, legislative rules carry the force and effect of law whereas interpretative and
other types of non-legislative rules do not. 16
The ‘force and effect of law‘ language essentially means that the legislative rules
will be entitled to additional deference in the event of a subsequent judicial review. 17
Of course, if the notice-and-comment
rulemaking process is flawed, this fact may open up other avenues of attack for potentially-aggrieved parties. 18
However,
because a legislative rule carries significant weight in a subsequent judicial review, the distinction between *268 legislative
and interpretative rules becomes an important focal point.
By definition, legislative rules have been described as ‘those that create new law, rights, or duties, in what amounts to a
legislative act.‘ 19
Alternatively, a legislative regulation has been articulated as one that that ‘effects a change in existing
law or policy.‘ 20
This is in contrast to an interpretative rule that does not create new rights, but merely clarifies an existing
statute or regulation. 21
A reviewing court also need not accept the agency characterization as to whether a rule is legislative
or interpretative at face value. 22
The D.C. Circuit case, American Mining Congress v. Mine Safety & Health Admin., 995 F.2d 1106 (CA-D.C., 1993), is cited
by the Tax Court in Altera and is also frequently referenced in nontax federal opinions as providing the majority position
for distinguishing between legislative and interpretative rules. The court in American Mining Congress articulated the test as
follows:
Accordingly, insofar as our cases can be reconciled at all, we think it almost exclusively on the basis of whether the
purported interpretive rule has ‘legal effect‘, which in turn is best ascertained by asking (1) whether in the absence of the
rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or
ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3)
whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior
legislativerule. 23

4. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4
If the answer to any of the American Mining Congress questions is ‘yes,‘ the court considers the agency to be acting with the
intent to bind regulated parties with the force of law, and the rule is considered legislative.
The Service's own policy on this issue is also worth considering. According to the Internal Revenue Manual, ‘rules or
statements issued by an agency to advise the public of the agency's construction of the statutes it administers are considered
interpretative.‘ 24
The Manual further provides that ‘[m]ost IRS/Treasury regulations are considered interpretative because the
underlying statute implemented by the regulation contains the necessary legal authority for the action taken and any effect of
the regulation flows directly from that statute.‘ 25
A legislative rule is ‘required when Congress simply provided an end result,
without any guidance as to how to achieve the desired goal or when a statutory provision does not provide adequate authority for
the regulatory action taken.‘ 26
On the other hand, the Service contends that ‘[i]f Congress provided specific rules and merely
left gaps for the Secretary [of Treasury] to file, regulations filling those gaps are considered interpretative.‘ 27
Altera's Analysis of the Legislative vs. Interpretative Framework
**5 The Service argued in Altera that, although the 2003 cost-sharing regulation had the force of law, the regulation was
nonetheless not legislative. 28
The Service also contended that the Tax Court was not required to decide the interpretative versus
legislative issue because Treasury complied with the notice-and-comment process. The taxpayer argued in response that the
options presented to the court were binary; either the 2003 cost-sharing regulation was interpretative and therefore not binding
on the Tax Court, or alternatively, the regulation was legislative and therefore subject to the requirements of APA § 553(b).
The Tax Court determined that the 2003 cost-sharing regulation was intended by Treasury to have the force and effect of law
because it was promulgated pursuant to Section 7805(a). Additionally, the court reasoned that the regulation must necessarily
be legislative because, post-Xilinx, the adjustment to the taxpayer's income could be sustained only if the final cost-sharing
regulation was valid.
The takeaway of the holding is clear; Treasury cannot overrule judicial precedent using its Section 7805(a) general rulemaking
powers unless the process it uses in doing so substantively complies with APA § 553(b). The holding, moreover, is consistent
with the administrative law concept that when an agency is changing a significant longstanding interpretation or policy, such
regulatory action should itself be viewed as inherently legislative. 29
ALTERA PROVIDES A COHERENT FRAMEWORK FOR
JUDICIAL REVIEW OF REGULATIONS IN THE TAX COURT
The APA framework, embodied in the arbitrary-and-capricious standard, must also be reconciled with Supreme Court precedent
offered in the landmark cases of State Farm 30
and Chevron. 31
An important point worth noting is that, despite the fact that
these two cases should conceptually rest heavily on the standards set forth in the APA, the court's opinions in both cases do
not precisely fit into those standards as they should. 32
State Farm and Sufficiency of Administrative Process
*269 State Farm stands for the proposition that, in applying the APA §706(2)(A) arbitrary-and-capricious standard, the court
must find that the agency ‘engaged in reasoned decisionmaking.‘ 33
Under State Farm, ‘the agency must examine the relevant
data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice
made.‘ 34
The reviewing court is empowered to consider whether the decision was ‘based on a consideration of the relevant
factors and whether there has been a clear error of judgment.‘ State Farm looks to the quality of the procedure employed by

5. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5
the agency in making a regulatory decision in order to ensure that the agency is not merely providing lip-service to the notice-
and-comment standards.
**6 State Farm further explains that ‘[n]ormally, an agency rule would be arbitrary and capricious if the agency has relied on
factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an
explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed
to a difference in view or the product of agency expertise.‘
In reviewing an agency's explanation for a rule, the Supreme Court said that a reviewing court ‘may not supply a reasoned
basis for the agency's action that the agency has not given.‘ Later cases have noted that an agency, ‘[i]n providing a reasoned
explanation for agency action that departs from an agency's prior position the agency must display awareness that it is changing
position.‘ 35
Chevron and Policy Supporting Deference to Agency Expertise
Chevron stands for the proposition that when an administrative agency issues a regulation dealing with resolving ambiguity in
a statute, the agency's interpretation of the statute should be given significant deference by a reviewing court. This is because
‘considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to
administer . . . .‘ 36
Chevron provides a two-step analysis; under step 1, the court ‘must determine whether Congress has directly
spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress.‘ Under Chevron step 2, a court is instructed to
defer to the agency's authoritative interpretation of an ambiguous statute unless it is ‘arbitrary or capricious in substance, or
manifestly contrary to the statute.‘ 37
Under Chevron, deference is accorded to regulations promulgated under a specific delegation or a general delegation of
legislative authority to an agency, including regulations promulgated pursuant to Section 7805(a). 38
The court in Altera noted
that ‘Chevron deference applies even where an agency adopts a construction that conflicts with a prior judicial construction
of the statute.‘ 39
An important exception to this maxim occurs when a precedential case holds that a statute unambiguously
expresses a congressional intent contrary to the agency's subsequent regulatory construction, however. 40
One important exception to Chevron should also be noted. In Mead Corp., 533 U.S. 218 (2001), the Supreme Court indicated
that Chevron deference should not be accorded to certain agency action such as ‘interpretations contained in policy statements,
agency manuals, and enforcement guidelines.‘ In these instances, such non-binding agency guidance is accorded a lower-level
of deference in accordance with the Supreme Court's ruling in Skidmore v. Swift, 323 U.S. 134 (1944). 41
Altera's Takeaways
**7 In Altera, the Service argued that the validity of the 2003 final cost-sharing regulations should be analyzed under Chevron,
whereas the taxpayer argued that State Farm controlled. The Tax Court concluded that the distinction was immaterial, because
step 2 of the Chevron analysis essentially incorporates the State Farm standard when a court is reviewing whether the agency's
interpretation is ‘arbitrary or capricious in substance.‘ 42
*270 The Service also argued that it was permitted to modify or abandon the arm's-length standard. The Tax Court indicated
that the preamble to the 2003 cost-sharing regulation did not justify the final rule on this basis though, as Treasury manifested
no intent to discard the standard in its notice of proposed rulemaking or the preamble to the 2003 final cost-sharing regulation

6. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 6
itself. 43
Thus, the issue was not whether the Service was prevented from changing the standard through regulatory action, but
whether it in fact did so by using appropriate process.
The Tax Court ultimately concluded that Treasury did not connect the rules expressed in the 2003 final cost-sharing regulation
with the facts on which it relied. The Tax Court in particular noted that Treasury failed to give any explanation for its position
regarding the sharing of stock-based compensation among parties engaging in cost-sharing arrangements. Thus, the stock-based
compensation sharing components of the 2003 final cost-sharing regulations were held to be invalid.
CONCLUSION
Although the APA has been used to challenge Treasury Regulations in other federal courts, Altera marks an important milestone
in that it is a taxpayer administrative law victory in the Tax Court. Of probably greater value to practitioners, however, is the
fact that Altera provides a seminal authority for examining the administrative law issues. The quality and precedential value
of the analysis is further highlighted by the fact that the case was reviewed by the entire Tax Court in accordance with Section
7460(b) and issued without dissenting or concurring commentary.
Among key takeaways from the case is that the use of the notice-and-comment rulemaking process by Treasury may prove to
be a double-edged sword; to the extent the process signals to a court that the Service considers a regulation to be legislative, it
may be accorded Chevron deference only if the process used is deemed sufficient. Altera also casts more doubt on Treasury's
position that many of its regulations are interpretative in nature, rather than legislative. If the absence of a rule means that an
assessment versus a taxpayer cannot be sustained, Altera could be read to conclude that all such rules are therefore legislative
in nature. Although the Tax Court carefully avoided this issue in Intermountain Ins. Service of Vail, LLC, 134 TC 211 (2010),
that case was decided prior to the Supreme Court's decision in Mayo Found. for Med. Educ. & Research, 562 U.S. 44, 107
AFTR2d 2011-341 (2011). 44
**8 A final point worth noting is that, to the extent Treasury is overriding judicial precedent in promulgating a new rule, it
should be prepared to address the specific rationale for overturning that law during the notice-and-comment process. Embodied
in both the arbitrary-and-capricious standard found in APA § 553(b) and the ‘arbitrary or capricious in substance‘ standard from
Chevron step 2 is the premise that agency interpretations should generally be accorded significant deference by a reviewing
court. In particular, the reviewing court is not empowered to substitute its own judgment as to what a rule should be, but to
decide only whether the agency's conclusions have some basis using the relevant factors and the information available. This
includes both acknowledging that a change to policy is proposed and rebutting facts and information submitted by potentially
aggrieved-parties. The basis for regulatory action following a judicial loss,it seems, must therefore deal with the underlying
rationale that gave rise to the conflicting precedent, and the administrative action will prevail only if that precedent does not
rely on a finding of unambiguous legislative intent.
Although Altera can be read narrowly, a reasonable reading of the case suggests that taxpayers may have a greater chance of
success in the Tax Court attacking a wide-variety of Treasury regulations on APA procedural grounds.
The takeaway of the holding is clear; Treasury cannot overrule judicial precedent using its Section 7805(a) general rulemaking
powers unless the process it uses in doing so substantively complies with APA § 553(b).
Altera also casts more doubt on Treasury's position that many of its regulations are interpretative in nature, rather than legislative.
Footnotes

7. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7
a1 MICHAEL DUFFY is an associate at Partridge, Snow and Hahn in Rhode Island, and is a New York University School of Law,
LL.M. candidate for 2016. The author would like to thank his friend and footnote-meister Timothy Razel for his assistance with this
article. Copyright (c) 2015 Michael Duffy.
1 5 U.S.C. section 553(b) .
2 Section7805(a) (2015) provides in relevant part: ‘[T]he Secretary [of Treasury] shall prescribe all needful rules and regulations for
the enforcement of [Title 26 of the U.S. Code], including all rules and regulations as may be necessary by reason of any alteration
of law in relation to internal revenue.‘
3 2015 5 U.S.C. Section 706 (2015) .
4 See also Intermountain Ins. Service of Vail, LLC, 134 TC 211 (2010) (holding temporary regulation invalid, but declining to rule on
the issue of whether regulation under review was interpretative or legislative in nature).
5 In a ‘cost-sharing‘ arrangement as referenced, commonly controlled parties enter into an agreement pursuant to which they share the
costs of developing an intangible asset in proportion to the party's share of reasonably anticipated benefits. The regulations at issue
dealt with whether certain costs are considered related to the development of the intangible
6 The 2003 final cost-sharing regulations were not applicable to the tax years at issue in Xilinx. However, the Ninth Circuit noted on
review that ‘[i]t is an open question whether [the inconsistencies between the arm's length standard and cost-sharing standards] have
been addressed in the new regulations Treasury issued after the tax years at issue in this case.‘
7 The Altera court notes that the Internal Revenue Manual explicitly provides the agency's position that ‘most IRS/Treasury regulations
will be interpretative regulations because they fill gaps in legislation or have a prior existence in law.‘ See also I.R.M. 32.1.5.4.7.5(2).
Although this statement of policy would seem to indicate that Treasury does not view the notice-and-comment procedures to be
necessary, I.R.M. 32.1.5.4.7.5.1(3) indicates that ‘[a]lthough most IRS/Treasury regulations are interpretative, and therefore not
subject to the notice-and-comment provisions of the APA, the Service usually solicits public comment when it promulgates a rule.‘
Treasury's use of the notice-and-comment procedures can be viewed as likely a prophylactic measure.
8 5 U.S.C. section 706(2)(A) .
9 Judulang v. Holder, 132 S.Ct. 476 (2011).
10 An informal rulemaking will generally use the notice-and-comment framework, whereas a ‘formal rulemaking‘ under the APA
requires an agency to hold a formal ‘hearing on the record,‘ among other procedural steps. 5 U.S.C. section 553(c) ; see also 5 U.S.C.
sections 556-557 . Pursuant to APA § 553(c), the formal rulemaking framework will apply to an agency rulemaking action only to
the extent that the legislature has provided for that result by statute.
11 5 U.S.C. section 553(b) .
12 Altera Corp. & Subs., 145 T.C. No. 3.
13 See e.g. Nova Scotia Food Prod. Corp., 568 F.2d 240 (CA-2, 1977).
14 Altera, supra note 12 (internal citations omitted, internal quotation marks omitted).
15 It should be noted that an agency is not prohibited from applying the notice-and-comment framework to non-legislative rules. See
note 6, supra. In fact, to the extent an agency applies greater procedure to considering a proposed rulemaking, a reviewing court may
be more likely to accord deference to that agency's particular construction. See e.g., Mead Corp., 533 U.S. 218 (2001). Whether the
use of notice-and-comment process itself can be used as a ‘short cut‘ by a reviewing court to determine if a rule was intended by an
issuing agency to have the ‘force and effect of law‘ has been considered by scholars. See Hickman, ‘Unpacking the Force of Law,‘
66 Vand. L. Rev. 465, 510-15 (2013). Indeed, the Service made this same argument in Altera.
16 Chrysler Corp. v. Brown, 441 U.S. 281 (1979); see also Mead Corp, supra note 15 (confirming Chevron deference does not apply
to non-legislative rules); Christensen v. Harris County, 529 U.S. 576 (2000) (providing that interpretative rules that lack the force of
law are not entitled to Chevron deference). Despite the seemingly coherent framework that interpretative rules are not considered to
have the force of law and should not be accorded higher-level deference upon judicial review, scholars have noted that the Supreme
Court's jurisprudence has not adequately outlined these rules. Indeed, commentators have noted that the Chevron deference has been
applied when a rule or regulation has not been promulgated in accordance with the notice and comment rulemaking provisions or
has otherwise been defined as interpretative. See Hickman, supra note 15 at 490.
17 See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
18 See e.g., State Farm Mut. Auto. Ins. Co., 463 U.S. 29; American Mining Congress v. Mine Safety & Health Admin., 995 F.2d 1106
(CA-D.C., 1993) (a legislative rule promulgated without proper notice and comment rulemaking is ‘procedurally invalid.‘).
19 Sweet v. Sheahan, 235 F.3d 80 (CA-2, 2000) (internal citations omitted).
20 D.H. Blattner & Sons, Inc. v. Sec'y of Labor, Mine Safety & Health Admin, 152 F.3d 1102 (CA-9 1983) (internal citations omitted).
21 Id.
22 See e.g. Hemp Indus. Ass'n v. DEA, 333 F.3d 1082 (CA-9, 2003).

8. LEAVES TREASURY REGULATIONS OPEN TO APA-BASED..., 123 JTAX 265
© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8
23 Emphasis added.
24 I.R.M 32.1.1.2.6.
25 Id.
26 I.R.M. 32.1.1.2.7.
27 I.R.M. 32.1.1.2.8. The standards are essentially repeated I.R.M. 32.1.5.4.7.5.1.
28 The court notes that the Service did not argue this issue at oral argument. The argument here is not necessarily nonsense, however.
See Hickman, supra note 15 at 490 (noting Supreme Court jurisprudence may permit less formal rulings and guidance documents
may be eligible for Chevron deference).
29 FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009); see also Intermountain Ins. Service of Vail, LLC., 134 TC 211 2010
(‘when there is otherwise binding judicial precedent, an agency interpretation asserting a contrary interpretation amounts to a change
in law.‘); but see Mayo Found. for Med. Educ. & Research, 562 U.S. 44, 107 AFTR2d 2011-341 (2011) (observing Supreme Court's
invitation to Treasury to amend its regulations if troubled by the consequences of a resolution of a case); Warshauer v. Solis, 577 F.3d
1330 (CA-11, 2009) (documenting circuit split on this issue). See also Kozel and Pojanowski, ‘Administrative Change,‘ 59 UCLA
L. Rev. 112 (2011) (noting inconsistency in Supreme Court treatment of administrative policy changes).
30 Note 18, supra.
31 Note 17, supra.
32 Bamberger and Strauss, ‘Chevron's Two Steps,‘ 95 Va. L. Rev. 611, 621 (2009) (noting emerging consensus that the ‘arbitrary,
capricious, and abuse of discretion‘ standard in APA § 706(2)(A) supplies the foundation for judicial oversight found in Chevron's
second step).
33 Citations omitted.
34 Internal quotation marks omitted.
35 FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009)) (internal quotation marks omitted).
36 See also Mead Corp., supra note 15 (citations omitted).
37 Mayo Found., supra note 29 (citations omitted).
38 Id. (concluding Chevron deference is accorded to regulations promulgated pursuant to Section 7805(a)).
39 Citing Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005).
40 See also Home Concrete & Supply, LLC, 109 AFTR2d 2012-1692 (2012); but see Brand X, supra note 39 (‘[o]nly a judicial precedent
holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill,
displaces a conflicting agency construction.‘).
41 The ‘Skidmore deference‘ is applied to such agency pronouncements based on the ‘thoroughness evident in [their] reasoning, [their]
consistency with earlier and later pronouncements, and all those factors which give [them] power to persuade, if lacking power to
control.‘). Commentators have also noted that other cases applying Skidmore have looked at the level of formality employed by the
agency in its decision-making process, the longevity of the agency's interpretation, the contemporaneity of the interpretation with
the enactment of the statute, and the degree of agency expertise required in answering the interpretive question. Hickman, supra
note 15 at 485.
42 The Tax Court cites for this principle the recent case of Judulang v. Holder, supra note 9 at n.7. In note 7, however, the Supreme
Court indicates that, regardless of the outcome consistent with step 2 of Chevron, the ‘more apt analytical framework in this case is
standard ‘arbitrary [or] capricious review under the APA.‘ (internal quotations omitted). To the extent the two standards referenced
by the court are different is not made clear in Judulang. Whether the Chevron ‘arbitrary or capricious in substance‘ standard is, in
fact the same as the test in APA § 706(2)(A) has been considered by scholars. See note 32, supra.
43 The court notes that, because the Service did not actually address this subject in issuing the 2003 cost-sharing regulations, it did not
need to conclude as to whether the court's holding in Xilinx foreclosed the agency's interpretation consistent with the Brand X decision.
44 Concluding that regulations promulgated under Section 7805(a)'s general rulemaking authority are entitled to Chevron deference.
End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.