Overview
On April 4, 2022, the Liberty Global court struck down temporary regulations aimed at fixing Congress’s effective-date oversight in section 245A.1Judge R. Brooke Jackson, an Obama-appointee, reasoned that the Treasury Department's invocation of good cause was insufficient to avoid the notice-and-comment requirements of the Administrative Procedure Act (APA).2 The US District Court for the District of Colorado granted partial summary judgment to Liberty Global, Inc. on the basis that the temporary regulations were invalid.
For years, Treasury has issued temporary regulations without notice and comment, providing only a minimal justification of "good cause" to meet the statutory exception from the notice-and-comment requirements.3 That practice has come under fire in the last decade. The Liberty Global decision may be the proverbial nail in the coffin for Treasury's use of temporary regulations, and it is part of a greater trend to require Treasury and the IRS to hew to the APA requirements.
Background
The temporary regulations were issued to close a gap in the effective date provisions of the Tax Cuts and Jobs Act (TCJA).4 The regime created by the TCJA contemplated that future controlled foreign corporation (CFC) income would be subject to current US tax under either the subpart F or global intangible low taxed income (GILTI) rules. The TCJA created the section 245A dividends received deduction to allow repatriation of earnings without triggering US tax. According to the legislative history, the section 245A dividends received deduction was intended only to apply to income that was exempt from GILTI, because otherwise, some foreign-source income would escape current taxation and taxation as a dividend.5 However, the effective dates for section 245A and GILTI did not achieve the desired interaction for CFCs with non-calendar tax years. Under the TCJA, section 245A was effective for distributions made after December 31, 2017, but the GILTI rules were not effective until the CFC's first tax year beginning after December 31, 2017. Due to this lack of uniformity in the effective dates, some CFC's earnings that were intended to be subject to GILTI (had it been effective at that time) were able to be paid as a dividend and deducted under section 245A in 2018.
Treasury issued temporary regulations in June 2019 to prevent taxpayers from taking advantage of this mismatch, referred to by practitioners as the GILTI donut hole. Liberty Global entered into a transaction in December 2018 designed to generate a section 245A dividends received deduction. Because the regulations were retroactive, Liberty Global did not receive the full deduction and brought a refund suit challenging the temporary regulations.
Does Section 7805(e) Supplant the APA Requirements?
The Liberty Global court first evaluated whether the statutory grant in section 7805(e) to issue temporary regulations excused Treasury from the APA notice-and-comment procedures. In 1988, Congress enacted section 7805(e), which provides that any temporary regulations shall also be issued as a proposed regulation, and temporary regulations expire three years after issuance. Citing this authority, Treasury has historically claimed that temporary regulations are exempt from the APA. Indeed, Treasury's 2019 Policy Statement On The Tax Regulatory Process stated that the Code "permit[s] the issuance of immediately-effective temporary tax regulations without a statement of good cause." In this case, the government argued that 7805(e) is a more specific statute that supplants the APA requirements.
Liberty Global cited to Chamber of Commerce v. IRS,6 which rejected that position for the temporary anti-inversion regulations under section 7874. In that case, the court wrote that it would "not disregard explicit directives of the APA in favor of legislative history" of section 7805(e) that arguably showed intent for the IRS to issue immediately effective regulations.7
The Liberty Global court also looked to Coalition for Parity v. Sebelius8, which interpreted a statutory grant to issue interim final rules. Coalition for Parity decided that the Department of Health and Human Services' ability to issue interim final rules did not displace the APA requirements. Instead, interim final rules could be promulgated either with notice and comment or with good cause to forego the notice-and-comment procedures.9 Liberty Global applied the same reasoning to Treasury temporary regulations holding that "if there is good cause to issue temporary regulations without notice and comment, it may be done."10
The court concluded that Congress did not clearly indicate in section 7805(e) that it intended to replace the general APA notice and comment requirement. Like Mann Construction,11 the district court reasoned that only "when Congress sets forth specific procedures that 'express[ ] its clear intent that APA notice and comment procedures need not be followed,'" may an agency depart from the obligatory procedures of the APA.12 Liberty Global found that nothing in section 7805(e) "gives a clear indication that Congress intended that notice and comment would not apply" to temporary regulations.13
Lack of Good Cause
Liberty Global next evaluated whether Treasury had good cause for failing to comply with notice and comment procedures. Treasury cited four reasons in the temporary regulation for why there was good cause to not engage in notice and comment: (1) following notice and comment would provide time and notice to taxpayers to engage in the transactions the regulations seek to prevent, (2) taxpayers would have to file amended returns to comply with retroactive regulations, (3) temporary regulations will be supplanted by final regulations issued with notice and comment, and (4) the regulations needed to be issued within 18 months of enactment of the TCJA to be retroactive to ensure that the TCJA tax regime functions correctly for all affected periods.
The court rejected the argument that the regulations needed to be issued without notice and comment to curb taxpayer behavior because if the regulations would be retroactive, "there was no reason to fear that the transactions would escape proper taxation…"14Judge Jackson reasoned that the regulations could have been issued as proposed regulations with retroactivity to enactment of the TCJA and allowed for notice and comment.
As to Treasury's second justification, the court noted "[t]here is some irony in the argument that bypassing notice and comment, which is designed to give those who will be affected by regulations the opportunity to have their comments heard, is necessary to spare those same taxpayers the costs of filing amended returns."15Judge Jackson offered that Treasury could instead have issued proposed regulations that would have put taxpayers on notice as to transactions that Treasury viewed as contrary to the purpose of the statute.
The court similarly was not persuaded by the ability to comment on the final regulations. “The provision of post-promulgation notice and comment is not an argument that there is good cause for not providing pre-promulgation notice and comment."16
Finally, the Liberty Global court did not find that Treasury presented sufficient evidence to show that it could not have issued the regulations with notice and comment within the 18-month statutory deadline. The court cited Treasury assistant deputy Chip Harter's statements at the American Bar Association Fall Tax Meeting to show that Treasury was aware of this potential issue as early as October 2018.17 The court concluded: "If the deadline could not have been met if an opportunity for notice and comment had been given, and retroactivity would thereby have been lost, I would find that to be good cause. However, that has not been shown."18Treasury's delay in issuing these regulations, while it was consumed with the task of implementing the TCJA and providing guidance to taxpayers on new law, ultimately doomed the regulations' validity.
Outcome and Future for Temporary Regulations
Because it found the regulations were invalid due to lack of notice and comment, the court declined to address the taxpayer's alternative arguments for invalidation of the regulation, namely that 1) the regulations are contrary to the express language of the statute and not entitled to Chevron deference,19 and 2) Treasury did not have the authority to make the regulations retroactive.20 Liberty Global's Chevron argument pointed to the inconsistency arising from Treasury's attempt to make section 245A effective before its statutory effective date. The clear effective date in the statute arguably would not provide any ambiguity to allow the regulations to meet Chevron step 1, which asks "whether Congress has directly spoken to the precise question at issue."21Liberty Global avoided ruling on the thorny question of whether Treasury can justify regulations that are contrary to the plain language of a statute by citing to its purpose.
Instead, the court chose to rule on the narrower APA ground, with the effect of hindering Treasury's ability to avoid notice and comment for temporary regulations even with a good cause justification. If the ruling stands, it will hamper Treasury's ability to respond to new issues with immediately-effective regulations. Liberty Global opens up to attack any Treasury regulations, temporary or otherwise, that have been issued without notice-and-comment. Even still, there are many pre-1988 temporary regulations which remain in effect and are vulnerable to similar challenges.
The government will certainly appeal the decision, but because it is a partial grant of summary judgment, the order is not final and appealable. The court noted that the parties had recognized at oral argument that there is a still an unresolved issue of fact as to whether LGI’s transaction complied with the statutory requirements for the deduction.22 The government would need to request the district court to certify its decision before it can immediately reach the Tenth Circuit.
Endnotes
1 Liberty Global, Inc., v. United States, No. 1:20-CV-03501-RBJ, 2022 WL 1001568, at *1 (D. Colo. Apr. 4, 2022).
2 5 U.S.C. § 551, et seq.
35 U.S.C. § 553(b)(B).
4 P.L. 115-97, 131 Stat. 2054.
5 See Senate Budget Committee Report, S. Prt. 115-20, at 370.
6 No. 1:16–CV–944–LY, 2017 WL 4682049 (W.D. Tex. Sept. 29, 2017).
7Id. at *7.
8 709 F. Supp. 2d 10 (D.D.C. 2010)
9 Coalition for Parity, 709 F. Supp. 2d at 19.
10 2022 WL 1001568, at *4.
11Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022). See Sixth Circuit Invalidates IRS Notice for Violation of Administrative Procedure Act in our March newsletter.
12 2022 WL 1001568, at *4 (quoting Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1237 (D.C. Cir. 1994)).
13 Id.
14 2022 WL 1001568, at *5.
15Id. at *6.
16 Id.
17 Id. at *2.
18 Id. at *6.
19Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 US 837 (1984).
20 Id. at *2.
21Chevron, 467 US at 842.
222022 WL 1001568, at *3.
