In the latest decision addressing the application of the Administrative Procedure Act (APA) in the federal tax context, a Colorado district court judge granted the taxpayer's motion for summary judgment in part, holding that temporary regulations issued to implement the section 245A dividends received deduction enacted by the Tax Cuts and Jobs Act of 2017 (TCJA) were invalid because the regulations did not comply with the APA's notice and comment requirement. Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. Apr. 4, 2022). Treasury issued the temporary regulations at issue on June 18, 2019, to address, among other things, gaps in the statutory rules of section 245A, which provides a deduction for certain dividends received from controlled foreign corporations (CFCs), and section 951A (the global intangible low-taxed income (GILTI) regime), which imposes a minimum tax on certain income from CFCs. Treasury believed these gaps presented tax planning opportunities for taxpayers.

Liberty Global contends it is entitled to claim deductions under section 245A based in part on three arguments that the temporary regulations were invalid: 

• Treasury did not have authority to issue the temporary regulations when there is no ambiguity in the language of the statute
• Treasury did not have the authority to make the temporary regulations retroactive
• The temporary regulations did not comply with notice and comment procedures under the APA

On Liberty Global's motion for summary judgment, the court addressed only Liberty Global's third argument that the temporary regulations were subject to the notice and comment requirement and held that Treasury was required to comply with APA procedures in promulgating the temporary regulations.

The court first found that the notice and comment requirement under the APA generally applies when Treasury issues temporary regulations. The government contended that section 7805(e) represents a statutory carveout from APA requirements for temporary regulations because it contemplates the issuance of immediately effective temporary regulations and thus should take precedence over the generally applicable APA. The court rejected the government's argument, holding that neither the statute nor the legislative history to section 7805(e) establishes "procedures so clearly different than those required by the APA that Congress must have intended to displace the norm."

The court next determined that Treasury lacked good cause to avoid complying with the APA notice and comment requirement. The APA exempts agencies from the notice and comment requirement for "good cause," where notice and comment procedures are "impracticable, unnecessary, or contrary to the public interest." 5 U.S.C. § 553(b)(B). Treasury asserted four reasons to establish good cause, none of which the court found persuasive. 

• First, Treasury asserted that taking the time to complete the notice and comment period would encourage taxpayers to engage in aggressive tax planning that the regulations intended to prevent. While the court was sympathetic to Treasury's concern regarding taxpayer behavior, the court noted that Treasury had sufficient time, at least seven months when measured from public discussion of the issue by government officials, to issue retroactive temporary regulations in compliance with notice and comment procedures. 
• Second, Treasury argued that the delay for notice and comment would impose tax filing inconvenience and compliance costs on taxpayers. The court responded that such concerns "[do] not override the public's interest in having an opportunity to comment on proposed regulations, nor the public interest in taxing consistently with congressional intent when the TCJA was debated and enacted."  
• Third, Treasury suggested that the public would later have an opportunity to comment when the temporary regulations were eventually finalized. The court again sided with Liberty Global, finding that if post-promulgation notice and comment were sufficient for the good cause exception, pre-promulgation notice and comment would never take place. 
• Finally, the court rejected Treasury's argument that the 18-month deadline for retroactive regulations in section 7805(b)(2) constitutes good cause, holding a statutory deadline is not enough by itself to exempt an agency from APA requirements. 

Lastly, the court ruled that Treasury's failure to comply with the notice and comment requirement was not a harmless error. The government argued that the error was harmless because Treasury provided an opportunity to comment following the issuance of the final regulations and gave taxpayers a choice to apply the temporary or final regulations to their 2018 tax returns. The court disagreed, holding that "permitting the submission of views after the effective date is no substitute for the right of interested persons to make their views known to the agency in time to influence the rule making process in a meaningful way." Liberty Global, at 14 (quoting U.S. Steel Corp. v. E.P.A. 595 F.2d 207, 214 (5th Cir. 1979)). 

The court's ruling follows recent cases Mann Construction from the Sixth Circuit Court of Appeals and CIC Services, LLC from the Eastern District of Tennessee which held that IRS notices designating so-called "listed transactions" or "transactions of interest" were subject to APA requirements. As government losses pile up, it is worth considering how Treasury and the IRS will respond. Any reaction may be delayed until the government can appeal the Liberty Global ruling to the Tenth Circuit Court of Appeals, but it is unclear how soon that may happen or whether the Tenth Circuit will ultimately reach the APA questions. The district court noted that there are still unresolved factual issues that bear on Liberty Global's eligibility for its claimed section 245A deductions without regard to the section 245A temporary regulations. Thus, it is possible that the Tenth Circuit could avoid opining on the validity of the temporary regulations entirely by confining its review to the still-unresolved factual issues.

For more information, please contact:

Loren C. Ponds, lponds@milchev.com, 202-626-5832

Kevin L. Kenworthy, kkenworthy@milchev.com, 202-626-5848

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

Marissa J. Lee*

*Former Miller & Chevalier attorney

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