Amicus Curiae Brief — Altera Corporation & Subsidiaries, Petitioner v. Commissioner of Internal Revenue

No. 19-1009

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In The

Supreme Court of the United States

---------------------------------♦--------------------------------ALTERA CORPORATION AND SUBSIDIARIES,

v.

Petitioners,

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

---------------------------------♦--------------------------------On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

---------------------------------♦--------------------------------BRIEF OF THE CHAMBER OF COMMERCE

OF THE UNITED STATES OF AMERICA AS

AMICUS CURIAE IN SUPPORT OF THE

PETITION FOR WRIT OF CERTIORARI

---------------------------------♦--------------------------------STEVEN P. LEHOTSKY

JONATHAN URICK

U.S. CHAMBER

LITIGATION CENTER

1615 H Street, NW

Washington, DC 20062

(202) 463-5337

Counsel for the Chamber

of Commerce of the

United States of America

CHRISTOPHER J. WALKER

Counsel of Record

THE OHIO STATE UNIVERSITY

MORITZ COLLEGE OF LAW

55 West 12th Avenue

Columbus, OH 43210

(614) 247-1898

christopher.j.walker@gmail.com

March 13, 2020

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COCKLE LEGAL BRIEFS (800) 225-6964

WWW.COCKLELEGALBRIEFS.COM

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...................................

ii

INTEREST OF AMICUS CURIAE ........................

1

INTRODUCTION AND SUMMARY .....................

3

ARGUMENT ...........................................................

6

I.

The Ninth Circuit’s Judgment Departs from

Supreme Court Precedent and Its Uniform

Application in the Circuit Courts ................

6

A. The Ninth Circuit’s Decision Transforms

the APA’s Reasoned-Decisionmaking Requirement into a “Scavenger Hunt” To

Uncover the Agency’s Reasoning ..........

8

B. The Ninth Circuit’s Decision Eviscerates the APA’s Requirement of Fair Notice and Meaningful Participation in

the Rulemaking Process for Tax Regulations .................................................... 12

C. The Ninth Circuit’s Decision Disregards

This Court’s Command To Withhold Chevron Deference Where an Agency’s Rulemaking Is Procedurally Defective ......... 16

II.

The Ninth Circuit’s Decision Introduces

Uncertainty for the Business Community

and Risks Undermining the National Economy ............................................................... 17

CONCLUSION .......................................................

21

ii

TABLE OF AUTHORITIES

Page

CASES

Bowen v. Georgetown Univ. Hosp., 488 U.S. 204

(1988) .......................................................................17

Burlington Truck Lines v. United States, 371

U.S. 156 (1962) ..........................................................8

Chamber of Commerce v. IRS, No. 1:16-CV-944,

2017 WL 4682050 (W.D. Tex. Oct. 6, 2017) ...............2

Chevron, U.S.A. v. NRDC,

467 U.S. 837 (1984) ................................... 3, 4, 16, 17

Citizens to Preserve Overton Park, Inc. v. Volpe,

401 U.S. 402 (1971) .................................................11

City of Arlington v. FCC, 569 U.S. 290 (2013) ............17

Cohen v. United States, 650 F.3d 717 (D.C. Cir.

2011) (en banc) ..........................................................7

Commissioner of Internal Revenue v. Bilder, 369

U.S. 499 (1962) ........................................................18

Dep’t of Commerce v. New York, 139 S. Ct. 2551

(2019) .......................................................................12

Diedrich v. Commissioner of Internal Revenue,

457 U.S. 191 (1982) .................................................19

Encino Motorcars, LLC v. Navarro, 136 S. Ct.

2117 (2016) ........................................................ 16, 20

FCC v. Fox Television Stations, 556 U.S. 502

(2009) ........................................................... 13, 16, 20

Gutierrez–Brizuela v. Lynch, 834 F.3d 1142 (10th

Cir. 2016) ............................................................. 4, 17

iii

TABLE OF AUTHORITIES – Continued

Page

Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C.

Cir. 1977) (per curiam) ............................................11

Jewett v. Commissioner of Internal Revenue, 455

U.S. 305 (1982) ........................................................18

Mayo Found. for Medical Education & Research

v. United States, 562 U.S. 44 (2011) ...................... 6, 7

Michigan v. EPA, 135 S. Ct. 2699 (2015) ............... 4, 17

Motor Veh. Mfrs. Ass’n v. State Farm Mut. Auto

Ins. Co., 463 U.S. 29 (1983).................. 8, 9, 10, 11, 16

Nat’l R.R. Passenger Corp. v. Boston & Maine

Corp., 503 U.S. 407 (1992) .......................................14

Pereira v. Sessions, 138 S. Ct. 2105 (2018) ............. 4, 17

Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199

(2015) ................................................................. 11, 15

SEC v. Chenery Corp., 318 U.S. 80 (1943)

(Chenery I) ......................................................... 13, 16

SEC v. Chenery Corp., 332 U.S. 194 (1947)

(Chenery II)........................................................... 9

Wilson v. Comm’r of Internal Revenue, 705 F.3d

980 (9th Cir. 2013) .....................................................5

REGULATIONS

26 C.F.R. § 1.482-1 ......................................................10

iv

TABLE OF AUTHORITIES – Continued

Page

OTHER AUTHORITIES

Kristin E. Hickman, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference,

90 Minn. L. Rev. 1537 (2006) ....................................7

Stephanie Hoffer & Christopher J. Walker, The

Death of Tax Court Exceptionalism, 99 Minn.

L. Rev. 221 (2014) ......................................................7

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INTEREST OF AMICUS CURIAE1

The Chamber of Commerce of the United States of

America (“Chamber”) is the world’s largest business

federation. It represents approximately 300,000 direct

members and indirectly represents the interests of

more than three million companies and professional

organizations of every size, in every sector, and from

every region of the country. An important function of

the Chamber is to represent the interests of its members in matters before Congress, the Executive Branch,

and the courts. To that end, the Chamber regularly

files amicus curiae briefs in cases that raise issues of

concern to the Nation’s business community.

This case presents issues of exceptional importance

to the Chamber and its members regarding the relationship between tax regulations and the Administrative Procedure Act (“APA”) and related administrative

law doctrines. As Federal Circuit Judge O’Malley (sitting by designation) details in her dissent from the

Ninth Circuit’s opinion, the IRS failed in a number of

critical respects to engage in reasoned decisionmaking

as required by the APA and Supreme Court precedent.

Such arbitrary and capricious rulemaking—which,

Pursuant to Supreme Court Rule 37.6, counsel for amicus

represent that they authored this brief in its entirety and that

none of the parties or their counsel, or any other person or entity

other than amicus, its members, or its counsel, made a monetary

contribution intended to fund the preparation or submission of

this brief. Pursuant to Rule 37.2(a), counsel for amicus represent

that all parties were provided notice of amicus’s intention to file

this brief at least 10 days before its due date and that all parties

have consented to the filing of this brief.

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contrary to blackletter administrative law, the Ninth

Circuit endorses here—imposes tremendous negative

consequences for the Nation’s business community.

The business community has a particular interest

in the interpretation and application of the rules governing the administrative process. Businesses face a

growing array of regulations, with tax regulations being among the most complex. When planning their operations and investing for the future, businesses have

no choice but to rely on those regulations. Businesses,

moreover, critically depend on the procedures and protections that the APA provides against arbitrary or

otherwise unlawful agency action. The IRS’s arbitrary

and capricious actions in this case alone would disrupt

billions of dollars in reliance interests of the affected

businesses.

The Chamber has a broad and diverse membership and a long history of successfully challenging

regulations that violate the APA—including IRS

regulations. See, e.g., Chamber of Commerce v. IRS,

No. 1:16-CV-944, 2017 WL 4682050 (W.D. Tex. Oct. 6,

2017). The Chamber is therefore uniquely positioned

to speak to the administrative law principles implicated by this case as well as the consequences to the

Nation’s business community from arbitrary agency

regulatory activities that upset settled expectations in

violation of the APA.

---------------------------------♦---------------------------------

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INTRODUCTION AND SUMMARY

This Court, the D.C. Circuit, and now the Tax

Court have properly rejected the IRS’s “tax exceptionalism” position that its regulatory activities are not

fully governed by the APA and related administrative

law doctrines. That rejection is particularly important

here, where the IRS seeks Chevron deference for its regulatory activities while attempting to evade the APA’s

protections against arbitrary and capricious agency action. This case thus presents issues of exceptional importance for businesses subject to tax rulemaking that

are worthy of review under this Court’s Rule 10.

I. Although purporting to remain in line with

well-established administrative law doctrines, the Ninth

Circuit strays far afield from this Court’s precedents in

three respects.

First, the Ninth Circuit transforms the APA’s

reasoned-decisionmaking requirement into what Judge

O’Malley aptly terms a “scavenger hunt” in search of

the agency’s reasoning. As the fifteen members of the

Tax Court unanimously detailed in their decision, the

IRS committed a number of fatal errors during its rulemaking process. Among them, the IRS failed to collect,

much less examine, the relevant data to engage in

reasoned decisionmaking. And it did not respond to numerous significant comments made during the comment period.

Second, once in court, the IRS improperly attempted

to justify its final rule based on alternative grounds not

raised during the rulemaking process—grounds that

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would result in a change in the IRS’s longstanding

position without any accompanying explanation. By

blessing these post-hoc rationalizations offered by the

IRS for the first time in the litigation itself, the Ninth

Circuit eviscerates the APA’s guarantee that the public

have fair notice of regulatory obligations and a meaningful opportunity to participate in the notice-andcomment rulemaking process.

Third, the Ninth Circuit disregards this Court’s

command that Chevron deference does not apply where

an agency engages in a procedurally defective rulemaking. In recent years, there has been a growing call,

including by some members of this Court, to narrow

or eliminate Chevron deference. See, e.g., Pereira v. Sessions, 138 S. Ct. 2105, 2120–21 (2018) (Kennedy, J.,

concurring); Michigan v. EPA, 135 S. Ct. 2699, 2712–14

(2015) (Thomas, J., concurring); Gutierrez–Brizuela v.

Lynch, 834 F.3d 1142, 1149–58 (10th Cir. 2016) (Gorsuch, J., concurring). Whatever one’s views on Chevron

deference generally, the Ninth Circuit’s decision to

accord Chevron deference to an agency’s statutory interpretation made for the first time in litigation is

squarely foreclosed by this Court’s precedent.

These are not garden-variety errors. The Ninth

Circuit’s departure from this Court’s established decisions on the procedural requirements of the APA is

egregious. And the Court of Appeals’ casual expansion

of Chevron—notwithstanding the recent calls of current and former Justices to revisit Chevron entirely—

is also worthy of this Court’s plenary review.

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If the established administrative law rules are

faithfully applied, it is not a close call that the IRS’s

actions must be vacated as arbitrary and capricious

under the APA. Indeed, of the twenty-two federal judges

who have ruled on the propriety of the IRS’s actions

here, nineteen—all fifteen Tax Court judges, a Federal

Circuit judge dissenting from the panel opinions, and

three Ninth Circuit judges dissenting from denial of

rehearing en banc—have agreed that the IRS fell far

short of its obligations under the APA.2

II. The Ninth Circuit’s decision to allow the IRS

to skirt its procedural obligations under the APA has

substantial negative consequences for the Nation’s

business community and thus the national economy.

The amount of money implicated by this one regulation is in the billions. Moreover, as Judge Milan Smith

notes in his dissent from denial of rehearing en banc,

the business community now faces great uncertainty

due to potential disuniformity in federal tax law. Businesses within the nine states governed by the Ninth

Circuit are bound by this invalid tax regulation, whereas

those in the rest of the country are not due to the Tax

Court’s nationwide jurisdiction.

It is worth noting that ten judges were recused from participating in the Ninth Circuit’s en banc process. See Pet. App. 146a

(“Judges McKeown, Wardlaw, Bybee, Bea, Watford, Owens, Friedland, Miller, Collins, and Lee were recused and did not participate

in the vote.”). At least one of them has written forcefully against

tax exceptionalism. See Wilson v. Comm’r of Internal Revenue,

705 F.3d 980, 999 (9th Cir. 2013) (Bybee, J., dissenting) (arguing

that the IRS and the Tax Court are bound by the APA).

2

6

More critically, arbitrary and capricious changes

to federal regulations uproot settled expectations among

regulated businesses. This is particularly true in the

context of tax regulation, where individuals and businesses rely heavily on the existing law when directing

their business operations and implementing their investment strategies. This case alone will upset billions

of dollars in reliance interests. But the precedent the

Ninth Circuit has set for arbitrary tax administration

in the western fifth of the country has the potential to

cause even greater damage to the national economy.

In Mayo Foundation for Medical Education and

Research v. United States, 562 U.S. 44, 55–56 (2011),

the Court held that administrative law applies to tax

regulation, refusing “to carve out an approach to administrative review good for tax law only.” Apparently,

the IRS has still not learned this lesson. Nor has the

Ninth Circuit. It is imperative that the Court send a

clear message that the IRS must follow the same rules

that apply to the rest of the administrative state.

---------------------------------♦---------------------------------

ARGUMENT

I.

The Ninth Circuit’s Judgment Departs from

Supreme Court Precedent and Its Uniform

Application in the Circuit Courts

For decades, tax law suffered from what has been

coined “tax exceptionalism”—the misperception that

tax regulations are not governed by the same longstanding rules of administrative law that generally

7

apply to any federal agency action.3 In recent years,

however, this Court and the lower courts have correctly

rejected tax exceptionalism.4 In the decision below, fifteen members of the Tax Court unanimously joined

that trend, holding that the IRS is bound by the same

rules—the APA and related administrative law doctrines—that govern the rest of the federal regulatory

state. See Pet. App. 108a–121a.

Although the Ninth Circuit purports to follow

suit, its misapplication of administrative law reflects

a tax exceptionalist approach inconsistent with Supreme Court precedent and the uniform application

of that precedent in the circuit courts. The Court need

not rely on just petitioners and amici to appreciate

the Ninth Circuit’s errors. The panel opinion drew a

trenchant, 32-page dissent from Judge O’Malley, a Federal Circuit judge sitting by designation (Pet. App.

47a–78a), as well as a 22-page dissent from denial of

See Kristin E. Hickman, The Need for Mead: Rejecting Tax

Exceptionalism in Judicial Deference, 90 Minn. L. Rev. 1537, 1541

(2006) (describing the “perception of tax exceptionalism that intrudes upon much contemporary tax scholarship and jurisprudence”).

4

See, e.g., Mayo Foundation, 562 U.S. at 55–56 (refusing to

apply a different standard of review to an IRS interpretation of

the tax code than is applied to other federal regulations); Cohen

v. United States, 650 F.3d 717, 736 (D.C. Cir. 2011) (en banc)

(holding that the APA’s judicial review provisions apply with full

force to a form of IRS guidance known as a notice). See generally

Stephanie Hoffer & Christopher J. Walker, The Death of Tax

Court Exceptionalism, 99 Minn. L. Rev. 221, 222–24 (2014) (chronicling how federal courts have rejected tax exceptionalism).

3

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rehearing en banc from Judge Smith, joined by Judges

Callahan and Bade (Pet. App. 146a–167a).

As Judge O’Malley exhaustively documents in her

dissent, the Ninth Circuit’s opinion “stretches” administrative law “beyond its breaking point” in a manner

“inconsistent with [ ] fundamental [APA] principle[s].”

Pet. App. 48a–49a. As Judge Smith concludes in his

dissent, “Treasury’s actions in this case are the epitome of arbitrary and capricious rulemaking.” Pet. App.

146a. In upholding the agency’s actions here, the Ninth

Circuit “tramples on the reliance interests of American

businesses, threatens the uniform enforcement of the

Tax Code, and drastically lowers the bar for compliance with the Administrative Procedure Act.” Id. at

146a–147a.

A. The Ninth Circuit’s Decision Transforms

the APA’s Reasoned-Decisionmaking Requirement into a “Scavenger Hunt” To

Uncover the Agency’s Reasoning

It is blackletter administrative law that, to survive arbitrary-and-capricious review under the APA,

“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.’ ” Motor Veh. Mfrs. Ass’n v. State

Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S.

156, 168 (1962)). In what has been termed the APA’s

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reasoned-decisionmaking requirement (or “hard look”

review), the State Farm Court further instructed:

Normally, 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. The reviewing court should not attempt itself to make up for such deficiencies:

“We may not supply a reasoned basis for the

agency’s action that the agency itself has not

given.”

Id. (quoting SEC v. Chenery Corp., 332 U.S. 194, 196

(1947) (Chenery II)).

The Ninth Circuit’s departure from this precedent

becomes evident in the opinion’s second paragraph:

“Our task, of course, is not to assess the better tax policy, nor the wisdom of either approach, but rather to

examine whether Treasury’s regulations are permitted

under the statute.” Pet. App. 6a. State Farm, of course,

requires more. It is not sufficient to conclude that the

substance of the agency’s final rule is permissible under the agency’s governing statute. The reviewing

court must ensure that the agency’s regulatory process

reflects reasoned decisionmaking. The Ninth Circuit’s

approach, by contrast, is more like “no look,” rather

10

than a “hard look,” into the agency’s decisionmaking

process.

Faithfully applying State Farm, the Tax Court

(Pet. App. 121a–136a), Judge O’Malley (Pet. App. 58a–

67a), and Judges Smith, Callahan, and Bade (Pet. App.

155a–166a) had little trouble concluding that the IRS

flunked this APA test. The fifteen tax experts on the

Tax Court unanimously agreed that “the final rule

lacks a basis in fact,” that “Treasury failed to rationally

connect the choice it made with the facts found,” and

that “Treasury’s conclusion that the final rule is consistent with the arm’s-length standard is contrary to

all of the evidence before it.” Pet. App. 138a.

Critically, despite applying the traditionally factintensive arm’s-length standard, the IRS did not even

attempt to conduct any factfinding regarding the rule’s

central assumption that unrelated parties entering

into qualified cost-sharing arrangements would generally share stock-based compensation costs. See Pet.

App. 124a & n.20 (noting IRS’s concession that it did

no factfinding).5 In other words, as the Tax Court

As the Tax Court explained, the well-established arm’s

length standard is satisfied “if the results of the transaction are

consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under

the same circumstances (arm’s length result).” Pet. App. 85a (quoting 26 C.F.R. § 1.482-1(b)(1)). Due to the fact that “identical transactions can rarely be located, whether a transaction produces an

arm’s length result generally will be determined by reference to

the results of comparable transactions under comparable circumstances.” Id. (quoting 26 C.F.R. § 1.482-1(b)(1)). Accordingly, this inquiry is necessarily fact intensive, yet “Treasury took the position

5

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concluded, the IRS “entirely failed to consider an important [empirical] aspect of the problem.” State Farm,

463 U.S. at 43; see also Pet. App. 127a (concluding that

“Treasury failed to ‘examine the relevant data’ ” (quoting State Farm, 463 U.S. at 43)).

The IRS also failed to consider, much less respond

to, numerous relevant and significant comments lodged

during the public comment period. This Court has repeatedly emphasized that “[a]n agency must consider

and respond to significant comments received during

the period for public comment.” Perez v. Mortgage

Bankers Ass’n, 135 S. Ct. 1199, 1203 (2015) (citing Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S.

402, 416 (1971)). That is because this APA-guaranteed

“opportunity to comment is meaningless unless the

agency responds to significant points raised by the

public.” Home Box Office, Inc. v. FCC, 567 F.2d 9, 35–36

(D.C. Cir. 1977) (per curiam) (footnote omitted).

The Tax Court detailed at length the variety of

significant comments to which the IRS provided no

meaningful response. See Pet. App. 130a–135a. Many

concerned the critical empirical inquiry into whether

unrelated parties entering into qualified cost-sharing

arrangements would generally share stock-based compensation costs. “Treasury’s failure to adequately respond to commentators,” the Tax Court concluded,

“frustrates [the court’s] review of the final rule and was

prejudicial to the affected entities.” Id. at 135a.

that it was not obligated to engage in fact finding or to follow evidence gathering procedures.” Id. at 124a.

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The problem with the Ninth Circuit’s refusal to enforce the APA’s reasoned-decisionmaking requirement,

Judge O’Malley astutely observes, is that it “endorses

a practice of requiring interested parties to engage in

a scavenger hunt to understand an agency’s rulemaking proposals.” Pet. App. 48a. The burden under the

APA, however, is on the agency to give notice of its proposal and the reasons for it so that the regulated community can understand it and respond; the agency may

then evaluate the comments received and adjust its

proposal or explain why no changes are warranted in

finalizing its rule. It is on the agency to “offer genuine

justifications for important decisions, reasons that can

be scrutinized by courts and the interested public.”

Dep’t of Commerce v. New York, 139 S. Ct. 2551, 2575–

76 (2019). That standard process results in both better

rules and fairer notice to the regulated community.

B. The Ninth Circuit’s Decision Eviscerates

the APA’s Requirement of Fair Notice

and Meaningful Participation in the Rulemaking Process for Tax Regulations

In an attempt to salvage its 2003 rule after the

fact, the IRS argued in litigation that the rule can be

justified under the commensurate-with-income standard and that the IRS could issue regulations that modify—or even abandon—the arm’s-length standard. That

argument violates two bedrock principles of administrative law.

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First, this Court has long held that “an administrative order cannot be upheld unless the grounds

upon which the agency acted in exercising its powers

were those upon which its action can be sustained.”

SEC v. Chenery Corp., 318 U.S. 80, 95 (1943) (Chenery

I). As Judge O’Malley explains, neither the proposed

rule nor the final rule suggested that the IRS intended

to abandon the traditional arm’s-length standard, and

thus any mention of the commensurate-with-income

standard in the rule was not a separate and independent rationale for the agency’s decision. See Pet. App.

58a–67a.

Second, to the extent the IRS intended to change

its longstanding position that the commensurate-withincome standard is consistent with the arm’s-length

standard, it was certainly required to at least recognize in the rulemaking process that it intended to

change its position. In FCC v. Fox Television Stations,

this Court held that the APA’s “requirement that an

agency provide reasoned explanation for its action

would ordinarily demand that it display awareness

that it is changing position. An agency may not, for example, depart from a prior policy sub silentio or simply

disregard rules that are still on the books.” 556 U.S.

502, 515 (2009); see also id. (“And of course the agency

must show that there are good reasons for the new policy.”).

The Ninth Circuit pardons the IRS’s violations of

these bedrock principles articulated in Chenery I and

Fox. It argues that “Chenery does not require us to

adopt Altera’s position as to how the arm’s length

14

standard operates. Instead, we must ‘defer to an interpretation which was a necessary presupposition of [the

agency’s] decision,’ if reasonable, even when alternative interpretations are available.” Pet. App. 38a (quoting Nat’l R.R. Passenger Corp. v. Boston & Maine Corp.,

503 U.S. 407, 419–20 (1992)).

But, as Judge O’Malley observes, “[t]he majority

accepts the latest of the Commissioner’s ever-evolving

post-hoc rationalizations and then, amazingly, goes

even further to justify what Treasury did here.” Pet.

App. 64a. The IRS’s latest post-hoc rationalization is

not a “necessary presupposition” of the agency’s regulation, as the panel majority suggests to avoid the

Chenery I bar. To be a “necessary presupposition,” the

agency’s interpretation must be “the only reasonable

reading of the [agency’s action], and the only plausible

explanation of the issues that the [agency] addressed

after considering the factual submissions by all of the

parties.” Nat’l R.R. Passenger, 503 U.S. at 420. Judges

O’Malley, Smith, Callahan, and Bade, as well as the fifteen judges on the Tax Court, would all beg to differ

that the IRS’s post-hoc rationalization was the only

reasonable and only plausible reading of the regulation. Indeed, as detailed in Part I.A, they all agree that

such a reading would be unreasonable and implausible.

“The APA’s safeguards,” as Judge O’Malley explains, “ensure that those regulated do not have to

guess at the regulator’s reasoning; just as importantly,

they afford regulated parties a meaningful opportunity

to respond to that reasoning.” Pet. App. 66a. The

15

Chamber and its members are often involved in notice-and-comment rulemaking in a variety of regulatory contexts. Based on this extensive experience, the

Chamber confirms Judge O’Malley’s observation that

“Treasury’s notice of proposed rulemaking ran afoul of

these safeguards by failing to put the relevant public

on notice of its intention to depart from the traditional

arm’s length analysis.” Id.

By contrast, as Judge Smith observes, “[b]y rewriting the reasoning supporting the rule, the [Ninth

Circuit] renders extensive comments irrelevant, and is

strangely untroubled by the idea that no member of

the tax community noticed this alternative reasoning

or submitted a relevant comment.” Pet. App. 159a. Had

the IRS provided notice of this dramatic change, Judge

Smith is entirely correct based on the Chamber’s extensive experience that the affected businesses and

trade organizations would have responded vigorously

and substantially during the comment period. And the

IRS would have been required under the APA to “consider and respond to significant comments received

during the period for public comment.” Mortgage Bankers, 135 S. Ct. at 1203.

Simply put and contrary to the Ninth Circuit’s

conclusion, confining an agency to the positions it has

taken in notice-and-comment rulemaking is a bedrock

principle of administrative law. It ensures the agency

engages in reasoned decisionmaking and exercises its

discretion in a nonarbitrary manner.

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C. The Ninth Circuit’s Decision Disregards

This Court’s Command To Withhold Chevron Deference Where an Agency’s Rulemaking Is Procedurally Defective

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117

(2016), is controlling on whether the IRS is entitled to

deference under Chevron, U.S.A. v. NRDC, 467 U.S.

837, 842–43 (1984). It is plain that the IRS is not entitled to any deference.

In Encino Motorcars, the Court concluded that the

“regulation was issued without the reasoned explanation that was required in light of the [agency’s] change

in position and the significant reliance interests involved.” Id. at 2126. The Court therefore refused to accord any deference. Id. at 2127. That is because, when

agency “procedures are defective, a court should not accord Chevron deference to the agency interpretation.”

Id. at 2125.

The IRS’s procedural errors here are more egregious than the agency’s in Encino Motorcars. Not only

did the IRS fail to engage in reasoned decisionmaking

as required by State Farm and the APA’s arbitraryand-capricious standard (Part I.A), but the IRS has attempted to advance a new statutory interpretation not

proffered during the rulemaking, in contravention of

Chenery I, Fox, and the APA’s notice-and-comment

rulemaking requirements (Part I.B). As this Court

has emphasized, “[d]eference to what appears to be

nothing more than an agency’s convenient litigating

17

position would be entirely inappropriate.” Bowen v.

Georgetown Univ. Hosp., 488 U.S. 204, 213 (1988).

Whatever one’s views on the legitimacy of Chevron

deference generally, the Ninth Circuit’s decision to defer to an agency’s statutory interpretation advanced

for the first time in litigation violates these principles

and should be summarily reversed under this Court’s

precedent. Indeed, the Ninth Circuit’s decision here

would be among the most notable circuit-court applications of Chevron deference that Justice Kennedy

could have imagined when he issued his recent call to

revisit “the premises that underlie Chevron and how

courts have implemented that decision.” Pereira, 138

S. Ct. at 2121. Relying on prior opinions from the Chief

Justice and Justices Thomas and Gorsuch, Justice

Kennedy underscored that “[t]he proper rules for interpreting statutes and determining agency jurisdiction

and substantive agency powers should accord with

constitutional separation-of-powers principles and the

function and province of the Judiciary.” Id. (citing City

of Arlington v. FCC, 569 U.S. 290, 327 (2013) (Roberts,

C.J., dissenting); Michigan v. EPA, 135 S. Ct. at 2712–

14 (Thomas, J., concurring); Gutierrez–Brizuela, 834

F.3d at 1149–58 (Gorsuch, J., concurring)).

II.

The Ninth Circuit’s Decision Introduces Uncertainty for the Business Community and

Risks Undermining the National Economy

It is imperative that the Court reaffirm the Tax

Court’s core holding that the APA applies with full

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force to IRS rulemaking. That holding is particularly

important in light of the current efforts to implement

the Tax Cuts and Jobs Act of 2017. This is a critical

time for both the IRS and taxpayers to understand

clearly and precisely what the rules of the road are and

how they are to be applied by the courts on judicial review. If the IRS is free to follow its modish approach

to administrative law, it imposes real-world and substantial impacts on the Chamber’s members and the

business community and the national economy more

broadly.

As a preliminary matter, businesses are now subject to the IRS’s novel interpretation of its 2003 regulation within the nine states encompassing the Ninth

Circuit. As Petitioners report, companies in the Ninth

Circuit have more than $5 billion at stake in this dispute alone. Pet. 31. Yet, as Judge Smith details in his

dissent, due to the Tax Court’s nationwide jurisdiction, the Ninth Circuit’s “opinion will likely upset the

uniform application of the challenged regulation in

Tax Court, producing a situation akin to a circuit

split.” Pet. App. 164a–165a. Outside the Ninth Circuit,

there are billions more at stake. See Pet. 26–28. As

this Court has acknowledged, certiorari is warranted

in such cases because of “the need for a uniform rule

on” tax matters. Commissioner of Internal Revenue v.

Bilder, 369 U.S. 499, 501 (1962); see also Jewett v.

Commissioner of Internal Revenue, 455 U.S. 305, 308–

09 (1982) (granting certiorari to resolve conflict between various courts of appeals and the Tax Court);

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Diedrich v. Commissioner of Internal Revenue, 457 U.S.

191, 194 (1982) (same).

More fundamentally, businesses depend upon

clear and predictable rules—and fair and nonarbitrary

administrative processes—when planning their operations and investing for their businesses. This is particularly true of tax regulations, which are going through

a once-in-a-generation change in light of 2017’s historic tax reform to bolster American competitiveness.

If it is not clear that the IRS is constrained by administrative law’s procedural protections, there will be destabilizing uncertainty for the individuals, businesses,

and industries regulated by those tax regulations. Arbitrary bureaucratic behavior, moreover, can disrupt

an industry’s settled expectations and investments,

with profound economic consequences for the industry

and, in turn, for the national economy. Judge Smith incisively notes in dissent that the Ninth Circuit here

“tramples on longstanding reliance interests in American businesses” and “upsets not only domestic tax law,

but international tax law as well.” Pet. App. 165a–

166a.

This does not mean, of course, that federal agencies can never alter the regulatory landscape. But when

changing existing regulations, agencies must follow

the APA and related administrative law doctrines,

which ensure that agencies develop the regulations

with the benefit of comments from the affected community and other experts, thus preserving democratic

processes and producing the best possible rules. “In explaining its changed position,” this Court has counseled,

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“an agency must also be cognizant that longstanding

policies may have ‘engendered serious reliance interests that must be taken into account.’ ” Encino Motorcars, 136 S. Ct. at 2120 (quoting Fox, 556 U.S. at 515).

The IRS’s rulemaking here fell far short of the reasoned decisionmaking required by the APA and this

Court’s precedents. In the process, the IRS arbitrarily

upset settled expectations to the tune of billions of dollars. This Court should make clear that the IRS must

play by the same rules of the road that govern the rest

of the federal regulatory state. A summary reversal is

warranted, though full merits briefing and argument

may be helpful to further articulate the application of

these bedrock administrative law principles to tax regulation.

---------------------------------♦---------------------------------

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CONCLUSION

The petition for a writ of certiorari should be

granted. In the alternative, the Court should grant the

petition and summarily reverse the decision of the

Court of Appeals.

Respectfully submitted,

CHRISTOPHER J. WALKER

Counsel of Record

THE OHIO STATE UNIVERSITY

MORITZ COLLEGE OF LAW

55 West 12th Avenue

Columbus, OH 43210

(614) 247-1898

christopher.j.walker@gmail.com

STEVEN P. LEHOTSKY

JONATHAN URICK

U.S. CHAMBER LITIGATION CENTER

1615 H Street, NW

Washington, DC 20062

(202) 463-5337

March 13, 2020