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Disputing Proposed Tax Regs Is Growing, Panel Says

March 9, 2018, Law360

Starling Marshall spoke at an event hosted by the Federal Bar Association and is quoted in a Law360 article regarding the growing legal strategy to challenge proposed tax regulations. According to Marshall, lawyers can challenge tax regulations on several grounds. Courts have ruled that the IRS must follow the Administrative Procedures Act, giving notice and collecting public comment on rulemaking, she said. But a procedures challenge isn’t likely to succeed, she said. The IRS can claim Treasury regulations are interpretive rules that, unlike legislative rules, do not need to meet the APA, she said. Moreover, the IRS gives notice and collects comments. The Chamber of Commerce case was an exception because it involved a legislative rule, Marshall said.

Lawyers also can claim the IRS issued a regulation in an arbitrary or capricious process, Marshall said. In Altera v. Commissioner, the U.S. Tax Court found that a tax regulation requiring cost-sharing participants to share stock-based compensation costs had no rational connection to facts and that the Treasury had disregarded public comments saying that participants did not share costs.

For a third line of argument, lawyers also can attack a Treasury regulation by arguing the regulation is promulgated in a way that defeats the purpose of the statute for which the regulation was written, Marshall said. An example is Dominion Resources Inc. v. U.S., where the Federal Circuit held that a Treasury regulation under IRC § 263A on deduction of interest incurred on debt was not a “reasonable interpretation” of § 263A, she said.

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