2018-05-17

Cato: The IRS Took the Road Less Traveled By, Yet Judges Still Made All the Deference

In 1984, George Orwell famously defined “doublethink” as “holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.” But even Orwell would blush at claims made by the Internal Revenue Service that one can somehow both follow the law and violate it with the same activity. Amazingly, this seems to be the exact argument employed against Duquesne Light Holdings and subsequently upheld by the U.S. Court of Appeals for the Third Circuit.

In the early 2000s, Duquesne filed a series of consolidated tax returns along with its wholly owned subsidiary AquaSource. Despite initially declining to challenge the company’s deductions in a 2004 audit, the IRS later determined that the losses claimed constituted a double deduction. Even though the company painstakingly followed the tax code and regulations to the letter, the IRS relied on a strained interpretation of an 80-year-old case, Charles Ilfeld Co. v. Hernandez (1934), to disallow $199 million in losses, demanding a $36.9 million payment.

The Third Circuit’s endorsement of this odd use of Ilfeld creates a broad new view of federal agency power. Rather than understanding Ilfeld as a background presumption for evaluating ambiguous agency rules, this new doctrine allows agencies to override their own regulations to penalize those who violate some unarticulated, uncodified policy principle. Duquesne followed the rules, which did not prohibit the deductions it claimed. But rather than allowing deductions that were legally authorized, the court imposed a “triple-authorization requirement” mandating an additional okay, specifically stating that the deductions may be taken together. In other words, the court said that it isn’t enough for the law to say “you may take deduction A” and elsewhere “you may take deduction B”; the law must then also explicitly say “you may take deduction A and deduction B at the same time.”

The court’s decision continues the long march toward unrestrained administrative power via judicial abdication. First came Chevron deference, whereby courts must defer to the statutory interpretation of the agency that enforces the relevant statute. Then came Auer deference, requiring that courts defer to an agency’s interpretation of its own ambiguous regulations. But the Third Circuit has now gone a step further, ruling that an agency can reinterpret its own unambiguous regulations to mean whatever it wants. If Auer deference is a jurisprudential black eye, then the Third Court’s decision here is an ocular enucleation.

Read more at https://www.cato.org/blog/irs-took-road-less-traveled-yet-judges-still-made-all-deference

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