Rulemaking Requirements Under the APA

On April 4, 2016, the U.S. Treasury Department enacted a package of regulations designed to curb corporate inversions. A corporate inversion is a tax reduction measure whereby a U.S. company reduces its U.S. tax burden by first merging with a company located in a foreign jurisdiction that has lower tax rates and then re-incorporating in that jurisdiction. Since the beginning of his term, President Obama has stated his intent to block what he calls “one of the most insidious tax loopholes out there.” Corporate inversions save companies a significant amount of money and apparently deprive the U.S. Treasury of billions in tax revenue every year.

The new Treasury regulations have already halted the $160 billion merger of Pfizer, a U.S. drugmaker and Allergan plc, a pharmaceutical manufacturing and distribution company based in Ireland. The two companies, the U.S. Chamber of Commerce and other trade groups are apparently contemplating a legal challenge to the new regulations, but this will not be easy. The Anti-Injunction Act of 1867 bars legal challenges to a tax until one has actually been assessed. This means that Pfizer and Allergan would have to complete their merger, file a tax return, and then wait for the IRS to assess a tax before a lawsuit could be filed.

An interesting and novel alternative has been proposed by a tax attorney in Washington, D.C. – he recently raised the possibility of suing the Treasury Department for having exceeded its legal authority under the Administrative Procedure Act (APA).

Rulemaking requirements under the APA

APA rulemaking requirements include the following:

  • Notice. Notice of a proposed rulemaking must be published in the Federal Register. The notice must include the effective date of the new rule, what the rule encompasses, and the legal authority the agency has for proposing it.
  • Public comments. The agency must then solicit public comments regarding the proposed rule. Comments are usually accepted for 30-60 days, depending on the rule’s complexity, and that time frame may be re-opened or extended if it solicited insufficient feedback from the public. All comments regarding a particular rule must be taken into consideration before the agency finalizes it.

Where applicable, the IRS’ use of Temporary Regulations, which are issued prior to notice and public comments, may be a path to challenging an IRS decision on procedural grounds.

Formal rulemaking

If a statute obligates an agency to conduct formal rulemaking, if a rule involves facts specific to individual rights, or if a rule includes adjudicative facts (facts that are controlling on a question of law), formal rulemaking may be required. Formal rulemaking is similar to courtroom proceedings, and includes a hearing on the record and the presentation of evidence.

There are a few exceptions to the above noted rulemaking requirements, particularly for rules involving issues such as military or foreign affairs, intra-agency policy and where the notice and comment procedures are unnecessary, unrealistic, or contrary to the public interest.