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

In1984, 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 ofIlfeld creates a broad new view of federal agency power. Rather than understandingIlfeld 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 ded...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs