Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Impact of Illegal Tax Guidance: Notice 2008-83
The Fall of 2008 was a historic period for the United States financial sector. In September, the Bush administration made a historic request for money and authority intended to help avert financial crisis: Congress was asked to pass a $700 billion bailout package granting the Treasury Department far-reaching authority. On September 28, in the midst of congressional consideration of the administration’s request, the Service released Notice 2008-83 (referred to throughout this Comment as the “Notice”), a brief statement, relatively minor given the magnitude of other events, that carried important consequences for banks. The Notice altered tax consequences for banks that purchased troubled banks and amounted to a large tax subsidy of these mergers and acquisitions.
In doing so, the Notice arguably went beyond the scope of the Service’s authority and represented an unreasonable interpretation of section 382. Banks in a position to take advantage of the Notice’s tax consequences had a weighty incentive to act quickly to secure important benefits; many did so. In advising their clients on these transactions, banks’ lawyers were faced with a complex problem. Many tax practitioners recognized that the Notice likely overstepped the Service’s regulatory authority. Still, the Notice was official Service guidance and explicitly explained that it was worthy of reliance. Ultimately, the authority of the Notice was revoked prospectively by federal legislation. The same law ensured that transactions memorialized prior to January 16, 2009 would enjoy the tax benefits of the Notice.
These actions on the part of both banks and the federal government may have been based on an understanding that the benefits of the Notice could not be withdrawn once claimed and that the Notice’s authority could only be revoked prospectively.
This Comment argues that such an understanding was incorrect: the Notice was arguably an illegal administrative act, notwithstanding the crisis to which it related. If the Notice was illegal, the implicit encroachment upon Congress’s power to write the tax laws raises basic separation of powers issues. Therefore, the Notice could have been rescinded retroactively by congressional or executive action; any action taken in reliance on the Notice was vulnerable to a retroactive remedy restoring the prior statutory interpretation and collecting the resulting tax.
Specifically, Part I of this Comment discusses the Notice’s political and economic context. Part II describes section 382, the Code section that the Notice interprets, and explains the Notice’s interpretation. Part III.A lays out the argument that the Notice was illegal as an unreasonable interpretation of section 382 beyond the scope of the Treasury and the Service’s regulatory authority. Part III.B explores one method by which the Notice could be overturned: Congress, or one of its chambers, could be granted standing in federal court to challenge the legality of the Notice. Part IV argues that, if the Notice was deemed illegal or was disavowed by a future administration, constitutional principles would have defeated banks’ arguments that their reliance interest in the Notice should defend them against collection of the relevant tax. This Comment analyzes only the legal aspects of these questions. Political and prudential considerations could, and arguably did, result in a more favorable outcome for reliant banks than the law allowed. Still, banks and their advisers should have been aware that in relying on the Notice they were relying primarily on the likelihood of a positive political outcome rather than an unimpeachable legal position. In sum, tax lawyers and the banks they represent should have looked past the Notice’s plain language to the statutory and constitutional structure that gives it authority and, finding the Notice wanting, should have been wary of relying on the Notice. More generally, tax guidance that is clearly illegal is open to congressional challenge and retroactive revocation and should be dealt with cautiously.