Why the Treasury Regulations Under Section 7508A Were Invalidated

This article reviews the opinion promulgated by United States Tax Court in Mohamed K. Abdo and Fardowsa J. Farah v. Commissioner of Internal Revenue Service to determine why Treasury Regulations promulgated by the Department of Treasury were struck down by the Tax Court.

Facts of the Case

The Internal Revenue Service (“IRS”) issued to the petitioners a notice of deficiency dated December 2, 2019. The notice specified March 2, 2020, as the last day to petition the Tax Court. The petitioners resided in Ohio. On March 31, 2020, the President issued a major disaster declaration under the authority of the Robert T. Strafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. Section 5121-5207, with respect to Ohio as a result of the COVID-19 pandemic. The declaration identified the disaster conditions as “beginning on January 20, 2020, and continuing.”

Between March 19 and July 9, 2020, the Tax Court did not receive mail because of the Court’s response to the COVID 19 pandemic. On July 10, 2020, the Tax Court received the petitioners’ Tax Court petition in response to the notice of deficiency dated December 2, 2019.

The IRS subsequently issued a series of notices in which the stated purpose was to provide relief under Section 7508A(a) pursuant to the Nationwide Emergency Declaration. Section 7508A(a) generally gives the Secretary of the Treasury (Secretary) or his delegate (i.e., the IRS) the discretion to postpone certain tax-related deadlines for up to one year for those taxpayers he or it determines to be affected by a federally declared disaster. Included in this series of IRS notices was IRS Notice 2020-23, 2020-18 I.R.B. 742, which was issued on April 11, 2020. Among other specified deadline extensions, Notice 2020-23 extended the deadline for filing a Tax Court petition to July 15, 2020, for those taxpayers who had a petition due to be filed on or after April 1, 2020, and before July 15, 2020. Notice 2020-23 specified, however, that it did not provide relief for the period for filing a petition if that period expired before April 1, 2020.

On September 2, 2020, the IRS filed a Motion to Dismiss on the ground that the petitioners’ petition was not filed within the time prescribed by Section 6213(a) or Section 7502. Section 6213(a)provides, in pertinent part, that a taxpayer may file a petition with the Court for a redetermination of a deficiency within 90 days after the notice of deficiency is mailed, not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day. Section 7502 generally allows a timely mailed petition to be treated as timely filed.

The IRS contended that, because the petitioners did not mail their petition until March 17, 2020, petitioners failed to file their petition within the time prescribed by Sections 6213(a) and 7502 and therefore the Tax Court Court lacks jurisdiction to redetermine the income tax deficiency. The petitioners contended that Section 7508A(d) entitled them to an automatic, mandatory postponement of time to file until March 21, 2020, and that their petition was therefore timely.

At the time the case was brought before the Tax Court, Section 7508A(d)(1) provided in the case of any “qualified taxpayer,” the period beginning on the earliest incident date specified in the declaration to which the relevant disaster area relates and ending on the date which is 60 days after the latest incident date so specified “shall be disregarded in the same manner as a period specified under section 7508A(a). At the time, Section 7508A(d)(2)(A) defined a “qualified taxpayer” to include an individual whose principal residence is located in a disaster area. Section 7508A(d)(3) by cross-reference to Section 165(i)(5)(A) and (B), defines a disaster area as an area determined by the President to warrant federal assistance under the Stafford Act. Petitioners contend that they are qualified taxpayers because they resided in Ohio at all relevant times. The Petitioners cited Chevron, U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) to overturn the IRS’s interpretation of Section 7508A(d).

The Chevron Test

The recently overturned Chevron set forth a deferential judicial approach to federal agency interpretation of law, one which we shall examine in detail. Chevron began as a challenge to EPA rules defining the phrase “stationary source” in the “new source review” program established by the 1977 amendments to the Clean Air Act. See 42 U.S.C.A. Section 7409. The 1977 amendments imposed more stringent air quality requirements on states that had not yet reduced pollution to levels below certain ambient standards in what the statute called nonattainment areas. These provisions required permits “for the construction and operation of new or modified stationary sources” of air pollution. See 42 U.S.C.A. Section 7502. A state could issue a permit for construction of a new or modified major source in a nonattainment area only if the proposed source met these stringent requirements. The EPA initially interpreted “stationary source” to include all individual pieces of pollution-emitting equipment within a plant. The EPA, however, conducted a subsequent rulemaking proceeding, the end result of which was to repeal these earlier rules and to replace them with the so-called “bubble” approach. Under the “bubble” approach, EPA defined a major stationary source as the entire plant rather than the individual facilities within the plant.

On appeal, the D.C. Circuit Court of Appeals overturned the EPA’s new interpretation of “stationary source.” The court found that Congress had no specific intent concerning the term “stationary source,” particularly as it applied to the bubble concept. Nevertheless, the court reversed the agency based on its own interpretation of that term in light of the overall purposes of the amended Clean Air Act.

The Supreme Court reversed the Court of Appeals, and in doing so, appears to have narrowed the range of legal issues in which courts are expected to have the final say. The Supreme Court disagreed with the D.C. Circuit’s willingness to substitute its legal interpretation for that of the federal agency when the statute in question was ambiguous and was being applied to a policy approach to pollution on which Congress provided no express direction. The Supreme Court set forth a two step approach to the review of questions of law:

“If Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” See Chevron, 467 U.S. at 843, 104 S.Ct. at 2782.

To uphold the agency’s interpretation, the court need not conclude “that the agency construction was the only one it permissibly could have adopted, or even the reading the court would have reached if the question had arisen in a judicial proceeding.” It need only conclude that the agency’s interpretation was a “permissible” one. Buttressing the Chevron court’s deferential approach to agency interpretations was the fact that certain agencies are connected to an electorally accountable branch of government- the executive. Justice Stevens thus spoke in terms of presidential deference:

“Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges’ personal policy preference. In contrast, an agency to which Congress has delegated policy-making responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration’s views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make much policy choices- resolving the competing interest which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the competing interest which Congress left to be resolved by the agency charged with the administration of the statute in light of everyday realities.” See Chevron, 467 U.S. at 865-66, 104 S.Ct. at 2793.

Chevron’s two step approach to judicial review has clearly changed the “mood” of reviewing courts when dealing with questions of statutory interpretation and to some extent it has changed the law of judicial review of agency interpretation as well. By asking first whether Congress spoke “precisely” to the statutory issue in question, and second, whether or not Congress’ intent was “unambiguously clear” on that issue, the Supreme Court has narrowed the category of issues involving the kinds of questions of law that a court is willing to examine closely, and has expanded the number of agency decisions to which it will defer. If a reviewing court is satisfied that there is no clear congressional intent respecting the precise question at issue, a reasonableness test applies to the agency’s interpretation of the statute involved. As the Chevron court noted, “the court may not substitute its own construction for a reasonable interpretation” by the agency. This is the case, even if the court would have reached a different conclusion in a judicial setting. Reasonableness review usually involves “the agency’s textual analysis (broadly defined, including where appropriate resort to legislative history) and the compatibility of the inquiry with the congressional purpose informing the measure.

The Petitioners’ and IRS’s Position

Petitioners argued that Congress clearly intended Section 7508A(d) to operate in a mandatory and automatic manner and, therefore, the IRS’s interpretation of Section 7508A(d) fails under the first step of the Chevron test discussed above. Specifically, petitioners contend that Section 7508A(d) provides a mandatory extension of the deadlines and gives no discretion to the Secretary. In effect, petitioners argue that Section 7508A(d)(1) provides an unambiguously self-executing postponement period that, by virtue of its “shall be disregarded in the same manner as a period specified under [Section 7508A(a)] language, incorporates all of the acts referenced by Section 7508A(a). Section 7508A(a) references “any of the acts described in paragraph (1) of Section 7508A).” Section 7508(a)(1) generally postpones the time for performing certain tax-related acts, including the filing of a petition with the Court for a redetermination of a deficiency, for individuals serving in a combat zone for the U.S. Armed Forces. See IRC Section 7508(a)(1)(C). Petitioners therefore conclude that they were entitled to an automatic, mandatory 60-day postponement period from January 20, 2020, the earliest incident date specified in the Ohio Disaster Declaration,⁷ to March 21, 2020, to file their petition.

In reaching this conclusion, petitioners interpret Section 7508A(d) to provide for “a mandatory postponement period for taxpayers affected by federally declared disasters, separate from but complementing the discretionary postponement provision in Section 7508A(a).” And, because Treasury Regulation Section 301.7508A-1(g)(1) and (2) limits the acts subject to the mandatory postponement period of Section 7508A(d) to “the acts determined to be postponed by the Secretary’s exercise of authority under Section 7508A(a) and (b),” petitioners construe the regulations as “nullify[ing] subsection (d), in its entirety, and convert[ing] a mandatory provision to a permissive provision.” Contending that the regulations thereby conflict with the statutory scheme and its legislative purpose, petitioners stake their position that the regulations are invalid under the Chevron standard.

The IRS contended that the “shall be disregarded in the same manner as a period specified under [Section 7508A(a)]” language of  Section 7508A(d)(1) does not clearly provide a self-executing postponement period for the acts referenced by Section 7508A(a) but that it is instead silent and ambiguous as to the acts to which the mandatory postponement period applies. To that end, the IRS further contended that the statute is ambiguous in two ways: First, Congress did not address what specific time-sensitive acts are postponed pursuant to Section 7508A(d), and second, Congress did not directly address federally declared disasters without an incident date under Section 7508A. In the IRS’s view, the regulations were necessary to resolve these ambiguities.

The IRS contended that the regulations provide a permissible and reasonable construction of the statute that builds upon the “statutory nexus between the time-sensitive acts in Internal Revenue Code Sections 7508A(a) and (b)”  Consequently, the IRS concluded that the regulations were entitled to Chevron deference. The IRS also noted that the Secretary did not use his discretion under Section 7508A(a) in response to the Ohio Disaster Declaration to postpone the time for petitioners to file a petition with the Tax Court. Instead, the IRS pointed out that the Nationwide Emergency Declaration on which the Secretary relied to issue Notice 2020-23. Because the Secretary relied on the Nationwide Emergency Declaration rather than the Ohio Disaster Declaration to extend certain timeframes pursuant to Section 7508A(a) the IRS argued that the Ohio Disaster Declaration did not trigger Section 7508A(d). In the IRS’s view, the regulations implemented in the reading of Section 7508A(d) and the Ohio Disaster Declaration did not extend the time for petitioners to file their petition.

The Tax Court Applies the Chevron Test to Overturn Regulations Promulgated by the IRS

To interpret Section 7508A(d) the Tax Court and consider whether Treasury Regulation Section 301.7508A-1(g)(1) and (2) provides a valid construction of the statute, the Tax Court turned to Chevron and its two-step analysis. In Chevron, the Supreme Court provided the following framework for court review of an agency’s authoritative construction of a statute:

When a court reviews an agency’s construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.  If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.

Chevron, 467 U.S. at 842–43 (footnotes omitted).

At step 1 of the Chevron analysis, we must therefore ask whether Congress has directly spoken to the precise question at issue. Id. at 842. And, if the court determines the statute is silent or ambiguous on the point, the court proceeds to Chevron step 2 where the court asks whether the agency’s answer is based on a permissible construction of the statute. Consequently, the court does not ask whether the agency’s statutory interpretation is the best one possible. Instead, the court inquires only whether the agency made a reasonable policy choice in reaching its interpretation. And the court defers to the agency’s interpretation unless it is “arbitrary, capricious, or manifestly contrary to the statute.

In reviewing Chevron step 1, the court identified the precise question at issue as whether Section 7508A(d) automatically entitles a qualified taxpayer to a mandatory extension to file a petition with the Tax Court in the context of a federal disaster declaration containing an incident date. To determine whether Congress has spoken to this question, the court considered the “plain” and “literal” language of the statute itself, the specific context in which the language is used, and the broader context of the statute as a whole. In so doing, the court employed the traditional tools of statutory construction, including the canons of construction.

The petitioners argued that Section 7508A(d) unambiguously provided a self-executing postponement period for all of the tax -related acts included in Section 7508(a)(1) by cross-reference to  Section 7508A(a). In the petitioners’ view, the contrast of the discretionary language of Section 7508A(a) with the mandatory language of Section 7508A(d) demonstrated that Congress intended these tax deadlines to be automatically extended when it added subsection (d).

The IRS in turn, contended that Section 7508A(d) was silent and ambiguous “in at least two ways. . . . First, Congress did not identify the time sensitive acts subject to Section 7508A(d). Second, Congress did not specify the mandatory postponement in Section 7508A(d). Section 7508A(d) applied to a Federal Disaster Declaration without an incident date. The IRS first argued that the statute was ambiguous regarding whether a taxpayer has an automatic, mandatory postponement period for filing a Tax Court petition. The IRS contended this is so because, except for the rules regarding pensions described in Section 7508A(d)(4), subsection (d) does not specify the time-sensitive acts to be postponed during the mandatory postponement period but only that the period is to be disregarded “in the same manner as a period specified under subsection (a) of Section 7508A(d)(1).” The IRS disagreed with petitioners’ reading of the statute to state that Section 7508A(d) required every act that the Secretary has discretion to postpone under Section 7508A(a) to be independently postponed for a mandatory period under Section 7508A(d), regardless of whether the Secretary actually postponed any acts under Section 7508A(a). According to the IRS, this approach “clearly was not required by the language” of the statute. Respondent also argues that the statute is ambiguous because Congress did not specify how the mandatory postponement period in Section 7508A(d) applied to a federal disaster declaration without an incident date. Concluding that the statute is ambiguous for these two reasons, the IRS urged the Tax Court to move on to Chevron step 2.

The Tax Court determined that a provision will be considered ambiguous where the disputed language is “reasonably susceptible of different interpretations. The Tax Court concluded that, in the context of a federal disaster declaration containing an incident date, subsection (d) is not reasonably susceptible to different interpretations with respect to whether a qualified taxpayer is automatically entitled to a mandatory extension to file a petition with the court. The Tax Court agreed with the petitioners that the natural reading of subsection (d) is that a qualified taxpayer is so entitled.

The Tax Court first considered the mandatory nature of subsection (d). As the foregoing chart demonstrates, the mandatory language of subsection (d) stands in stark contrast to the discretionary language of subsection (a). Under the discretionary language of Section 7508A(a), the Tax Court found that the Secretary may specify (1) whether a period is disregarded, (2) how long a period is disregarded, (3) for whom a period is disregarded, and (4) for what purposes a period is disregarded. The mandatory language of subsection (d), however, provides the Secretary no discretion whatsoever regarding any of these four aspects of the extension. Instead, subsection (d) provides that, for a defined person, a defined period “shall be disregarded” in a defined manner. On the basis of the plain and literal language of the statute, the Tax Court determined that Congress must have clearly intended to provide for a postponement period that is mandatory.

The Tax Court determined that the heading of subsection (d) — “Mandatory 60-day extension” — further confirms this reading. As has been established, “the title of a statute and the heading of a section cannot limit the plain meaning of the text. In the case of Section 7508A(d), the heading is not at any variance with the text. The language of subsection (d) speaks of the defined postponement period in mandatory terms, and the heading uses the term “mandatory” itself. Having established the general understanding that Section 7508A(d) creates a mandatory postponement period, the Tax Court next considered whether the statute requires that this period automatically extend the date for filing a Tax Court petition by at least 60 days. The IRS argued that the statute is silent and hence ambiguous in this regard. The petitioners, meanwhile, contend that Section 7508A(d)(1) provided an unambiguously self-executing postponement period that, by virtue of the requirement that the period “shall be disregarded in the same manner as a period specified under [Section 7508A(a)], incorporated all of the acts referenced by Section 7508A(a), including the deadline to file a petition with the Tax Court.

In applying the Chevron test, the Tax Court found that the Court spoke directly to the question at issue and determined that the petitioners had 60 additional days to file a petition with the court. The Tax Court also invalidated Treasury Regulation Section 301.7508A-1(g)(1) and (2) to the extent that it limited acts automatically postponed by Section 7508A(d).

Moving Forward

Congress updated Section 7508A(d) on November 15, 2021, to clarify which acts a 60 day postponement applies. Under the amended version of Section 7508A, a 60-day period begins to run on the incident date of the disaster declaration and ends on the later of 60 days after the incident date or the date of the disaster declaration. Prior to the amendment of Section 7508A(d), the 60 day date was a minimum period. Section 7508A(d) called for a period to be disregarded that began to run on the earliest incident specified in a disaster declaration and an ending “on the date which is 60 days after the latest incident date so specified.” Under these rules, the start date for COVID-19 cases would be on or about January 20, 2020 and end on or about July 10, 2023, the end date for the COVID-19 Public Health Emergency.

The Tax Court ruling in Abdo applies to all cases that give rise to questions to those Tax Court petitions and refund claims filed between December 20, 2019 and 2021. In theory the updated version of Section 7508A(d) only extends the statute of limitations to file a Tax Court petition or commence refund litigation by 60 days. The end date of updated version of Section 7508A(d) limitation period to petition the U.S. Tax Court or proceed with refund litigation could be significantly shorter than the previous version. The question is does Congress have the authority to impair the rights of individuals that had rights to petition the Tax Court or file refund claims with the IRS between December 20, 2019 and November 15, 2021. In theory, amended Section 7508A(d) alters the substantive rights of these individuals to recover from the Government for an incorrect tax assessment or an overpayment of taxes.

The United States Supreme Court held in Landgraf v. USFI Film Products, 511 U.S. 244, 114 S,Ct. 11483, 128 L.Ed..2d 229 (1994) held that legislation that would impair the substantive rights should apply only to conduct occurring after the statute’s effective date, absent clear Congressional intent to make the legislation retroactive. There is nothing in the new Section 7808A(d) that indicates the statute is meant to be retroactive. Even if the Government were to argue that Section 7808A(d) should be applied retroactively, the new limited postponement postponement period will only be found to be constitutional if it satisfies a two-part test enunciated in United States v. Carlton, 512 U.S. 26, 30-31, 32 (1994). The test in Carlton requires that (1) the retroactive application of the statute must be supported by a legitimate legislative purpose furthered by rational means such that Congress’s purpose in enacting the amendment was neither illegitimate or arbitrary and 2) Congress acted promptly and established only a modest period of retroactivity. It will be interesting to see how the courts will grapple with this issue should the Government attempt to apply new Section 7808A(d) retroactively in tax controversy cases.

Anthony Diosdi is an  international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.