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Pat Smith Quoted in Tax Notes re Fourth Circuit QinetiQ Case

Tax Notes

Ivins attorney Pat Smith was quoted in a Tax Notes article on the upcoming oral argument in the Fourth Circuit QinetiQ case, dealing with the issue of whether the Administrative Procedure Act’s reasoned decision-making requirement applies to IRS deficiency notices, Previewing the APA Arguments in QinetiQ.

Challenges to deficiency notices are evaluated by the Tax Court on a de novo basis, not the more deferential arbitrary and capricious standard that governs most other agency actions, which are reviewed only on the basis of the administrative record. As a result, it’s inappropriate to apply the principle of reasoned decision-making to a notice of deficiency, said Patrick J. Smith of Ivins, Phillips & Barker Chtd. ‘‘The IRS doesn’t get any deference except a burden of proof advantage in the Tax Court, so there is no reason to apply a reasoned decision-making standard,’’ he said. The government advanced that same argument in its brief.

The text of section 7522 may not decide the question in QinetiQ because a violation of it doesn’t give the taxpayer any rights, Smith said.

The issues in Ax and QinetiQ aren’t identical, but both address whether the arbitrary and capricious standard and reasoned decision-making aspect of it apply to challenges to deficiency notices in the Tax Court, Smith said.

The impact of Ax in the QinetiQ arguments could mean a decisive win for the government. ‘‘The Tax Court decision in Ax was totally correct,’’ said Smith. The Ax taxpayers’ reliance on SEC v. Chenery Corp., 318 U.S. 80 (1943), was appropriate because although Chenery was decided before the APA was enacted, the rationale the court gave for the reasoned decision-making requirement was that a decision committed to agency discretion can be upheld only on a basis that the agency itself relied upon, he said. ‘‘The court needs to know what rationale the agency relied on. That’s the reason for that requirement,’’ Smith said.

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