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Mannella, State Farm, and the Arbitrary and Capricious Standard

Patrick J. Smith
Tax Notes

In Mannella, the Third Circuit agreed with the Seventh Circuit’s Lantz decision, which upheld the validity of regulations imposing a two-year time limit on claims for equitable innocent spouse relief under section 6015(f). Dissenting in Mannella, Judge Thomas L. Ambro would have held that Treasury and the IRS violated step two of Chevron because they provided no explanation of their reasons for imposing this two-year time limit when the rule was adopted.

Judge Ambro concluded that in the absence of a contemporaneous explanation of an agency’s reasoning, it is impossible for a reviewing court to exercise its role under Chevron in evaluating whether the agency’s action represented reasonable decision-making. Judge Ambro’s conclusion has substantial support in administrative law relating to the Administrative Procedure Act’s arbitrary and capricious standard as interpreted in the Supreme Court’s landmark 1983 State Farm decision.

State Farm requires that agencies engage in reasoned decision-making and that they provide contemporaneous explanations of their reasoning so reviewing courts can evaluate whether the agency has satisfied the reasoned decision-making requirement. The requirements imposed by State Farm are commonly viewed as substantially similar to the requirements of Chevron step two. Although State Farm violations are commonly asserted against other agencies, they are rarely asserted against Treasury and the IRS, even though the preambles to regulations often fail to provide the type of explanation State Farm requires. 

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