COMMENTARY / SPECIAL REPORT Fox Television In FCC v. Fox Television Stations Inc., 129 S. Ct. 1800 (2009), the Supreme Court resolved two important issues relating to the application of the arbitrary and capricious standard. First, Fox Television explicitly answered the question whether the standard imposes a more demanding level of judicial review in a case in which the agency changes its position than in a case in which the agency adopts a position on a particular issue for the first time.

The Court’s answer on this question was that the level of judicial scrutiny under the arbitrary and capricious standard is no different in these two cases. By its explicit resolution of the first issue, the Court also implicitly resolved a second issue, TAX NOTES, July 16, 2012 namely whether the arbitrary and capricious standard applies only to agency changes in position and not at all to agency positions adopted for the first time. By clarifying that the level of judicial review under the arbitrary and capricious standard is the same for both types of situations, the Court also left no doubt that the application of the standard is not limited to agency changes in position, but is also equally applicable to agency positions adopted for the first time. Conclusion The APA’s arbitrary and capricious standard provides a powerful tool that can be used in challenging IRS regulations, particularly after Judulang’s confirmation that this standard and Chevron step two are equivalent. IRS regulations are especially vulnerable to challenge under the arbitrary and capricious standard, because the IRS seems to be unaware that this standard requires that agencies must explain the reasons for their rules when they issue regulations.

However, taxpayers have seldom invoked this standard in challenging IRS regulations. Presumably this will begin to change, with the attention that Mayo has brought to the applicability in the tax world of general administrative law principles. The Federal Circuit’s recent Dominion Resources decision shows that this change is beginning to take place. 279 (C) Tax Analysts 2012.

All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. and thus provides a much more widely available basis for challenging IRS regulations than the IRS’s noncompliance with the notice and comment requirement in issuing temporary regulations. Moreover, although the APA notice and comment requirement may have some applicability to IRS documents other than temporary regulations, such as the notice that was challenged in Cohen, the arbitrary and capricious standard will ordinarily also be available as a basis for challenge in these cases, as Cohen illustrates. .