Mannella, State Farm, and the Arbitrary and Capricious Standard

Abstract

In Mannella, the Third Circuit agreed with the Seventh Circuit's Lantz decision ruling against taxpayer challenge to the rule in the regulations imposing a two-year time limit on claims for equitable innocent spouse relief under section 6015(f). In a dissent in Mannella, Judge Ambro would have held that the IRS violated step two of Chevron because the IRS provided no explanation of its reasons for imposing this two-year time limit at the time the rule was adopted.

Judge Ambro concluded that in the absence of such a contemporaneous explanation of the agency's reasoning, it was 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 the area of administrative law relating to the administrative pocedure act's arbitrary and capricious standard, as that standard was interpreted in the Supreme Court's landmark 1983 State Farm decision.

State Farm requires that agencies engage in reasoned decision-making and that agencies provide contemporaneous explanations of their reasoning to make it possible for reviewing courts to 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 assertions that agencies have violated State Farm are commonplace for agencies other than the IRS, violations of State Farm have almost never been asserted against the Service, even though preambles to regulations are vulnerable to challenge under this standard because they often do not provide the type of explanation State Farm requires.

Keywords: Mannella, State Farm, Chevron, Chenery, Lantz, Mayo, tax myopia