1. Is the new test a logical outgrowth of the original test? Why or why not?

2. How could the IRS have avoided a successful challenge to this new rule?

The Internal Revenue Service (IRS) proposed a rule concerning the allocation of membership dues paid to nonprofit organizations under which certain non-dues revenue was to be treated as taxable revenue. According to the proposed rule, the IRS intended to determine tax liability from this revenue using a seven-factor test. After the comment period, the IRS replaced the seven-factor test with a new allocation method that the IRS considered to be more fair and consistent. The new method carved down the factors used in the original rule, and a new three-factor test was published as a final rule without any additional comment period.

The American Medical Association (AMA) is a nonprofit corporation that charges its members dues that cover a variety of services. The AMA also publishes several journals from which the AMA derives revenue. Under the IRS’s three-factor test for allocation, the AMA’s tax liability increased significantly. After the IRS assessed the AMA’s tax liability under the three-factor test, the AMA brought a lawsuit claiming that the new three-factor allocation regulation was invalid because the IRS had never given the proper public notice required by the APA when the agency departed from its original seven-factor test.