The fight over "fighting regs" and judicial deference in tax litigation

Boston University Law Review

Volumn 92, Issue 2, 2012, Pages 643-700

  Lederman, Leandra ^a  

^a INDIANA UNIVERSITY   (United States)

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EID: 84860144393     PISSN: 00068047     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (57)

1. Jason J. Czarnezki, An Empirical Investigation of Judicial Decisionmaking, Statutory Interpretation, and the Chevron Doctrine in Environmental Law, 79 U. COLO. L. REV. 767, 768-69 (2008).
2. Catherine L. Fisk & Deborah C. Malamud, The NLRB in Administrative Law Exile: Problems with Its Structure and Function and Suggestions for Reform, 58 DUKE L.J. 2013, 2079-85 (2009) (suggesting that review of National Labor Relations Board (NLRB) actions and judicial deference to the agency become more consistent with review of and deference to all federal agency decisions).
3. Kristin E. Hickman, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference, 90 MINN. L. REV. 1537, 1539 (2006) ("Settling the question of deference toward Treasury regulations carries significant implications for both tax jurisprudence and tax policy.").
4. See David M. Hasen, The Ambiguous Basis of Judicial Deference to Administrative Rules, 17 YALE J. ON REG. 327, 332 (2000) ("[0]ne effect of Chevron's replacement of the variable judicial deference that had been applied to agencies' legislative rules with a blanket rule of deference to reasonable agency interpretations of ambiguous or silent statutes has been to grant agencies vastly greater discretion in resolving statutory ambiguity.").
5. See William N. Eskridge, Jr. & Lauren E. Baer, The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations from Chevron to Hamdan, 96 GEO. L.J. 1083, 1107-08 (2008) ("In forty-nine post-Chevron cases, the Court invoked Beth Israel [Hosp. v. NLRB, 437 U.S. 483 (1978)] deference and refrained from mentioning Chevron, any of the post-Chevron cases, or the famous two-step formula⋯. [T]he application of Beth Israel deference is found not only in labor law⋯ but also in immigration, treaty interpretation, sentencing, education, and regulated industries." (footnotes omitted));
6. Richard E. Levy & Robert L. Glicksman, Agency-Specific Precedents, 89 TEX. L. REV. 499, 524-25 (2011) (discussing some courts' application of Natl Muffler Dealers Ass'n v. United States, 440 U.S. 472 (1979), instead of the ChevronlSkidmore general administrative law framework).
7. Id. at 221. The Court remanded for consideration of the amount of respect the ruling needed to be accorded. See id. at 227, 234-35. Not everyone sees Chevron and Skidmore as distinct standards. The view that they are similar standards is often associated with Supreme Court Justice Breyer. See, e.g., Kristin E. Hickman & Matthew D. Krueger, In Search of the Modern Skidmore Standard, 107 COLUM. L. REV. 1235, 1248 (2007) ("Justice Breyer has long adopted the view that Chevron and Skidmore are functionally similar, with Chevron's emphasis on delegation representing merely another factor for a reviewing court to evaluate in deciding whether to defer to an administrative interpretation.");
8. Jim Rossi, Respecting Deference: Conceptualizing Skidmore Within the Architecture of Chevron, 42 WM. & MARY L. REV. 1105, 1138 (2001) (arguing that in his dissent in Christensen v. Harris County, 529 U.S. 576 (2000), Justice Breyer "hints, and implicitly endorses, that Skidmore can be understood within the architecture of Chevron deference, not as an alternative to Chevron deference");
9. Kathryn A. Watts, Adapting to Administrative Law's Erie Doctrine, 101 Nw. U. L. REV. 997, 1007 n.56 (2007) ("Justice Breyer appears to view Chevron as a special type of Skidmore deference.").
10. Mitchell M. Gans, Deference and the End of Tax Practice, 36 REAL PROP. PROB. & TR. J. 731, 792-95 (2002).
11. In a pre-Mead article, Professor Linda Galler also argued that no deference should be accorded Revenue Rulings. See Linda Galler, Emerging Standards for Judicial Review of IRS Revenue Rulings, 72 B.U. L. REV. 841, 891 (1992). The Gans proposal is discussed infra at text accompanying notes 148-152.
12. Professor David Franklin explains, The first [rulemaking] technique [under the APA], so-called "formal" rulemaking, involves onerous trial-type hearings and is rarely required unless a specific statute calls for rules to be "made on the record after opportunity for an agency hearing." Far more common is the second technique, variously known as "informal," "notice-and-comment," or "section 553" rulemaking. David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 YALE L.J. 276, 282 (2010) (footnote omitted) (quoting 5 U.S.C. §§ 553(c), 556, 557).
13. Thomas W. Merrill & Kathryn Tongue Watts, Agency Rules with the Force of Law: The Original Convention, 116 HARV. L. REV. 467, 476-77 (2002) ("Legislative rules are those that have the force and effect of law. From the perspective of agency personnel, regulated parties, and courts, these rules have a status akin to that of a statute.").
14. U.S. DEP'T OF JUSTICE, ATTORNEY GENERAL'S REPORT ON ADMINISTRATIVE PROCEDURE 99 (1941), available at http://www.law.fsu.edu/library/admin/ pdfdownload/apa1941.pdf.
15. Stanley S. Surrey, The Scope and Effect of Treasury Regulations Under the Income, Estate, and Gift Taxes, 88 U. PA. L. REV. 556, 556 n.f (1940). Surrey later became Assistant Secretary of the Treasury (Tax Policy).
16. See Kristin E. Hickman, Coloring Outside the Lines: Examining Treasury's (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements, 82 NOTRE DAME L. REV. 1727, 1796 (2007).
17. see also Ellsworth C. Alvord, Treasury Regulations and the Wilshire Oil Case, 40 COLUM. L. REV. 252, 261 (1940) ("The Treasury's construction of the statute, as set forth in interpretative regulations, is binding as a matter of law (it is too often not binding as a matter of practice) upon the Treasury's officers and agents; but it is not binding upon taxpayers."). With respect to judicial review of interpretative regulations, Alvord wrote, [W]here an interpretative regulation is involved, the ultimate question before the courts is: What does the statute mean?⋯ If the statutory meaning is clear, neither legislative nor executive constructions to the contrary will have any force. However, if the statute is ambiguous, the regulations, as contemporaneous constructions of the statute by those charged with executing it, are and properly should be given weight by the courts, just as committee reports and other legislative interpretations will be consulted. Such aids to interpretation are often helpful, but never controlling. Id. at 261-62 (footnotes omitted).
18. Erwin N. Griswold, A Summary of the Regulations Problem, 54 HARV. L. REV. 398, 402 (1941).
19. Louis Eisenstein, Some Iconoclastic Reflections on Tax Administration, 58 HARV. L. REV. 477, 529 (1945).
20. Id. at 100. The Court stated that the regulation in question was promulgated under a specific delegation of authority in Code section 23, rather than the general delegation in section 62. See id. at 102. Contemporaneous commentators expressed uncertainty as to whether the case involved a legislative regulation. Kenneth Culp Davis, Administrative Rules - Interpretative, Legislative, and Retroactive, 57 YALE L.J. 919, 956 (1948) ("[T]he Court seemingly assumed, perhaps erroneously, that the regulation was legislative⋯."); Surrey, supra note 39, at 572 ("If Section 23(1) did extend to Section 114(b)(3), as the Court apparently decided⋯ it had before it a legislative regulation⋯. But if Section 23(1) did not extend to Section 114(b)(3) - and the Court seems not too sure of their relationship [-]⋯ only an interpretative regulation is involved⋯."). Another commentator "convincingly demonstrates that another section was the subject of interpretation and that the rule was interpretative rather than legislative." Davis, supra, at 956 n.185; see also Alvord, supra note 40, at 256-57.
21. See Robert C. Brown, Regulations, Reenactment, and the Revenue Acts, 54 HARV. L. REV. 377, 384-85 (1941).
22. Id.; cf. Frederic P. Lee, Legislative and Interpretive Regulations, 29 GEO. L.J. 1, 3 (1940) ("If the statute provides that nonconformance to the regulation is to result in the imposition of legal sanctions specified by Congress, then the regulation is legislative."). Merrill and Watts argue, The implications of Lee's Georgetown article are considerable. His comments about how one identifies a grant of legislative, as opposed to interpretive, rulemaking authority exactly track the convention we have described. This understanding almost certainly reflects his extensive tenure as an attorney in the House and Senate Offices of Legislative Counsel - a tenure that coincided with the period during which Congress routinely observed the convention. Merrill & Watts, supra note 34, at 522.
23. See id. Some regulations receive substantial comments. See, e.g., Reporting of Gross Proceeds Payments to Attorneys, T.D. 9270, 2006-2 C.B. 237, at 238 (2006),
24. reprinted in Reporting of Gross Proceeds Payments to Attorneys, TAX NOTES TODAY, July 12, 2006, LEXIS, 2006 TNT 134-6 ("The IRS received written comments on the 1999 proposed regulations, and held a public hearing on September 22, 1999. After considering those comments and the testimony at the public hearing, the IRS and the Treasury Department decided to amend and repropose regulations under sections 6041 and 6045(f)⋯. A number of written comments were received in connection with the reproposed regulations⋯. In addition to written comments, a number of telephone calls were received with questions and comments regarding the reproposed regulations.").
25. See, e.g., I.R.S. Notice 2001-7, 2001-1 C.B. 374, available at http://www.irs.gov/pub/irs-drop/n-01-7.pdf ("Because the [Internal Revenue] Service is continuing to study the many comments regarding the NPRM under § 6045(f), the Service intends to further delay the effective date of § 1.6045-5.").
26. Id. at 226-27. One scholar has argued that Mead has made a mess of "the question [of] when an agency is entitled to Chevron deference for procedures other than notice-and-comment rulemaking or formal adjudication." Lisa Schultz Bressman, How Mead Has Muddled Judicial Review of Agency Action, 58 VAND. L. REV. 1443, 1445 (2005). Another scholar has argued that Mead actually did not change the Supreme Court's practice of when to apply Chevron: Even after Mead, the Supreme Court continues to apply Chevron deference only in contexts that fall within the scope of Chevron's original consensus. Under the pretext of reconstructing Congress's intent, the Court has granted Chevron deference where agency decision-making processes satisfy five core factors: (1) congressionally delegated authority, (2) agency expertise, (3) political responsiveness and accountability, (4) deliberative rationality, and (5) national uniformity. Contrary to conventional wisdom, none of these overlapping rationales can be properly considered redundant; since the Court decided Mead, it has consistently withheld Chevron deference when any one of these core rationales is not satisfied. Thus, the Supreme Court continues to honor Chevron's consensus under the veil of Mead's delegation fiction.
27. Evan J. Criddle, Chevron's Consensus, 88 B.U. L. REV. 1271, 1275 (2008) (footnote omitted).
28. But see Mark Seidenfcld, Chevron's Foundation, 86 NOTRE DAME L. REV. 273, 275 (2011) (stating that "[b]y treating constitutional justifications and policy considerations on an equal footing, this understanding forfeits any potential to explain how the factors that bear on this question should fit together in resolving it," and arguing that "the foundation for the Chevron doctrine is anchored in the separation of powers as manifested by the structure of the Constitution and Article Ill's assignment of the judicial powers"). Treasury regulations appear to satisfy Professor Criddle's five factors, given the express delegations in the Code to the Treasury, Treasury's expertise, the fact that it has no less accountability than other agencies, the deliberative process Treasury regulations go through, and the national uniformity of Treasury rulemaking. Professor Seidenfeld argued that his Article Ill-based "foundation for Chevron justifies factors akin to those used in Mead more than does the legislative intent foundation on which that case relied." Seidenfeld, supra, at 301. His analysis would reach different results from Mead in some cases. Id. at 302.
29. See Kristin E. Hickman, A Problem of Remedy: Responding to Treasury's (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements, 76 GEO. WASH. L. REV. 1153, 1158-59 (2008) ("Congress, Treasury, and taxpayers all operate with the understanding that Treasury regulations, whether temporary or final, are legally binding on both taxpayers and the government.").
30. See Juan F. Vasquez, Jr. & Peter A. Lowy, Challenging Temporary Treasury Regulations: An Analysis of the Administrative Procedure Act, Legislative Reenactment Doctrine, Deference, and Invalidity, 3 Hous. Bus. & TAX L.J. 248, 276-77 (2003) ("The Supreme Court⋯ did note that 'the framework of deference set forth in Chevron does apply to an agency interpretation contained in a regulation.'⋯ But, when coupled with the emphasis the Court places on the notice-and-comment process, a strong argument can be made that the Court was referring only to 'an agency interpretation contained in a regulation' that also completes the notice-and-comment process." (quoting Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000)).
31. See Irving Salem et al., ABA Section of Taxation Report of the Task Force on Judicial Deference, 57 TAX LAW. 717, 728 (2004) ("Temporary regulations, whether legislative or interpretive, are issued without notice and comment.").
32. See Michael Asimow, Public Participation in the Adoption of Temporary Regulations, 44 TAX LAW 343, 366-67 (1991) ("Once an agency has decided on a definitive rule and the rule has gone into effect, the staff may be less willing to make substantial alterations in the rule (and retrain enforcement personnel) in response to comments that suggest drastic changes in the rule⋯. Indeed, a post-effective comment period is little more than a petition for modification of a rule - a right that all persons have whether the agency asks for post-effective comments or not." (footnote omitted)).
33. U.S. Federal Tax Research, Tax Mgmt. Portfolio (BNA) No. 100, at A-27 (2005) [hereinafter BNA Tax Mgmt. Portfolio];
34. see also Kornman & Assocs. v. United States, 527 F.3d 443, 453 (5th Cir. 2008) ("The Government acknowledges that revenue rulings are not promulgated pursuant to the notice-and-comment procedures of the Administrative Procedures [sic] Act.");
35. John F. Coverdale, Court Review of Tax Regulations and Revenue Rulings in the Chevron Era, 64 GEO. WASH. L. REV. 35, 79 (1995) ("The IRS does not ordinarily employ notice-and-comment procedures in the publication of Revenue Rulings, although occasionally it requests comments on proposed Revenue Rulings." (footnotes omitted)).
36. See Marie Sapirie, DOJ Won 'I Argue for Chevron Deference for Revenue Rulings and Procedures, Official Says, TAX NOTES TODAY, May 16, 2011, LEXIS, 2011 TNT 90-7 ("The Department of Justice will no longer argue for Chevron deference for revenue rulings and revenue procedures, said Gilbert Rothenberg, appellate section chief in the DOJ's Tax Division.").
37. Mead was decided in 2001. See United States v. Mead Corp., 533 U.S. 218, 218 (2001). Professor Ellen Aprill explained, "Mead's invocation of Skidmore for tariff rulings⋯ seems to undermine the Tax Court's attitude toward revenue rulings, and Mead has in fact begun to influence the Tax Court's attitude toward revenue rulings." Ellen P. Aprill, The Interpretive Voice, 38 LOY. L.A. L. REV. 2081, 2109 (2005).
38. Patrick J. Smith, Life After Mayo: Silver Linings, 131 TAX NOTES 1251, 1260 n.62 (2011).
39. John F. Coverdale, Chevron's Reduced Domain: Judicial Review of Treasury Regulations and Revenue Rulings After Mead, 55 ADMIN. L. REV. 39, 89 (2003) ("Mead teaches that 'Chevron left Skidmore intact and applicable where statutory circumstances indicate no intent to delegate general authority to make rules with force of law, or where such authority was not invoked⋯.' Although penalties attach for careless, reckless or intentional disregard of a revenue ruling, the Treasury, in promulgating revenue rulings, does not invoke its authority to make rules with the force of law⋯. Revenue rulings, therefore, should not be considered candidates for Chevron deference." (footnotes omitted));
40. Mitchell M. Gans & Jay A. Soled, A New Model for Identifying Basis in Life Insurance Policies: Implementation and Deference, 7 FLA. TAX REV. 569, 595 (2006) ("Although the Supreme Court has not yet clarified whether Chevron or Skidmore applies to revenue rulings, it is very likely that the courts will apply Skidmore rather than Chevron in this context.").
41. Kristin E. Hickman, 1RB Guidance: The No Man's Land of Tax Code Interpretation, 2009 MICH. ST. L. REV. 239, 260 (footnotes omitted).
42. Hickman cites Tualatin Valley Builders Supply, Inc. v. Comm'r, 522 F.3d 937, 945-47 (9th Cir. 2008) (O'Scannlain, J., concurring), regarding an argument in favor of applying Chevron deference to a Revenue Procedure,
43. and Christopher M. Pietruszkiewicz, Discarded Deference: Judicial Independence in Informal Agency Guidance, 74 TENN. L. REV. 1, 43-44 (2006), as advocating National Muffler deference for Revenue Rulings, Revenue Procedures, and IRS Notices. Id. at260n.127.
44. See David F. Shores, Deferential Review of Tax Court Decisions: Dobson Revisited, 49 TAX LAW. 629, 631 (1996) ("History has not been kind to the Dobson decision. It was legislatively modified, or, depending on one's point of view, overruled in 1948 when Congress adopted the predecessor to section 7482(a), amending the statute to provide that Tax Court decisions shall be reviewed in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." (footnote omitted)).
45. See Steve R. Johnson, The Phoenix and the Perils of the Second Best: Why Heightened Appellate Deference to Tax Court Decisions Is Undesirable, 11 OR. L. REV. 235, 249 (1998) ("Dobson quickly proved unpopular. Many circuit court of appeals decisions applied Dobson, but unenthusiastically, and leading commentators criticized it." (footnote omitted)); see also Eisenstein, supra note 51, at 540 ("The Dobson decision is essentially a reaction against the failure of administration by the Treasury, which could have narrowed the area of judicial intervention. Nevertheless, the Dobson case is not the answer to the Supreme Court's prayer.").
46. Paul L. Caron, Tax Myopia, or Mamas Don't Let Your Babies Grow up to Be Tax Lawyers, 13 VA. TAX REV. 517, 590 (1994).
47. As a court, the Tax Court lacks the policymaking power and presidential control agencies have. Presidential control is one justification for Chevron deference. See Lisa Schultz Bressman, Procedures as Politics in Administrative Law, 107 CoLUM. L. REV. 1749, 1764 (2007) ("Administrative law reflects the presidential control model by increasing judicial deference to agency decisions. The most prominent example is Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. In that case, the Court held that agencies are entitled to judicial deference for interpretations of ambiguous statutory provisions in large part because they are subject to presidential control⋯." (footnote omitted));
48. see also Emily Hammond Meazell, Deference and Dialogue in Administrative Law, 111 COLUM. L. REV. 1722, 1727-28 (2011) ("[A]gencies are answerable to the elected President, giving them a heightened claim of discretionary authority when it comes to policymaking.").
49. Gregg D. Polsky, Can Treasury Overrule the Supreme Court?, 84 B.U. L. REV. 185, 188 (2004)
50. (observing, prior to Natl Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005), that "[i]t has been increasingly common for the Treasury to attempt to 'fix' a Supreme Court interpretation that, for various reasons, the Treasury finds problematic"). But cf. Brand X, 545 U.S. at 1003 (Stevens, J., concurring) (arguing that the Brand X principle "would not necessarily be applicable to a decision by this Court that would presumably remove any preexisting ambiguity");
51. 467 F.3d 149 (2d Cir. 2006), aff'dsub nom., Knight v. Comm'r, 552 U.S. 181 (2008). One commentator described the government's approach in this case as follows: "[T]he Justice Department took the remarkable position that the Court should deny a taxpayer's petition for certiorari on the basis of a regulation that the Treasury Department had not yet promulgated or even proposed." Mark E. Berg, Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments, 61 TAX LAW. 481, 482 (2008).
52. I.R.C. § 7805(b). The effective date provision states that it applies "with respect to regulations which relate to statutory provisions enacted on or after the date of the enactment of this Act." Id. § 7805 note. Taxpayer's counsel in United States v. Home Concrete & Supply recently argued to the Supreme Court that "enacted" modifies "regulations." Transcript of Oral Argument at 51, United States v. Home Concrete & Supply, LLC, No. 11-139 (U.S. Jan. 17, 2012), available at http://www.supremecourt.gov/oral-arguments/argument-transcripts/ll-139.pdf ("[W]e think, in context, it must modify 'regulation' because there's two types of IRS regulations: regulations relating to statutes and regulations relating to internal IRS practices.");
53. see also Brief of American College of Tax Counsel as Amicus Curiae in Support of Respondents, United States v. Home Concrete & Supply, LLC, No. 11-139, at 13 (U.S. Dec. 22,2011), available at LEXIS, 2011 TNT 248-17 (arguing that the language of the effective date provision is ambiguous as to whether "enacted" modifies "regulations" or "statutory provisions.").
54. see also Leandra Lederman & Stephen W. Mazza, Limitation by Regulation: Heads the Service Wins, Tails Taxpayer Loses?, 30 ABA SEC. OF TAX'N NEWSQUARTERLY 7, 7-8 (2010).
55. Id. The Supreme Court has granted certiorari in Home Concrete. See Grant of Certiorari in 11-139, United States v. Home Concrete & Supply, 132 S. Ct. 71 (2011), available at http://www.supremecourt.gOv/qp/ll-00139qp.pdf.
56. Id. at 459-60 (citation omitted). As authority for according the Revenue Ruling some weight, the court cited Linda Galler, Judicial Deference to Revenue Rulings: Reconciling Divergent Standards, 56 OHIO ST. L.J. 1037, 1077-82 (1995).
57. An analogy for this type of inquiry is the burden of proof rule in Tax Court. The Tax Court's rules provide that the burden of proof is generally on the taxpayer but is on the IRS with respect to "new matter, increases in deficiency, and affirmative defenses, pleaded in his answer." TAX CT. R. PRAC. & PROC. 142(a). The IRS, however, is barred from raising a new issue so late as to cause surprise and prejudice. See LEANDRA LEDERMAN & STEPHEN W. MAZZA, TAX CONTROVERSIES: PRACTICE AND PROCEDURE 339-40 (3rd ed. 2009).