Sixth Circuit Declines to Defer to Revenue Rulings (9/13/12)

A significant topic in tax procedure is the various IRS pronouncements, from Regulations on down (down in terms of authority), and their influence in the interpretation of the tax law.  I posted a blog a few days ago discussing a case in which the Second Circuit gave deference to an IRS interpretation of a regulation.  See 2d Circuit Defers to the IRS's Litigating Position (9/9/12), here.  The issue of deference is a big subject and will likely be the subject of many blogs going forward.

Today, I discuss the issue again as presented in a recent Sixth Circuit opinion, United States v. Quality Stores, Inc., ___ F.3d ___, 2012 U.S. App. LEXIS 18820 (6th Cir. 2012), here.  The substantive issue presented in the case was whether severance payments are subject to FICA taxes.  This is a bit of an esoteric issue, but for some taxpayers it involves a large amount of money.  In Quality Stores, a refund of over $1 million in employer and employee FICA taxes were involved.  The Sixth Circuit held that the FICA payments were not subject to FICA.  Basically, the court reviewed the statute and legislative history as supporting its conclusion despite the fact that the income paid on severance was subject to income tax withholding.  In so holding, the Sixth Circuit created a conflict with a previous holding in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008).

I won't bore the reader by boring into the substance  of the holding.  Suffice it to say that there was  no regulation on point, so the Sixth Circuit first reached its holding based upon the statute, the legislative history and the cases.  The Court gave this as its conclusion (footnote omitted):

Accordingly, we conclude, under the stipulated facts of this case, that the payments Quality Stores made to its employees pursuant to the Pre- and Post-Petition Plans qualify as SUB payments under I.R.C. § 3402(o). Because Congress has provided that SUB payments are not "wages" and are treated only as if they were "wages" for purposes of federal income tax withholding, such payments are not "wages" for purposes of FICA taxation.

Then, after reaching its conclusion, the Court addressed the IRS's reliance on Revenue Rulings.  Although one could argue that Revenue Rulings might be subject to Chevron deference, the IRS will not assert Chevron deference for Revenue Rulings.  Accordingly, in addressing the Revenue Rulings, the Sixth Circuit presumably was addressing a weaker form of deference commonly referred to as Skidmore deference.  (I say presumably because the decision does not mention Skidmore, but I speculate that was the claim the Court was addressing.)  Skidmore deference is of uncertain scope, but generally is thought to apply to an agency announcement not entitled to Chevron deference to the extent that the reasoning of that announcement is persuasive.  I am not sure exactly what that means, for if the reasoning for a legal interpretation is persuasive, perhaps it should carry the day without any deference being necessary or helpful.  But presumably Skidmore means something.  Whatever Skidmore deference might mean, the Sixth Circuit said that its conclusion (quoted above) controlled:

We decline to imbue the IRS revenue rulings and private letter rulings with greater significance than the congressional intent expressed in the applicable statutes and legislative histories. Congress, not the IRS, prescribes the tax laws; IRS revenue rulings "have only such force as Congress chooses to give them, and Congress has not given them the force of law." Dixon v. United States, 381 U.S. 68, 73 (1965); Aeroquip-Vickers, Inc. v. Comm'r of Internal Revenue, 347 F.3d 173, 181 (6th Cir. 2003) (observing we do not give Chevron deference to revenue rulings because "the IRS does not invoke its authority to make rules with the force of law"). The power of the IRS to "administer a federal statute and to prescribe rules and regulations to that end is not the power to make law . . . but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute." Dixon, 381 U.S. at 74.  The rights of the taxpayer are defined by the statute, which establishes the standard by which such rights must be measured. Id. And where a promulgated Treasury regulation has no power to alter a statute Congress enacted, neither does a revenue ruling. See id. at 75. In appropriate circumstances we may give substantial judicial deference to longstanding and reasonable interpretations of IRS regulations and revenue rulings, Envtl. Def., 549 U.S. at 575, but in this case we conclude, for all the reasons we have discussed, that the IRS has not taken congressional intent fully into account.

For further reading with more context, see my Federal Tax Procedure text -- footnoted version, pp. 61-78 and nonfooted version pp. 42-53.  I don't believe that Quality Stores and the foregoing discussion adds materially to what is already said in the text, so there will be no changes for this case.  There is some thinking that the Government may ask for certiorari to resolve the conflict with CSX, in which case the Supreme Court will have yet another opportunity to tell us what Chevron and Skidmore mean.