Note that Bob Probasco, Senior Lecturer and Director of the Low Income Tax Clinic at Texas A&M University School of Law, here, and I have an ongoing discussion in the comments below about the issues I try to present in this blog. I strongly encourage the readers to read at least Bob's comments and, secondarily my replies. And to engage in the discussion!
A prominent argument among academicians is that, after Chevron (as interpreted in the later cases), Treasury tax regulations promulgated after notice and comment are "legislative regulations" under the APA. I am among the distinct minority who disagree. Indeed, I may be the distinct minority who disagree, although, as I shall note, the IRS also disagrees. I am not aware that any court has specifically addressed the issue.
Here's the background. Legislative regulation is one category of regulation (or rule, as the APA calls it). The other category is interpretive regulation (called "interpretative regulation" in the APA, but now generally called interpretive). Under the APA, legislative regulations generally require notice and comment and prospective application. The APA specifically exempts interpretive regulations from notice and comment and from prospectivity. Treasury/IRS generally issues all regulations under the notice and comment procedure without regard to the legislative and interpretive categories in the APA. Regulations that the IRS views as interpretive, however, may be retroactive subject to the limitations in § 7805 and the IRS often provides retroactive effective dates. The issue addressed here -- the brouhaha so to speak -- is whether Chevron means that there is no such thing as an interpretive IRS regulation (as one prominent author claims).
I have written an article where I address this issue in the article at various points. Townsend, John A., IRS Guidance – Rulemaking and Deference to IRS Statutory Interpretation (July 27, 2018), Available at SSRN: https://ssrn.com/abstract=3212060.
In my ongoing discussions with a respected colleague who is among the majority on the issue as to which I am a (maybe the) minority, I produced what I call an Executive Summary of JAT Position on the Brouhaha. I post it below (and offer it in pdf format here). I invite readers to comment in the comments below (so all can benefit from the comments) or by email to me at jack@tjtaxlaw.com. For the email comments, I will not post them with attribution or even post them at all without the author's permission.
Executive Summary of JAT Position on the Brouhaha
1. Before 1946 (the year the Administrative Procedure Act (“APA”), 5 U.S.C. § 551ff. was enacted), there was a clear understanding of the difference between legislative regulations and interpretive regulations. (I use the current terminology for these categories – legislative and interpretive.) The distinction:
a. Legislative regulations created the rules within the scope of the authority Congress delegated. Section 1502, authorizing consolidated return regulations, is that classic tax example of delegated legislative regulation authority. In a bare few lines of authority, the IRS has promulgated hundreds of pages of mind-numbingly detailed and complex rules that, while within the scope of the authority delegated, cannot be derived on the basis of the statute alone. The consolidated return regulations are the law. If the IRS had no consolidated return regulations, there would be none and the courts could not create them. Legislative regulations could be prospective only, except in very rare circumstances not relevant here. For example, the IRS could not require corporate taxpayers to comply with the consolidated return regulations for conduct completed before the regulations were promulgated.
b. Interpretive regulations merely interpret the law without setting new law not fairly derived from the text of the statute. Section 7805(a) authorized interpretive (sometimes called general authority) regulations. There is no classic tax example of an interpretive regulation, but the sleep or rest rule for § 162 deductions approved in United States v. Correll, 389 U.S. 299 (1967) is a well-known example. If there is no interpretive regulation for the statute text, the courts can interpret and apply the law. And, because by their nature, interpretive regulations interpret the statute, the interpretation can apply retroactively.
c. The distinctions I draw in subparagraphs c. and d. are highly theoretical. Between the clearest cases of legislative regulations and administrative regulations lies a continuum where, toward the center, the theoretical distinctions may be difficult to apply. But, for purposes of this discussion, I will assume that at least at the ends of the continuum, the distinctions are valid and can be applied meaningfully.
2. Deference before 1946.
a. Courts deferred in some cases to agency interpretations of statutes, although there was no formal test or framework for how and when courts would defer. In the final analysis, deference was important only when the court applied an agency interpretation although the court believed that there was a more reasonable interpretation that, absent deference, the court would have applied in a case. In other words, in the Correll case, the court might have been able to formulate other reasonable interpretations, even perhaps, other more reasonable interpretations for the sleep or rest rule but deferred to the agency interpretation in the regulation.
3. In 1946, Congress enacted the APA applying a regulations framework recognizing and applying different requirements for the two categories of regulations – legislative regulations and interpretive regulations as discussed in paragraph 1.a. And 1.b. Congress gave no indication in the APA or its legislative history that it was concerned with court deference to agency interpretation discussed in paragraph 2.
a. Terminology Caveat:
i. The APA uses the term “rules” to mean agency regulations. The IRC, however, commonly uses the term “rules” to mean guidance below the level of regulations, which I and others call subregulatory guidance. For example,§ 7805(a) refers to “rules and regulations” and § 6662(b)(1) refers to “rules or regulations;” as thus presented in the IRC, the two are different categories, with “rules” being subregulatory guidance. To illustrate, Reg. § 1.16(a) defining “gross income” in § 61 is a rule in the meaning of the APA and is a regulation in the IRC; Rev. Rul. 76-75, 1976-1 C.B. 14, defining gross income to include certain interest reduction payments is not a regulation in the IRC (subregulatory guidance) and is not a rule under the APA. In this analysis, I will use the term regulation as the same as rule in the APA.
ii. The APA does not use the term “legislative regulations”; rather, it (i) states a general rule requiring that all regulations generally must be promulgated with notice and comment and be prospective; and (ii) exempts interpretive rules from that general rule . Regulations subject to the general rule (in part relevant here, not interpretive regulations) are commonly called legislative regulations.
b. The APA requires:
i. Legislative regulations must generally be (i) issued with notice and comment; and (ii) be prospective from 30 days after made final. 5 U.S.C. § 553(b) & (d).
ii. Interpretive regulations are exempt from both requirements; interpretive regulations may thus be (i) issued without notice and comment (although, at agency’s discretion may be issued with notice and comment) and (ii) retroactive to the date of the statute. 5 U.S.C. § 553(b) & (d). At the agency discretion, interpretive regulations may have lesser retroactivity or may be prospective only. E.g., § 7805(a).
c. The APA said nothing, explicitly or implicitly, about the deference that courts should give agency regulations.
4. In 1984, Chevron (Chevron U.S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)) was decided. Chevron and its progeny (mostly its progeny) created what is now called the Chevron framework (or some variant, such as doctrine) that guides a court in determining whether and how a court will defer to agency interpretations of the law.
a. The Chevron framework (as traditionally stated) has two steps:
i. Step One: if the statute text is not ambiguous (meaning that it does not permit more than one reasonable interpretation), the statute text controls without the need for any interpretation. The statute ambiguity is often referred to as a “gap” in the statute text.
ii. Step Two: if the statute text is ambiguous (meaning that the statute text permits more than one reasonable interpretation), the agency reasonable interpretation will control even though the court believes there is another more reasonable (in its mind) interpretation. If, at Step Two, the agency interpretation is not reasonable, it is ignored and the court makes its own most reasonable interpretation. (The application of the Chevron framework has considerable nuance in how the Steps are applied, but I think that is a fair summary of the framework for present purposes.)
b. The Chevron Court’s reasoning for granting the agency at Step Two the power to choose among reasonable interpretations has several strands.
i. If Congress used ambiguous text in the statute, presumably, Congress intended the agency to make reasonable interpretations of the text in its administration of the statute. The Court analogized this presumption to an explicit legislative regulation, even if only implicit in the use of ambiguous statutory text.
ii. The Court said that it has “long recognized that considerable weight” should be given an agency interpretation, referring the to deference authority discussed above in paragraph 2.
iii. The agency in administering the whole statute will have better expertise in making the appropriate interpretation to accommodate the complex pieces of the administrative regime assigned to the agency.
iv. Recognizing that choosing among reasonable interpretations can involve policy or political choices, the agency acting under the control of the President accountable to the people and elected every four years is closer to the political process than courts are and thus, in theory, better situated to make those interpretive choices.
5. The question is whether Chevron says anything about the APA and the APA’s distinction between legislative and interpretive regulations:
a. Chevron did not refer to the APA or its distinction between legislative and interpretive regulations. Indeed, Chevron did not mention the APA at all, nor say anything that can fairly be said as interpreting or intending to interpret the categories established in the APA.
b. Chevron did use the term “legislative regulation,” a term, as the general rule is interpreted, the APA uses to apply to regulations requiring notice and comment and prospectivity.. There is nothing in Chevron, however, that suggests that the Court meant that term in claiming a theoretical basis for deference to be coterminous with legislative regulations in the APA and thus control in the application of the APA which the Court did not mention. I think the Court was simply using the concept (not unique to the APA) to say that, by using ambiguous text, the Congress expected the agency to make interpretations in administering the statute.
c. Chevron’s subject was deference, not the APA. In its sphere of deference (as opposed to the APA), Chevron did not create deference to agency interpretations ex nihilo; as noted in paragraph 2. and the Chevron court explicitly recognized, courts already applied deference but in an unstructured and unpredictable way. Chevron’s innovation to the law of deference to agency interpretation was more incremental than radical. All it did was to refine deference to formulate a framework to make deference more regularized and predictable. But, deference had been a long tradition in the courts continued after the enactment of the APA without any hint that deferring to an agency regulations interpretation transformed the interpretation into a legislative regulation.
6. Section 7805(b) was amended in 1996 to limit retroactivity of § 7805 regulations which, as noted in 1.b., above, were considered interpretive regulations and could be retroactive to the effective date of the statute.
a. I have heard the argument that the amendment to § 7805(b) was based on a congressional understanding that § 7805(a) authorized only legislative regulations subject to the APA requirement of prospectivity, thus requiring specific statutory authority allowing some retroactivity (or such lesser period as the IRS determines).I view that argument as devoid of context, history and reason.
b. I read § 7805(b) as based on the traditional understanding that § 7805(a) general authority interpretive regulations could be retroactive to the date of the statute (although they need not be, in the agency discretion). In order to limit the § 7805(a) authority, Congress amended § 7805(b) to impose limits on retroactivity.
c. As a practical matter, it may not make much difference to conceive of the 1996 amendment to § 7805(b) in either way discussed in subparagraphs a. and b. But, I do think it is important in understanding the APA categories
7. Mayo (Mayo Foundation for Medical Ed. and Research v. United States, 562 U.S. ___ , 131 S.Ct. 704, (2011)) was decided in 2011 to impose the Chevron deference framework on § 7805's general authority interpretive regulations. The Court’s choices in Mayo was not deference or no deference. Rather, it was whether the Chevron deference framework applied rather than the pre-Chevron deference formulation applied. Mayo said nothing about the APA that Chevron did not say (which, of course, was nothing).
8. The issue addressed in this summary – the brouhaha – is whether Chevron requires that agency regulations – IRS regulations in particular – be issued with notice and comment (as almost all IRS final regulations are) be treated as legislative regulations under the APA.
a. Some (probably the consensus of) scholars argue that Chevron and its progeny as correctly interpreted, mean that all notice and comment IRS regulations are legislative regulations under the APA and that, correspondingly, there can be no notice and comment IRS interpretive regulations. (I incorporate below an excerpt from my article linked above that states the position):
b. No court has held that regulations interpretations that, absent the Chevron framework, would be interpretative regulations have been transformed by the Chevron framework into legislative regulations. That would effectively eliminate the category of interpretive regulations from the APA.
c. The IRS has always maintained that most of its regulations are issued under § 7805 and are interpretive. IRM 32.1.1.2.6 (09-23-2011) Interpretative Regulations. If the IRS is correct, the agency regulations that would be interpretive under non-APA rules are still interpretive under the test pre-Chevron are still interpretive under the APA and thus require neither notice and comment or prospectivity.
9. JAT Conclusion: IRS notice and comment regulations that are interpretive in character are interpretive regulations under the APA. Those interpretive regulations did not need to be promulgated after notice and comment and the interpretations could apply retroactively (subject to § 7805(b)’s limitations).
Addendum On Notice and Comment Regulations' Interpretations as Legislative Regulations
I said in the outline above that I would provide an excerpt from my article regarding the claim that Chevron eliminates the category of interpretive regulations. The article is Townsend, John A., IRS Guidance – Rulemaking and Deference to IRS Statutory Interpretation (July 27, 2018), Available at SSRN: https://ssrn.com/abstract=3212060. The following has been revised somewhat and I have changed the footnote numbering to begin with 1:
This has been called the “short cut” approach–if it is a regulation with notice and comment, it is legislative for deference purposes regardless of whether it might, under the traditional understanding, might be legislative or interpretive, and that deference gives the regulation the “force of law” making it legislative for APA purposes. n1 Some of the published commentators–maybe even a majority–subscribe to that concept. n2 Basically, under that concept, there is no such thing as an interpretive regulation if it has been promulgated with notice and comment (as most IRS regulations are). n3
n1 I lifted this “short cut” description from David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Yale L.J. 276 (2010).
One problem with this short cut is that related legislation, the Regulatory Flexibility Analysis Act (“RFAA”), 5 U.S.C. §§ 601 ff. seems to recognize that interpretive regulations can exist, even though the short cut says interpretive regulations cannot exist. Section 603(a) states: “In the case of an interpretative rule involving the internal revenue laws of the United States, this chapter applies to interpretative rules published in the Federal Register for codification in the Code of Federal Regulations.” For purposes of the RFAA, tax legislative and interpretive regulations are treated the same, which one author has said “eliminated the [RFAA] effect without eliminating the distinction.” Stephanie Hunter McMahon, Pre-Enforcement Litigation Needed for Taxing Procedures, 92 Wash. L. Rev. 1317, 1333-1334 (2017). The problem is that the short cut, if valid, means there are no interpretive regulations and this sentence in § 603(a) is meaningless. I am not sure exactly what the RFAA does for the discussion of the APA distinction between interpretive and legislative regulations. If that distinction remains valid (i.e., if interpretive regulations can exist), then that would be true for all agencies and not just the IRS; I see no apparent reason to single out the IRS in the RFAA to make its interpretive regulations subject to the RFAA, whereas other agencies’ interpretive regulations (if they can exist) are not subject to the RFAA. Because I have not fully plumbed the depth of that provision of the RFAA, I am unable to determine its persuasive effect on the issue being discussed, so I relegate it to this footnote.
n2 A prominent advocate of this position in the tax area is Professor Kristin Hickman who, in a number of articles, advocates it forcefully. I won’t cite them all here, but a good starting point is Kristin E. Hickman, Unpacking the Force of Law, 66 Vand. L. Rev. 465 (2013), Professor Hickman succinctly summarized her position in an email to me dated February 14, 2017 (quoted with permission), in addressing § 7805(a) which, prior to Chevron, was viewed as a grant of interpretive authority):
My position is and always has been that regulations promulgated under 7805(a) are legislative rules as that term is understood for purposes of the Administrative Procedure Act. In administrative law, the courts ditched any distinction between specific and general authority decades ago. Administrative law doctrine says that legislative rules are those that carry the force of law, while interpretative rules do not. Although the force of law concept is blurry at the margins, I do not see any possible way that one could conclude that 7805(a) regulations do not carry the force of law. Moreover, reading 7805(a) as a delegation of legislative rulemaking power is consistent with how the courts have interpreted similar general authority grants in other statutes. (For example, the regulations at issue in Chevron were promulgated under a similar general authority rulemaking grant in the Clean Air Act.) In summary, there are no Treasury regulations that are interpretative rules as that term is understood for purposes of the Administrative Procedure Act -- irrespective of the terminology embraced by the tax community.
n3 Consider, however, the bar’s understanding. By Executive Order 13789 (4/21/17), the President ordered Treasury (IRS) to review tax regulations issued after January 1, 2016 for burden on taxpayers, undue complexity and exceeding statutory authority and (i) make an interim report within 60 days and (ii) make a report within 150 days recommend specific actions to reduce the regulations. On March 23, 2017, the American College of Tax Counsel, a prominent group of private tax practitioners, wrote the Secretary of Treasury and the Director of OMB to have the EO “clarified to exclude [Treasury Department] interpretive regulations.” The ACTC comment would be meaningless if interpretive regulations were an oxymoron.
[End of Excerpt]
I have just added this to footnote 2 above, in response to Professor Hickman, although I will likely lift it into the body of the article when I revise and repost it on SSRN:
I just say at this point that I think Professor Hickman, as forceful as she is in her arguments, puts too much weight on the “force of law.” My objections include those long ago stated by perhaps the most storied administrative law expert (Kenneth Culp Davis, Administrative Rules - Interpretative, Legislative, and Retroactive, 57 Yale L.J. 919, 934 (1948)):
The supposition is common that legislative rules have the force of law and that interpretative rules do not. Much more accurate is the statement that legislative rules have the force of law and that interpretative rules sometimes do. To be still more precise, we must depart from the uncertain concept of “force of law.” Courts frequently give as much effect to interpretative rules as to legislative rules, and courts frequently find ways to set aside legislative rules. The idea of “force of law” ignores many refinements; an unappealed decision of a lower court has the force of law in its effect upon immediate parties but is only of some persuasive weight in another court. Even a decision of the highest court lacks force of law to the extent that an overruling may be retroactive. Meticulous analysis must avoid the dichotomy depending on force of law. A more significant inquiry is into degrees of authoritative weight. Legislative rules normally have greater authoritative weight than interpretative rules, but the authoritative weight of interpretative rules varies considerably. Courts are not supposed to substitute their their judgment as to content of legislative rules, but although courts are free to substitute their judgment as to content of interpretative rules they often refrain in varying degrees from doing so.
Added 1/19/19:
Some other Federal Tax Procedure Blog entries relevant to the issue:
- Interpretive and Legislative Regulations and the Relationship to Chevron (Federal Tax Procedure Blog 2/26/17), here.
- Justice Scalia on Chevron Deference (Federal Tax Procedure Blog 2/15/16), here.
- District Court Holds that Temporary Regulations are Legislative and Thus Fail APA's Notice and Comment Requirement (Federal Tax Procedure Blog 10/10/16), here.
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