Sunday, March 17, 2019

Treasury and IRS Policy Statement on Tax Regulatory Process (3/17/19)

Treasury and the IRS have issued a joint Policy Statement on the Tax Regulatory Process (3/5/19), here.

I am in the midst of finalizing an article titled:  The Report of the Death of the Interpretive Regulation Is an Exaggeration.  I have just included a discussion of this new policy.  I thought I would offer my discussion although framed in the context of the article.  Here is a cut and paste of the discussion.  This discussion in the article has only a few short(er) footnotes, so I omit the footnotes.

I offer this short introduction so that readers will have some context offered by the article. 

In the article, I argue that the Administrative Procedure Act ("APA") permits two types of regulations (those published as regulations in the Federal Register) -- (i)  legislative regulations and (ii) interpretive regulations.  The distinction between the two categories is: 
(i) a legislative regulation is promulgated pursuant to express statutory authority to set the law where the regulation functions like a statute because, within the scope of the delegation, the regulation is the law.  The classic tax example of a legislative regulation is the consolidated return rules promulgated by regulation under § 1502. 
(ii) an interpretive regulation is promulgated as an interpretation of a statute Congress enacted (in the case of tax, generally in the Internal Revenue Code (Title 26)).  There is no classic tax example of an interpretive regulation; I use the example of the away from home regulation addressed in United States v. Correll, 389 U.S. 299 (1967), here.  
As Kenneth Culp Davis, the leading authority on administrative law said shortly after enactment of the APA:  "According to the theory, legislative rules are the product of a power to create new law, and interpretative rules are the product of interpretation of previously existing law."

Basically, as the Courts have said, legislative regulations are the law (and thus, in the jargon, have the "force of law"), whereas interpretive regulations simply interpret to law (and do not have the force of law, even if courts give the agency interpretation deference under the Chevron framework).

The distinction between legislative and interpretive regulations has a lot of nuance which I develop in the article.  Indeed, I develop that nuance in  the article, perhaps at too great a length in the article (which I post on SSRN after I offer for comments in a conference in April 2019)  Still, the foregoing is the essence of the argument.

With the foregoing, readers with some background in administrative law and the APA specifically should be able to understand the general concepts in the new Policy Statement and my comments below.

IV. New Treasury and IRS Policy Statement on the Tax Regulatory Process.

On March 5, 2019, Treasury issued a document titled Policy Statement on the Tax Regulatory Process.  In this Policy Statement, Treasury announces policies based principally upon “sound regulatory policy.” I attach that Policy Statement as Appendix B to this article.  The Policy Statement was issued after this article was substantially drafted.  I referred to the Policy Statement in appropriate places in the article, but I thought separate discussion of the Policy Statement would be helpful to readers because it overlaps with some of the themes developed in the article.

I offer the key points as separate bullet points with Comments after each bullet point (and caution that I have “cleaned up” some of the quotes):

“The APA generally requires notice and comment for legislative rules. The APA exempts interpretive rules from notice-and-comment requirements. Nonetheless, as a matter of sound regulatory policy, the Treasury Department and the IRS will continue to adhere to their longstanding practice of using the notice-and-comment process for interpretive tax rules published in the Code of Federal Regulations.”

Comments:  This statement is consistent with long-standing practice to promulgate interpretive regulations with Notice and Comment and confirms that the practice, which will continue, is based on “sound regulatory policy,” rather than the legal mandate of the APA.  As respects the key issue in this article–the continuing viability of interpretive regulations–this Policy Statement confirms the IRS position that interpretive regulations remain a viable APA approved category.