Treasury and IRS Policy Statement on Tax Regulatory Process (3/17/19; 4/19/20)

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.  [Addendum 9/25/19, the article is here:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400489.]

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 [Addendum as of 4/19/20:  the following is from my working draft of the article for revision later; hence, some of it may reflect developments or thinking after I posted the original of this blog entry on 3/27/19; my footnotes are not included.]
V. Treasury/IRS Policy Statement on the Tax Regulatory Process.

On March 5, 2019, Treasury issued a document titled Policy Statement on the Tax Regulatory Process (“Policy Statement”).  In this Policy Statement, Treasury announces policies based principally upon “sound regulatory policy.” The Policy Statement is included as Appendix B, starting on p. 150.  The Policy Statement was issued after this article was substantially drafted.  I have revised the article to refer to the Policy Statement in appropriate places, 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 Treasury’s 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 (which requires Notice and Comment only for legislative regulations).  As respects the key issue in this article–the continuing viability of interpretive regulations–this Policy Statement confirms the Treasury position that interpretive regulations remain a viable APA approved category.  Under the position, although Treasury could issue final interpretive regulations without Notice and Comment, it is committing to use the Notice and Comment procedure thus muting this difference between legislative and interpretive regulations in the tax context.

• “The Treasury Department and the IRS have long interpreted the Internal Revenue Code to permit the issuance of immediately-effective temporary tax regulations without a statement of good cause.”

Comments:  This practice was based on the Treasury’s practice with interpretive Temporary Regulations not to use the Good Cause exemption from Notice and Comment because the interpretive Temporary Regulations were already exempt as interpretive regulations.  That a Temporary Regulation, not having gone through Notice and Comment, may be immediately effective is different from the issue of whether interpretive Temporary Regulations may apply retroactively to conduct prior to the effective date of the Temporary Regulation or any predicate Notice.  See the discussion of the regulations involved in Home Concrete above beginning on p. 131.

• “As a matter of sound regulatory policy, the Treasury Department and the IRS commit to include a statement of good cause when issuing any future temporary regulations under the Internal Revenue Code.”

Comments: A Good Cause statement is required by the APA only for legislative regulations and hence was not required for Treasury Temporary Regulations that were interpretive rather than legislative. The IRS has historically taken the position that most of its regulations were interpretive and thus the Temporary Regulations were interpretive, not requiring a Good Cause statement.  That Treasury and the IRS now “as a matter of sound regulatory practice” commits to use a Good Cause statement for Temporary Regulations interpretive in character, does not mean that it is required to do so.  In this regard, I am not sure that including the Good Cause statement will have any practical effect.  Treasury always had the authority to apply its discretion as to the immediate effect of its interpretations, which is what the Temporary Regulations format does.  In exercising the discretion to use the Temporary Regulations format, Treasury would have articulated, at least internally, a reason for the need for immediate effectiveness rather than proceeding only through Proposed Regulations with Notice and Comment.  And that reason would have been explicit or implicit in the explanation of the Temporary Regulation.  So, adding this additional procedural requirement for expressly articulating the Good Cause statement in the Temporary Regulation explanation would not seem to be imposing any major requirement to Treasury’s Temporary Regulations practice.

• The Policy Statement then turns to subregulatory guidance and distinguishes between regulations and subregulatory guidance. “Unlike statutes and regulations, subregulatory guidance does not have the force and effect of law.”

Comments: Out of context of the entire Policy Statement, this might be read as implying that regulations have the force and effect of law without regard to the distinction between legislative and interpretive regulations.  As noted previously, only legislative regulations have the force and effect of law, as that term has traditionally been used in the APA context.  Perhaps Treasury and the IRS have fallen into the same error that courts and others have in misreading Chevron.  Or, perhaps, Treasury and the IRS are using the term force and effect of law in the deference meaning that Justice Scalia used it: “Interpretive rules that command deference do have the force of law.”  (See discussion beginning on p. 111) Either way, it is a mistake, I urge, to impose that concept, valid in a general sense for deference, into the discussion of the APA distinction between legislative and interpretive regulations.

• Although subregulatory guidance does not have the force and effect of law, “taxpayers can have confidence that the IRS will not take positions inconsistent with its subregulatory guidance when such guidance is in effect.”

Comments: This is consistent with past practice previously announced; in any event, it does not bear on the issue to which this article is addressed.

• Treasury and the IRS “will not argue that subregulatory guidance has the force and effect of law” and thus will not seek in litigation to have a court defer to subregulatory interpretation under either Auer or Chevron.

Comments: The Policy Statement conflates force of law (an APA concept) with deference (not an APA concept) that I question in this article. In any event, DOJ had previously announced that it would not rely upon Chevron for subregulatory Treasury/IRS guidance.  But, that still leaves open the issue of Skidmore deference (deference to extent persuasive), whatever that means.  Skidmore deference has been applied to revenue rulings.  If Skidmore does mean something, then consider Justice Scalia’s comment that “Interpretive rules that command deference do have the force of law.”  All of which is to repeat the concept stated several times in this article that conflating the APA concept of force of law (applying only to legislative rules/regulations) with deference is a mistake.

• In deciding whether to issue guidance as regulations or subregulatory guidance, the IRS will “consider the content and nature of the interpretation or position being announced,” considering such factors as “the intended effect on taxpayers’ rights or duties, the need for public comments, the form and content of prior positions, the significance of the issues, the statutory framework, and whether the interpretation or position is of short-term or long-term value.”

Comments: There is nothing new here and does not bear on the issues to which this article is addressed.

• After considering those factors, “if the intended interpretation or position would have the effect of modifying existing legislative rules or creating new legislative rules on matters not addressed in existing regulations, the interpretation or position will generally be issued through notice-and-comment rulemaking, absent exceptional circumstances.”

Comments: This requires careful parsing, because it does bear on the issues addressed in this article.  The bold-faced language could be read as saying that “an interpretation or position” can be legislative in character if it modifies existing legislative rules or creates new legislative rules.  Perhaps this is semantics, but an “interpretation” that modifies a legislative rule or creates a new legislative rule has gone past the point of interpretation and moved into legislative rule territory under the Traditional Understanding.  If that is what the Policy Statement means, then it is consistent with the Traditional Understanding because legislative rules require Notice and Comment.  If the rule is truly an interpretation of the statute (an interpretive rule which does not modify an existing legislative rule or create a new legislative rule), the APA does not require Notice and Comment but the Treasury practice has been and will continue to use Notice and Comment though not required.  Given the overall tenor of the Policy Statement adopting its prior long-time distinction between legislative rules and interpretive rules, I urge caution in reading too much into the bold-faced ambiguous words.

• For future notices of intent to issue proposed regulations, the notice will include a statement that, if the Treasury Department does not issue proposed regulations or other guidance within 18 months, taxpayers may continue to rely on the notice but the IRS will not assert a position adverse to the taxpayer based on the notice.

Comments: Nothing material here to the issues addressed in this article.  However, I am not sure exactly what this means.  Let’s say that the notice of intent for proposed regulations offers a correct interpretation of the law–an interpretation of an ambiguous statute that a court would apply without Chevron deference.  Does that mean that, if the Treasury does not issue proposed regulations or other guidance within 18 months, the IRS will not apply that correct interpretation adverse to the taxpayer?  I would think that (i) the IRS should still apply that correct interpretation regardless of whether it helps or hurts the taxpayer, and (ii) fidelity to the congressional role would permit the IRS to forego adverse action as a matter of discretion only where the IRS interpretation in the notice is one that a court would have applied only by giving Chevron deference.  That is perhaps too subtle to try to address in a summary notice of a new policy.

Conclusion on the Policy Statement and the Larger Agency Perspective.  Finally, just to put the Policy Statement in the broader perspective, the Policy Statement applies only to the Treasury and the IRS.  While I have focused in the article on Treasury and IRS practice under the APA, I have done that in the broader context of the application of the APA to all agencies.  The narrative I have presented for the critical APA distinction between legislative and interpretive regulations for agencies generally is not affected by the Policy Statement.  Thus, the argument I make in the article that the APA category of interpretive regulations remains a viable category for federal agencies generally is not affected by the Policy Statement.  And, for the reasons I note in this discussion of the Policy Statement, the Policy Statement does not affect that distinction for Treasury Regulations (Final or Temporary) even though, for reasons of sound regulatory practice, Treasury Regulations (Final or Temporary) even where only interpretive in character will be subjected to the Notice and Comment processes required only for legislative regulations, thus muting this difference between legislative and interpretive regulations.