On the History of the Chevron / National Muffler Deference Kerfuffle (8/7/21)

Professor Jonathan Choi, here, of Minnesota Law School has published several articles on tax statutory interpretation.  He recently published Legal Analysis, Policy Analysis, and the Price of Deference: An Empirical Study of Mayo and Chevron, 48 Yale J. Reg. 818 (2021), here.

I post a couple of comments that I have corresponded with Professor Choi about.  

1.  Professor Choi says that National Muffler was a less deferential analysis than Chevron.  (See pp.  823 & 828.)

JAT response:  

The background for this comment is that in Mayo Foundation v. United States, 562 U.S. 44 (2011), the Supreme Court held that the Chevron Framework regime for deference applied to tax regulations.  Prior to Mayo and after Chevron was decided in 1984, the Supreme Court analyzed tax regulations under the National Muffler rather than Chevron.  The question in Mayo was which regime applied – the Court held Chevron applied.  A deeper question not resolved in Mayo was whether a different result would have obtained under National Muffler.  Professor Choi assumes that it would have.  Further, he assumes that, until the Court decreed that Chevron controlled, the deference regime for tax regulations was National Muffler, which he believes is a less deferential standard.  I disagree.  I am not convinced that the standards were materially different, although certainly worded differently.  At the end of the day, both standards would sustain reasonable agency interpretations.  As the Seventh Circuit noted in Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 981-982 (7th Cir. 1998) both Chevron and the “traditional rule [National Muffler] * * * both come down to one operative concept--reasonableness” and are “two different formulations of a reasonableness test;” although there may be a “subtle difference”;  “we should be wary of attempts to discern too many gradations of reasonableness,” so that “viewed from this perspective at least, the supposed gap between Chevron and the traditional rule is a distinction without a difference.” 

To be sure, the Mayo Court said that the two standards were different and factors relevant to one standard might not be relevant to another; the Court further rejected adopting a “less deferential” (p. 55) standard for tax regulations with the implication, but implication only, that National Muffler was a less deferential standard. Still, the Mayo Court did not say that a different outcome would have been reached if the National Muffler standard applied.  The district court in Mayo, although rejecting the agency interpretation, found that its result was reached under both standards.  See Mayo Found. for Med. Educ. & Research  v. United States, 503 F. Supp. 2d 1164, 1171 (D. Minn. 2007).  Other courts have found little or no difference between the standards.  Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 981-82 (7th Cir. 1998) (quoting Bell Federal Savings & Loan Association v. Commissioner, 40 F.3d 224, 227 (7th Cir. 1994) (both “approaches apply essentially the same test” and the “difference between the two approaches is negligible at best”); Hefti v. Commissioner, 983 F.2d 868. 872 (8th Cir. 1993) (citing National Muffler (in turn citing Correll) and Chevron as being essentially the same as to the reasonable interpretation holding);  Cent. Pa. Sav. Ass’n v. Commissioner, 104 T.C. 384, 391-392 (1995) (also citing Bell Federal and concluding that, although not necessary to decide, “we are inclined to the view that the impact of the traditional, i.e., National Muffler standard, has not been changed by Chevron, but has merely been restated in a practical two-part test with possibly subtle distinctions as to the role of legislative history and the degree of deference to be accorded to a regulation” (citing cases); Swallows Holding, Ltd. v. Commissioner, 126 T.C. 6, 56 (2006) (reviewed opinion, quoting Cent. Pa. and concluding that result would be the same), vacated, 515 F.3d 162 (3d Cir. 2008); Estate of Gerson v. Commissioner, 127 T.C. 139, 154 (T.C. 2006) (result same under either standard), aff’d 507 F.3d 435 (6th Cir. 2007); and see also and Noel B. Cunningham and James R. Repetti, Textualism and Tax Shelters, 24 Va. Tax Rev. 1, 47 (2004) (“We agree with those who have concluded that there is no significant difference between the standards set forth in Chevron and National Muffler.”).  

There are factors in pre-Chevron deference jurisprudence (discussed in National Muffler) that are not present on the face of the Chevron Framework.  For example, contemporaneity of the agency interpretation could support the reasonableness of the agency interpretation in pre-Chevron cases (including National Muffler, pp. 484-486).  The Chevron Framework does not state contemporaneity as a factor.  But contemporaneity of the interpretation may be considered under Chevron in determining reasonableness of the interpretation. United States v. Mead Corp., 533 U.S. 218, 252-253 (2001) (Scalia, J., dissenting but not conflicting with the majority on this issue, an agency response to a question can show contemporaneous understanding relevant to the Chevron inquiry, citing FDIC v. Philadelphia Gear Corp., 476 U.S. 426, 438-439 (1986)); see also Kristin E. Hickman, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference, 90 Minn. L. Rev. 1537, 1561 n. 116 (2006) (as to Step One, “Even contemporaneity may enter into Chevron analysis to the extent that an agency’s contemporaneous construction of a statute may offer insight into congressional intent.”)

There are statements that National Muffler and Chevron are not the same and may produce different outcomes.  In Swallows Holding, Ltd. v. Commissioner, 126 T.C. 96 (2006), rev'd 515 F.3d 162 (3d Cir. 2008), the Court of Appeals applied Chevron and saying (p. 164) “the result would not be the same under Chevron analysis as it would be under National Muffler.” (See also p. 167.)  That claim cannot be taken at face, because, having decided that the case must be resolved under Chevron, the Court’s claim about National Muffler is dicta and the Court did not even analyze the case under National Muffler.  But, taking the comments at face that National Muffler could produce one outcome while Chevron might produce another, that merely illustrates why Chevron was adopted in the first place – to prevent the type of unpredictability inherent in the pre-Chevron deference test.  Remember that the ultimate drill under pre-Chevron and Chevron deference jurisprudence was to defer to reasonable agency interpretations of ambiguous text. 

I suspect that most pre-Chevron cases would be resolved the same under Chevron, but without the better predictability that Chevron offers probably would resolve some cases that appear different.  So, I believe that there would be substantial overlap in outcome under the two tests with some possibility of different outcomes in some outlier cases.  That is to say that, if the interpretation was reasonable under Chevron, a court applying National Muffler would defer in most, perhaps all, cases.  I have not done a rigorous survey of the cases where a court made the claim that National Muffler and Chevron would produce different outcomes and backed up that claim with rigorous analysis of the two standards to show the different outcomes.  I think the claim that there was an outcome determinative difference was mostly in the imaginations of taxpayers and their counsel hoping to extract a better result than Chevron would have given them and in the imaginations of some scholars for whatever reason and, in combination, they simply created the false myth of a material difference.

2.  Professor Choi argues that Mayo was a key turning point making a marked shift in the type of deference given.

JAT Comment:

I disagree.  I think that prior to Mayo some courts did in fact apply Chevron and the Supreme Court had not stated that Treasury was different than other agencies to which Chevron applied.  To be sure, as noted above, the Supreme Court continued after Chevron to use National Muffler, but it did not say that National Muffler was different in an outcome determinative sense than Chevron.  Nor did it say tax was exceptional, allowing different administrative law outcomes for tax regulations than for other agency regulations.

Professor Choi bases his analysis on the argument that Mayo was a marked and stark turning point.  In my last pre-Mayo Federal Tax Procedure book (2010 editions Student and Practitioner editions), I noted that the courts were using both Chevron and National Muffler to test tax regulations.  I then said: “My feeling is that the courts will ultimately reach consensus (perhaps enforced by the Supreme Court) that Chevron does apply, but the issue may be academic only in most cases since the two standards for deference would likely produce the same results.”  

All of this gets back to the notion of tax exceptionalism, spawned in significant part by this National Muffler-Chevron brouhaha (tempest in a teapot).  See Alice G. Abreu and Richard K. Greenstein,  Tax: Different, Not Exceptional, 71 Admin. L. Rev. 663 (2019), here.