On Tax Exceptionalism and Deference (4/3/22)

Yesterday in a blog on Chevron deference here, I stated in the first sentence that that the claim of tax exceptionalism was a false claim.  I included my reason for saying it was a false claim as a Postscript to that blog, but have decided to pull it out and make it a separate blog entry.  

A major component for that claim of tax exceptionalism was that there was a difference in deference for tax interpretations and deference for other agency interpretations.  Starkly, the claim was that Chevron deference to all other agency interpretations did not apply to tax interpretations.  Just stating that starkly should make one suspicious of the claim because Congress never did anything that justified the claim, and the Supreme Court never articulated the claim; when the Supreme Court did address the claim in 2011, it squarely rejected it.  Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011).  I also had anticipated the Mayo holding outcome in my pre-Mayo Federal Tax Procedure Books, e.g., the 2010 edition p. 59 here, where I conclude “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.”

            I have recently written on the myth of tax exceptionalism in my article above, here, at pp. 67-70 which I quote here without the footnotes. (But remember  that the detail (the writing substitute for detail) is in the footnotes; to see the text and footnote, click here.)

                        10.      The Myth of Tax Exceptionalism.

            So-called “tax exceptionalism” has also crept into the discussion, at least as regards tax rulemaking and its imagined distinction from rulemaking by other agencies.  The notion, much bandied about for many years, is that IRS administration of the tax law was somehow outside the ambit of administrative law rules (including the APA) that applied to other federal agencies.  If not outside, then IRS administration was at least subject to peculiar applications of administrative law. In a recent case, quoting an article co-authored by Professor Hickman, the Sixth Circuit alleged in the conclusion to the majority opinion that Treasury and the IRS “do not have a great history of complying with APA procedures, having claimed for several decades that their rules and regulations are exempt from those requirements.”  That claim is based on Professor Hickman’s claim addressed in this article that interpretive regulations are legislative regulations so that the use of Temporary Regulations for immediate effect and presumably even retroactive effect for interpretations is not in compliance with the APA.  That allegation, the core of tax exceptionalism, is false which may explain why, although a central feature of the Sixth Circuit opinion, neither the parties nor Professor Hickman as amicus repeated the allegation in their briefs before the Supreme Court, and the Supreme Court judiciously did not repeat it.

            This notion of tax exceptionalism has spawned competing camps (at least at the extremes), with one favoring the alleged existence of some notion, often squishy, of tax exceptionalism (or at least the myth of tax exceptionalism) and the other opposing the notion (or its myth). The tax exceptionalist camp is on the wane, particularly after a leading Supreme Court case discussed in detail in Section III below, Mayo Foundation for Med. Educ. v. United States, 562 U.S. 44 (2011).  The demise, or at least diminishment to practical irrelevancy, of the notion of tax exceptionalism is attributed to academia generally and to Professor Hickman specifically.

            There were several threads that contributed to the notion of tax exceptionalism.  I deal with the two most common threads in this article–the APA distinction between legislative and interpretive regulations and deference to Treasury interpretations in regulations.  Here is a summary of the tax exceptionalism claims made under these threads:

            •          The first thread is the APA distinction between legislative and interpretive regulations where the claim has been that the Treasury practices and the courts’ sometimes acceptance of those practices are inconsistent with the APA because they treat Treasury Regulations that do no more than interpret IRC text as interpretive regulations rather than as legislative regulations.  Refuting that assumption is a major focus of this article of this Section, and I hope I have made the case by this point in the article.

            •          The second thread related to deference (now known as Chevron deference). The claim of tax exceptionalism was based on the notion that judicial deference to tax interpretations was different than deference to other agency interpretations.  The Supreme Court rejected that notion in Mayo.  Deference as a basis for tax exceptionalism is now out.  But some assert that there was a window of time before Mayo when there was tax exceptionalism because deference was applied differently for tax interpretations than for other agency interpretations.  As I read the deference trajectory before Mayo, there was never any tax exceptionalism for deference in the first place. I develop this argument in Section III.

These two threads, although distinct, have become entangled in a way that, superficially, makes the claim of tax exceptionalism seem more credible than it is.

            I argue that the persons claiming some perceived tax exceptionalism have just been tilting at windmills, creating more confusion than enlightenment.  I am not alone in taking the position, for as two scholars recently noted, “The concept of exceptionalism adds nothing. It is an empty vessel.  The concept of tax exceptionalism is an empty vessel even in the area where it has most flourished—the application of administrative law principles to tax.”  Even worse, that notion has fanned much of the confusion that has led to the notion that the interpretive regulation, at least those issued with Notice and Comment, is no longer a viable category under the APA.

An editorial comment:  I think the motivated reasoning that caused many in the tax community to embrace the false notion of tax exceptionalism is going on now as the courts and pundits push to apply the APA to tax settings.  Some examples of this are:

• the claim that regulations that do no more than reasonably interpret ambiguous statutory text are legislative regulations, a claim that if true would judicially repeal the category of interpretive regulations recognized in the APA.  (Curiously, without recognizing the inconsistency, this claim is often made while applying Chevron, a test of an interpretation and not a test of a legislative regulation; so the courts making this claim get to the right result, testing the interpretation but get there through the false claim that interpretations in regulations are legislative in character.)
• the related claim that APA requirements for legislative regulations must apply to Treasury regulations without consideration of different contexts that may require outcomes for Treasury regulations that are only superficially different from other agency regulations.  For example, the current brouhaha over whether IRS notices of listed transitions are invalid legislative pronouncements suffer from shortsightedness of context.

It's a matter of applying common sense and context as suggested in this article more or less on topic: Alice G. Abreu and Richard K. Greenstein,  Tax: Different, Not Exceptional, 71 Admin. L. Rev. 663 (2019).  Congress was concerned about giving prompt notice for potentially bogus tax products, with potential penalties applying if they are in fact abusive, a process that would be subverted by requiring advance notice and comment (giving those abusers a pass for abusive behavior in the interim).  Common sense should be in the mix and contribute to the outcome.

This area of the law is a mess.  Maybe someday Congress or the Supreme Court will clean up the mess.  I doubt that the Supreme Court will any time soon given its current makeup.