Supreme Court Denies Cert in Whirlpool Financial; On Phantom Regulations (11/23/22)

I previously wrote on the petition for writ of certiorari (colloquially “cert petition”) stage in Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944 (6th Cir. Dec. 6, 2021), CA6 here and GS here. See Petition for Cert in Whirlpool, SG Waiver of Response, and Several Amici Arguing for Cert (Federal Tax Procedure Blog 8/5/22; 8/16/22), here. My even earlier blog on the Sixth Circuit opinion is: Whirlpool's BS Tax Shelter Fails in the 6th Circuit; on Statutory Interpretation and Legislative History (12/7/21; 2/22/22), here. In the blog on the cert petition, I noted that the Solicitor General in effect claimed that the cert petition was a nothingburger (to use a popular term), by filing a one-sentence waiver of response. Despite the waiver, the Supreme Court ordered the SG to respond. See the Supreme Court docket entries here. The SG filed a brief in opposition (colloquially a “brief in opp”). On that record before the Court, on November 21, 2022, the Supreme Court denied the cert petition.

There is nothing substantive that I think would be helpful to readers to add. I thought that, particularly for students, it might be helpful to offer something briefly on the “phantom regulation” concept which is not mentioned in the Sixth Circuit opinion but are mentioned in the cert petition. I will only try to summarize at a high level, but direct to my discussion in my book Federal Tax Procedure (2022 Practitioner Ed.) (SSRN https://ssrn.com/abstract=4180710. I there note that the issue is often raised by the taxpayer seeking a benefit where the statute seems to command a regulation for the benefit and ask the question whether the IRS can deny the benefit by simply not promulgating a regulation? Here, the shoe is on the other foot, with the IRS achieving the benefit where, in one way of reading the statute, the IRS has not promulgated a regulation required by the statute. I state how the Tax Court has dealt with the issue (p. 69, footnotes omitted):

In a 2016 * reviewed opinion, the Tax Court concluded the task is to determine whether the statutory text, considered in light of the legislative history or other interpretive tools, can be applied without further explication in a regulation. The analysis turns upon whether “Congress couched its delegation of rulemaking authority in mandatory or permissive terms.” If mandatory, the Court could treat the delegation of authority as  self-executing” and could discern from the statutory text as interpreted the result that Congress intended the IRS to adopt and apply in the case at hand.

    * The quote in the book says it is a 2017 opinion; the opinion was 2016: 15 West 17th Street LLC v. Commissioner, 147 T.C. 557 (2016) (Reviewed opinion) (I will correct in the 2023 editions). 

That quote is focused on a taxpayer seeking the benefit in the absence of regulations. Does the same analysis apply if the IRS seeks the benefit in the absence of a statutory delegation of requirement or authority to promulgate regulations? Arguably, that is what the Sixth Circuit did without mentioning the term phantom regulations. At least that is what Whirlpool Financial claimed in its cert petition, albeit indirectly by citing (p. 3) Andy Grewal, The Sixth Circuit Conjures Phantom Regulations, Yale J. on Regul. Notice & Comment (Feb. 21, 2022), here. In its response, the SG did not mention the term. In its reply, Whirlpool Financial only mentions the term in citing Grewal’s article.

The majority opinion in 15 West 17th Street by Judge Lauber and concurring opinion by Judge Holmes use the term phantom regulations. My search of Google federal cases for the term “phantom regulation” here indicates only 4 cases using the term other than 15 West 17^th Street. All of the 4 cases are at the trial level. My general Google search here picked up some noncase authority discussions.

I think the term is a good term to describe the phenomenon—a court applying the statute directing or permitting a regulation in the absence of the regulation based on the general tools of statutory interpretation (including legislative history). The question is whether the statutory text controls the result as held by the Sixth Circuit in Whirlpool Financial, so that it can apply the statute in the absence of regulations. That, of course, is a statutory interpretation issue.

The phantom regulation issue is indirectly related to an issue that I have discussed in this blog—whether an interpretation in a regulation within the scope of the statutory ambiguity is invalid because the regulation adoption as procedurally defective (e.g., as in failure to use the proper notice-and-comment procedure for a regulation). See Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) (regulation procedurally invalid for failure to address a material comment); and compare Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), cert petition filed 10/4/22 (same regulation procedurally invalid because material comments properly addressed). The Oakbrook Supreme Court docket entries are here. My conclusion is that, even if the regulation is invalid (same as if there were no regulation in which a regulation would be permitted), the interpretation must be respected if it is the best interpretation of the statute. See Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here; and see also What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (Federal Tax Procedure Blog 10/21/22; 11/8/22), here. That is not exactly phantom regulation but might operate the same way. The way I would posit it is that the absence of a regulation (as in phantom regulation) should still be controlled by the statute if any possible regulation that could be adopted must include the interpretation to be valid. The problem with this, if the statutory text requires a single interpretation that the IRS could adopt, it would not be in the scope of ambiguity of the statute (not within an agency discretion to pick among other interpretations)

Another way of looking at Whirlpool Financial is (as I have in my current working draft for the 2023 edition) after describing the phantom regulation claim:

I think however that, at the risk of engaging in semantics, the issue is not whether the Sixth Circuit has created whole cloth a regulation to apply in the absence of a regulation but has properly interpreted the statute to impose the result in the absence of a regulation.