Section 7805(a) - Legislative or Interpretive and Problem of Retroactivity (4/2/20; 4/24/20)

In my article, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 2/28/20, here), I argued that interpretive regulations for agencies generally and for the IRS under § 7805(a) remain viable despite some claims to the contrary.  Today, I summarize a key facet of my argument in the article – that § 7805(a) authorizes only interpretive regulations (rather than legislative regulations as some scholars argue) and that the limitations on retroactivity in § 7805(b) are properly viewed as limitations on the general rule of retroactivity for interpretive regulations rather than grants of authority to promulgate retroactive legislative regulations.  Since I provide copious citations in the article, I will not lard up this blog post with citations except as necessary.  (Variations on this theme have been addressed in prior blogs, particularly, Treasury Regulations and the APA Categories of Legislative and Interpretive Regulations (Federal Tax Procedure Blog 1/12/19; 1/19/19), here, and Legislative Rules And Chevron Deference An Oxymoron? (Federal Tax Procedure Blog 1/31/20; 2/10/20), here, but I recommend that readers sort through this blog before going to those other offerings.)

Section 7805, here, is a familiar Code Section.  It is titled:  Rules and regulations.  It’s first subsection is:

(a) Authorization
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Note that the authorization is for “rules and regulations.”  I focus here just on regulations (although I will sometimes use the term rules, which is an APA category that may include both regulations and subregulatory guidance (such as in the case of the IRS, Revenue Rulings).

The antecedents of the current § 7805(a) trace back to the dawn of the modern income tax (stated by scholars as 1917, 1918 or 1921, with some antecedents ever further back in general administrative law). Section 7805(a) is often referred to as a “general authority” provision in contrast to specific authority in a Code section to promulgate regulations to either define (interpret) a term in the statutory text (interpretive regulations) or to prescribe the law (a legislative regulation).  Most Treasury regulations are general authority regulations issued under § 7805(a).  (There is some fuzziness here because some would argue that a specific authority statutory direction to define a statutory term makes the regulations legislative in character rather than interpretive, even though all the statute does is direct the IRS to interpret the statutory term; but let’s not get hung up on that because that would mean that the specific authority regulations are all legislative rather than interpretive and would not affect the dividing line between § 7805(a) general authority regulations and specific authority regulations.)

The question I address here is whether regulations issued under general authority statutes such as § 7805(a) (or even under inherent authority derived from Congress’ assigning administrative authority to the agency) are interpretive or legislative in character.  I focus here on § 7805(a) for Treasury Regulations, but the issue is presented for other agency general authority regulations.

In the current context, § 7805 had a pretty clear meaning for most of its statutory life.  The meaning was that § 7805(a) authorized the Treasury (IRS) to prescribe guidance in the form of “rules and regulations” which did not create new law but interpreted ambiguous text in existing statutes.  The understanding was that § 7805(a) authorized interpretive regulations and did not authorize legislative regulations.

I think most judges and scholars were comfortable with understanding at least until Chevron and more likely until later cases interpreting Chevron.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and then principally United States v. Mead Corp., 533 U.S. 218 (2001).  Then some new ways of viewing § 7805(a) crept into the academic discourse.  Section 7805(a), so the new notion goes, is a grant of authority to the IRS to create legislative regulations (legislative rules must be regulations).  A key feature of legislative regulations is that they create the law just as if they were statutes and are not interpretations of the law (statutes).  Because legislative regulations are the law (and not interpretations of the law), they are said to have the force of law.  Thus, morphing that traditional modeling of the legislative regulations to deference concepts under Chevron and its progeny, the new notion is that § 7805(a) regulations, within the scope of the authority granted, are the law.  Why?  Because, once you say that § 7805 regulations have the force of law, you say that they are the law just like statutes and not interpretations of the law (statutes).

District Court Holds that Temporary Regulations are Legislative and Thus Fail APA's Notice and Comment Requirement (10/10/16)

In Chamber of Commerce v. U.S. IRS, ________ (W.D. Tex. 10/6/17), here, the Court concluded that the so-called inversion Temporary Regulation was a legislative regulation that could not become effective until there was either the APA required notice and comment because no reasoned good cause statement had been given as required for immediate effectiveness of legislative regulations.   Caveat:  this is a revised opinion.  I have not attempted to locate the differences between the original opinion issued 9/29/17 and this revised opinion.  All of the following discussion relates to the revised opinion issued 10/6/17.

First, I offer the Court's explanation of the Temporary Regulation, which it called the Rule.

The Rule was issued pursuant to statutory authority in the Internal Revenue Code, which provides: 

The Secretary shall prescribe such regulations as may be appropriate to determine whether a corporation is a surrogate foreign corporation, including regulations (A) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and (B) to treat stock as not stock. 

26 U.S.C. § 7874(c)(6). And further, 

The Secretary shall provide such regulations as are necessary to carry out this section, including regulations providing for such adjustments  to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including the avoidance of such purposes through (1) the use of related persons, pass-through or other noncorporate entities, or other intermediaries, or (2) transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons. 

26 U.S.C. § 7874(g). The statute uses terms granting broad authority to the Secretary of the Treasury for example: "such regulations as may be appropriate" and "such regulations as are necessary to carry out this section." The statute does not limit the broad authority granted in the first part of each subsection by identifying regulations that would not be appropriate or providing boundaries to the Secretary's authority under the statute. Instead, the statute gives examples of what the Secretary may employ by using the word "including" several times. Further, the examples given in the statute of regulations the Secretary may issue include significant authorizations, such as the authority to "treat stock as not stock," which could substantially alter a calculation under the statute based on the stock of a corporation.

Based on the broad authority granted by Congress, the court concludes the Rule does not exceed the statutory jurisdiction of the Agencies. The Rule directs that certain stock be disregarded in calculations made under the statute, which falls into the statute's allowance that regulations may "treat stock as not stock." Further, the Rule aims to "prevent the avoidance of the purposes" of the statute, which is specifically named as an authorized function of regulations issued pursuant to the statute. 

The court concludes the Rule does not exceed the statutory jurisdiction of the Agencies.

The Court then holds (pp. 8-10) that the IRS gave a reasoned explanation for the Rule consistent with the broad grant of authority. Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

JAT Note: The Court to this point has not distinguished between a legislative regulation and an interpretive regulation.

The Court then holds (pp. 10-13) that the Temporary Regulation, issued without notice and comment, violates the APA requirement for notice and comment.  In this portion of the discussion, the Court does not mention the fact that interpretive regulations are exempted from the APA notice and comment requirement.  So, the assumption must be, for purposes of that discussion, that the Temporary Regulation was a legislative regulation.

The Court then turns (pp. 13-15) to the interpretive regulation exception to the APA notice and comment requirement.  This is the nub of the reason I write this blog entry, so I quote the key part: