Court Invalidates IRS Attempt by Rev Proc to Change Legislative Regulation (8/5/19; 12/10/20)

In Bullock v. IRS, 401 F. Supp. 3d 1144 (D. Mont. 2019), here, the court held that the IRS's use of a Revenue Procedure to revoke a requirement of a legislative regulation, issued with notice and comment, was invalid.

Section 6033(a)(1) requires tax exempt entities to file a return “stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.”  The IRS long ago adopted notice and comment regulations requiring the tax-exempt entity to identify on Schedule B of Form 990 persons contributing more than $5,000 during the taxable year.  26 C.F.R. § 1.6033-2(a)(2)(ii)(f).

Rev. Proc. 2018-38 eliminated the IRS’s previous requirement contained at 26 C.F.R. § 1.6033 that exempt organizations report donor information.

Two states, Montana and New Jersey sued to have the Rev. Proc. declared procedurally invalid for lack of adoption with notice and comment.  Each of the states claimed that they were injured by the change because they could use the Form B disclosures for their own tax administration purposes and were allowed to access that IRS information under the requirements for the IRS to share tax return information with the states.

The district court held that the states met the predicate requirements (such as standing) so that it could reach the merits of the states' claims.  (I won't discuss those predicate requirements, but they are interesting reading.)

On the merits of the states' claims, the court held, in effect, that the regulations requirement that the tax-exempt entities report donor information on Schedule B of Form 990 was a "legislative" rule which could be changed only by another legislative rule which would require that it be adopted by notice and comment regulation rather than in subregulatory guidance such as a Rev. Proc.  This is a straight-forward application of the APA distinction between legislative and interpretive rules. [for an errata correction I made to this sentence, see note at bottom of this blog]

JAT Comments.
1.  I have stated a highly summarized view of the Court's holding.  As I have stated the holding, it would appear that the IRS did not have much of a case.  I don't think it did.  I reach my conclusion in three steps:

• The statute granted the IRS authority to make the law.  The statute said that the IRS could compel the tax-exempt entity to report "such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe."
• The regulations promulgated under this authority were legislative regulations.  The regulations were not attempting to interpret the statutory text (except as to the scope of the legislative authority that it be for the purpose of carrying out the internal revenue laws) but, within that scope, was stating what the requirements--the law--were.  The regulations were thus the law, and are thus legislative regulations.
• The Rev. Proc. was not interpreting either the statutory text or the legislative regulations text or any ambiguity in those texts.  Rather, , in effect, the Rev. Proc. revoked the regulations text.  As such, the Rev. Proc. was legislative (because changing a legislative regulation) rather than interpretive and thus was required by the APA to be promulgated after notice and comment.

2.  If the Rev. Proc. could be fairly construed as interpreting the regulation rather than as changing it, the Rev. Proc. might have been susceptible to Auer analysis for potential deference.  See Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019), discussed in Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/26/19; 7/2/19), here.

3.  So, what was all the commotion about?  For readers really interested, I offer the parties' briefs:

• IRS Brief in Support of Motion to Dismiss, here.
• States Combined Brief in Support of Summary Judgment and Response to Motion to Dismiss, here.
• IRS Combined Reply in Support of Motion to Dismiss and Response to Motion for Summary Judgment, here.
• States Reply in Support of Plaintiff's Motion for Summary Judgment, here.

I will say that the IRS briefs' have some spins of plausibility to hammer the Rev. Proc. into an interpretive or procedural rule, which would then exempt it from APA required notice and comment.  As the courts have said, however, "the spectrum between a clearly interpretive rule and a clearly substantive [legislative] one is a hazy continuum."  American Hosp. Ass'n v. Bowen, 834 F.2d 1037, 1045 (D.C. Cir. 1987).  Still the line must be drawn.  I think the court in Bullock drew the right line.

4.  Also, a reminder, that I have an article on the general issue of the distinction between interpretive and legislative regulations, 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.

5. Added 12/10/20 7:15pm:  I just had occasion to re-read the Bullock and noted that I had missed how well the Court discussed the distinction between legislative and interpretive regulations.  I am going to added that discussion below and then discuss it (cleaned up to eliminate irrelevant text and most quotes and case citations for easier readability but providing certain bold face to draw attention):

An agency must follow the requisite notice-and-comment procedures if the rule effects a change in existing law or policy that imposes general, extra-statutory obligations.  

Legislative rules create rights, impose obligations, or effect change in existing law pursuant to authority delegated by Congress.  

This framework [for distinguishing legislative and interpretive rules] acknowledges that legislative rules, unlike interpretive rules, possess the "force of law." Three circumstances exist in which a rule possesses the "force of law." First, a rule possesses the force of law when, in the absence of the rule, there would not be an adequate legislative basis for enforcement action. The second circumstance occurs when the agency explicitly invokes its general legislative authority. The final circumstance arises when the rule effectively amends a prior legislative rule. 

Now, focus on an interpretation of a statute.  The statute is the law, not the interpretation of the statute.  And that is true whether the interpretation is made by an agency or by a court.  If the interpretation will permit an agency or the court to apply the interpretation without an interpretive agency rule, then the interpretation can be placed in an interpretive rule (including a regulation).  A regulation with that interpretation of the statute is an interpretive regulation and generally entitled to Chevron deference.  That is basically the point of my article linked above, but Judge Morris in Bullock nails it with fewer words.

ERRATA NOTE ON CORRECTION ON 8/5/19:  In my original blog, I had the following sentence:  "This is a straight-forward application of the APA distinction between legislative and substantive rules."  An astute reader spotted that there was something wrong in that legislative and substantive rules are, in APA parlance, the same.  The types of rules I meant to distinguish are legislative and interpretive rules.  I thank that reader.  I have made the correction.