Wednesday, April 6, 2022

Court Invalidates Regulation for Invalidity of Good Cause Statement (4/6/22)

In Liberty Global, Inc. v. United States (D. Colo. Dkt. 1:20-cv-03501-RBJ #46 Order dtd. 4/4/22), CL here and GS here, the Court granted summary judgment to Liberty Global holding IRS temporary regulations on § 245A invalid for not undertaking notice and comment before the effective date.  (The docket entries and pleadings on the motion are available on Courtlistener here.)  I am not so much concerned about the substantive issue of whether Liberty Global owes the tax in question.  I am concerned about what I perceive as lack of sound analysis on the APA issues by parties and, as a result, by the Court.

Basically, the Court held that:

1.  The regulation in issue was a legislative regulation, apparently without analysis of the issue because “the parties do not dispute that the temporary regulations are legislative rules.”  (Slip Op. 9.)

2. As a legislative regulation issued with a statement of good cause for immediate effect, the good cause statement was not persuasive; therefore the temporary regulation did not have immediate effect.

3. Implicit in #2 was that, if the good cause statement were valid, the temporary regulation could have not only been effective immediately upon promulgation but there was still the issue of whether good cause immediate effect would permit retroactivity under § 7805(b)(2) (although that may be implicit).

I think the Court’s holdings are consistent with mainstream judicial and scholarly current thinking.  As readers of this blog know, I part company with mainstream current thinking on key premises relevant to this discussion.  I provide key relevant points of departure, but those wanting detailed analysis can find it in John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN last revised 12/15/21), here.


JAT Departures from Mainstream

§ 7805(a) is a grant of legislative rulemaking authority (some argue legislative authority only, and that Treasury regulations based on § 7805(a) are all legislative regulations).

§ 7805(a) grants interpretive authority only, which means that Treasury regulations based only on § 7805(a) and doing nothing more than reasonably interpreting the statute within the zone of ambiguity are interpretive regulations. For the balance of the blog, I will assume a § 7805(a) regulation reasonably interpreting statutory text within the zone of ambiguity.

§ 7805(b) is express authority for retroactivity of a § 7805(a) legislative regulation.  The general rule is that a legislative regulation cannot be retroactive prior to finalization after notice and comment. The exception to that general rule is that a legislative temporary (also called interim-final) regulation can have immediate effect (but not retroactive effect) if  promulgated with a good cause statement.

§ 7805(b) is an express limitation of the general rule of retroactivity for interpretive regulations.  § 7805(b) does not permit any period of retroactivity for a Treasury legislative regulation (that is effectiveness prior to promulgation as temporary regulation (interim final) or final regulation). For example, Treasury could not promulgate a true legislative rule (such as a consolidated return regulation under § 1502) by either final notice and comment regulation or by temporary regulation  with good cause statement and have it effective retroactively earlier than the date the regulation, whether final or temporary, is promulgated.  Can you imagine requiring compliance with a law (legislative regulation) that did not even exist prior to promulgation?

§ 7805(a) regulations require notice and comment for final regulations.

§ 7805(a) interpretive regulations have never required notice and comment; even before the APA, Treasury had a practice (not required) of promulgating Treasury final regulations (as opposed to temporary regulations) with notice and comment. That practice (but not requirement) fit easily within the APA enacted in 1946. The practical effect of final notice and comment interpretive regulations is that they have more (i) legitimacy than subregulatory guidance generally and (ii) are usually subject to Chevron deference, a test of an interpretation and not a test of law created by statute or legislative regulation.

§ 7805(a) temporary regulations issued without notice and comment for immediate or retroactive effect are invalid.  (This is the basis for the claim that Treasury has consistently not complied with the APA since its enactment, until for policy reasons rather than APA requirements it began using good cause statements in 2019.)   (The discussion in the parenthetical was added 4/4/22 at 5:00pm.)

§ 7805(a) temporary regulations doing nothing more than interpreting ambiguous statutory text may be effective immediately and apply retroactively without notice and comment and without a good cause statement. This was the case for the interpretive temporary regulation in United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012) which failed not because of retroactivity and lack of good cause statement, but because the interpretation was not within the scope of the statutory ambiguity as limited by a prior Supreme Court opinion; had retroactivity for interpretive regulations not been permitted, the brouhaha resulting in Home Concrete would have failed without reaching the Supreme Court.   On this basis, Treasury has consistently complied with the APA because the APA exempts interpretive regulations from notice and comment and good cause requirements for legislative regulations. (See particularly JAT Further Comment # 2 below.)   (The discussion in this cell was substantially revised on 4/4/22 at 5:00pm.)

§ 7805(a) regulations for immediate effect require a good cause statement. (A variation of the previous claim.)

§ 7805(a) regulations do not require a good cause statement for immediate effect because only legislative regulations require a good cause statement; Treasury now says that, as a matter of sound regulatory policy” but not an APA requirement, it will issue immediately effective temporary interpretive regulations with a good cause statement for immediate effect.  See Treasury and IRS Policy Statement on Tax Regulatory Process (3/17/19; 4/19/20), here

The Liberty Global analysis is based on those mainstream notions in the left column.

My nonmainstream analysis is:

1. Treasury based on the temporary regulation on both § 7805 and § 245A(g) which provides:

(g) Regulations

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations for the treatment of United States shareholders owning stock of a specified 10 percent owned foreign corporation through a partnership.

2. I am agnostic at this time as to whether § 245A(g) grants legislative authority for the temporary regulation.  I think that could go either way.  For example, it seems that the ”including” example suggests legislative rulemaking authority.  If that is right then the word “including” would suggest legislative rulemaking authority for the main part of the sentence.  If the relevant part of the regulation is based on § 245(g) as a legislative regulation, then I have no conceptual quarrel with the Court’s holding or the parties’ apparent agreement that the temporary regulation was a legislative regulation. On the other hand, the wording of the main clause of the sentence seems more like § 7805(a) ("prescribe all needful rules and regulations for the enforcement of this title") which has historically been read as conferring interpretive authority only.  I discuss in the article interpretive authority given in a substantive statute which, in effect, overlaps with § 7805(a) and still is an interpretive authority rather than legislative authority. Compare, for example, the language of the quintessential legislative regulation authority, § 1502.  Another key caveat is that the regulation is also based on § 7805(a).  If the “interpretation” is reasonable within the scope of the text’s ambiguity, then it is an interpretive regulation not needing legislative rulemaking authority and could be valid for that reason, attracting Chevron deference.  Further, if it is a valid interpretation, with Skidmore respect, then the interpretation could control the outcome.

3. I am not agnostic on whether § 7805(a) grants legislative rulemaking authority. It does not.  See my article cited above (pp. 54-64) where I go through the history of § 7805(a) to show that from before the APA and through the 1996 changes to § 7805(b), § 7805 authorized and applied only to interpretive regulations, as to which the general rule for general authority regulations of all agencies was that interpretive rules (like judicial interpretations) are retroactive.  Section 7805(b) enacted in 1996, merely put retroactivity limitations on interpretive regulations, the effect of which was not to deny the validity of the interpretations but limit their authority as a regulation which, practically speaking, is to deny them Chevron deference.  The key point, though, is that, if the temporary regulation passes muster as an interpretive regulation, then the regulation qua regulation could be retroactive subject to limitation under § 7805(b)(2) and be valid so as to attract Chevron deference.  In any event, whether or not it is a valid regulation, the interpretation might still be valid without Chevron deference.

4. It is not clear to me why the Government does not claim that the interpretation is valid even apart from the validity of the regulations distraction.  Remember that the interpretation qua interpretation is entitled to Skidmore  respect (not deference).


Added 4/6/22 1:30 pm:

1. Consider this, although not directly in point, it goes to the broader claim about Chevron:

“Chevron in fact involved an interpretive regulation” Christensen v. Harris Cty., 529 U.S. 576, 590 (2000) (Scalia, J. concurring).  See also Hospital Corp. of America v. Commissioner, 348 F.3d 136 (6th Cir. 2003) (“This court has applied the Chevron analysis to interpretive Treasury Regulations. [citation omitted] And indeed, Chevron itself involved deference to an agency interpretation of a statutory term.”).  

Of course, this was before the nonsense claims that (i) Chevron applies or only applies to legislative regulations and (ii) the interpretive regulation is no longer viable APA category even though it is expressly recognized in the APA.  

Added 4/4/22 5:00pm

2.  In United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012), the Court considered a temporary interpretive regulation issued under § 7805(a) without a good cause statement and with retroactive effect to years still open when the temporary regulation was promulgated.  The majority held that, because interpretive regulations must be within the scope of statutory ambiguity and its prior holding in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), there was no ambiguity in the statute that the IRS could permissibly interpret, meaning that the regulation and the interpretation was invalid.  But the Court did not hold or hint that the regulation and interpretation failed for a predicate reason because it could not be retroactive to periods prior to promulgation of the temporary regulation.  Indeed, Justice Kennedy's dissent contesting only the majority's holding that there was no ambiguity makes clear that retroactivity for an interpretive regulation is quite proper, a  proposition not contested by the majority (pp. 504-505, emphasis supplied). 

The Department’s clarification of an ambiguous statute, applicable to these taxpayers, did not upset legitimate settled expectations. Given the statutory changes described above, taxpayers had reason to question whether Colony’s holding extended to the revised § 6501(e)(1). Having worked no change in the law, and instead having interpreted a statutory provision without an established meaning, the Department’s regulation does not have an impermissible retroactive effect. It controls in this case.
Note that, because the interpretation was of a pre-1996 statute, it was not subject to § 7805(b)'s limitations on an interpretive regulation's retroactivity.  Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 1101(b), 110 Stat. 1452, 1469 (1996) (“The amendment made  by subsection (a) shall apply with respect to regulations which relate to statutory provisions enacted on or after the date of the enactment of  this Act.”).  This effective date provision is not codified but is published in the Note to 26 U.S.C. § 7805. 

The Supreme Court would have not reached the holding in Home Concrete had it found the predicate procedural irregularity the mainstream thinking claims for § 7805(a) regulations,

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