Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (1/8/24; 1/15/24)

Section 6751(b)(1) provides:

(1) In general

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.

Penalties cannot be assessed unless they have written supervisor approval by some magical moment; stated otherwise, an assessment or a step predicate to assessment of penalties without prior written approval is invalid. The only magical moment in the statute is the “initial determination of the assessment.” That statutory language on its face is nonsense because there is no “initial determination of the assessment,” at least other than the assessment itself. The courts have made hash of the language of the statute, which, through its fuzziness coupled with a snippet in the legislative history, lends itself to fuzzy thinking about the tax system we have and to disparate outcomes. In short, the interpretation and application of § 6751(b) is a mess. 

I  discuss the mess in my Federal Tax Procedure (current 2023.2 Practitioner Edition SSRN here) at pp. 385-393. Because of the mess, which has been brewing for several years, I have noted in recent versions of my Federal Tax Procedure Practitioner Edition (e.g., 2023.2 Edition p. 387 n. 1645):

    n1645 This appears to me to be a classic case where a well-considered statutory amendment or, failing that, comprehensive interpretive regulations could clean up the mess. The courts have already found the statute ambiguous, the condition required for “reasonable” interpretive regulations. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). By adopting well-considered interpretive regulations, the IRS could essentially moot out the plethora of prior and future court machinations to deal with the problem. See National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967, 981 (2005) (permitting the agency to adopt interpretive regulations contrary to prior judicial interpretations so long as the prior judicial interpretations are not compelled by the text of the statute, which would not be true here because the statute is ambiguous). I don’t think reversal of the court interpretations of § 6751(b) would be foreclosed under Brand X by prior judicial precedent that foreclose the agency new interpretation as occurred in United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012). An interpretive regulation, with notice and comment, by Treasury, the expert on IRS processes and the big picture, would likely produce a more holistic set of interpretations than courts can do anecdotally as unique cases arise. The problem with the regulations approach is that final regulations could take a very long time, perhaps a couple of years. But since the regulations would be interpretive, Treasury could adopt a Temporary Regulation and, provided that the final Regulation is adopted within three years, the Temporary Regulation could be effective immediately (§ 7805(e)) and the final Regulation could be effective from the date of the Temporary Regulation (§ 7805(b)). And, perhaps even, the Temporary and Final Regulations might be persuasive authority under Skidmore v. Swift & Co., 323 U.S. 134 (1944) for application retroactively to the date of the statute for any case still in pipeline or getting there involving conduct prior to the effective date of the Temporary Regulation. Such retroactive application beyond the limits imposed by § 7805 is a long subject, I think that the interpretation might apply retroactively with the only limit being that the  interpretation be within the scope of § 6751(b)’s ambiguity from the enactment of the statute.

Separately, the Taxpayer Advocate proposed a legislative solution. See Legislative Recommendations 32 and 36 in Taxpayer Advocates Legislative Recommendations for 2023 and 2022, respectively as follows: 

Amend IRC § 6751(b)(1) to clarify that no penalty under Title 26 shall be assessed or entered in a final judicial decision unless the penalty is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate prior to the first time the IRS sends a written communication to the taxpayer proposing the penalty as an adjustment.

Added 1/15/24 4:00pm: The TA continues this legislative recommendation in the 2024 Purple Book Recommendation #33, here.

There is no indication that any legislative solution will be forthcoming.

In April 2023, Treasury issued Proposed Regulation 301.6751(b)–1 to deal with many of the issues raised by the § 6751(b) mess. See NRPM 88 FR 21564, here. Written comments have been submitted (collected here), and a hearing held (transcript here). Consistent with her Legislative Recommendations, the Taxpayer Advocate indicated disagreement with the Proposed Regulation’s approach. See NTA Blog: Reconsidering the IRS’s Approach to Supervisory Review (8/29/23) (last updated 12/8/23) here, stating in conclusion:

The IRS’s approach to supervisory review of penalties is heavy-handed and burdensome on taxpayers. Among other things, supervisory review should occur before applicable penalties are communicated to taxpayers in writing. Negligence penalties should also be presumptively subject to supervisory review and not automatically assessed by a computer program. The proposed regulations under IRC § 6751 provide the IRS with an excellent chance to reconsider its approach to supervisory review. This is an opportunity that the IRS has so far declined to embrace, but there is still time. I urge the IRS to reexamine its policy and I request that Congress consider clarifying the law to protect taxpayers’ rights.

Since we don’t know what the final regulations might provide, if and when adopted, I don’t propose to review the Proposed Regulations’ resolution of the interpretive choices that have so befuddled the courts into making a total mess of § 6751(b).

Rather, I address here the alternatives for resolution of the § 6751(b) mess. The choices are: Legislation, regulations, or the courts. Further thrashing around in the courts seems likely in the absence of legislation. Legislation seems unlikely. So, as I said earlier, resolution of the mess through regulations seems to be systemically the best solution.

There is a potential glitch on the horizon with a regulation’s solution. The Proposed Regulations would be entitled to Chevron and probably need deference to quiet courts further thrashing around. However, in the October 2023 Term, the Supreme Court is considering the following questions:

Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

 Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451) (“Loper Bright”); and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219). Many think deference (whether called Chevron deference or not) will be rejected in the pending cases. I ask readers to consider what eliminating deference might do to the Final Regulation that might be forthcoming under § 6751(b)? (I set aside so-called Skidmor4e deference which is not deference at all. See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here.

Several circuits have already announced different “best” interpretations of § 6751(b). (See the discussion in the NPRM.) If the Final § 6751(b) Regulation is given no deference, at least in theory, that would mean that these past interpretations are the law in the respective circuits and is an open de novo issue in circuits (and their lower courts, including the Tax Court) that have not pronounced. (Note that, under Golsen, the Tax Court would have to apply the respective Circuit authority if different than its own interpretation.)  There are likely to be conflicts all over the lot (so to speak), that the Supreme Court only could resolve in order to meet the national imperative, sometimes articulated and less often respected, for uniform interpretation of tax law. In other words, only Congress or the Supreme Court will be able to fix the mess, and even their ability to fix retroactively may be circumscribed. And the Supreme Court’s fix would likely be episodic rather than comprehensive as in the Proposed Regulations.

 I have just picked out one area of tax law that would be affected by elimination of Chevron deference. There are myriad other contexts that would be affected. Would the type of result in United States v. Correll, 389 U.S. 299 (1967) now be off the table? In Correll, by interpretive § 7805(a) regulation, Treasury adopted an administrable interpretation of the “away from home” statutory requirement. Other interpretations were possible. The Court said: “The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner’s regulations fall within his authority to implement the congressional mandate in some reasonable manner.” 

Are all regulations interpretations not clearly mandated by the statute now open game for courts to thrash around with disparate results?

This is the same type of issue that Justice Robert H. Jackson addressed in his unanimous opinion in Dobson v. Commissioner, 320 U.S. 489 (1943), here, reh. den. 321 U.S. 231 (1944), here, which compelled deference under the statutory standard of review for Tax Court interpretations of law—“not in accordance with law.” I discuss Justice Jackson’s unanimous Dobson decision in detail in  John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN 4665227 December 14, 2023), here, where I note that the same statutory review standard—“not in accordance with law”—interpreted in Dobson to require deference was adopted as the review standard in APA § 706(2)(A), just 3 years later, thus perhaps requiring deference.

I suppose that one way to wiggle out of this conundrum is to limit deference (let's call it Loper deference) to statutory equipoise. Statutory equipoise is a big issue. See 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; Chevron and Equipoise In Statutory Interpretation (Federal Tax Procedure Blog 5/26/22), here. But imagine that equipoise is a range, say a range from 40% to 60% where certainty of the interpretation is outside the range and equipoise is within the range. Then deference would work as it does now. 

• On the concept of equipoise as a range, I think the range analysis is necessary, because it would be quite impossible to determine that a legal interpretation is exactly 50-50. Cf. John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020) (SSRN here. 
• Of course, there were practitioners in the various cycles of tax shelters who claimed the ability to determine and opine that a bogus tax shelter was 51% more likely than not; during that tax shelter commotion, I always believed that determining more likely than not in either direction could not be done on a 51%-49% basis but would likely require a belief well above 51%, say 60% or 65%, in order to be able to opine that the position is more likely than not.

Note the bulleted items were separated from the body of the paragraph and revised and enlarged on 1/9/24 at 3:00pm.

One further comment on the Proposed Regulations. There is much commotion in the legal community (judges and scholars) as to the use of legislative history and purpose in interpreting statutes. As is common for Treasury Proposed and Final Regulations, the explanations in the § 6751(b) Proposed Regulations rely on legislative history and  purpose. See for example:

•  “The proposed regulations are intended to clarify the application of section 6751(b) in a manner that is consistent with the statute and its legislative history, has nationwide uniformity, is administrable for the IRS, and is easily understood by taxpayers.”
• “The Treasury Department and the IRS have concluded that an earlier deadline for approval of an initial determination of a penalty would not best serve the legislative purpose of section 6751(b).”
• “Read in light of the statute’s legislative purpose and the structure and operations of the IRS, it is appropriate to understand that term as referring to an official at a higher level than the individual making the initial penalty determination. To do otherwise would be to exclude a large group of individuals the IRS has assigned to review proposed penalties. This approach is consistent with the legislative history and allows IRS employees to operate within the scope of their assigned duties.”

My question is whether, if a court applies deference to Treasury (or other agency) Regulations) invoking legislative history and statutory purpose, the interpreted law applied by the courts (with deference) relies in part on legislative history and purpose. Justice Scalia, long a fan of Chevron deference but not a fan of legislative history and legislative purpose (see FTP above pp. 13-15), seemed to have handled those competing contradictions without any concern. (But then, as Ralph Waldo Emerson said “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines." See Paul Rosenzeig, A Foolish Consistency is the Hobgoblin of Little Minds -- The Metadata Stay (LawFare 12/19/13), here.)

Added 1/10/24 12:00pm:

Eugene Scalia, son of the late Justice Scalia and Trump's Secretary of Labor, has an op-ed in the Wall Street Journal today on the Chevron issue to be argued next week in the Loper and Relentless cases. Eugene Scalia, Chevron Deference Was Fun While It Lasted (WSJ 1/9/23), here. Scalia notes at the beginning:

I’m less hostile than many conservatives toward Chevron v. NRDC (1984), the Supreme Court decision that instructs judges to defer to certain agency interpretations of statutes they administer, which the justices will reconsider next week. My ambivalence springs in part from filial loyalty—my father, Justice Antonin Scalia, was Chevron’s foremost champion before souring on such deference doctrines in his last years.

Scalia's main points as I derive them are:

1. He has an anecdotal data set of two rules he describes as:

It [they] strengthened my department’s hand and our ability to implement the president’s agenda. It could also help bring uniformity to the law, and I adopted two rules partly for this reason. One rule distinguished independent contractors from employees for purposes of the wage and hour laws. The other delineated when two companies are the so-called joint employers of a worker, so that each company must ensure the minimum wage and overtime are paid.

2. Both "were important legal issues the Supreme Court hadn’t addressed in decades. In the lower courts, the legal test being applied varied by circuit. My rules were intended to bring clarity and consistency, in a way that I thought reflected the right view as a matter of both law and policy." [JAT Note: this same phenomenon applies to the § 6751(b) and the Proposed Regulations.]

3. In approving regulations, he [Scalia] did interpret but often agency heads (particularly those who are not lawyers) do not but rather seek to implement the administration's policy agendas. 

4. The role of the final "decider"--the agency head--is to assist in the policymaking that would enter the regulations. Policymaking and related political factors may affect how the final rules appear. He claims: "Some rules get adopted against the advice of the lawyers—the actual interpreters."

5. This role, he claims:

punctuates this peculiarity of Chevron deference: that courts at times defer to “interpretations” that the agency’s interpreters thought were wrong, and which were adopted because the decider was contemptuous of the law’s meaning. A court never knows when this is how an interpretation was adopted.

6. Finally, as to his anecdotal data set of the two rules, he offers this:

A coda regarding those two rules I adopted in hopes of bringing consistency to the law: My successor as secretary set about undoing both. In the case of independent contractors, the department on Tuesday adopted a new rule with a diametrically opposed approach. Expect litigation to commence immediately over which rule should remain in place, the one I adopted or the new one.

JAT Comments on Scalia's article:

1. I don't know how the Department of Labor does its job in considering, proposing and finalizing regulations, but the process he describes may not be indicative of how other agencies--and the Treasury/IRS in particular--do it. 

2. He seems to claim that Chevron gave him (and other agency heads) too much policymaking discretion to avoid being faithful to the statute, presumably within the scope of the ambiguity in the statute. He claims that somehow the fact that the Biden administration set about to undo the rules he approved is proof of his anti-Chevron stance. But, he should consider the possibility that the Biden changes were necessary to correct Trump rules from their over-policymaking not faithful to the statute and the considerations that normally go into interpreting a statute.

3. Let's use the § 6751(b) Proposed Regulations as an anecdotal example. I ask readers to parse the statute, the mess that courts have created from the statute, and the regulations to see if the proposed rules fairly reconcile the statutory and court mess. More importantly, do they reflect overt or sub silentio policy choices not consistent with the statute? Again, without considering whether the Proposed Regulation should be adopted, is there any doubt that those participating in the Proposed Regulations knew the topic well, knew that their goal in interpretation was to be the faithful agent of Congress, and produced work product that, in a fair range, implemented their goal. Of course, the notice and comment process is designed to flush out where they may not have achieved the goal.

4. See also Aaron Saiger, Agencies' Obligation to Interpret the Statute, 69 Vand. L. Rev. 1231 (2016), here ("In circumstances where a reviewing court is expected to defer to agency interpretation, the agency bears a legal and ethical duty to select the best interpretation of its governing statute.").