IRS Enjoined from Enforcing Tax Shelter Notice Requirement for Material Advisor for Microcaptive Transactions (9/22/21)

In CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, the Court held that the Anti-Injunction Act (§ 7421(a)) did not preclude a contest by a “material advisor” of IRS  Notice 2016–66 requirement to report micro-captive transactions.  See Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.  Accordingly, the Supreme Court remanded the case to the Court of Appeals which remanded it to the district court. 

In CIC Services, LLC v. IRS (E.D. Tenn. No. 3:17-cv-110 9/21/21), CL here, the district court held that the Notice was a legislative rule that required promulgation by notice and comment regulation.  Based on that holding, the court found the requirements for an injunction were met and that the injunction should be applied with respect to CIC.  I suppose that means, practically, that the IRS cannot impose penalties for any failure by CIC to comply with the requirements of the Notice  (Note, however, that the opinion says that “CIC also notes that, to date, it has complied with the Notice’s requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year.”).

This is a major win for the tax shelter industry but probably not the last word in this saga.

Without getting into the nitty-gritty on the application of the APA’s legislative/interpretive distinction (upon which turns the notice and comment regulation requirement), I suppose that the going forward solution for the IRS would be to use the immediate effect Temporary Regulation, with "good cause statement," process with contemporaneous Proposed Regulations for the notice and comment process.  The APA requirement for good cause is “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B).  Potentially abusive tax shelters should be sufficient for immediate effect under this provision. 

I am not sure that the court correctly determined that the Notice was a legislative rule requiring notice and comment (or good cause statement).  Because the court made the legislative determination with sound bites rather than detailed analysis, I won’t address that here.  I suppose the Government will appeal to the Sixth Circuit on an expedited basis because of the injunction.

The CourtListener (CL) docket entries for the case are here.

JAT Comments (added 9/22/21 2:30pm:

Updated Article on APA Interpretive Regulations (1/28/20)

In June, I posted an a blog on article on the APA issue of the continued viability of the interpretive regulation.  Article on the Continued Viability of the APA Category of Interpretive Regulations (6/21/19), here.  I have now posted a substantial update of the article at the same URL on SSRN.

The SSRN cite for the revised article is:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN: https://ssrn.com/abstract=3400489.

The revised abstract is:

There is a claim about in the scholarly administrative law community that the APA category of interpretive regulations, including tax regulations under IRC § 7805(a), are no longer a viable category under the Administrative Procedure Act ("APA). Instead, so the claim goes, regulations that have historically been considered interpretive because all they do is reasonably interpret ambiguous statutory text are now legislative regulations under the APA thus subject to the APAs legislative regulations’ requirements for Notice and Comment and Prospectivity. 

In the article, I quote, with permission, a noted scholar who claims:  

• "regulations promulgated under 7805(a) are legislative rules as that term is understood for purposes of the Administrative Procedure Act;"
• "Administrative law doctrine says that legislative rules are those that carry the force of law, while interpretative rules do not. Although the force of law concept is blurry at the margins, I do not see any possible way that one could conclude that 7805(a) regulations do not carry the force of law;"
• "In summary, there are no Treasury regulations that are interpretative rules as that term is understood for purposes of the Administrative Procedure Act -- irrespective of the terminology embraced by the tax community."  

If that claim is true for § 7805(a) regulations, it is true for all agency regulations interpreting the statute under similar agency grants (either express or implied).
My limited anecdotal polling from talking with administrative law professors is that the claim is a mainstream scholarly position. And courts noise around with the concept, although usually without nuance. 

By contrast, in the recent oral argument in Kisor v. Wilkie (Sup. Ct. No. 18-15), transcript p. 10), Justice Breyer, an administrative law scholar (taught administrative law at Harvard Law School), said “there are hundreds of thousands, possibly millions of interpretive regulations.” And courts regularly refer to interpretive regulations as if they were a viable APA category. 

So which is it? Are interpretive regulations generally and Treasury interpretive regulations specifically a viable APA category? 

Supreme Court Yet Again Weighs In At the Edges on Legislative and Interpretive Rules (6/26/19; 7/2/19)

In Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here], the Supreme Court decided to retain Auer deference, at least for now.  I offer some preliminary thoughts on the opinions in Kisor and may revise them as I think further and consider others comments.

Although perhaps oversimplifying for analysis, I think Auer deference functions like Chevron deference but one step removed from the statutory text.

• Chevron deference applies to some reasonable agency interpretations of ambiguous statutory text.
• Auer deference applies to reasonable agency subregulatory interpretations of  ambiguous agency regulations (which for this purpose may be either (i) ambiguous legislative regulations (e.g., in a tax context, ambiguous consolidated return regulations) or (ii) ambiguous interpretive regulations entitled to Chevron deference (e.g., in a tax context, say ambiguous “away from home” interpretive regulations entitled to deference as in Correll)).

In Kisor, while re-affirming Auer deference, the opinions were fractured as to what Auer continues to mean and whether it may be on life support.  All we can say for sure is that Auer lives (for now, although its precise application may be muddled and Kisor clearly restricts Auer’s application over what some of the prior less restrained applications suggested).

I don't want to get into the Justices competing views of Auer deference.  The pundits will be doing that for some time now.

I do want to get into what, if anything, Kisor says about the legislative / interpretive issue that I have fulminated about recently.  See Article on the Continued Viability of the APA Category of Interpretive Regulations (Federal Tax Procedure Blog 6/21/19), here; and Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (Federal Tax Procedure Blog 6/23/19), here.

Just to restate the issue.  Some, a considerable consensus in the scholarly community, claim that the interpretive regulation is no longer viable, having been conflated into legislative rules by judicial opinions after the adoption of the APA.  I reject that notion.  I do note as an important pushback Justice Breyer's comment in the Kisor oral argument:  “there are hundreds of thousands, possibly millions of interpretive regulations.”   Justice Breyer is, of course, an administrative law expert (he and Justice Kagan are the administrative law experts on the Court), and he thinks that interpretive regulations are still viable.  (Significantly, at oral argument, no Justice challenged the notion that interpretive regulations were a viable APA category.)

The Kisor opinions, as I said, were fractured, with some key points not gathering a majority. The Justices in the plurality for the Court opinion which I discuss herein were Justices Kagan (author), Ginsburg, Breyer and Sotomayor.  Remember  that Justices Kagan and Breyer are the Court's administrative law experts, so from the perspective I focus on (the APA distinction between legislative and interpretive regulations), Justice Kagan's opinion concurred in by Justice Breyer are most important to the legislative /interpretive issue.

Treasury Regulations and the APA Categories of Legislative and Interpretive Regulations (1/12/19; 1/19/19)

NOTE: THIS WAS SUBSTANTIALLY REVISED AND EXPANDED ON 1/13/19)

Note that Bob Probasco, Senior Lecturer and Director of the Low Income Tax Clinic at Texas A&M University School of Law, here, and I have an ongoing discussion in the comments below about the issues I try to present in this blog.  I strongly encourage the readers to read at least Bob's comments and, secondarily my replies.  And to engage in the discussion!

A prominent argument among academicians is that, after Chevron (as interpreted in the later cases), Treasury tax regulations promulgated after notice and comment are "legislative regulations" under the APA.  I am among the distinct minority who disagree.  Indeed, I may be the distinct minority who disagree, although, as I shall note, the IRS also disagrees.  I am not aware that any court has specifically addressed the issue.

Here's the background.  Legislative regulation is one category of regulation (or rule, as the APA calls it).  The other category is interpretive regulation (called "interpretative regulation" in the APA, but now generally called interpretive).  Under the APA, legislative regulations generally require notice and comment and prospective application.  The APA specifically exempts interpretive regulations from notice and comment and from prospectivity.  Treasury/IRS generally issues all regulations under the notice and comment procedure without regard to the legislative and interpretive categories in the APA.  Regulations that the IRS views as interpretive, however, may be retroactive subject to the limitations in § 7805 and the IRS often provides retroactive effective dates.  The issue addressed here -- the brouhaha so to speak -- is whether Chevron means that there is no such thing as an interpretive IRS regulation (as one prominent author claims).

I have written an article where I address this issue in the article at various points.  Townsend, John A., IRS Guidance – Rulemaking and Deference to IRS Statutory Interpretation (July 27, 2018), Available at SSRN: https://ssrn.com/abstract=3212060.

In my ongoing discussions with a respected colleague who is among the majority on the issue as to which I am a (maybe the) minority, I produced what I call an Executive Summary of JAT Position on the Brouhaha.  I post it below (and offer it in pdf format here).  I invite readers to comment in the comments below (so all can benefit from the comments) or by email to me at jack@tjtaxlaw.com.  For the email comments, I will not post them with attribution or even post them at all without the author's permission.

Executive Summary of JAT Position on the Brouhaha

1. Before 1946 (the year the Administrative Procedure Act (“APA”), 5 U.S.C. § 551ff. was enacted), there was a clear understanding of the difference between legislative regulations and interpretive regulations.  (I use the current terminology for these categories – legislative and interpretive.)  The distinction:
a. Legislative regulations created the rules within the scope of the authority Congress delegated.  Section 1502, authorizing consolidated return regulations, is that classic tax example of delegated legislative regulation authority.  In a bare few lines of authority, the IRS has promulgated hundreds of pages of mind-numbingly detailed and complex rules that, while within the scope of the authority delegated, cannot be derived on the basis of the statute alone.  The consolidated return regulations are the law.  If the IRS had no consolidated return regulations, there would be none and the courts could not create them.  Legislative regulations could be prospective only, except in very rare circumstances not relevant here.  For example, the IRS could not require corporate taxpayers to comply with the consolidated return regulations for conduct completed before the regulations were promulgated.
b. Interpretive regulations merely interpret the law without setting new law not fairly derived from the text of the statute.  Section 7805(a) authorized interpretive (sometimes called general authority) regulations.  There is no classic tax example of an interpretive regulation, but the sleep or rest rule for § 162 deductions approved in United States v. Correll, 389 U.S. 299 (1967) is a well-known example.  If there is no interpretive regulation for the statute text, the courts can interpret and apply the law.  And, because by their nature, interpretive regulations interpret the statute, the interpretation can apply retroactively.
c. The distinctions I draw in subparagraphs c. and d. are highly theoretical.  Between the clearest cases of legislative regulations and administrative regulations lies a continuum where, toward the center, the theoretical distinctions may be difficult to apply.  But, for purposes of this discussion, I will assume that at least at the ends of the continuum, the distinctions are valid and can be applied meaningfully.

2. Deference before 1946.
a. Courts deferred in some cases to agency interpretations of statutes, although there was no formal test or framework for how and when courts would defer.  In the final analysis, deference was important only when the court applied an agency interpretation although the court believed that there was a more reasonable interpretation that, absent deference, the court would have applied in a case.  In other words, in the Correll case, the court might have been able to formulate other reasonable interpretations, even perhaps, other more reasonable interpretations for the sleep or rest rule but deferred to the agency interpretation in the regulation.

3. In 1946, Congress enacted the APA applying a regulations framework recognizing and applying different requirements for the two categories of regulations – legislative regulations and interpretive regulations as discussed in paragraph 1.a. And 1.b.  Congress gave no indication in the APA or its legislative history that it was concerned with court deference to agency interpretation discussed in paragraph 2.
a. Terminology Caveat:
i. The APA uses the term “rules” to mean agency regulations.  The IRC, however, commonly uses the term “rules” to mean guidance below the level of regulations, which I and others call subregulatory guidance.  For example,§ 7805(a) refers to “rules and regulations” and § 6662(b)(1) refers to “rules or regulations;” as thus presented in the IRC, the two are different categories, with “rules” being subregulatory guidance.  To illustrate, Reg. § 1.16(a) defining “gross income” in § 61 is a rule in the meaning of the APA and is a regulation in the IRC; Rev. Rul. 76-75, 1976-1 C.B. 14, defining gross income to include certain interest reduction payments is not a regulation in the IRC (subregulatory guidance) and is not a rule under the APA.  In this analysis, I will use the term regulation as the same as rule in the APA.
ii. The APA does not use the term “legislative regulations”; rather, it (i) states a general rule requiring that all regulations generally must be promulgated with notice and comment and be prospective; and (ii) exempts interpretive rules from that general rule .  Regulations subject to the general rule (in part relevant here, not interpretive regulations) are commonly called legislative regulations.
b. The APA requires:
i. Legislative regulations must generally be (i) issued with notice and comment; and (ii) be prospective from 30 days after made final.  5 U.S.C. § 553(b) & (d).
ii. Interpretive regulations are exempt from both requirements; interpretive regulations may thus be (i) issued without notice and comment (although, at agency’s discretion may be issued with notice and comment) and (ii) retroactive to the date of the statute.  5 U.S.C. § 553(b) & (d).   At the agency discretion, interpretive regulations may have lesser retroactivity or may be prospective only.  E.g., § 7805(a).
c. The APA said nothing, explicitly or implicitly, about the deference that courts should give agency regulations.