Can § 7805(a) & (b) Be Read as Delegating to Treasury/IRS Interpretive Authority with Deference (7/14/24)

I recently updated a post on Corner Post. See Does Corner Post Permit § 2401(a)’s 6-year Statute of Limitation to Apply from Date of Regulation for Procedural Challenges? (Federal Tax Procedure Blog 7/10/24; 7/11/24), here. In the update (in red), I argued that the Corner Post holding was meaningless because Loper Bright compels that the best interpretation controls whether or not incorporated in a regulation (previously required for deference) and whether or not such a regulation was procedurally or substantively valid. So, whenever a court adjudicates, the best interpretation should now be applied from the effective date of the enacted statute.

One consequence of that for tax is that § 7805(b), here, is rendered meaningless unless, as I note here, there is a continuing role for deference. A reminder on what § 7805(b) does. From my Federal Tax Procedure Book 71 (2023.2 Practitioner Edition) (footnotes omitted and emphasis supplied), here:

          (1) if issued within 18 months of the date of the statute, then to “the date of the enactment” of the statute;

          (2) if issued later than 18 months, then the earliest of the following dates: (a) the date the final regulation was published; (b) the date on which any Proposed or Temporary Regulation was published; and (c) the date on which any notice substantially describes the contents of the expected Proposed, Temporary or Final Regulation;

          (3) if necessary “to prevent abuse,” with no limitation as to the date of retroactivity;

          (4) “to correct a procedural defect in the issuance of any prior regulation,” with no indication as to the date of retroactivity;

          (5) if “relating to internal Treasury Department policies, practices, or procedures,” with no limitation as to the date of retroactivity.

These are limitations on the regulations but not the interpretation. If the [Treasury] interpretation is the best interpretation of the statutory text, then perforce the interpretation will apply from the effective date of the statute (whether or not the interpretation is in a regulation). In other words, if the IRS [Treasury] were to include the interpretation in a regulation which violated the time limitations, that would not invalidate the interpretation or prevent the interpretation from applying from the effective date of the statute; it would just invalidate the regulation.

Chevron Deference: Much Ado About Not Much (8/15/21)

This is my third offering on the most recent D.C. Circuit opinion in Guedes v. ATF, 920 F.3d 1 (D.C. Cir. 8/9/22), DCCir here,  and GS here. My prior offerings are (chronological order):  Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here; and § 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (Federal Tax Procedure Blog 8/11/22), here.  (Note that I omitted from my original discussion the parallel Fifth Circuit opinion in Cargill v. Garland, 20 F.4th 1004 (5th Cir. 12/14/21), CA 5 here and GS here; see Fifth Circuit Affirms Agency Best Interpretation of Statute, thus Not Applying Chevron (Federal Tax Procedure Blog 12/20/21; 12/21/21), here.)

The point I want to make here explicit that which may be only implicit in my prior offerings. When courts defer (or parties (usually the Government) argue that a court should defer) to a “reasonable” agency interpretation, they often do not differentiate between (i) those reasonable agency interpretations that are the best interpretations and (ii) those agency interpretations that are not the best interpretations but are only reasonable agency interpretations qualifying for Chevron deference.  Thus, by chanting "reasonable" and Chevron and appearing to defer, many (I think most) cases involve agency interpretations that are the best interpretations so there is no deference at all.  That is the key point of this new Guedes opinion (and the Cargill opinion). 

And, that is why courts should, as did the court in the new Guedes and in Cargill opinions, make clear what the best interpretation is so that they can either (i) apply that interpretation without any nonsense about Chevron or (ii) apply Chevron only when Chevron deference is outcome determinative – i.e., when the agency interpretation is not the best interpretation.  Keep in mind that, in making the determination as to the best interpretation, courts should give Skidmore respect (not deference) to the agency's interpretation because the agency, not the courts, has been assigned to administer the administrative scheme and is in a better position to deal with subtleties in administration than a court is.  See Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21).

As to the latter applying Chevron deference only when the agency interpretation is not the best interpretation, I point readers to some discussion in my article John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), https://ssrn.com/abstract=3400489:

In the postscript to the article (pp. 122-123) I offer the following reformulation of steps preserving Chevron's basic teaching but isolating when it is outcome determinative (footnotes omitted):

§ 7805(b) Time Limits Do Not Apply to Agency Best Interpretations of the Statute (8/11/22)

I recently posted a blog on Guedes v. ATF, 45 F.4th 306 (D.C. Cir. 8/9/22), DCCir here,  and GS here. See Important DC Circuit Opinion That Chevron Deference is Irrelevant if Agency Interpretation is Best Interpretation (Federal Tax Procedure Blog 8/9/22; 8/10/22), here. The essence of this new Guedes case is that an interpretation that is the best interpretation of the statute applies without any deference to the agency interpretation. The best interpretation controls, not because it is the agency interpretation, but because it is the best interpretation. So, for example, even if that best interpretation is in an interpretive regulation, the best interpretation controls. And the best interpretation controls even if the regulation is procedurally invalid. I have made that point (not much discussed in the mainstream claims) in several blog posts. I list only a few:  11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21), here; Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here; and Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22), here.

I focus here on the consequences of this key point—the best interpretation of the statute controls independently of the validity or characterization of the regulation in which the best interpretation may appear. Readers may recall that § 7805(b) limits retroactivity for § 7805(a) regulations interpreting Code sections enacted after the effective date of the 1996 amendments to § 7805(b). For regulations interpreting Code sections enacted before the 1996 effective date, the interpretations may be fully retroactive to the date of enactment of the Code sections being interpreted. So, imagine a hypothetical Code section enacted after 1996, say enacted in 1997, so that § 7805(b) applies to limit the retroactivity of an interpretive regulation. Suppose that, in 2022, the IRS adopts a regulation interpreting the Code section. The regulation qua regulation cannot apply retroactively to 1997. But, the best interpretation can and should apply retroactively to 1997. (I need to clarify what retroactive means in this context; the interpretation has to be within the range of reasonable interpretations since the date of enactment so, in that sense, the interpretation is not retroactive; but the retroactive language is often used to describe the concept of the interpretation later recognized (in the example, in 2022) as the best interpretation applying from the date of enactment.)

The point is that an interpretation in a Treasury regulation (Temporary or Final) otherwise subject to the § 7805(b) time limits will avoid those time limits if the interpretation is the best interpretation of the statute.   Let me repeat that so that it sinks in:  An interpretation that is the best interpretation can and should apply retroactively without regard to § 7805(b). Indeed the best interpretation is effective even if announced in subregulatory guidance (such as Revenue Ruling or Notice). What that necessarily means is that § 7805(b)’s time limits practically apply only to an agency regulation interpretation that is not the best interpretation and thus needs a valid regulation (in this case within the § 7805(b) time limits) for Chevron deference.

This raises some questions:

Tax Court (Judge Halpern) Discusses Chevron and Retroactivity Issues in Significant Opinion (2/2/22)

Caveat:  The Tax Court opinion was corrected on 2/8/22 (see TC here Dkt. 86 *).  There is no indication of the changes made in the opinion.  I have checked the quotes below against the corrected opinion; they do not appear to have been revised.  I don't know whether the changes will result in new posts to Casetext and Google Scholar.  I will check later and post updates if they are made to those services.  (I earlier sent a letter to the Tax Court Clerk suggesting that, when revising an opinion, the Court provide public notice of such revisions.  See My Suggestions to Tax Court on Procedure Related Matters (11/23/20), here (noting that the Supreme Court makes the revisions available).)

In TBL Licensing LLC v. Commissioner, 158 T.C. ___ No. 1 (1/31/21), TC here Dkt. 85 *, Casetext here, and GS here, the Court (Judge Halpern) determined that inter-company shuffling of assets among related U.S. and foreign entities constituted a reorganization in which a domestic entity made a taxable distribution of intangible assets to a foreign entity. The amount of the resulting increase in income is  $1,452,561,000. (Slip Op. 91.)  It is not clear whether that is just a timing difference; in any event, I don't propose to get into the nitty-gritty on the reorganization and resulting increase in income. Instead, I offer the case to discuss two procedural issues related to issues I have discussed before on this blog.

First, in broad strokes, the case involved the statute and regulations. In part relevant here, the regulations did not apply, so the Court resolved the relevant issue solely by interpreting the statute and applying the best interpretation. There is no Chevron issue there, and the IRS did not assert Chevron deference. But TBL apparently attempted to assert something sounding like Chevron into the analysis. The Court stated its confusion about that (Slip Op. 79-80):

            Petitioner suggests that respondent is to blame for the absence of a provision in the regulations that can be applied to petitioner's circumstances. The absence of an applicable regulatory provision, however, requires that we look to the statute alone to determine the tax consequences of petitioner's transaction. For the reasons explained supra part III, section 367(d)(2)(A)(ii)(II), interpreted in accordance with the legislative history, requires petitioner to recognize gain. The absence of a provision in the regulations providing otherwise is petitioner's problem — not respondent's.

            Because respondent's position is grounded in an interpretation of the applicable statutory provisions and not on any regulations, we do not understand petitioner's argument that respondent's "litigating position" is "impermissible" under Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988). Bowen stands for the proposition that an agency's litigating position is not entitled to the same deference a court would give to a position adopted through notice and comment rulemaking. See id. at 212-13; see also Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Respondent does not ask that we grant Chevron deference to the interpretation of the applicable statutes that he advances in this case.