Book Outline Section
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Nature of Update
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Location for current editions
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Ch. 2
II. Executive Branch.
B. IRS.
6. IRS Rule Making
Authority.
(4) Nonexistent or
Phantom Regulations.
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Complete Revision of this section
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Student Ed. P. 64
Practitioner Ed. p. 84-85
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(4) Nonexistent
or Phantom Regulations.
Congress
will sometimes direct or authorize the IRS to issue regulations to flesh out
the statutory scheme. The direction or
authorization may be for either interpretive regulations or legislative
regulations. For any number of reasons,
the IRS may not get around to promulgating the required regulations for long
periods and in some cases not at all. n195 The party – most often the taxpayer – suffering from the absence of
regulations may seek in audits or litigation the result that would have
obtained had the regulations been promulgated.
How do the IRS and the courts resolve cases which would be subject to
such regulations if they existed? Should
the IRS or the courts create, in effect, a “phantom” regulation to resolve the
case based on the policies and directions reflected in the statute (as
discerned from the statute or legislative history that is persuasive as to the
legislative intent)?
The Tax
Court has defined the problem thusly:
This
case thus requires us to address a question that has arisen with some
frequency: How should a court respond when a taxpayer or the IRS desires to
have a particular tax treatment apply in the absence of the regulations to
which the statute refers? In some cases, the Secretary may have affirmatively
declined to issue regulations, having concluded that they are unnecessary or
inappropriate. In other cases, the Secretary may intend to issue regulations
but may have encountered delays because of subject matter complexity or the
press of other business. Courts have described the question presented here as
whether the statute is “self-executing” in the absence of regulations. [Case
citations omitted]
The
courts have struggled to define the proper judicial response in these
scenarios. In each case, Congress has delegated to an executive branch agency
the task of using its expertise to craft appropriate regulations. Under the
Administrative Procedure Act and familiar separation-of-powers principles, a court’s
usual role is to review the regulations an agency has issued, not to conjure
what regulations might look like had they been promulgated. On the other hand,
if it is absolutely clear that Congress intended that a particular tax benefit
or tax treatment should be available, a legitimate question arises as to
whether the IRS may prevent that outcome by declining to engage in rulemaking.
Commentators have described this scenario as one of “spurned delegations” and
the resulting judicial dilemma as one of crafting “phantom regulations.” [Law
review citations omitted] n196
The Tax Court concluded the task is to determine whether the
statutory text, considered in light of the legislative history, can be applied
without further explication in a regulation n197 The analysis turns upon whether “Congress couched its delegation of
rulemaking authority in mandatory or permissive terms.” I add that the
mandatory terms inquiry means that Congress intended the regulations to allow
the treatment requested by the taxpayer or the IRS.
As to
statutory text which, as interpreted, is mandatory in the delegation and
Congress’ intent as to the result is clear:
In
sum, this Court and other courts have frequently, but not always, held to be
self-executing taxpayer-friendly Code provisions that include a mandatory
delegation to the Secretary. One commentator has described this as “the equity
approach,” on the theory that “treating such delegations otherwise would
inequitably deprive taxpayers of legislatively intended benefits.” In several
of these cases, the IRS conceded (or did not seriously dispute) that the
statute was self-executing in the absence of regulations. The “whether/how” approach has been employed
mainly “with respect to taxpayer-unfriendly delegations.” In many of those cases,
the central question was whether the statute by its terms made the taxpayer
liable for the tax. n198
As to
statutory text which, as interpreted, is permissive in the delegation, so that
they are interpreted to delegate discretionary or policy choices to the IRS
(whether taxpayer-friendly or not), the courts will generally not impose
result. n199 Of course, as thus framed so
that different results may obtain by characterizing the delegation as mandatory
or permissive, one needs to distinguish between those two
characterizations. Without offering
anything definitive, I suspect the answer to that may be like the definition of
pornography – you know it when you see it.
I wonder
whether one analytical tool to determine when the court can supply the rule in
the absence of regulations would be to use the Chevron analysis for testing the
validity of regulations (I discuss Chevron below). Chevron basically tests the validity of
regulations using the tools of statutory construction in a two-step process. The concept would be that, if there were a
regulation that did not include the relief the party seeks, the regulation
would be invalid. This would be a
notional regulation analysis. This would
simply say that, based on the Chevron analysis, Congress clearly intended the
relief and therefore, even in the absence of the regulation, the Court can
supply the relief.
FOOTNOTES
n195 A classic example is § 385, enacted in 1969. Section 385 authorizes–but does not direct–the IRS to promulgate regulations to adopt a test for distinguishing between corporate debt and equity. The courts had developed general rules which were so squishy in application that they were difficult for taxpayers, the IRS and the courts to apply. Congress punted to the IRS the authority to make the rules. The IRS tried but finally realized that it could not do that in a way that might not create more problems than it solved. The IRS has yet to promulgate regulations. Taxpayers, the IRS and the courts are left with the same squishy rules as before. In 2016, the IRS issued proposed regulations.
n196 15 West 17th Streeet LLC v. Commissioner, 147 T.C. ___, No. 19 (2016) (Reviewed opinion).
n197 Id., citing Temsco Helicopters, Inc. v. United States, 409 F. App’x 64, 67 (9th Cir. 2010) (citing Francisco v. Commissioner, 119 T.C. 317, 322-323 (2002), aff’d on other grounds, 370 F.3d 1228 (D.C. Cir. 2004)).
n198 Id. (Citations omitted.)
n199 Id.
