A recent policy statement from the US Department of Treasury provides important information for taxpayers navigating US tax reform and alters the existing tax regulatory landscape in a few meaningful ways. Taxpayers should be aware of these changes and how they affect their engagement and compliance with the tax rulemaking process, Treasury regulations, and IRS guidance.
The US Department of the Treasury (Treasury) released a Policy Statement on the Tax Regulatory Process dated March 5, 2019 (the Statement). The Statement is short, but its two and a half pages cover a wide range of issues of critical importance to anyone who relies on Internal Revenue Service (IRS) guidance, participates in the tax regulatory process, or wonders how or when Treasury and the IRS will issue additional interpretations of the recent Tax Cuts and Jobs Act (TCJA).
In a nutshell, Treasury and the IRS “clarify and affirm” their commitment to “sound regulatory practices” through several pronouncements in the Statement. These pronouncements include
While styled as a clarification and affirmation—which, in statutory construction parlance, often implies the absence of a substantive change—the Statement alters the existing tax regulatory landscape in a few meaningful ways. Taxpayers need to understand these changes and how they affect their engagement and compliance with the tax rulemaking process, Treasury regulations, and IRS guidance.
The Statement, signed by David J. Kautter, assistant secretary for tax policy, and Brent J. McIntosh, general counsel for the Treasury, begins by reaffirming a “commitment to a tax regulatory process that encourages public participation, fosters transparency, affords fair notice, and ensures adherence to the rule of law.”
To that end, the Statement first confirms that the “best practice for agency rulemaking is the notice-and-comment process established by the Administrative Procedure Act (APA).” The Statement explains that the notice-and-comment process “enables the public to apprise the government of relevant information [or] alert the government to consequences that it may not foresee.” The APA generally requires notice and comment for legislative rules—those that have the force and effect of law.[3] But the Statement also commits “as a matter of sound regulatory policy” to continue to use the notice-and-comment process for interpretive rules—those that do not have the force and effect of law[4] and are published in the Code of Federal Regulations.
Second, the Statement acknowledges that Treasury and the IRS “have long interpreted” the Internal Revenue Code to “permit the issuance of immediately-effective temporary tax regulations without a statement of good cause” as generally required by the APA.[5] The Statement reverses this interpretation and commits to providing “a statement of good cause” in the “exceptional circumstances” where regulations must be issued without the notice-and-comment process (i.e., temporary regulations). The Statement also notes that “any resulting final regulations will be subject” to the notice-and-comment process.
Third, the Statement confirms that Treasury and the IRS will not argue that subregulatory guidance has the force and effect of law. The Statement pledges that the IRS will not ask the US Tax Court to apply Auer deference (which gives an agency’s interpretation of its own regulations “controlling weight” in certain circumstances) or Chevron deference (which defers to an agency’s reasonable interpretation of an ambiguous statute administered by the agency) to subregulatory guidance. However, the IRS retains its commitment to “not take positions inconsistent with its subregulatory guidance when such guidance is in effect.”
Fourth, the Statement describes the practice of publishing notice of Treasury’s and the IRS’s intent to issue proposed regulations in the Internal Revenue Bulletin. The Statement explains that if no proposed regulations or other guidance is released within 18 months after the date a notice is published, taxpayers may continue to rely on the notice but do not necessarily need to do so. The Statement explains that Treasury and the IRS will not assert a position adverse to taxpayers “based in whole or in part on the notice.”
The Statement continues the trend of bringing tax law within the broader administrative law regimes that apply to other government agencies. That trend gained steam in 2011, when the US Supreme Court announced that it was “not inclined to carve out” an approach to reviewing regulations that was “good for tax law only.”[6]
Shortly thereafter, the US Department of Justice’s Tax Division foreshadowed another aspect of the Statement by announcing that the Tax Division would no longer argue for Chevron deference to subregulatory guidance.[7]
The trend accelerated following the TCJA. In April 2018, several months after the TCJA was enacted, General Counsel McIntosh explained that “[s]wift and successful implementation” of the TCJA through guidance from Treasury and the IRS is “critical,” and that Treasury was examining the tax regulatory process as well.[8] Also in April 2018, Treasury entered into a collaboration with the White House Office of Information and Regulatory Affairs (OIRA) that ended the longstanding practice of exempting tax rulemaking from OIRA review (the framework for other agencies’ rulemaking).[9]
Taxpayers should take comfort in many of the Statement’s representations. These include the representations that Treasury and the IRS will continue to avoid taking positions that are either inconsistent with applicable subregulatory guidance[10] or adverse to taxpayers based on notices of intent to issue regulations until additional guidance is issued.
But the Statement is also notable for its omissions. First, it does not express a view regarding the level of deference courts should apply to regulations (as opposed to subregulatory guidance). The appropriate level of deference is an increasingly debated topic, with Justice Neil Gorsuch even questioning in a recent tax case whether Chevron deference “retains any force” with respect to regulations.[11]
Second, while the commitment to notice-and-comment rulemaking has substantial benefits, it comes with a significant tradeoff: It takes time, while taxpayers typically appreciate swift guidance. Further, the IRS and Treasury have been criticized recently for failure to properly apply the notice-and-comment process itself—a concern the Statement does not address.[12]
With respect to deference to subregulatory guidance, the Statement does not mention Skidmore deference.[13] Although Skidmore deference is generally the lowest level of deference—a case-by-case inquiry that depends on a piece of guidance’s “power to persuade” even if it lacks “power to control”—the IRS often requests and receives Skidmore deference for subregulatory guidance.[14] The Statement arguably leaves Treasury and the IRS room to continue to request Skidmore deference for revenue rulings, revenue procedures, notices, and announcements. Indeed, the Department of Justice’s Tax Division took that approach after it committed in 2011 to not assert Chevron deference for the same guidance.[15]
Skidmore deference has also been criticized as being hard to apply and, thus, the analytical framework for applying and relying on guidance might become murkier than under Chevron deference or Auer deference. It is also possible that cases where the IRS previously asserted Chevron deference or Auer deference for subregulatory guidance might have come out differently if only Skidmore deference were at issue. For instance, the IRS has successfully argued for deference to subregulatory guidance despite its arguable inconsistency with the regulation the guidance was purporting to interpret.[16] Further, the mere presence of multiple tiers of deference was arguably confusing for courts to navigate and apply,[17] which might have affected case outcomes.
The Statement also raises the specter that Treasury and the IRS might—despite the commitment to not take positions inconsistent with applicable subregulatory guidance—suggest that the subregulatory guidance taxpayers use to support a position should be accorded less weight.
Finally, the Statement does not address subregulatory guidance that is not published in the Internal Revenue Bulletin. In recent years, Treasury and the IRS have increasingly used these forms of guidance, such as “frequently asked questions,” to provide taxpayers with guidance on new and emerging issues.[18] How, if at all, the Statement affects other important types of subregulatory guidance is not entirely clear.
The Statement makes many welcome and meaningful pronouncements that taxpayers should appreciate. But it also leaves a number of important questions unanswered, only a handful of which are raised above. Taxpayers will need to consider these and their effects going forward—especially as taxpayers grapple with the uncertainty and ambiguity that the TCJA continues to create.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Chicago
Tom Linguanti
Washington, DC
Michael Kummer
[1] 519 U.S. 452 (1997).
[2] 467 U.S. 837 (1984).
[3] Chrysler Corp. v. Brown, 441 U.S. 281, 302-03 (1979).
[4] Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 99 (1995).
[5] See 5 U.S.C. § 553(b)(B) (providing for “good cause” finding and “a brief statement of reasons therefor” when an agency issues regulations after finding that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest”).
[6] Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55 (2011).
[7] See Marie Sapirie, “ABA Section of Taxation Meeting: DOJ Won’t Push Chevron Deference for Revenue Rulings,” Tax Notes Today (May 16, 2011) (quoting Acting Deputy Assistant Attorney General (Review and Appellate) Gil Rothenberg).
[8] Statement of Brent J. McIntosh, General Counsel, US Department of the Treasury, Before the Senate Subcommittee on Regulatory Affairs and Federal Management (Apr. 12, 2018).
[9] Around the same time, OIRA hired Professor Kristin Hickman, one of the leading scholars on the interplay between administrative law and tax rulemaking, as a special advisor. Much of Professor Hickman’s academic work covers the precise topics discussed in the Statement. See, e.g., Kristin E. Hickman, “Coloring Outside the Lines: Examining Treasury’s (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements,” 82 Notre Dame L. Rev. 1727 (2007); Kristin E. Hickman, “IRB Guidance: The No Man’s Land of Tax Code Interpretation,” 2009 Mich. St. L. Rev. 239 (2009).
[10] See Internal Revenue Manual § 32.2.2.10(4) (Aug. 11, 2004) (“Chief Counsel attorneys must follow legal positions established by publications in papers filed in Tax Court or in defense letters or suit letters sent to DOJ. Chief Counsel attorneys may not rely on case law to take a position that is less favorable to a taxpayer in a particular case than the position set forth in a publication.”).
[11] BNSF Ry. Co. v. Loos, 586 U.S. ___ (2019) (slip op.) (Gorsuch, J., dissenting).
[12] See, e.g., Altera Corp. v. Commissioner, No. 16-70496, 2018 WL 3542989 (9th Cir. July 24, 2018) (discussing argument that Treasury did not adequately consider and respond to comments), withdrawn 898 F.3d 1266 (9th Cir. 2018).
[13] See Skidmore v. Swift & Co., 323 U.S. 134 (1944).
[14] See, e.g., Webber v. Commissioner, 144 T.C. 324, 357-60 (2015).
[15] See, e.g., W.E. Partners II, LLC v. United States, 119 Fed. Cl. 684 (Ct. Cl. 2015) (granting Skidmore deference to subregulatory guidance and holding for the United States).
[16] See, e.g., Aeroquip-Vickers, Inc. v. Commissioner, 347 F.3d 173 (6th Cir. 2003).
[17] See, e.g., id. at 184 (Clay, J., dissenting) (criticizing the majority for nominally applying Skidmore deference despite the IRS’s request for Chevron deference on the basis that the majority “overstate[d] the level of deference revenue rulings receive”).
[18] See, e.g., Opportunity Zones Frequently Asked Questions (last updated Jan. 11, 2019); FATCA Frequently Asked Questions (last updated Nov. 29, 2018).