With a bill scheduled to be taken up by the House the week of January 9, House Judiciary Committee Chair Bob Goodlatte, R-Va., is seeking to upend decades of administrative law doctrine and do away with Chevron deference.
The Regulatory Accountability Act of 2017 (H.R. 5 ) casts a wide net, targeting agency rulemaking authority generally, and the impact on the IRS would be undeniable. Buried in the 82-page bill is the brief Title II, Separation of Powers Restoration Act, which would amend 5 U.S.C. section 706 of the Administrative Procedure Act by inserting language that would allow courts to "decide de novo all relevant questions of law," including agency rules. The bill also would amend the statute to state that a court will not defer to an agency's guidance.
"Unquestionably, it would be a huge deal," Patrick J. Smith of Ivins, Phillips & Barker Chtd. said of the potential change.
In Chevron, U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), the Supreme Court created a two-part test for examining the validity of administrative law. First, the court assesses whether a statute speaks unambiguously on an issue, in which case, that meaning controls. Second, if the statute is ambiguous, a court cannot overrule an agency's regulation unless it is "arbitrary or capricious in substance, or manifestly contrary to the statute." Later, in Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 ( ), the Supreme Court held that Chevron applies with full force to tax law. (Prior analysis .)
"The Regulatory Accountability Act is a major step to reverse the negative effects regulations are having on our economy. The bill promotes making the regulatory process more transparent for the American people; increases the power of the people's elected representatives and the courts to stop overreaching new rulemaking; and lets the public have the full say they deserve in the rulemaking process," Goodlatte said in the release.
The new legislative package combines several regulatory reform initiatives passed by the House during the last Congress. This time around, however, the reform measures may stand a greater chance of enactment. While congressional Republican vigor toward curtailing administrative law may not be new, its desires now are seemingly more aligned with an incoming Republican administration that has repeatedly placed regulations in its crosshairs. President-elect Donald Trump's nominee for director of Office of Management and Budget, Rep. Mick Mulvaney, R-S.C., was one of the original cosponsors of the Separation of Powers Restoration Act of 2016, which similarly would have required de novo review of regulations. (Prior coverage , .)
The OMB oversees agencies and departments in the executive branch and reviews agencies' legislative requests and federal regulations. Included in the OMB is the Office of Information and Regulatory Affairs (OIRA), the office to which agencies must give an assessment of anticipated benefits and costs of regulations if the rules are deemed significant. For purposes of the Congressional Review Act, which potentially prevents a rule from taking effect following congressional disapproval, OIRA also makes a determination on whether regulations are "major rules" that would result in an annual effect on the economy of $100 million or more. Historically, tax regs have not been subject to frequent cost-benefit analyses, which has supported the independence of tax administration. (Prior analysis .)
Smith noted that the lack of an effective date in Title II would likely make it applicable to any challenges pending on the date of enactment. He added that he expects the incoming administration to stop defending regs that are currently being challenged.
"Given the outcome of the election, there will be a lot fewer challenges to regulations generally, including tax regulations, in the next four years than would have been the case if the election came out the other way. The Trump administration will simply withdraw the regs and they will simply not be issuing any new regs that business will be inclined to challenge," Smith said. He added that the longer-term effects of H.R. 5's enactment on future administrations could be greater, given the general difficulties in changing the law.
The bill would generally require agencies engaging in final rulemaking to choose the lowest-cost alternative as well as prevent high-impact rules from taking effect until "final disposition of all actions seeking judicial review" have been timely sought. Unless otherwise explicitly provided for, that timely sought period would be within 60 days of publication. High-impact rules are defined as those that OIRA determines would impose an annual cost on the economy of at least $1 billion.
Smith argued that the new least-costly provision could have an impact on some tax rules, particularly as it relates to compliance costs. "But [it could affect] more broadly areas where the relevant statutory provision provides a relatively broad grant of regulatory authority," Smith said.
A September 2016 Government Accountability Office report analyzed tax regulations promulgated between 2013 and 2015 and found that none of them was designated major by OIRA and only one was determined to be significant. To support their view, Treasury and the IRS argued that the economic impact of tax regs comes from the underlying statute, not the regulation. Notably, the far-reaching debt-equity regs were one instance when the economic impact was hotly debated in the tax community. (Prior coverage .)
With a higher, $1 billion threshold, it is difficult to foresee many tax regulations being subject to a "high-impact" designation that would delay the effective date, when many regs already fail to meet the lower "major" designation, Smith argued. He added, however, that it was "certainly imaginable" that it could apply to a "particularly extreme tax rule." Smith also said that he did not envision the 60-day period to timely file a challenge to stay the effective date of regs until resolution as an obstacle to potential litigants.
"Obviously the Anti-Injunction Act [AIA] comes into play here, but even if the AIA were held to bar pre-enforcement challenges to tax regulations, despite Direct Marketing, the 60-day rule only requires that some person seek judicial review within the 60-day period. I would think this seek-judicial-review requirement would be satisfied even if the suit were dismissed based on the AIA," Smith said.
In Direct Marketing v. Brohl, 575 U.S. ___, 135 S. Ct. 1124 (2015), the Supreme Court held that a challenge to a Colorado tax reporting requirement was not barred by the Tax Injunction Act, which was modeled after the AIA.
Also included in H.R. 5 is a requirement that issuers of major rules, high-impact rules, rules with a negative impact on jobs and wages, and rules that involve "a novel legal or policy issue arising out of statutory mandates," issue an advance notice of proposed rulemaking (ANPRM) no later than 90 days before a proposed rule is published. Historically, Treasury and the IRS have used ANPRMs only in rare circumstances, when seeking informal input from the tax bar as part of a brainstorming process when the government has a less formal stance on an issue. (Prior coverage .)
Smith argued that the potential breadth of what could be considered a novel legal or policy issue might sweep up more tax regs into the ANPRM requirement than was previously the case.