Tax Exceptionalism Overblown

I. A Bogus Battle

A. First: The Summary

The federal Administrative Procedure Act requires two things for tax and other “rules” written by federal agencies: (1) notice and comment for rules that aren’t “interpretive” (generally called legislative rules);¹ and (2) that rules follow the statute and not be arbitrary or capricious.²

Although the APA refers to “rules,” everyone knows that includes what some agencies call regulations and may include other agency guidance written under a congressional grant of legislative authority (of which the notice in Mann is an example).³

The Chevron doctrine requires one thing for tax and other regulations: Legislative regulations — written when a court cannot determine the more likely than not meaning of the statute (which is called interpretation) — must not be arbitrary or capricious and must be in accordance with the statute.⁴

Therefore, the substantive requirements of the APA and Chevron are effectively the same; however, Chevron didn’t refer to the APA, suggesting that the requirements to follow the statute and not be arbitrary are the obvious baseline due process requirements applied to any governmental action that would exist without the APA.

When the Supreme Court applied Chevron deference to a legislative tax regulation in Mayo,⁵ the taxpayer argued that it should win because unlike the facts of National Muffler (which predated Chevron),⁶ the regulation that the Mayo Foundation opposed was recently adopted in response to litigation.

The Mayo opinion declined to apply such considerations to legislative tax regulations (presumably requiring they be long standing). Therefore, to the extent Mayo said anything negative about National Muffler (which isn’t at all clear), it refused to read a fact that existed in Muffler (which, rightly understood, involved an interpretive regulation) into a requirement that should be applied in Mayo (which involved a legislative regulation).

So if anything, Mayo set a lower standard for tax rules, and Mayo can hardly be said to reject “tax exceptionalism,” if that means favoring tax rules.

Now the Supreme Court majority has fallen out of love with Chevron,⁷ but the doctrine (pending its reversal) remains a high barrier to substantive attacks on legislative regulations.

Therefore, litigants, particularly tax litigants, have turned to the three major lines of attack on tax rules: (1) claiming the regulation is interpretive and that the court should be able to interpret the statute without regard to the regulation, (2) claiming a foot fault occurred in the procedure for adopting the rule (and shoehorning all sorts of IRS pronouncements into the rules category), and (3) encouraging the Court to read the statute literally, which it seems increasingly ready to do, as shown in Boechler.⁸

That second argument should be hard to explain if the litigant also claims a regulation is interpretive (meaning notice and comment wasn’t required) but, nevertheless, taxpayers argue it because (1) Treasury acts like almost all regulations are legislative for procedural purposes; (2) commentators have invented a new definition of legislative rules — whether they are “binding” on taxpayers; and (3) the categorization of rules as interpretive or legislative is somewhat fluid.

Bottom line: Mayo didn’t end “tax exceptionalism,” because there never was tax exceptionalism of the sort meant by most users of that term. There has been, however, an understanding of the nature of tax rules — just as there are special considerations for bankruptcy, family law, domestic terrorism, and military law — that requires a long and careful discussion, without all the self-righteousness about bringing tax rules down a peg.

B. Why the Glee?

A large crop of professors, brief authors, and article writers have gleefully claimed that some amorphous malady they call “tax exceptionalism” is dead, citing Mayo’s statements about National Muffler. The claim serves as an all-purpose ground for winning most any argument with the IRS. The flaws in their scholarship might be overlooked if they weren’t so darn happy about it. They all seem delighted to assert that the IRS and Treasury were taken down a peg by the Mayo opinion, often without noticing that Mayo held for the IRS and applied Chevron deference to a Treasury regulation. So if you want to take the IRS down a peg, Mayo isn’t your best cite.

The professorial criticism of a claimed insularity of tax professionals didn’t begin with National Muffler or Mayo or even professor Kristin Hickman. It dates to at least the early 1990s, when Paul Caron penned “Tax Myopia, or Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers.”⁹ Again, a catchy title coupled with amusing criticism of the sometimes-self-important group known as tax lawyers kicked off a season of derision for pastimes such as trying to discover the meaning of the code by reading legislative history. Caron was able to enlist professor Boris I. Bittker in his cause.

And yet, the conclusion of the Caron article is puzzling in the hindsight of 30 years: “A symbiotic relationship between tax and nontax law will deepen our tax understanding while providing a fertile area in which to test and refine nontax principles.” Presumably, that thought reflects the “law and economics” or “law and anthropology” trends that had swept law schools. But whatever that means, this observer has not seen any such symbiotic relationship develop unless you mean that more taxpayers are asserting real and imagined APA rights in litigation with the IRS. I do not call that testing and refining anything other than tax reduction.

But why the glee? Reasons vary. Many are doing it for money, mostly the tax litigators who make arguments for a living and can appropriate almost any cite to their cause. Other glee-filled commentators have bought into a politically motivated IRS. Others are not so much anti-IRS as they are pro-wee-little taxpayers who have been unfairly taxed by overreaching IRS published guidance; the law school clinics are in this group.¹⁰ Others were seeking tenure by writing presumably provocative articles.

Still others understood what the Supreme Court said in Mayo and liked the deference result, as long as Treasury regulations are under the thumb of the Office of Information and Regulatory Affairs, the result of a Trump-era order, bringing tax regulations more directly under the control of the White House.¹¹

This article shows that Mayo didn’t do what the gleeful say it did. It didn’t end or even address tax exceptionalism or myopia. It isn’t even a cite for the existence of tax exceptionalism. There may be a version of tax exceptionalism, but it has nothing to do with Mayo or even Chevron deference.

The exceptionalism is that the tax law is and has long been effectively a code, existing in the realm of code law that characterized European legal systems, but not that of England, which was based on the common law. Code systems are administered by agencies. In contrast, to take the starkest example, bankruptcy law is rooted in the equity branch of the common law and has been fitted only partly into a codification.¹² That codification is notoriously imprecise in comparison with the tax code. And for a reason: Bankruptcy law is designed to have a lot of play in the joints and give its judges lots of discretion; tax law is not. In contrast, the last thing either liberals or conservatives should want is an IRS that has the power to say: “Well maybe you ought not to have to pay that tax after all,” or “maybe you should pay a little more.”¹³ So yes, tax is exceptional in that way.

Second, right up to 2001 the Supreme Court has touted the IRS as the “masters of the subject.”¹⁴ That view has never been identified as a culprit in tax exceptionalism.

Third, as recently as 2021, Justice Neil M. Gorsuch said: “Men must turn square corners when they deal with the government.”¹⁵ He may not have realized he was quoting Justice Oliver Wendell Holmes Jr.’s statement in a federal tax case:

Men must turn square corners when they deal with the Government. If it attaches even purely formal conditions to its consent to be sued those conditions must be complied with. Lex non proecipit inutilia (Co. Lit. 127b) expresses rather an ideal than an accomplished fact. But in this case we cannot pronounce the second appeal a mere form. On appeal a judge sometimes concurs in a reversal of his decision below. It is possible as suggested by the Court of Claims that the second appeal may be heard by a different person. At all events the words are there in the statute and the regulations, and the Court is of opinion that they mark the conditions of the claimant’s right. See Kings County Savings Institution v. Blair, 116 U.S. 200. It is unnecessary to consider other objections that the claimant would have to meet before it could recover upon this claim.¹⁶

As discussed below, those exceptional features of federal taxation didn’t go away with Mayo.

C. Some Examples of the Gleeful Gang

1. Private law firms.

For an example from the gleeful litigators’ group, see the brief written by the Skadden and Dorsey & Whitney law firms in a recent tax case.¹⁷ It states:

Treasury must follow APA rulemaking procedures just like any other agency. See Mayo Found., 562 U.S. at 55.

Skadden must have that statement in its form bank because it showed up in another brief for Coca-Cola, joined by Latham & Watkins:

The IRS is not exempt from the APA, the arbitrary-and-capricious standard embedded in it, or that standard’s prohibition against disregarding reasonable reliance interests. The IRS’s attempt to carve out a singular exception for itself, see Resp. 50-55, reeks of impermissible tax exceptionalism. See Mayo Found, for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 55 (2011). Indeed, the IRS’s actions in this case prove why Congress will never exempt the IRS from the APA.¹⁸

But at page 55 Mayo actually said:

Under Chevron, in contrast, deference to an agency’s interpretation of an ambiguous statute does not turn on such considerations. We have repeatedly held that “agency inconsistency is not a basis for declining to analyze the agency’s interpretation under the Chevron framework.” [W]e have instructed that “neither antiquity nor contemporaneity with [a] statute is a condition of [a regulation’s] validity.” [A]nd we have found it immaterial to our analysis that a “regulation was prompted by litigation.” [W]e expressly invited the Treasury Department to “amend its regulations” if troubled by the consequences of our resolution of the case.

Aside from our past citation of National Muffler, Mayo has not advanced any justification for applying a less deferential standard of review to Treasury Department regulations than we apply to the rules of any other agency. In the absence of such justification, we are not inclined to carve out an approach to administrative review good for tax law only. To the contrary, we have expressly “[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of administrative action.” . . . (declining to apply “a different and stricter nondelegation doctrine in cases where Congress delegates discretionary authority to the Executive under its taxing power”).

The principles underlying our decision in Chevron apply with full force in the tax context. Chevron recognized that “the power of an administrative agency to administer a congressionally . . .”

Neither on page 55 nor elsewhere in the opinion did Mayo refer to the APA or title 5 of the U.S. code. So Mayo neither said, held, nor implied that “Treasury must follow APA rulemaking procedures just like any other agency.” What Mayo said was that Chevron applies to tax regulations, setting an exceptionally low threshold for legislative regulations to clear. That wasn’t a new discovery in substance because pre-Chevron tax opinions had in effect applied Chevron deference to tax (and other) legislative regulations; Muffler is the best example. But Mayo was the first chance the Supreme Court had to make that point in a tax case because it was the first tax regulation the Court had confronted since Chevron in which the legislative versus interpretive character had to be decided and deference applied.

So no, Mayo didn’t hold that tax regulations must follow the APA; rather, it applied Chevron deference to a legislative tax regulation and accorded Chevron deference to a legislative tax regulation, and the IRS won. Mayo had nothing to say about the APA or its rulemaking procedures, which was what the litigators quoted above were interested in.

One other fact often overlooked by the gleeful crowd: Like Mayo, the Chevron opinion similarly didn’t refer to the APA or title 5 of the U.S. code. So to the extent the commentators are mad at people that ignore the APA, they should start with the Supreme Court.

And Mayo didn’t call out preexisting tax exceptionalism. Instead, in addition to the housekeeping point, it rejected the party’s request to create a higher standard for tax legislative regulations.

2. Officious intermeddlers.

I call ostensibly unaffiliated amici “officious intermeddlers.” An amicus brief filed in the Boechler appeal argued that tax isn’t exceptional and so a statute of limitations should be treated the same way as the Court treated a statute of limitations in a bankruptcy case.¹⁹ It cited Young,²⁰ which held that limitations periods usually are subject to equitable tolling unless inconsistent with the text of the statute, and that is doubly true of bankruptcy cases, meaning it wouldn’t be inconsistent with the bankruptcy statute because “bankruptcy courts . . . are courts of equity and ‘apply the principles and rules of equity jurisprudence.’”

In other words, Young held that bankruptcy courts are special, and there is a bankruptcy “exceptionalism” requiring or allowing special tolerance of debtors, which the amicus would like to cross-fertilize to the not-similarly-special Tax Court. That should debunk the idea that an area of law cannot be special. But the Tax Court has said it is a court of limited jurisdiction and doesn’t have the equitable power to expand its jurisdiction (although the Tax Court has taken account of equitable considerations in some instances).²¹ The Supreme Court held that the IRS had no power to waive a taxpayer’s failure to make a timely election that he didn’t know about; the Court thought it inappropriate for the IRS to have that sort of discretion.²²

Carlton Smith has filed many amicus briefs in tax cases on these sorts of procedural issues. He argued on the side of the Mayo Foundation, claiming that the regulation was interpretive — and losing that argument. Along the way he asserted his personal dislike for tax exceptionalism and went further by painting the tax collector as inherently biased and not to be trusted with regulations:

The other problem that amicus sees in the Eight Circuit’s approach is that it applies the National Cable opinion uncritically in the tax area. As the Tax Court and commentators have noted, tax regulations differ from the FCC regulations that were at issue in National Cable. The IRS is the tax collector. It is hardly a neutral arbiter of the Internal Revenue Code in the same way that other government agencies, such as the FCC, would be an arbiter between competing groups of the public.²³

Anyone is entitled to question his government, but it takes a fair amount of chutzpah to disbelieve the IRS’s own mission statement:

(1) The mission of the Internal Revenue Service is to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. It is the duty of the Service to correctly apply the laws enacted by Congress; to determine the reasonable meaning of various Internal Revenue Code provisions in light of the Congressional purpose in enacting them; and to perform this work in a fair and impartial manner, with neither a government nor a taxpayer point of view.

(2) At the heart of administration is interpretation of the Internal Revenue Code. It is the responsibility of each person in the Service charged with the duty of interpreting the law to try to find the proper interpretation of the statutory provision and not to adopt a strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only when we ascertain and apply the proper interpretation of the statute.²⁴

3. Commentators.

Another writer wrote that in the past the IRS “often took advantage of this [exceptionalism] by imposing more tax than plainly intended by Congress.”²⁵ He said the Supreme Court changed that in Mayo Foundation, which required that the standard of review that applies to other federal regulations also apply to Treasury and the IRS’s interpretations of the code. He implied that the standard was made higher, but it was made lower.

The idea that the IRS, on its own, “imposed” tax greater than intended by Congress is frankly astounding. When the IRS takes positions on the meaning of ambiguous provision of the code, which it cannot avoid, the IRS personnel involved believe they are pursuing the intent of Congress in 100 percent of the cases. Now they may be “proved” wrong by a judge who applies some different interpretive methods, but they will almost never be proved wrong by a judge who investigates all indicia of congressional intent (legislative reports, for example). IRS personnel strive to never exercise discretion because they know that is a route to career ruin. Therefore, they always want to be able to point to some written down source. They never “impose more tax” than Congress intended, as far as they know.

4. Do-good groups.

When the American College of Tax Counsel submitted its amicus brief on behalf of CIC Services against application of the Anti-Injunction Act to a challenge to a reporting penalty, it recognized that the so-called tax exceptionalism of National Muffler would have applied more limits on legislative tax regulations than Mayo required, but then it used the same term to decry the exceptionalism that would impose fewer limits on the IRS’s ability to prevent prepayment tax contests.²⁶ In other words, the mantra of tax exceptionalism means all things to all litigants and can serve any purpose.

The National Federation of Independent Business Small Business Legal Center isn’t exactly a do-good group,²⁷ but it got teamed up with the National Taxpayers Union Foundation, which may or may not be a do-good group, for an amicus brief in Boechler.²⁸ They asserted that tax exceptionalism is an anachronism not mandated by Congress. They reason this way:

• they source a description of tax exceptionalism not to any arguments of the IRS or even court holdings but to a law review article that claimed that tax thinks it is “deeply different” from other law;

• tax exceptionalism produces a line of thinking that justifies not adhering to notice and comment rulemaking and other APA requirements; and

• the IRS has long contended APA notice and comment and other procedural requirements don’t apply to some of its regulations.

So the truth comes out. The real burr under the saddle of these folks is that they’ve got it in their minds that Treasury disses the notice and comment process required for legislative rules (only), and for this they often cite Hickman. But her article admits that historically, Treasury regulations have generally used notice and comment regardless of whether it is required.²⁹

Hickman’s beef with Treasury seemed to be that it feigned an inability to distinguish between legislative and interpretive regulations and so subjected almost all its regulations (other than temporary regulations) to the higher procedural standard. Precisely what is wrong with that approach is hard to see. Most would say Treasury erred on the side of caution procedurally, to the benefit of the commenting public (who generally are those who can afford to pay well to comment).

5. IRS and tax opponents.

Evidently, Holmes was mistaken when he said taxes are the price we pay for civilization. Now some of the gleeful exult when the IRS loses a tax case in court, labelling pretty much any loss as evidence of the demise of tax exceptionalism. For example, one recent statement by an academic put Hewitt³⁰ and Mann Construction³¹ in that category.³²

And yet a lawyerly analysis of those opinions reveals a quite different story. The Trump-appointee judge that wrote the Hewitt opinion simply got it wrong on the law.³³ The Mann case was rightly decided but for the wrong reason; unfortunately, that wrong reason gave aid and comfort to the anti-exceptionalism crowd.³⁴ The sad fact is that adopting a one-size-fits-all method of analysis of tax litigation allows a tax opponent to find the IRS wrong in almost all cases.

D. Nexus of APA and Chevron

So where does the APA fit into this story? The APA imposes two types of rules on rulemaking. One type is procedural, which generally isn’t applicable to interpretive regulations or interpretive guidance of any sort,³⁵ and the second type are substantive standards that apply to all rules. The Judulang³⁶ opinion explained the interaction of the APA with Chevron shortly after Mayo. Judulang identifies the essential similarity of Chevron/Mayo and the APA substantive standard for rules, and it says they produce the same answer and chose the APA to cite.

And what is the APA standard for testing the substance of agency rules? It is the barest of standards. First, the rule must accord with the statute,³⁷ and second, it must not be arbitrary or capricious,³⁸ usually meaning it must meet a modicum of due process reasonableness. That translates into two requirements that look like Chevron’s steps: (1) If the rule is contrary to the words of the statute that a court can interpret, the rule will be invalid as contrary to the law, and (2) if the court cannot interpret the statute to produce a single more likely than not meaning — because it is ambiguous, leaves a gap, or otherwise indicates the intent of Congress that the agency supply the rule — the court will accept the rule unless it is unreasonable under a minimal standard of review. That is essentially the Chevron test, and that is why Judulang equated Chevron with the APA.

E. Chevron Is So Yesterday

What the tax exceptionalism writers haven’t yet grasped is that they are fighting yesterday’s war. To the extent they are touting Chevron over National Muffler as to deference to the agency’s legislative rules, they haven’t noticed that the Supreme Court has soured on Chevron deference. It hasn’t upheld a regulation under an ambiguous statute by using Chevron deference since 2014. Utility Air Regulatory Group³⁹ was the most recent opinion of the Court this writer can find applying Chevron deference to uphold a regulation on an ambiguous statute. Justice Antonin Scalia wrote that opinion, and he was generally a fan of Chevron; he died in 2016. Since then, the Court has either found it could interpret the statute or denied deference to a legislative rule because it was unreasonable.

Further, some litigants have noticed the Court’s cooling on Chevron and have started to ask for its “repeal.” In SAS Institute Inc.⁴⁰ the appellant asked the Court to abandon Chevron; Gorsuch demurred, saying he would leave that to another day.

The reason for the turnaround is that Chevron deference to agencies was fine as long as the agency was a Republican-appointed agency writing a pro-industry pollution standard (Chevron).⁴¹ But after eight years of the Clinton administration followed by the Obama administration and the Obamacare regulations, deference to agencies began to be less appealing to Republican-appointed justices. Thus, we see a lot more opinions discovering that the justices can interpret the statute for themselves. And why would Republican judges not do that? It’s well known that Republicans have played the long game of packing the courts for the very purpose of putting a heavy sea anchor on the actions of future Democratic Congresses or administrations (in addition to overruling disliked precedents).⁴²

The courts today usually avoid Chevron deference by proclaiming the statute to be “clear.”⁴³ Clarity is in the eye of the beholder; all it takes is the Supreme Court or other court saying it is so. And in doing so they can be seen to use all possible interpretive tools, maybe even those mentioned (though not applied) in National Muffler. An example is Quality Stores.⁴⁴ That 2014 federal tax opinion by Justice Anthony Kennedy managed to not refer to Chevron but upheld the IRS position also by agreeing with revenue rulings and relying on a host of interpretive signals.⁴⁵

II. What Was National Muffler Actually About?

A. Predicting Mayo

The generally acknowledged origin of the view that tax exceptionalism was proclaimed by National Muffler is the pre-Mayo article by Hickman.⁴⁶ It used a catchy title that rhymed, and it worked. According to HeinOnline as of August 18, it had been cited by 146 other articles and four cases. The premise of the Hickman article is that National Muffler should be downgraded as inconsistent with Chevron. Absent that, Muffler is confusing the lower courts, Hickman said. Lore has it that the Supreme Court reads Hickman’s articles and jumps to conform; viz. Mayo. Now the story has been embellished by casting Mayo as bashing tax exceptionalism, with even more credit going to the founder of the idea.

Hickman was exercised by the fact that tax folk and courts kept citing National Muffler in tax cases after Chevron. Of course, there were two good reasons for that. First, it was (and still is) an unreversed decision of the Supreme Court that could be used by one party or the other to support its view of a regulation or other IRS position. No lawyer in her right mind would pass up the chance for that cite if it helped, and no lower court would ignore it.

Second, the possible interpretive considerations National Muffler referred to made sense and still make sense in interpretive situations, and Mayo is not to the contrary. Even a critic of tax exceptionalism admitted that.⁴⁷ So it was no surprise that (1) a taxpayer hurt by a Treasury regulation (Mayo Foundation) cited the unreversed decision in National Muffler, or that (2) the Supreme Court, which was in 2011 at the apogee of its embrace of Chevron, made the unavoidable statement that its subsequent opinion in Chevron should be cited and relied on in cases like Muffler (which predated Chevron) if viewed as a legislative regulation case.

That by itself doesn’t constitute ending tax exceptionalism; it constitutes pointing out the limiting effect of a later Supreme Court decision on an earlier Supreme Court decision. Only the Supreme Court can do that. Until the Supreme Court does that, taxpayers will keep citing the old decision.⁴⁸

B. National Muffler Said

1. An interpretive rule called legislative.

National Muffler held that an organization of Midas franchisees that combined to bargain with their franchisor over the terms of their business relationship couldn’t be a section 501(c)(6) “business league,” because they weren’t “directed to the improvement of business conditions of one or more lines of business” as required by the regulation, which had been interpreted by courts to mean an entire industry or an industry group in a geographical area.

Although painful, there is no way to understand Muffler and its relationship to Mayo without working through the Muffler opinion and Mayo’s references to it. And the only reason to suffer the pain is to debunk the tax exceptionalism malarkey.

The Muffler opinion begins with words that sound like the statute was ambiguous in the same way the statute in Mayo was ambiguous; but then it said things that indicated the regulation was interpretive. That got the Muffler opinion off on the wrong foot: It said the statute was ambiguous, which would lead to a legislative regulation, but it treated the issue as one of interpretation.⁴⁹ The opinion said: “The statute’s term ‘business league’ has no well-defined meaning or common usage . . . outside the perimeters of section 501 (c)(6).” But then the opinion applied the maxim noscitur a sociis. It viewed the related words “chamber of commerce and board of trade” to have the common meaning of including an industry line of business.

So that reliance on the words of the entire subsection plus the Latin maxim sounds like the way the Court handles a statute that can be interpreted to have one meaning, without going beyond the words of the statute and reading them in context. But then the Muffler opinion undercuts that view by stating:

In such a situation, this Court customarily defers to the regulation, which, “if found to ‘implement the congressional mandate in some reasonable manner,’ must be upheld.” United States v. Cartwright, 411 U.S. 546, 550 (1973), quoting United States v. Correll, 389 U.S. 299, 307 (1967).

That sounds like Mayo’s description of legislative regulations. However, it isn’t clear whether Correll was interpreting the statute or deferring to Treasury or applying the reenactment doctrine. It addressed the statute allowing deduction for business “meals and lodging . . . away from home.” The Court thought the juxtaposition of meals with lodging meant you could deduct meals only if you had to secure overnight lodging. It also applied the reenactment doctrine: Congress was aware of the long-standing IRS position and didn’t change the law.⁵⁰

If Muffler has a fault, it is in not grasping the distinction that the later Chevron opinion made into a superfactor: Is the statute subject to interpretation, or must the later-invented Chevron deference be applied to the regulation?

2. Masters of the subject.

Then Muffler explains that the business league regulation at issue was authorized by section 7805. It is thought that not until Mayo did we know that section 7805 authorized legislative as well as interpretive regulations. That view is wrong, as Muffler shows (if you think the statute wasn’t subject to interpretation). Then Muffler makes one of those Chevron-deference-like statements that shocks even deference lovers. The opinion stated that the regulation was issued under section 7805:

That delegation helps ensure that in “this area of limitless factual variations,” ibid., like cases will be treated alike. It also helps guarantee that the rules will be written by “masters of the subject.”

The Supreme Court has used that term multiple times to refer to the Bureau of Internal Revenue from 1878 to 2001.⁵¹ No member of the Court dissented from Justice Ruth Bader Ginsburg’s 2001 opinion so stating (a post-Chevron opinion).

3. Interpretation of the regulation.

So it isn’t clear whether the statute at issue in Muffler was due Chevron deference (under that subsequent opinion) or could be interpreted; but the opinion treated it as ambiguous in the Chevron sense and made the mistake (in hindsight) of applying interpretive factors. The confusion is deepened by the clearer fact that the issue in the case wasn’t the interpretation of the statute but interpretation of the regulation: Did line of business (the term in the regulation, not the statute) mean an entire industry?

The lower courts had uniformly upheld the industrywide interpretation of the regulation with one exception, the Pepsi-Cola case.⁵² But that decision didn’t hold that the “line of business” regulation improperly narrowed the statute; rather, it disagreed with the other opinions interpreting the regulation to mean an entire industry. So that was the issue on which certiorari was granted: the appellate court conflict on the interpretation of the regulation, not on the validity of the regulation.

4. The ‘Muffler factors.’

And yet, the Muffler opinion ignored what it had just said about the interpretation of the regulation rather than the regulation’s interpretation of the statute, and incorrectly stated that the issue was whether the regulation comported with the statute, listing these potential considerations: (1) the plain language of the statute, its origin, and its purpose; (2) the fact that the regulation was a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent; (3) if written later, the manner in which it evolved; (4) the length of time the regulation has been in effect; (5) the reliance placed on it; (6) the consistency of the commissioner’s interpretation; and (7) the degree of scrutiny that Congress has devoted to the regulation during subsequent reenactments of the statute. In support of this list, the opinion cited pre-APA (pre-1946) opinions.

The opinion found that the regulation (actually the interpretation) wasn’t substantially contemporaneous with the enactment (like Mayo), the IRS had changed its position (like Mayo), but the current interpretation had been in place for a long time and was a reasonable interpretation that was consistent with what the Court found to be Congress’s intent. The opinion didn’t explicitly apply the reenactment doctrine, although it might have; that was likely the reason it observed that the regulation was old. The opinion ended by again speaking in terms consistent with Chevron deference to the agency as to a statute subject to several plausible interpretations.

In truth, the Supreme Court likely treated the Muffler appeal the same way it treated most tax cases: It mostly ignored it, assigning it to Justice Harry Blackmun, who was viewed as the resident tax opinion writer.⁵³ The Court trusted Blackmun to get it right, and in this case he sort of confused his authorities in his rush to hold for the IRS. So if that is tax exceptionalism, blame Blackmun.

C. Mayo’s Quibble

It’s hard to see why Mayo would have quibbled with Muffler but for the fact that the Mayo Foundation argued that somehow Muffler should prevent the agency from changing its interpretation in response to litigation (which occurred in Mayo but not Muffler). But Muffler did disregard the agency’s change of interpretation (though years before) and didn’t address the litigation response.

The only element that Muffler actually relied on and that the taxpayer cited but that Mayo said didn’t control the outcome in Mayo was the long-standing existence of the interpretation, but so what? It’s an old litigator’s technique to say that in Case X, facts Y and Z existed and so they must have been essential to its outcome in Case X and likewise must control the instant case. The Court in Mayo simply saw through the technique and held precisely what Muffler had held (if the regulation were viewed as legislative): If the statute is ambiguous (which it may not have been in Muffler), the agency can define the law within a broad zone of reasonableness. The fact that Muffler went further and showed additional reasons why the regulation was reasonable (because it sort of muffled the legislative versus interpretive distinction) doesn’t seem to be an error. So presumably, the Mayo opinion meant not so much to swat at Muffler as to reject an overinterpretation of Muffler, which is exactly what the Mayo opinion said:

We are not inclined to carve out an approach to administrative review good for tax law only.

“To carve out” speaks in futurity. The Court was responding to the plaintiff’s gloss on Muffler and not rejecting something done in the Muffler case.

If Mayo wanted to complain about Muffler, there were many other things to complain about. There was the reference to the reenactment doctrine and the citations of legislative history and even the Latin maxim, noscitur a sociis. Today’s Court may be rethinking the reenactment canon as applied to agency interpretations just as it is rethinking Chevron deference to agency rules.⁵⁴ And yet Mayo didn’t complain or cite them as wrong.

On the other hand, Treasury issued the Mayo regulation in response to litigation, and it represented a major reversal of the IRS’s position; necessarily, the new regulation couldn’t have been contemporaneous with the statute. So the plaintiff Mayo Foundation must have hoped simply to contrast the new regulation to which it objected with the old regulation that Muffler upheld and to reason that the newness doomed the new regulation. And yet nothing in Muffler actually stood for that point.

D. Remember Muffler Predated Chevron

For the third time, let’s recall that Muffler predated Chevron and cannot have been expected to exactly conform to it — and yet it did, and the opinions it cited were remarkably prescient of Chevron, even though Muffler muffed the analysis. The Muffler Court could have interpreted the statute to agree with the regulation and not applied any deference.

Muffler said, “business league” was like “income” in section 61: a term “so general . . . as to render an interpretive regulation appropriate,” citing Reynolds.⁵⁵ But that was a poor analogy. The term income in section 61 is in a class by itself, if for no other reason than that it is in the 16th Amendment. Moreover, the issue of Reynolds wasn’t the validity vel non of a regulation interpreting income, but whether a regulation adopted five years after the year at issue could be enforced against Reynolds (no).

Reynolds cited Morrissey.⁵⁶ It upheld a regulation’s identification of associations. That is another protean example in the tax law that is hardly a template. Treasury has gone from limiting associations to de jure corporations to allowing entities to announce whether they are associations; the statute had better authorize a legislative regulation, or else reg. section 301.7701-3 is in trouble. Both “income” and “association” are terminally ambiguous and lead to legislative regulations (or Supreme Court constitutional rulings). “Business league” probably would be interpreted today, given the Court’s penchant for removing from the agencies decisions about statutory meaning. The Muffler court couldn’t see that far ahead.

III. Tax Collectors Are the Good Guys

It used to be “conservative” to view tax collectors, at least at the federal level,⁵⁷ as doing the work of an organized society. Justice George Sutherland wrote Gregory, almost single-handedly inventing the substance-over-form doctrine that works one way: in favor of the IRS.⁵⁸ But move forward 80 years and substance over form became viewed by a federal appellate court as an overreach by big government: “Each word of the ‘substance-over-form doctrine,’ at least as the Commissioner has used it here, should give pause.”⁵⁹ The Sixth Circuit likened the IRS or Congress to a notorious Roman emperor: “Caligula posted the tax laws in such fine print and so high that his subjects could not read them.”

Whatever the Sixth Circuit was trying to say, it wasn’t complimentary of the tax system or its administration. And it is a stark reversal of the Supreme Court’s historic treatment of federal taxation. Less than 40 years ago the Supreme Court said:

The time has come for a rule with as “bright” a line as can be drawn consistent with the statute and implementing regulations. Deadlines are inherently arbitrary; fixed dates, however, are often essential to accomplish necessary results. The Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards. Any less rigid standard would risk encouraging a lax attitude toward filing dates. Prompt payment of taxes is imperative to the Government, which should not have to assume the burden of unnecessary ad hoc determinations.⁶⁰

And that was Chief Justice Warren Burger (appointed by Richard Nixon) speaking.

So no, Mayo didn’t end tax exceptionalism. But once again litigators can apply professor Martin D. Ginsburg’s aphorism: Whenever the commissioner fashions a stick to beat upon the head of the taxpayer (here protecting the tax system), it will turn into a large green snake (here tax exceptionalism) that bites the commissioner on the hind parts.