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The APA Is Not A Hammer

Posted on June 24, 2022

Professor Bryan Camp follows up from his post yesterday, as he explores the history of the APA and tax regulations to support his view that all tax regulations are not legislative rules under the APA. For Professor Hickman’s post, see It’s Time To Let Go: Treasury Regulations Are Not Interpretative Rules. While this issue may seem a bit academic, it is important, as litigants increasingly challenge the procedural validity of tax guidance in cases like Oakbrook Land Holdings v Comm’r and Hewitt v Comm’r. Les

Kristin Hickman loves the APA. To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love. It’s her Hammer, her righteous Mjölnir.

And when you have a hammer, everything looks like a nail. Including ALL Treasury regulations. This is a follow-up post from yesterday to explain why I disagree with Kristin’s contention that ALL Treasury regulations are “legislative” for APA purposes.

To recap: we are concerned with the question of how must Treasury regulations be promulgated to be in conformity with the APA. To answer that question, Kristin starts her analysis with the APA text. All agencies must conform to the APA. It’s a hammer. Kristin has spent her academic career looking for a unified theory of administrative law and she views the APA as the enforcement mechanism to whack all the governmental agencies that pop up their unruly heads. Agencies that do not conform to a strict reading of the APA must be claiming to be “exceptional” from the law. That’s the Myth of Tax Exceptionalism I discussed yesterday.

To achieve this trans-agency uniformity, Kristen looks at the words in the APA and gives them a strict, but abstract, meaning: “legislative” means “force of law.” She then applies that meaning to various agencies to whack them into conformity. When she applies it to the Treasury Department she concludes that ALL Treasury regulations have the “force of law” and are, therefore, legislative for issuance purposes under the APA.  For that proposition she looks to the Supreme Court’s decision in Mayo as imbuing all Treasury regulations with that magic “force of law.”

I certainly agree there are certain uniform principles of law that apply to all agencies. The biggest one is “do what Congress tells you to do.” I just disagree that the APA is the right place to start. I believe one should start with the agency’s organic statute and the case law about that agency.  I start there because no lawyer actually practices something called “administrative law.” Lawyers practice environmental law, or securities law, or SSA disability law….or tax law. While Kristin and I might study “administrative law” in the abstract, that’s not how it works in the real world.

I think the history of the APA shows that it was not intended to be a hammer. It was not enacted to override or intrude on specific laws applicable to specific agencies. I think the history of the APA supports reading and applying it not so much as a hammer as a safety net, providing a set of legal principles that agencies should follow. But there are many ways to obey those principles. Thus, it’s entirely possible that the APA applies differently to different agencies, depending on the agency’s organic statute. You need to look at the history. That is particularly true for the Treasury Department.

Kristin seems to say APA history does not matter, for two reasons. First, she appears to believe that the APA wiped out all prior agency rules and practices. It hammered out all that came before. Second, as to tax administration, she appears to believe that the nature and function of tax administration has dramatically changed since the APA’s enactment. The 1940’s and 1950’s are no longer relevant. Specifically, she believes that the tax regulations are now more “oriented away” from revenue raising and “oriented towards” using tax laws to serve non-revenue social policies. She writes “Although the tax system has always served multiple goals, recent decades have seen a dramatic escalation in tax programs and provisions serving purposes other than traditional revenue raising.” “Administering the Tax System We Have,” 63 Duke L.J. 1717, 1728 (2014).

I disagree with Kristin on both counts.   It’s part of what I call the “Myth of Change”  that I mentioned yesterday. First, I think it is critical to understand that Treasury was promulgating regulations long, long before the APA was enacted. The APA was enacted on top of an existing tax guidance structure. Second,I think tax administration has always been an exercise in balancing revenue raising needs with social policies. To be sure, the particular social policies that Congress wants to affect through taxation have changed over time, but not the use of the tax laws to do more than raise revenue.  I have not seen convincing evidence that Congress is using the tax laws now more than ever for social policy as opposed to revenue raising. That’s the Myth of Change.

1. Tax Regulations Came Before The APA

The APA, 60 Stat. 237 was enacted June 11, 1946. It resulted from the Attorney General Office’s monumental study of federal agencies, published in a famous 1941 Final Report. That Report is still highly influential on how courts apply the APA. see Joanna Grisinger, Law in Action: The Attorney General’s Committee on Administrative Procedure, 20 J. of Policy History 379 (2008) (reviewing the influence of the Final Report on the APA). The Final Report, in turn, grew out of a detailed study of then-existing agencies, a study contained in 27 Monographs written by staff, each running hundreds of pages. Each one is a book. Monograph 22 focused on the tax administration, back at a time when the IRS was called the Bureau of Internal Revenue (BIR).

Our understanding how the APA applies to tax regulations should thus start in the 1940’s because unlike chicken and eggs, we actually know what came first: tax regulations! And then, yes indeedy, we need to see whether tax administration or general principles of administrative law have changed so much as to require a change in that relationship.

What lessons do we learn from this history?

(a) The APA was not intended to be a hammer.

The AG’s Committee “had initially hoped to be able to suggest uniform rules for agency practice” similar to the Walter-Logan bill that Congress had passed and President Roosevelt had vetoed. Final Report at 22 (emphasis supplied). That’s what Kristin wants. In light of the information produced in the 27 monographs, however, the Final Report backed away considerably from that aspiration and instead prescribed a general framework for balancing the goals of agency efficiency and autonomy with the goals of agency transparency and protection of individuals from arbitrary agency actions. See generally, Roni A. Elias, The Legislative History of the Administrative Procedure Act, 27 Fordham Envtl. L. Rev. 207 (2008)(nice short student note).

That is why the resulting APA was widely understood as standing for the proposition that “procedural uniformity was not well suited to the administrative process.” Grisinger, supra, at 402.  That is, the APA provided generalized standards for controlling administrative actions rather than detailed and strict prescriptions.  

As enacted, the APA incorporated broad conceptual principles of administrative law. Fundamentally was the binary notion of what agencies did. Agency action was either an “adjudication” or a “rulemaking.” Roughly speaking, rulemaking was forward-looking, the process of creating some kind of general statement that would apply to a broad set of situations in the future. In contrast, adjudication was backwards-looking, the process of applying the law to an existing set of facts.

As to rulemaking, the APA created large conceptual baskets for types of rules, with associated procedures for their issuance. Again, as Jack Townsend properly noted and as I discussed yesterday, the APA says nothing about what weight various types of rules should carry with the courts. The default issuance procedure was notice-and-comment.  Some regulations had to go through a more formal process, but only when Congress specified by using the magic language “on the record after a hearing.” United States v. Florida East Coast Ry., 410 U.S. 224 (1973). And other regulations could be issued with less formal process if they were either “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice” or if the issuing agency had “good cause” to find that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. §553(b). These foundational concepts were roomy enough to accommodate a wide variety of guidance modalities.

Let’s see what lesson we can find about tax guidance.

(b) Treasury Regulations were not believed to require notice and comment for issuance.

The contemporary view in the 1940’s was that existing issuance procedures were consistent with this new “constitution” of administrative law. The concerns expressed in the Final Report related mostly to the new agencies created by the New Deal, agencies that “have been devised by Congress under the pressure of events for the exercise of new powers in new fields.” Final Report at 213 (emphasis supplied). Thus, nothing in either Monograph 22 nor the Committee’s Final Report suggests there were concerns with Treasury regulations. Far from it. Monograph 22 acknowledged that the “considerable history” behind the BIR made it a very different subject from other agencies “which are working in areas only recently occupied by the Federal Government.” Monograph 22 at 146.

The writers of Monograph 22 discuss in some detail the issuance of a variety of tax guidance documents. They were fine with the then current process. Public hearings? That “would probably be of small practical value, since the problems to be studied are of a highly technical or “legal” character…” Id. at p 147.  Moreover, “time…is often a problem.”  Id. at 146. Well, Duh! The writers suggested notice and comment would be appropriate “when time allowed.” Id. Thus, the vision was that Treasury Regulations would normally be issued without notice and comment unless time allowed or other circumstances required. When the writers did express concerns about agency guidance, it was with sub-Treasury guidance being too prolific and de-centralized. Id. at 150-156. Anyone reading Monograph 22 today will find it very familiar: what was true then is largely still true today.

Given this history, it is not surprising that the common view was that the APA did not require Treasury to issue most regulations through notice-and-comment process.  That, perforce, meant the rules should be classified as interpretive. The great administrative law scholar Kenneth Culp Davis reflected this general understanding. Writing in 1959 for law students, he explained that “the great bulk of Treasury Regulations under the tax laws clearly are interpretative rules, not legislative rules, despite the provision of §7805…. Without the grant of power by §7805, the power of the Secretary or his delegate would be the same…” Administrative Law Text (Foundation Press Hornbook Series) (1959) at 87.   

Again, to reiterate Jack’s point: the APA is notoriously silent on the extent to which a court must follow agency rules when deciding a dispute. While §706 instructs the reviewing court to “decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action,” that directive is silent on the effect of agency guidance on the court’s task. The general understanding in 1946—expressed in the influential Attorney General’s Manual as well as elsewhere—was that the APA neither added to nor subtracted from the law of judicial review as it had developed to that point, but instead was only a restatement of existing law.

Into this silence post-APA tax cases continued the pre-APA approach of evaluating tax guidance depending on the level of authority behind its issuance. Under that view, pre-APA case law had long of distinguished between Treasury and sub-Treasury guidance. The post-APA case law continued that distinction, with no discussion of how the Treasury regulations were issued. For example, in 1948 the Supreme Court considered the validity of a regulation that required taxpayers using the installment sale rules to compute deductions consistently with income. In its opinion, the Court said nothing about whether the recently enacted APA now required changes in how regulations were issued. Instead, it just went ahead and explained the proper level of deference to be given, proposing this standard: “Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and…should not be overruled except for weighty reasons.” Commissioner v. South Texas Lumber Co. 333 U.S. 496, 501 (1948). Hmmm. Sounds a lot like Chevron! And Mayo. And just as in those opinions, the Court’s South Texas Lumber opinion makes no linkage between how the Treasury regulations were issued and the level of deference accorded them. ‘Cause that was a different issue.

Lower courts as well continued to distinguish Treasury guidance from sub-Treasury guidance, just as they did in pre-APA. Post APA decisions repeatedly follow the pre-APA approach that sub-Treasury guidance “not promulgated by Secretary” did not have the same weight with courts as Treasury regulations in interpreting tax statutes. See, e.g. Biddle v. Commissioner, 302 U.S. 573 (1938), 383 (1938); Helvering v. New York Trust Co., 292 U.S. 455, 468 (1934). But again, these cases do not turn on how the guidance was issued. They turned on who was issuing it: Treasury or IRS.

The proper application of the APA to tax administration must therefore start with the recognition that, at the time of its enactment, tax administration was generally considered to be obedient to the APA’s restatement of basic administrative principles. The APA’s statutory language did not require any changes to how tax guidance was issued or how it was evaluated by courts when adjudicating tax disputes.

2. Tax Administration Is Same As It Ever Was

Kristin properly pushes back that the analysis cannot end there. The next step in the analysis, is to see what post-APA events might have changed this relationship between the APA and tax administration.  Hmmm. Well….certainly the language of the APA has not changed. The concepts are still broadly defined. They still do not imagine that only documents titled “regulations” are agency rules subject to the APA, nor do they imagine that every agency document titled “regulation” is a rule that must either be issued in the same way as all other agency rules or that ought to receive the same kind of judicial deference as all other similarly-titled guidance. These are roomy concepts. So the inquiry is whether either tax administration or judicial interpretation of the APA, or both, have changed in a way that creates a different relationship between the APA and tax administration.

We’ll save that inquiry for a different post, next week.

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