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It’s Time To Let Go: Treasury Regulations Are Not Interpretative Rules

Posted on June 16, 2022

Today’s post is from Kristin Hickman, the McKnight Presidential Professor in Law at the University of Minnesota Law School. Kristin is a leading authority in the fields of administrative law, tax law, and statutory interpretation, and her writing has greatly influenced courts and other academics. Les

It’s tough to know what to do when an esteemed colleague cannot be persuaded from and continues to perpetuate an idea that is not only legally untenable but that arguably has negative real-world consequences. I have nothing but respect and warm regard for Jack Townsend. A smart and experienced tax practitioner and teacher, Jack was kind to me and engaged seriously with my ideas about tax and administrative law when many others did not. For many years now, I have enjoyed discussing and debating the intersection of tax administration and administrative law requirements, doctrines, and norms with Jack. And when it comes to ideas, I believe in a big tent approach, acknowledging that law is often uncertain and seeing merit even in arguments with which I strongly disagree. In this same vein, I am happy to let other people have their say, and I don’t feel that I have to reply to every thought that someone publishes but that I think is misguided.

At some point, however, one does have to recognize that ideas can have consequences, and that refusing to let go of and continuing to promote a legal argument may encourage real world actors to behave badly. Such is the case, I think, with Jack’s claim that a (potentially large) subset of Treasury regulations are interpretative rules under the Administrative Procedure Act (APA), and thus that they are exempt from notice-and-comment rulemaking procedures (even if Treasury and the IRS purport to follow those procedures in adopting such regulations).

For the last 15 years, I have explained in articles, essays, and amicus briefs (e.g., here and here) why Treasury regulations simply do not qualify as interpretative rules for APA purposes under any contemporary standard, so I do not want to belabor the point here too much.  To summarize briefly, black-letter administrative law holds, and has held for decades now, that legislative rules are legally binding and interpretative rules are not.  No one seriously questions that all Treasury regulations are legally binding, whether issued under an express grant of rulemaking power in a particular Internal Revenue Code provision or the general rulemaking grant of 26 U.S.C. § 7805(a). A different understanding did exist at the time the APA was adopted, but that different understanding was predicated on (1) now-rejected perceptions that the nondelegation doctrine of Article I, §1 of the Constitution did not allow § 7805(b)-type regulations to be legally binding (for more on that, see, e.g., here, esp. pp. 1104-1113), plus (2) very different approaches to the tax legislative process and in how Treasury exercised its general rulemaking authority in the 1940s relative to today. The casual use of the term “interpretive regulations” by this or that justice or judge in describing legally-binding regulations that interpret statutes does not alter the standards the courts employ in distinguishing legislative rules from interpretative ones and does not signal that the justice or judge is questioning the categorization of the regulations for APA purposes.

Even if you think that some Treasury regulations should be considered interpretative rules—whether on originalist grounds, for pragmatic reasons, or otherwise—at this point, it is clear that the courts will not agree with you. Whatever case law may have existed previously, the Supreme Court laid the jurisprudential groundwork for treating all Treasury regulations as legally binding for APA purposes in its 2011 decision in the Mayo Foundation case. Since then, no federal judge has concluded that any Treasury regulation is an interpretative rule, while several have held the opposite. The Tax Court, hardly staffed by APA maximalists, unanimously concluded in 2015 in the Altera case that Treasury regulations are legislative rules, using reasoning that was not specific to the regulations at bar and would apply equally to every other Treasury regulation. The Tax Court’s Altera decision was reversed by the Ninth Circuit, but only on other grounds. The IRS and the Department of Justice have mostly if not entirely stopped arguing in court that Treasury regulations are exempt from notice-and-comment requirements as interpretative rules, I presume because they know that the argument is not colorable, will not succeed, and will undermine the credibility of their other claims. Currently, the active debate in the courts is over whether Internal Revenue Bulletin guidance like IRS Notices or Revenue Procedures are legislative or interpretative rules, not whether Treasury regulations are. The fact that Treasury regulations do not qualify as interpretative rules does not mean that no agency pronouncements qualify as interpretative rules; plenty of agency pronouncements, including by the IRS, fall under the interpretative rule category for APA purposes. Just not Treasury regulations.

Regardless of the above, one might wonder, what’s the harm in continuing to assert in academic articles and blog posts that some Treasury regulations should be considered interpretative rules? After all, academic works advance all kinds of interesting legal and normative arguments that have no chance of succeeding in real world courts. Academic writing is great for developing and exploring crazy new ideas, or resurrect or maintain old ones.

In this instance, however, when highly-regarded tax lawyers like Jack refuse to concede that all Treasury regulations are legislative rules and parse legal texts to gin up uncertainty regarding that characterization, they embolden Treasury and IRS regulation drafters to do the same. Even as IRS and Department of Justice litigators decline to argue in court that Treasury regulations are interpretative rules, the IRS in the Internal Revenue Manual has doubled down post-Mayo on the assertion that most of its regulations are exempt from APA procedural requirements as interpretative rules. In my experience, many (though by no means all) Treasury and IRS regulation drafters still do not take APA procedural requirements as seriously as they should, no doubt inspired at least in part not just by the Internal Revenue Manual but also by highly-regarded tax lawyers giving them cover. Treasury and IRS intransigence on the applicability of APA procedural requirements to Treasury regulations undermines taxpayer confidence in tax system fairness and legitimacy, which in turn encourages taxpayer disrespect and discourages tax compliance. Why shouldn’t taxpayers rely on untenable legal arguments and stretch the boundaries of statutory interpretation to justify their tax return reporting positions when the IRS continues to embrace an untenable legal claim regarding its own legal obligations in the Internal Revenue Manual?

Tax system integrity depends in no small part on smart and experienced tax lawyers, both inside and outside the government, knowing when to stop pushing the legal envelope. It is time for the tax bar to let go of and move forward from the idea that Treasury regulations are interpretative rules.

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