April 21 Tax Policy Colloquium (with Leandra Lederman)

Last Thursday, we discussed Leandra Lederman's work in progress, "Hold the Mayo: What Respect Should Courts Accord Tax Regulations and Rulings Issued During Litigation?" Unusually for us, this is mainly an administrative law paper, addressing two main subjects: (a) the recent Supreme Court decision (Mayo Foundation v. U.S.) holding that the so-called Chevron doctrine of very broad interpretive deference to the regulations issued by administrative agencies, does indeed apply to tax regulations (but not to less formal administrative statements, such as the issuance of IRS Revenue Rulings), and (b) the occasional IRS practice of issuing what are called "fighting regulations" or rulings, i.e., those issued during the course of a particular litigation and purporting to affect its outcome, not just future cases.

Constitutional and administrative law, along with statutory interpretation, have the odd feature of lacking a determinate framework for decision. By contrast, if one is assessing tax policy questions, say from a particular welfare economics framework, then in principle there is an agreed methodology for determining what the right answer is. But that said, I personally find Chevron deference to Treasury regulations both interpretively plausible and likely to have predominantly good effects. The latter impression, however, is based on a set of very general assumptions or beliefs about how the Treasury currently acts and about how courts or Congress (if not allowed to delegate as much) would do in its stead.

The "fighting regulations" problem can be put in focus by imagining that the IRS, whenever facing litigation, could have the Treasury issue a regulation applying just to that case, and purporting to solve it in the government's favor. If (a) the government had time to do "notice and comment" on the regulation, (b) the courts would stand for it, and (c) it was consistent with statutory restrictions on regulatory retroactivity, it would cause the IRS always to win all of its litigation so long as, under the Chevron standard, the regulation adopted a defensible interpretation of underlying statutes and was not "arbitrary or capricious."

But on the other hand, if litigation alerts the IRS to a problem it didn't previously know about (e.g., due to a particular taxpayer's clever and aggressive planning), and if it can address the problem prospectively through regulations that reasonably interpret the law to shut down the game, why should the first mover in effect be grandfathered, creating stronger incentives to look for these things. (In a separate legal context, this is a big piece of the case for a broad economic substance standard in combatting tax shelters.) While I as a judge would want to cast a very skeptical eye on this-case-only regulations (and I'm sure most actual judges would as well), the fact that the IRS or Treasury is willing to publish a broader and more authoritative statement than its attorneys' briefs to the court, having future applicability to other situations, is indeed meaningful, and should be taken as such. So even mere revenue rulings, even when issued in the middle of litigation, while not determinative, are also not equivalent to mere assertions in the government brief.