Overview
While in recent years, both the legislative and judicial branches have shown significant hostility to the broad regulatory powers of the federal agencies, President Trump has continued that hostility in the executive branch as well. Several recent developments in all three branches of the federal government suggest that there may be a significant curtailing of regulatory authority. While tax guidance is unlikely to be the primary target, this push for regulatory reform could have a significant impact on IRS regulations.
On January 11, 2017, the House of Representatives passed H.R. 5, the Regulatory Accountability Act of 2017, sponsored by Rep. Goodlatte (R-VA). Title I of the bill would require agencies to choose the lowest cost rulemaking alternative that meets statutory objectives. Title II of the bill (also known as the Separation of Powers Restoration Act) would modify the Administrative Procedure Act to limit the authority of the Treasury Department and the IRS, as well as other federal government agencies, by eliminating their ability to interpret ambiguous statutes under Chevron.[1] The legislation requires courts to “decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies.” Courts would no longer be required to defer to the agency’s construction of a statutory provision, but instead would be free to adopt their own interpretations. Less formal, interpretative regulations are currently entitled to less deference, known as Skidmore deference.[2]
Title IV of the legislation (also known as the REVIEW Act) would require that high-impact rules, those that may impose an annual cost on the economy of not less than $1 billion, not be effective until the final disposition of all actions seeking judicial review of the rule. Judicial challenges to such rules must commence either within the time period set forth by the statute authorizing the rulemaking, or if not set forth by statute, during the 60-day period beginning on the date on which the rule is published in the Federal Register. If a judicial challenge is not made during the applicable time period, the rule would become effective as early as the date on which the applicable period ends. For rules that are challenged, this means that the rules could potentially be held up for years as they make their way through the court system. Additionally, the repeal of Chevron will likely spark increased litigation over non high-impact rules, as those who do not like an agency’s rule will have an easier time challenging the rule without the hurdle of getting past Chevron deference. While this may have a significant impact on rules of some agencies, the Tax Anti-Injunction Act is still in effect, which will likely limit any impact on tax regulations.[3]
Title V of the legislation (also known as the ALERT Act) would require agencies to submit monthly updates of all rules expected to be proposed or released in the upcoming year to the Office of Information and Regulatory Affairs (OIRA), an office within the Office of Management and Budget (OMB) and requires that most regulations must be published in such reports at least six months before becoming effective. Section V would limit the ability of agencies, such as Treasury and the IRS, to issue anti-abuse regulations without notice.
This bill follows the trend of other recent bills introduced in Congress to eliminate Chevron deference. In July 2016, the House of Representatives passed H.R. 4768, the Separation of Powers Restoration Act of 2016, sponsored by Rep. Ratcliffe (R-TX). An identical bill, S. 2724, was introduced by Senate Finance Committee Hatch (R-UT) in the Senate in 2016.
Proponents of these bills say that they will help to restore the three equal branches of government and ensure that administrative agencies do not act outside of the power granted to them by the Constitution. However, a significant concern with these bills is that they could backfire, taking away the incentive for agencies to pursue notice and comment rulemaking. Regulations that go through the full rulemaking process face the burdens and protections of the Administrative Procedure Act, including the notice and comment process, and potential challenges under Altera.[4] Under current law, if an agency jumps through these hoops, it is afforded protections under Chevron in court. However, under the proposed bills, agencies will receive no benefit for going through the rulemaking process, as the regulation will be subject to de novo review by a court.
Instead, if one of these bills becomes law, the Treasury Department and the IRS may decide to rely on revenue rulings, notices, and other guidance, which do not face the same procedural hurdles as notice and comment rulemaking. Eliminating the notice and comment process will reduce the ability of the public to provide input to the agency. For complex guidance, this will make it more difficult for agencies to issue guidance that gets the important points right. For anti-abuse and other taxpayer-unfavorable guidance, this could eliminate an important check on the authority of the IRS.
On the other hand, it is possible the legislation will have little impact at all. Even if required deference under Chevron is overturned by statute, courts will not be precluded from considering an agency’s interpretation of the meaning of a law. Thus, the practical result of the legislation could be minimal, if courts continue to defer to the experts at the administrative agencies, even if the agency’s opinion is no longer the final word. A similar level of deference is already used for interpretative guidance under Skidmore deference.[5] Congress may also choose to fill gaps in legislation itself to alleviate ambiguity, thereby obviating the need for Treasury and the IRS to do so.
Although some tax practitioners have historically taken the view that tax law is special and should not be subjected to the same administrative rules applied to other agencies, the Supreme Court’s 2011 opinion in Mayo Foundation for Education Research v. United States held that Chevron applies to rules promulgated in the tax arena. In Mayo, the Court found that tax law should not have its own rules with regard to court’s approach to administrative review and held that Chevron “provide[s] the appropriate framework” for review of tax regulations.
A recent Supreme Court case signaled that the application of Chevron deference to administrative rules in tax cases may be limited in certain circumstances. In King v. Burwell, the Fourth Circuit upheld an IRS rule promulgated to interpret a provision in the Affordable Care Act (ACA) applying Chevron deference. However, when King reached the Supreme Court, the Court declined to apply Chevron deference to the IRS rule and held that:
Chevron does not provide the appropriate framework here. The tax credits are one of the act’s key reforms and whether they are available on Federal Exchanges is a question of deep “economic and political significance;” had Congress wished to assign that question to an agency, it surely would have done so expressly. And, it is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.
The Court stated that it was the Court’s task to determine the proper reading of the statute, and after analyzing the statutory language, Congressional intent, and legislative history of the ACA, it upheld the IRS rule.
The Supreme Court will likely continue to shift towards limiting Chevron deference. While Justice Scalia generally approved of Chevron deference, Neil Gorsuch, President Trump’s newly confirmed Supreme Court justice, does not. In a 2016 concurring opinion in Gutierrez-Brizuela v. Lynch, Judge Gorsuch wrote: “[T]he fact is Chevron…permit[s] executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framer’s design.” While Gutierrez-Brizuela was not a tax case, there does not seem to be much reason to believe that Justice Gorsuch would view tax cases differently.
President Trump has shown hostility to regulatory authority as well. In addition to a temporary freeze on all regulations pending administration review, which is common for new administrations, on January 30, 2017, President Trump signed a more far-reaching Executive Order on Reducing Regulation and Controlling Regulatory Costs. This executive order attempts to reign in the regulatory process by providing that, unless prohibited by law, whenever an executive department or agency publicly proposes for notice and comment or otherwise promulgates a new regulation, it must identify at least two existing regulations to be repealed (the so-called 2-for-1 executive order).
In addition, for fiscal year 2017, currently in progress, the heads of all agencies have been directed that the total incremental cost of all new regulations to be finalized, including repealed regulations, will be no greater than zero, unless otherwise required by law or consistent with advice provided in writing by the Director of the Office of Management and Budget (the Director). For fiscal years after 2017, the Director will identify to agencies a total amount of incremental costs that will be allowed for each agency in issuing new regulations and repealing regulations as part of the presidential budget process.
The order delegates significant implementation authority to the Director, including the authority to exempt categories of regulations from the order. This executive order could significantly reduce the amount of regulations and possibly other guidance coming from Treasury and the IRS. The executive order broadly defines regulation to arguably include subregulatory guidance. However, OIRA issued an interpretive memorandum on February 2, 2017, which limits the 2-for-1 executive order to significant regulatory actions. Under current Treasury and OIRA interpretations, little Treasury and IRS guidance rises to the level of significant regulatory actions.
In light of the Executive Order as well as the Administration’s regulatory freeze, Treasury and IRS officials have indicated that they plan to hold off on issuing most guidance for the time-being.
On February 24, 2017, President Trump signed the Executive Order on Enforcing the Regulatory Reform Agenda aimed at regulatory reform, which instructs the head of each agency to designate a Regulatory Reform Officer. As part of the their duties, the Regulatory Reform Officers are directed to identify regulations that eliminate jobs or inhibit job creation; are outdated, unnecessary, or ineffective; impose costs that exceed benefits; create serious inconsistency or otherwise interfere with regulatory reform initiatives and policies; rely on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard of reproducibility; or derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified. Within 90-days of the Executive Order, the Regulatory Reform Officers are directed to report to the agency head on progress towards improving implementation of regulatory reform initiatives and identifying regulations for repeal, replacement, or modification. The act also requires each agency to establish a Regulatory Reform Task Force consisting of the Regulatory Reform Officer, the agency Regulatory Policy Officer, a representative from the agency’s central policy office, and for certain agencies three additional senior agency officials designated by the agency head. Adding a policy-level person to the task force is likely to raise the profile of regulatory considerations.
On March 13, 2017, President Trump signed the Executive Order on a comprehensive plan for reorganizing the Executive Branch aimed at reorganizing governmental functions and eliminating unnecessary agencies. Within 180-days of the issuance of this Executive Order, the head of each agency is required to submit to the Director a proposed plan to reorganize the agency. The agency proposals are required by the Executive Order to be published in the Federal Register and open to public comment.
In the long term, these restrictions or reductions in issuing IRS guidance may end up being detrimental as IRS frequently provides certainty and clarity with regard to the Internal Revenue Code that is welcomed by those taxpayers seeking to have a clear and predictable set of rules to follow.
Shortly into the new administration and the 115th Congress, it appears that restrictions on administrative agencies’ regulatory authority may be on the minds of lawmakers in all three branches of government. Proponents generally seem more concerned with legislative rules, such as in the environmental context, than interpretative guidance that facilitates compliance with the statute. However, unless reform efforts are mindful of the unique role of IRS guidance, there is a risk that the IRS’s ability to provide clear, authoritative guidance to taxpayers may be collateral damage in the zeal for reform.
[1] In Chevron U.S.A. v. Natural Resources Defense Council, 467 US 837 (1984), the Supreme Court held that where Congress has not directly addressed the precise question at issue, and the statute is silent or ambiguous, courts should defer to the agency’s interpretation if it is not arbitrary and capricious and is based on a permissible construction of the statute.
[2] In Skidmore v. Swift & Co., 323 US 134 (1944), the Supreme Court held that an administrative agency’s interpretative rules deserve deference according to their persuasiveness, which is decided on a case-by-case basis.
[3] See 26 U.S.C. § 7421(a) providing that no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. But see Chamber of Commerce v. IRS, No. 1:16-cv-944, ECF No. 45 (W.D. Tex. Nov. 8, 2016), http://www.txwd.uscourts.gov/SitePages/Home.aspx, where the Chamber of Commerce is arguing that the Tax Anti-Injunction Act does not apply to facial challenges to rules under the APA, where no tax’ is allegedly due, no IRS assessment or collection efforts are underway, and there is nothing to restrain.
[4] See Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015). In Altera, the U.S. Tax Court invalidated a portion of a U.S. Treasury Regulation issued under Section 482. The Tax Court held that tax regulations may be invalidated if not based on “reasoned decision-making” supported by evidence in the administrative record. The decision opened the door to additional regulatory challenges by taxpayers. Altera is currently on appeal to the Ninth Circuit.
[5] See supra note 2.
