House of Representatives Passes Bill To End Judicial Deference to Treasury’s Rule-Making Authority

By: Jerald David August

A bill, H.R. 5, recently introduced by House Judiciary Committee Chair Bob Goodlatte, R-Va.,  the Regulatory Accountability Act of 2017, proposes to end the Chevron deference doctrine, passed the House of Representatives by a 50 vote majority (283-183) on January 11. The bill was referred to the Committee on the Judiciary, in addition to the Committee on Oversight and Government Reform and the Committee on Small Business.  

There are now six separate regulatory reform bills passed by the House in prior Congresses which: (i) in Title I would modify certain parts of the Administrative Procedure Act to require federal agencies to select the lowest-cost rulemaking alternative that meets statutory objectives, and permit the issuance of more costly rules only when cost-justified and needed to protect the general health, safety and welfare; (ii) require added opportunity for public input and comment especially for rules that would have significant economic impact; (iii) as relates to this post in particular, repeal, in Title II of H.R. 5, the “Chevron doctrine” and “Auer doctrine” to end judicial deference to certain agency statutory and regulatory interpretations; (iv) require agencies to account for the direct, indirect and cumulative impacts of new regulations on small businesses, such as when the new rules would have a negative impact on jobs and wages; (v) postpone the effective dates of certain rules from taking effect until the courts can resolve timely filed litigation challenging their promulgation in the federal register; and (vi) require federal agencies to post online, timely information about regulations in their development and expected nature, cost and timing in the form of an Advance Notice of Propose Rulemaking. 

While the focus of H.R. 5 was on federal agency rule-making authority and procedures, as applied to the Treasury and the Internal Revenue Service, it is not clear whether the repeal of the “Chevron doctrine” would also impact on the issuance of “guidance” in the form of revenue rulings, revenue procedures or notices as well as whether “temporary regulations” are within the scope of the bill.  

Of course it is now for the Senate to take the bill forward for consideration. Since the Republicans hold only 52 seats in the Senate it is presently uncertain whether the legislation will be subject to a filibuster or will be subject to refinement and modifications. Expect the bill to be “fast-tracked” nevertheless as it represents a key component of the new Administration’s efforts to improve and expand the climate for doing business in the United States.

Background of Chevron Deference Doctrine in The Tax Law

While neither the Department of the Treasury nor the Internal Revenue Service are part of the legislative branch of our government, per se, they often are delegated authority by the Congress or by direction of the executive branch to issue regulations which can legally bind taxpayers and provide for penalties and sanctions for those taxpayers who fail to follow such guidance. See 26 USC §7805(a). As a result, the Treasury and IRS are imbued with “quasi-legislative” powers but are bound, however, to follow certain statutory procedures set forth in the Administrative Procedure Act (the “APA”) , 5 USC §§551-559, 701-706.  

In the landmark case of Chevron, USA, Inc. v. Natural Resources Defense Council, Inc.,  467 U.S. 837 (1984) the United States Supreme Court set forth standards by which a court is compelled to grant deference to administrative regulations (of a federal agency).  The two-part test announced in Chevron, supra, holds: (i) has Congress specifically addressed the issue to be interpreted and is the statute clear and unambiguous? If so, then any regulation which deviates from such treatment set forth under the statute is invalid; or (ii) if Congress has not directly spoken to the question raised by application of the statute, a so-called “gap question”, then the agency’s interpretation, to the extent based on a reasonable and permissible construction of the statute, the courts must give deference to the agency’s interpretation.  Thus, the Chevron standard created a two-part test for examining the validity of administrative law. First, the court assesses whether a statute speaks unambiguously on an issue, in which case that meaning controls and the agency must give effect to the unambiguously expressed intent of Congress. Second, if the statute is ambiguous, a court cannot overrule an agency's regulation unless it is "arbitrary or capricious in substance, or manifestly contrary to the statute." See also   Mayo Foundation for Medical Education and Research v. U.S.,  131 S.Ct. (2011); United States v. Mead Corp., 533 U.S. 218, 226-27 (2001)(application of Chevron doctrine to cases under the Internal Revenue Code). It should also be noted that the Supreme Court has opined that where a precedential case holds that a statute unambiguously evidences congressional intent contrary to the agency’s construction of the statute, the prior judicial construction controls. U.S. v. Home Concrete & Supply, LLC, 109 AFTR 2d 2012-1692 (2012).

Under Chevron step two, the court determines whether the agency's prescription in its regulation is based on a permissible construction of the statute. The Supreme Court precedent requires that considerable weight to be given to an agency's permissible administrative rule: where Congress has explicitly left a gap for the agency to fill. In such instances, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. Chevron, supra, @843-844. The Court thus recognized that in a step two setting, the administrative agency, not the judiciary, is the expert in the field and should be using its wisdom and policy objectives in interpreting the statutory language and in filling any gaps. See August, “Altera: Why the Government Can’t Count on Chevron Step Two”, Tax Notes, Special Report (June 2016); “Altera and Cost-Sharing Requirements Under Section 482---Another Tax Court Rebuke to the IRS (in Issuing Regulations)”, Business Entities (WG&L) Jan/Feb 2016;

The Chevron doctrine has a third facet, referred to by some commentators as Chevron step zero. This inquiry goes to whether the Chevron doctrine should apply at all. In Mead, supra, for example, the Supreme Court held that a tariff classification in a U.S. Customs Service ruling was not entitled to Chevron deference. The Court found that the ruling did not carry the force of law required for Chevron deference because it was unclear whether Congress had delegated rulemaking authority to the agency in this area. Still, the Court held that tariff classification rulings are best treated like interpretations in policy statements, agency manuals, and enforcement guidelines. See Lisa Schultz Bressman, "How Mead Has Muddled Judicial Review of Agency Action," 58 Vand. L. Rev. 1443, 1457-1474 (2005).

If the Chevron doctrine doesn't apply and the issue before the court is one in which the agency has special knowledge and expertise (which is frequently the case), the court should determine whether the agency's interpretation is persuasive given the various contexts in which the ruling may be applied and has been applied by the agency.This is referred to as Skidmore deference. See Skidmore v. Swift Co., 323 U.S. 134 (1944).

Chevron deference is granted only to those regulations which carry the force of law and are promulgated pursuant to Congressional authority. Still, there is a required link between the quasi-legislative powers of the Treasury and IRS with the requirements imposed on all federal agencies under the APA. While the APA has been cited in the Supreme Court’s analysis in several important decisions in this area in noting that the fact that a regulation was subject to the “notice-and-comment” procedures prior to being promulgated in final form, there is no Supreme Court decision that holds that the failure to comply with the APA, per se, causes the regulation to fail. [1]

Still, it is indeed important to understand that a federal agency needs to have decision making authority to interpret an implement federal tax statutes which are often vague or otherwise inconsistent or possibly outdated. See Bob Jones University v. U.S. , 561 U.S. 574 (1983).

Back to the Regulatory Accountability Act (the “RRA”) of 2017, H.R. 5

The RRA is too detailed and complex to summarize in a page or two so here are the highlights which were briefly referred to above.  The RRA combines six separate reform of federal agency rule-making authority that have padded the house and are presumed to enjoy bipartisan support.

  1. Require agencies to choose the lowest-cost rulemaking alternative that meets statutory objectives and require greater opportunity for public input and vetting of critical information particularly for rules involving tremendous amounts of dollars.
  2. Would repeal the Chevron (and Auer) doctrines and end judicial deference to administrative statutory or regulation interpretations.
  3. Would require agencies to account for the direct, indirect and cumulative impacts of new regulations on small business in an effort to reduce adverse costs and impacts.
  4. Prohibit new billion dollar rules from taking effect until courts can resolve timely filed litigation challenges on their validity (which is already a part of the APA).
  5. Publish on line summaries of new proposed rules so that the public can understand what agencies are actually proposing to do.

At present there is no effective date of the bill.

The Future of the RRA

The RRA will eventually be debated and voted upon by the Senate and the question is whether it will receive 60 or more required votes (unless it can be tacked-onto a budget reconciliation bill) . Based on the number of “red state” Senators up for re-election in the next year or two, it is indeed possible for the RRA will get through perhaps will one or more concessions. What would be good news is for the Congress to stop giving carte blanche authority in the Code as it has frequently done to allow the Treasury to issue “legislative” type regulations.  Make all rule-making or most subject Treasury regulation projects subject to the notice-and-comment procedures of the APA and again go through the “filters” of OMB.

Trump Immediately Moves to Freeze Treasury Regulation Projects

Well, the Trump Administration just postponed existing Treasury and IRS regulations projects and may not be issuing regulations that business would be inclined to challenge in the near future. The moratorium announced a regulatory freeze pending review in a written memorandum of January 20  by White House Chief of Staff Reince Priebus addressed to the heads of all federal executive departments and agencies.  That means that any proposed or pending regulations will be frozen to permit the new administration time to review them. Non-published regulations under the prior Obama Administration will be withdrawn. Regulations published but not effective are delayed for 60 days review.  In particular this means that the proposed partnership audit rules (REG-136118-15)(not yet filed by January 20), and the publicly traded partnership final section 7704 regulations (T.D. 9817) and the final and temporary regulations under §871(m) (the dividend equivalent regulations) the latter sets being released but not published by January 20 will automatically be withdrawn.

 [1] But see Altera Corp.  v. Comm’r ,  145 T.C. No. 3 (2015), appeal pend’g 9th Cir.)(Tax Court held that cost sharing arrangement regulation under §482 was invalid citing, inter alia, it flunked the requirements under the notice-and-comment rules to the APA and did not otherwise fall within an exception provided in 5 USC §553(d)) . See August, “Alter: Why the Government Can’t Count on Chevron Step Two”, Tax Notes, Special Report (6/06/2016); "Altera and Cost-Sharing Requirements Under Section 482: Another Tax Court Rebuke to the IRS," 18 Bus. Entities 4 (Jan./Feb. 2016).

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