Andrew Pruitt · July 2011
79 GEO. WASH. L. REV. 1558 (2011)
Can the Internal Revenue Service (“IRS”), by exercising its regulatory powers over the federal tax laws, reverse taxpayer-favorable court decisions? In a series of recent cases, most prominently Intermountain Insurance Service of Vail, LLC v. Commissioner (“Intermountain II”), the IRS has argued that it can invalidate recently decided cases by issuing retroactive interpretative regulations and asserting that these regulations warrant controlling deference under established administrative law principles. The IRS’s arguments have stirred controversy in the tax community, giving further credence to claims that the agency and the Treasury Department (“Treasury”) are pushing the boundaries of their regulatory powers to an extent never before seen.
The Commissioner of Internal Revenue cited two sources of law for this broad authority. The first is the agency’s statutory prerogative under the Internal Revenue Code (“Code”) to issue “all needful rules and regulations” to enforce the federal tax laws, including retroactive regulations. The second is the doctrine of administrative deference, most commonly associated with the United States Supreme Court’s decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., and more recently articulated in National Cable & Telecommunications Ass’n v. Brand X Internet Services (“Brand X”). Brand X established that a court must uphold a reasonable agency interpretation of an ambiguous statute even if a court has already issued a contrary interpretation.
For decades, the scope of the IRS and Treasury’s regulatory authority has been a highly controversial topic, and the extent to which these entities are subject to general principles of administrative law is central to this debate. Both government bodies, as well as many in the tax community, have long maintained that there is a sort of “tax exceptionalism” in administrative law, and the IRS’s arguments in Intermountain II have sounded similar themes. Although the Commissioner lost 13–0 in the United States Tax Court, the IRS was not deterred. Acknowledging that “it would be a long haul,” the agency announced that it would continue to litigate until it gets “the right answer.” The question of judicial deference to retroactive interpretative Treasury regulations, or I.R.C. § 7805(b) regulations, is now part of the ongoing (and escalating) litigation in the circuit courts, and the IRS’s arguments are gaining traction.
The caselaw on judicial deference to tax regulations, including retroactive regulations, has been described as “a muddle,” “markedly erratic,” and “a quagmire.” Tax scholars and practitioners have not only noted a “continuing and widening confusion in the lower courts” over which standard applies, but have also disagreed themselves over which standard should apply. The question is whether Chevron and its progeny govern judicial review of tax regulations or whether the Court’s earlier, tax-specific standard under National Muffler Dealers Ass’n v. United States retains precedential force. The Supreme Court has had decades to address the debate, but has only recently sought to bring any clarity to the issue, with its 2011 decision in Mayo Foundation for Medical Education & Research v. United States.
This Essay argues that the Chevron doctrine is not the appropriate standard for reviewing I.R.C. § 7805(b) regulations, and that the National Muffler test is the better alternative. Chevron and Brand X are premised on the idea that controlling deference should be accorded only to agency rules issued pursuant to congressional delegations of policymaking authority. The IRS’s attempts to overturn court decisions through the agency rulemaking process do not warrant heightened deference because, as a reincorporation of its failed litigating position and an obstruction of the judicial decisionmaking process, they do not fall within the limited scope of the Chevron doctrine. This hybrid legislative-adjudicative agency action warrants a more nuanced and flexible judicial deference framework, not Chevron’s powerful, mandatory regime. The National Muffler test—a tax-specific, multifactor standard—would more appropriately balance the IRS’s regulatory interests with the countervailing interests of both taxpayer-litigants and the judiciary in the validity and integrity of judicial decisions.
