In my last post I attempted to show how everyone in the 1940’s and 1950’s believed most Treasury Regulations were interpretive.  Kristin properly responds with a “so what.”  Times change and Kristin pushes the idea that the function of tax administration has transformed from revenue raising to social policy implementation.  She’s not the only one.  I encourage readers to check out these two great articles:  Susannah Camic Tahk, Everything is Tax: Evaluating the Structural Transformation of U.S. Policymaking, 50 Harv. J. Legislative 67 (2013); Linda Sugin, The Great and Mighty Tax Law: How the Roberts Court has Reduced Constitutional Scrutiny of Taxes and Tax Expenditures, 78 Brooklyn L. Rev. 777 (2103).

So today’s post is to take a look at the claim that tax administration has changed sufficiently to change how we classify Treasury Regulations.  Big caveat here: it also may be that other changes in the law or in society now make it appropriate to classify Treasury Regulations as legislative and not interpretive.  I’m not going there today. 

Much of the recent scholarship on how tax administration has changed focuses on various transfer programs—notably the Earned Income Tax Credit (EITC) and the Affordable Care Act (ACA). Some commentators have suggested that the social welfare function served by the EITC should trigger a reformed due process analysis for tax administration.  I really like this article by Megan Newman, Low-Income Tax Gap: The Hybrid Nature of the Earned Income Tax Credit Leads to its Exclusion from Due Process Protection, 64 Tax Lawyer 719 (Spring 2011).  And Les keeps telling me that tax issues for Low Income Taxpayers are really issues about subsidies.   He gives a great presentation of these views in his article Nina Olson: A Champion for Taxpayer-Centered Tax Administration, 18 Pitt. Tax Rev. 117 (2020).  Surely it seems that the IRS is now tasked with jobs would be foreign to those living in the 1940’s and 1950’s.

I agree with much of that.  The basic idea is that much of the tax laws serve non-revenue raising functions.  That necessarily means that what are ostensibly tax regulations may serve those functions as well, including poverty relief, etc.  I get that.  What I am skeptical about are claims that tax administration today involves social policies more than it did at or before enactment of the APA.  Remember, that’s our inquiry: has tax administration changed such that tax regulations today are doing something qualitatively different than they did in the 1940’s and 1950’s when everyone agreed with Professor Davis that “the great bulk of Treasury Regulations under the tax laws clearly are interpretative rules, not legislative rules….”  Davis, Administrative Law Text (1959) at p. 87. 

I have three reasons to doubt claims that tax administration today involves social policies more than it has in the past. 

First, I don’t even know the baseline.  How do you measure the extent to which tax laws are “oriented” towards or away from revenue collection?  In her “Administering The Tax System We Have” article, Kristin made a good stab at it.  She tried to quantify by studying tax regulations over a three year period.  She created a fairly elaborate coding system and concluded that a substantial % of tax regulations were “oriented away” from revenue raising.  One of several difficulties with that project was that she had no historical baseline.  So while she could draw some (debatable) conclusions about the current allocation of administrative efforts between “revenue-raising” and “social policy” implementation, she could draw no historical conclusions. 

Second, it is not clear whether this recent tax scholarship reflects real change or just a change in awareness among tax academics.  Collecting taxes has always been intimately bound up with social policy.  Scholars in other disciplines have known this for forever.  Economics know this.  Check out Joseph Schumpeter’s 1918 classic “The Crisis of the Tax State”, an extended (and rather hyperbolic) examination of the relationship between taxation and social economy.  Historians know this.  See, Isaac William Martin, Ajay K. Mehrotra, and Moica Prasad, The New Fiscal Sociology:  Taxation in Comparative and Historical Perspective (Cambridge University Press 2009), collecting essays from many historians.  No free link to the book, but you can check out my review of it in the Am. Journal of Legal History.  In particular, historians of slavery know this.  See e.g. Robin Einhorn, American Taxation, American Slavery (U. Chicago Press, 2006).  Political Scientists know this. See, e.g. Julian E. Zelizer, Taxing America:  Wilbur Mills, Congress, and the State, 1945-1975 (Cambridge University Press 1998).  Folks, that’s just pulling off the top of my head from stuff I’ve actually read.  I’m sure a little digging will reveal much more.

Third, while I agree that the objects of Congressional solicitude have expanded (EITC, ACA premium credits, clean energy tax credits), I am skeptical that this represents a fundamental shift in the use of the tax laws.  I think it rather represents a shift in which social policies get put in the tax laws.  History gives us many examples of how Congress has used the taxing power for purposes other than revenue raising.  I think a few examples from this history shows the difficulty in arguing that tax administration is now, in any relevant sense, more “oriented away” from revenue raising than it was before the APA. 

We tend to think that because historical actors had simpler technology they also had simpler minds.  They did not.  They just did not have the internet.  Throughout history there have always been really strong non-revenue raising policies embedded in tax provisions, and folks have always been acutely aware of the non-revenue effects of tax laws. 

Let’s take a look.  

Start with Formation of the Republic.  The first use of tax law to further a social policy and not raise revenue is right there in Article 1, Section 2, Clause 3 of the U.S. Constitution.  It’s the great compromise:  in exchange for allowing enslaved persons to be counted for representation purposes, the Constitution also created a tax break: “direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.”  That’s a tax law. And it was about must more than revenue raising!  It was about embedding slavery into the new American republic.

Not everyone bought into the compromise.  Some Southerners opposed it because they feared Congress would use taxation to achieve abolition.  Since enslaved persons were property, abolitionists would use the federal power to impose “a grievous and enormous tax on it, so as to compel owners to emancipate their slaves rather than pay the tax.”  That’s from the formerly sainted Patrick Henry, as quoted in Robin Einhorn, American Taxation, American Slavery (U. Chicago Press, 2006). at 181.  Others disagreed with Henry’s analysis, but the very robustness of the debate demonstrates the awareness in the 1780’s of how tax systems are used for non-revenue purposes.

Move to the early republic.  Understand that before 1862 the federal government’s revenue came almost entirely from tariffs.  Historical Statistics of the United States, 1789-1945, Table Series P 89-98 (“Federal Government Finances”), pp. 295-298.  Ok.  Do YOU want to argue that tariff legislation did not have a significant non-revenue function?  I thought not.  But if you really think that tariffs were even mostly about revenue raising, I recommend you read this commentary from one of the leading tariff lawyers of his day:  William McKinley, The Tariff in the Days of Henry Clay and Since: An Exhaustive Review of Our Tariff Legislation from 1812 to 1896 (Henry Clay Publishing Co., 1896).  He’ll set you straight.  And the title is not misleading.  It’s an exhaustive read.  While we might today ignore tariffs because they account for so little of the federal government’s revenue, remember again that in the mid-1800’s, tariffs were pretty much the entire funding mechanism. 

And yet it was during this very time—mid 1800’s, when tax administration was chiefly focused on tariff administration—that courts created the doctrines regarding both issuance and authority of tax guidance that lawyers in the 1940’s believed to be in harmony with the commands of the APA.  That’s in my History of Tax Regulations article.

Move to the Civil War.  Few would argue that the Revenue Act of 1862 was anything other than a revenue raiser.  Yet even there Congress wrestled with social policy, in the form of what  tax breaks to give various classes of taxpayers.  That’s what we call “tax expenditures” today.  For example, shortly after Congress enacted the very first income duty in 1862, folks pointed out that the failure to tax owner-occupied housing constituted a tax subsidy that discriminated against renters.  There was back and forth on this issue for several years.  Congress even created a special Commission to study the problem.  But Congress refused to tax the imputed income of self-owned property, for policy reasons.  In fact, Congress explicitly excluded the rental value of self-owned homes from gross income but, to equalize, permitted a deduction for house-renters of their house-rents. Revenue Act of 1864, 13 Stat. 223, 281 (§117).  When the income tax was reinstated in 1913, Congress dropped the house-rent deduction (but kept the imputed income exclusion), over the objection of then Senator (and future Justice) Sutherland, who protested this discrimination against house renters. See Seidman’s Legislative History at 992-993.

Move to 1913.  Let’s talk charities.  When it revived the income tax in 1913, Congress had social policy reasons for exempting certain organizations if they were organized “exclusively” for various purposes, including religious, charitable, scientific, or educational purposes, so long as “no part of the net income of which inures to the benefit of any private stockholder or individual.” 38 Stat. 114, 172. 

Whatever you believe the social policy for tax exempt organizations to be—and Professor Atkinson gives a thorough review of many of them in his article Theories of the Federal Income Tax Exemption for Charities:  Thesis, Antithesis, and Syntheses, 27 Stetson L. Rev. 395 (1997)—the policy is in considerable tension with the revenue function of tax, even if the JCT (for reasons I do not understand) does not include this exclusion in its yearly list of tax expenditures.

The BIR was left to grapple with drawing the social policy lines in the 1910’s and 1920’s, long before the APA.  For example, would income derived from unrelated business activities be subject to tax if it was used entirely for an organization’s exempt purpose?  The BIR said yes; the Supreme Court said no. Trinidad v. Sagrada Orden de Predicadores de la Prvincia del Santisimo Rosario de Filipinas, 263 U.S. 578 (1924). What about a company formed to provide employment to members of a certain labor union, all of whose the profits went to the labor union?  Was its income exempt?  The BIR said no.  And here’s a funny thing:  that position was embedded in sub-Treasury guidance and never challenged.  Legislative rule?  Interpretive rule?  The original decision was in Office Decision (O.D.) 523, 2 C.B. 211 (1920).  The position was re-affirmed by Rev. Rul. 69-386, 1969-2 C. B, 123, and up until the TE/GE “scandal” was found in IRM 7.25.5.2.4. 05-21-2014)(“Nonqualifying Activities”). I don’t know where it is now. 

But What About the EITC?  It is commonly believed that Congress created the EITC in 1975.  See, e.g. Dorothy Brown, The Tax Treatment Of Children: Separate But Unequal, 54 Emory L. J. 757, 766 (2004).  Not quite.  It is more accurate to say that Congress revived the EITC in 1975.  The EITC first appeared in §206 of the Revenue Act of 1924 in the form of a tax credit equal to 25% of earned income. The credit continued until 1932 when it was demoted to a deduction.  This smaller relief eventually died in 1944, succumbing to the revenue demands of WWII, the expansion of the class tax to a mass tax, and the creation of the standard deduction.  

The social policy behind the 1924 EITC was similar to that of the 1975 EITC and was equally in tension with revenue-raising.  Actually, it appears more in tension with revenue raising.  Both policies were intended to “orient” the law towards promoting social justice and “orient away” from revenue raising.  But guess what, folks.  Concepts of social justice change.  The current EITC is viewed as being in lieu of welfare payments to the poor, the idea being that this netting mechanism is more efficient than having one hand of the government paying out benefits while the other hand collects taxes.  The 1924 EITC had a similar social policy but directed at a different class of taxpayers: wealthy wage earners who had the same income as those whose income was due to returns from capital.  And why did Congress view that as social justice?  Why because those wage-earners needed help to save for their retirement in a way that those who were able to generate income from capital did not need.  And since those earning income from captial had gotten a HUGE tax subsidy starting in 1921, wage earning accounts, lawyers, and doctors believed they were getting shafted.  Equalizing those classes of taxpayers involved a potentially larger hit to revenue than shifting welfare payments to the poor into the tax laws.  The legislative history contains back-and-forth debates in Congress over the extent to which revenue needs outweighed the social policy, and vice versa.  You can find the grody details in Bryan Camp, Franklin Roosevelt and the Forgotten History of the Earned Income Tax Credit, 20 Green Bag 2d. 337 (2017).

My Bottom Line: Certainly tax administration has changed since enactment of the APA.  But the changes that are perhaps most relevant to administrative law are procedural changes, not a reorientation of the tax system or a re-balancing of revenue and non-revenue functions.  That is, while I am skeptical that the tax system created by Congress has changed in ways that create a different relationship with the APA, I am concerned that the tax system administered by the Service has changed, and dramatically.  As I spell out in excruciating detail elsewhere, tax administration is now driven by computer and computer coding. Bryan T. Camp, Theory and Practice in Tax Administration, 29 Va. Tax Rev. 227 (2009). This debate about “legislative” and “interpretive” regulations is less important, I think, than recognizing that agency rules encoded in computers have a “force of law” in a much more immediate and real-world way than do the issuance of tax regulations.  Just ask anyone whose electronic filing is rejected!  But I don’t hear Kristin or anyone demanding that every computer coding change go through notice and comment process!  I think these changes create a need to rethink conceptions of due process, but leave that discussion to a different time and place.

Concluding Thoughts: The Weird Results If All Regs Are Legislative

Kristin’s views are definitely trending and becoming the new orthodoxy. In fact, you are likely committing malpractice if you are not mounting a procedural attack on any and all administrative guidance adverse to your client!  

But some weirdness is starting to appear.  Go read Judge Guy’s concurrence in Oakbrook.  Then go read Judge Toro’s recent opinion in Rogerson v. Commissioner, T.C. Memo 2022-49 (May 12, 2022).  Or just keep reading my scribbles here.

The issue in Oakbrook was whether the taxpayer was entitled to a massive deduction for a conservation easement.  The statute requires that a conservation purpose must be guaranteed in perpetuity. §170(h)(5)(A).  Treasury has issued a regulation saying that to meet the perpetuity requirement easement agreements must provide for a particular distribution of proceeds if unexpected events require the later sale of the property subject to the easement. Treas. Reg. 1.170A-14(g)(6)(ii).  The IRS did not think the Oakbrook easement met the statutory perpetuity requirement because it did not meet the regulatory requirement.

Channeling Kristin’s views of tax regulations, the taxpayer argued that the regulation was invalid because Treasury had not properly promulgated it.  The government said “no, we issued the regulation properly.” Two of the judges in Oakbrook agreed with the government and found that Oakbrook did not comply with this validly issued regulation, splitting with the 11^th Circuit.

Judge Guy, however, took a different approach.  He agreed with the taxpayer that the Treasury Regulation was improperly issued and so was invalid.  In fact, he recites the Myth of Mayo by using it to justify, without explanation, his sub-silentio conclusion that the proceeds regulation was a legislative regulation.  Here’s what he says, using the money quote from Mayo:

“The Department of the Treasury must play by the same rules as other federal agencies. The Supreme Court made that clear when it refused to carve out an approach to administrative review good for tax law only and expressly recognized the importance of maintaining a uniform approach to judicial review of administrative action.”  (internal quotes omitted)

I hope you see the myth there.  The battle in Oakbrook was not a battle about what deference to give the regulation; it was about whether the regulation was validly issued.  A void regulation gets no deference because there’s just no there there, just empty space where a regulation might have been.  So who cares what Mayo says about deference?  Kristin is correct that courts do not appear to care whether Treasury regulations are or are not subject to notice and comment requirements.  Everyone in this case assumed the regulation was legislative.  

But was it?  Judge Guy’s concurrence undercuts that assumption.  After finding the regulation void he then went on to say that the taxpayer loses.  He still thought that the easement agreement did not satisfy the perpetuity requirement.  Why?  Well, gosh, he interprets the statute to reach that conclusion!  He applies traditional tools of statutory interpretation to decide what the word “perpetuity” means and then finds that Oakbrook’s easement agreement did not satisfy his judicial interpretation of what “perpetuity” requires. 

Hmmm.  So let me get this straight: when Judge Guy does it we call it “interpretation.”  But a Treasury Regulation doing the same thing is not an interpretive regulation?  It’s a legislative regulation?  That makes no sense to me. 

Rogerson presents a similar scenario.  There, the taxpayer had a bunch of losses from a yacht leasing activity in 2014, 2015, and 2016.  They were passive losses and, as readers know, that meant he could only take them against gains from passive activities.  Thus says §469(a).  It just so happened that he reported a bunch of gains from ownership in three S corporations in those years, all of which he reported as passive activities.  The trouble was, for the nine years prior to 2014, he had reported his involvement in the predecessor corporation as active. 

The issue in the case was whether Mr. Rogerson materially participated in the S corps in the three years at issue.  The statute is notoriously unhelpful here, saying only that a taxpayer’s participation in an activity is active when the taxpayer “materially participates” in the activity.  The statute then says a “taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—(A) regular, (B) continuous, and (C) substantial.” §469(h)(1).  Ok.  Sure.  But what do those words mean?  How are we to interpret those words?  Well, there are regulations for that. 

The applicable regulations say that a taxpayer can satisfy the statutory requirement if they meet any one of seven tests laid out in the regulation.  One of the tests is that the taxpayer has materially participated in the activity for five of the ten years before the year in question.  Temp. Treas. Reg. § 1.469-5T(a)(5). 

Yep.  It’s one of those Temp. regs from long, long ago that was grandfathered when Congress revised §7805 to limit Temp regs to three years.  This one is from 1988.  To complicate matters, Treasury issued associated regulations after that and then modified them with the result, says Judge Toro, that “today, the five of ten test appears in a temporary regulation, while the rule explaining how the five of ten test should be applied appears in a final regulation.”  Op. at 18.

Flourishing the exceptionalism myth, the taxpayer’s attorney attacked the Temp. Reg., trying to avoid having his material participation in prior years count against him in the years at issue.  If the taxpayer could get that nasty regulation voided, then it would appear the taxpayer would be home free. 

Not so fast.  It is true that Judge Toro thought the regulation was valid and applied it.  Bummer for Mr. Rogerson.  But then Judge Toro adds an analysis much like Judge Guy’s concurrence in Oakbrook; he looks at whether Mr. Rogerson’s activities were material participation within the meaning of the statute, disregarding the regulations. 

“To summarize, Mr. Rogerson would not prevail even if he were correct about the procedural validity of the five of ten test, because we find that he was regularly, continuously, and substantially involved in the operations of RAEG during 2014, 2015, and 2016 within the meaning of section 469(h). Accordingly, we need not decide whether the five of ten test is procedurally valid and turn instead to Mr. Rogerson’s final argument.”  Op. at 27.

Hmmm.  So let me get this straight: if you maintain (as Kristin does) that the Treasury Regulation creating the five in ten rule was a “legislative” action and not an “interpretive” action, then is not Judge Toro also engaging in a “legislative” action?  Just like Judge Guy?  Contrariwise, if you say Judge Toro was engaging in mere “interpretive” actions, then how is a Treasury Regulation that does the same thing any different?  How is it not an interpretive action as well? 

There are several answers to that. Kristin’s answer, of course, is the Myth of Mayo: Mayo transformed ALL Treasury regulations into legislative rules because they now carry the mythic “force of law.”  Treasury would agree that this regulation was a legislative one, but for a different reason: the regulation was not issued under the general authority in §7805 but was instead issued under specific authority given Treasury to “specify what constitutes…material participation…for purposes of this section.” § 469(l)(1). 

To me neither are satisfactory answers.   Both are form-over-substance reductions.  Kristin’s answer that “force of law” makes a rule legislative is not only reductionist but also circular.  It obliterates the APA distinction, despite her protestations (she writes “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.”).  Treasury’s answer used to make some sense but has become disconnected from substance over time as Congress randomly authorizes regulations in specific statutes when the general authority would suffice.  In Rogerson, for example, Treasury did not need specific authority to interpret the statutory test for material participation.  Ya got three statutory words: regular, substantial, continuous.  What those words mean is an interpretive task, whether done by a single judge or by the Treasury Department.

I think there’s a better way to distinguish “interpretive” from “legislative” rules.  It involves looking at each agency, and evaluating what the agency action is attempting to do in relation to its organic statute.  It’s an agency-by-agency determination, not some unified field theory of administrative law.  The APA is not a hammer.  But I promised Les I’d keep this under 4,000 words and I’m already over that, so I must leave those thoughts for another day. 

To recap: we are concerned with the question of how must Treasury regulations be promulgated to be in conformity with the APA.  To answer that question, Kristin starts her analysis with the APA text.  All agencies must conform to the APA.  It’s a hammer.  Kristin has spent her academic career looking for a unified theory of administrative law and she views the APA as the enforcement mechanism to whack all the governmental agencies that pop up their unruly heads.  Agencies that do not conform to a strict reading of the APA must be claiming to be “exceptional” from the law.  That’s the Myth of Tax Exceptionalism I discussed yesterday.

To achieve this trans-agency uniformity, Kristen looks at the words in the APA and gives them a strict, but abstract, meaning:  “legislative” means “force of law.”  She then applies that meaning to various agencies to whack them into conformity.  When she applies it to the Treasury Department she concludes that ALL Treasury regulations have the “force of law” and are, therefore, legislative for issuance purposes under the APA.  For that proposition she looks to the Supreme Court’s decision in Mayo as imbuing all Treasury regulations with that magic “force of law.” 

I certainly agree there are certain uniform principles of law that apply to all agencies.  The biggest one is “do what Congress tells you to do.”  I just disagree that the APA is the right place to start.  I believe one should start with the agency’s organic statute and the case law about that agency.  I start there because no lawyer actually practices something called “administrative law.”  Lawyers practice environmental law, or securities law, or SSA disability law….or tax law.  While Kristin and I might study “administrative law” in the abstract, that’s not how it works in the real world. 

I think the history of the APA shows that it was not intended to be a hammer.  It was not enacted to override or intrude on specific laws applicable to specific agencies.  I think the history of the APA supports reading and applying it not so much as a hammer as a safety net, providing a set of legal principles that agencies should follow.  But there are many ways to obey those principles.  Thus, it’s entirely possible that the APA applies differently to different agencies, depending on the agency’s organic statute.  You need to look at the history. That is particularly true for the Treasury Department. 

Kristin seems to say APA history does not matter, for two reasons.  First, she appears to believe that the APA wiped out all prior agency rules and practices.  It hammered out all that came before.  Second, as to tax administration, she appears to believe that the nature and function of tax administration has dramatically changed since the APA’s enactment.  The 1940’s and 1950’s are no longer relevant.  Specifically, she believes that the tax regulations are now more “oriented away” from revenue raising and “oriented towards” using tax laws to serve non-revenue social policies. She writes “Although the tax system has always served multiple goals, recent decades have seen a dramatic escalation in tax programs and provisions serving purposes other than traditional revenue raising.” “Administering the Tax System We Have,” 63 Duke L.J. 1717, 1728 (2014). 

I disagree with Kristin on both counts.   It’s part of what I call the “Myth of Change”  that I mentioned yesterday.  First, I think it is critical to understand that Treasury was promulgating regulations long, long before the APA was enacted.  The APA was enacted on top of an existing tax guidance structure.  Second,I think tax administration has always been an exercise in balancing revenue raising needs with social policies.  To be sure, the particular social policies that Congress wants to affect through taxation have changed over time, but not the use of the tax laws to do more than raise revenue.   I have not seen convincing evidence that Congress is using the tax laws now more than ever for social policy as opposed to revenue raising.  That’s the Myth of Change.

1. Tax Regulations Came Before The APA

The APA, 60 Stat. 237 was enacted June 11, 1946.  It resulted from the Attorney General Office’s monumental study of federal agencies, published in a famous 1941 Final Report.  That Report is still highly influential on how courts apply the APA. see Joanna Grisinger,  Law in Action: The Attorney General’s Committee on Administrative Procedure, 20 J. of Policy History 379 (2008) (reviewing the influence of the Final Report on the APA).  The Final Report, in turn, grew out of a detailed study of then-existing agencies, a study contained in 27 Monographs written by staff, each running hundreds of pages.  Each one is a book.  Monograph 22 focused on the tax administration, back at a time when the IRS was called the Bureau of Internal Revenue (BIR).

Our understanding how the APA applies to tax regulations should thus start in the 1940’s because unlike chicken and eggs, we actually know what came first: tax regulations!  And then, yes indeedy, we need to see whether tax administration or general principles of administrative law have changed so much as to require a change in that relationship. 

What lessons do we learn from this history? 

(a) The APA was not intended to be a hammer. 

The AG’s Committee “had initially hoped to be able to suggest uniform rules for agency practice” similar to the Walter-Logan bill that Congress had passed and President Roosevelt had vetoed. Final Report at 22 (emphasis supplied).  That’s what Kristin wants.  In light of the information produced in the 27 monographs, however, the Final Report backed away considerably from that aspiration and instead prescribed a general framework for balancing the goals of agency efficiency and autonomy with the goals of agency transparency and protection of individuals from arbitrary agency actions.  See generally, Roni A. Elias, The Legislative History of the Administrative Procedure Act, 27 Fordham Envtl. L. Rev. 207 (2008)(nice short student note). 

That is why the resulting APA was widely understood as standing for the proposition that “procedural uniformity was not well suited to the administrative process.” Grisinger, supra, at 402.  That is, the APA provided generalized standards for controlling administrative actions rather than detailed and strict prescriptions.  

As enacted, the APA incorporated broad conceptual principles of administrative law.  Fundamentally was the binary notion of what agencies did.  Agency action was either an “adjudication” or a “rulemaking.”  Roughly speaking, rulemaking was forward-looking, the process of creating some kind of general statement that would apply to a broad set of situations in the future.  In contrast, adjudication was backwards-looking, the process of applying the law to an existing set of facts. 

As to rulemaking, the APA created large conceptual baskets for types of rules, with associated procedures for their issuance.  Again, as Jack Townsend properly noted and as I discussed yesterday, the APA says nothing about what weight various types of rules should carry with the courts.  The default issuance procedure was notice-and-comment.  Some regulations had to go through a more formal process, but only when Congress specified by using the magic language “on the record after a hearing.”  United States v. Florida East Coast Ry., 410 U.S. 224 (1973).  And other regulations could be issued with less formal process if they were either “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice” or if the issuing agency had “good cause” to find that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”  5 U.S.C. §553(b).  These foundational concepts were roomy enough to accommodate a wide variety of guidance modalities. 

Let’s see what lesson we can find about tax guidance.

(b) Treasury Regulations were not believed to require notice and comment for issuance. 

The contemporary view in the 1940’s was that existing issuance procedures were consistent with this new “constitution” of administrative law.  The concerns expressed in the Final Report related mostly to the new agencies created by the New Deal, agencies that “have been devised by Congress under the pressure of events for the exercise of new powers in new fields.” Final Report at 213 (emphasis supplied).  Thus, nothing in either Monograph 22 nor the Committee’s Final Report suggests there were concerns with Treasury regulations.  Far from it.  Monograph 22 acknowledged that the “considerable history” behind the BIR made it a very different subject from other agencies “which are working in areas only recently occupied by the Federal Government.” Monograph 22 at 146.

The writers of Monograph 22 discuss in some detail the issuance of a variety of tax guidance documents.  They were fine with the then current process.  Public hearings?  That “would probably be of small practical value, since the problems to be studied are of a highly technical or “legal” character…” Id. at p 147.  Moreover, “time…is often a problem.”  Id. at 146.  Well, Duh!  The writers suggested notice and comment would be appropriate “when time allowed.”  Id.  Thus, the vision was that Treasury Regulations would normally be issued without notice and comment unless time allowed or other circumstances required.  When the writers did express concerns about agency guidance, it was with sub-Treasury guidance being too prolific and de-centralized. Id. at 150-156.  Anyone reading Monograph 22 today will find it very familiar: what was true then is largely still true today. 

Given this history, it is not surprising that the common view was that the APA did not require Treasury to issue most regulations through notice-and-comment process.   That, perforce, meant the rules should be classified as interpretive.  The great administrative law scholar Kenneth Culp Davis reflected this general understanding.  Writing in 1959 for law students, he explained that “the great bulk of Treasury Regulations under the tax laws clearly are interpretative rules, not legislative rules, despite the provision of §7805….  Without the grant of power by §7805, the power of the Secretary or his delegate would be the same…” Administrative Law Text (Foundation Press Hornbook Series) (1959) at 87.   

Again, to reiterate Jack’s point: the APA is notoriously silent on the extent to which a court must follow agency rules when deciding a dispute.  While §706 instructs the reviewing court to “decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action,” that directive is silent on the effect of agency guidance on the court’s task.  The general understanding in 1946—expressed in the influential Attorney General’s Manual as well as elsewhere—was that the APA neither added to nor subtracted from the law of judicial review as it had developed to that point, but instead was only a restatement of existing law.

Into this silence post-APA tax cases continued the pre-APA approach of evaluating tax guidance depending on the level of authority behind its issuance.  Under that view, pre-APA case law had long of distinguished between Treasury and sub-Treasury guidance.  The post-APA case law continued that distinction, with no discussion of how the Treasury regulations were issued.  For example, in 1948 the Supreme Court considered the validity of a regulation that required taxpayers using the installment sale rules to compute deductions consistently with income.  In its opinion, the Court said nothing about whether the recently enacted APA now required changes in how regulations were issued.  Instead, it just went ahead and explained the proper level of deference to be given, proposing this standard: “Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and…should not be overruled except for weighty reasons.” Commissioner v. South Texas Lumber Co. 333 U.S. 496, 501 (1948).  Hmmm.  Sounds a lot like Chevron!  And Mayo.  And just as in those opinions, the Court’s South Texas Lumber opinion makes no linkage between how the Treasury regulations were issued and the level of deference accorded them.  ‘Cause that was a different issue.

Lower courts as well continued to distinguish Treasury guidance from sub-Treasury guidance, just as they did in pre-APA.  Post APA decisions repeatedly follow the pre-APA approach that sub-Treasury guidance “not promulgated by Secretary” did not have the same weight with courts as Treasury regulations in interpreting tax statutes.  See, e.g. Biddle v. Commissioner, 302 U.S. 573 (1938), 383  (1938); Helvering v. New York Trust Co., 292 U.S. 455, 468 (1934).  But again, these cases do not turn on how the guidance was issued.  They turned on who was issuing it: Treasury or IRS. 

The proper application of the APA to tax administration must therefore start with the recognition that, at the time of its enactment, tax administration was generally considered to be obedient to the APA’s restatement of basic administrative principles.  The APA’s statutory language did not require any changes to how tax guidance was issued or how it was evaluated by courts when adjudicating tax disputes. 

2.  Tax Administration Is Same As It Ever Was

Kristin properly pushes back that the analysis cannot end there.  The next step in the analysis, is to see what post-APA events might have changed this relationship between the APA and tax administration.  Hmmm.  Well….certainly the language of the APA has not changed. The concepts are still broadly defined.  They still do not imagine that only documents titled “regulations” are agency rules subject to the APA, nor do they imagine that every agency document titled “regulation” is a rule that must either be issued in the same way as all other agency rules or that ought to receive the same kind of judicial deference as all other similarly-titled guidance.  These are roomy concepts.  So the inquiry is whether either tax administration or judicial interpretation of the APA, or both, have changed in a way that creates a different relationship between the APA and tax administration. 

We’ll save that inquiry for a different post, next week. 

First, I will start where Jack started.  He started his post with the observation that the APA contains guidance on how agencies are supposed to promulgate of agency regulations (called “Rules” in the APA).  But the APA does not similarly give guidance as to what weight an agency rule is supposed to carry when a court seeks to resolve a dispute relating to that rule.  To Jack, the question of deference to an agency rule is different that the question of what procedures an agency must follow to issue the rule.  That’s incontrovertible. 

And Kristin does not contradict Jack.  ‘Cause she can’t.  She instead just ignores the distinction.  ‘Cause she can.  She seems to believe that the distinction between interpretive and legislative rules for APA promulgation purposes was eliminated by the Supreme Court’s opinion in Mayo Foundation for Medical Educ. and Research v. U.S., 562 U.S. 441 (2010).  Her reasoning is that any regulation that carries the “force of law” is legislative and in Mayo, she says in her blog post, “the Supreme Court laid the jurisprudential groundwork for treating all Treasury regulations as legally binding for APA purposes.”

Her reasoning is based on myths.  The first one you can call the Myth of Mayo. 

1. The Myth Of Mayo

In Mayo, the Supremes decided that Treasury Regulations should be given the same weight (i.e. level of deference) as would be given any other agency’s regulations under the Supreme Court’s guidance in Chevron.   Let’s call that “Chevron deference.”  [That’s also a myth, as beautifully demonstrated in Ann Graham, “Searching for Chevron in Muddy Watters: The Roberts Court and Judicial Review of Agency Regulations” 60 Ad. Law Rev. 229 (2008).  But that’s a subject for a different post.]

Mayo says nothing about the distinction between interpretive and legislative rules.  It was a decision about deference.  There was no issue in Mayo over how the regulation at issue had been promulgated.  Again, the issue in Mayo was on the proper level of deference, not on the proper mode of promulgation.  As to deference, the Mayo court sure did say that ALL Treasury regulations get the same treatment as other agency regulations: Chevron deference.  Again, it’s beyond this short post to go into all the reasons for why that is so, but it basically comes down to what is the right way to balance the duties of a court with the duties of administrative agencies.

The myth of Mayo is to say that it stands for the proposition that all Treasury regulations are legislative for promulgation purposes.  The Court said nothing of the sort!  Kristin, however, conflates the two issues that Jack presents as separate: (1) how an agency rule must be promulgated, and (2) what deference should a court give an agency rule. 

Why does she do that? Well, because for the past 15 years or so Kristin has been beating on a drum that Treasury violates the APA when it issues ANY regulation without following the “appropriate” notice and comment procedure.  I use the word “appropriate” in quotes because what is “appropriate” under the APA is a moving target.  Thus, for example, we have the current disagreement on the Conservation Easement proceeds regulation between the 11^th Cir. in Hewitt (proceeds regs did not follow proper APA procedure) and the 6^th Circuit in Oakbrook (regs were properly promulgated).  I’ll come back to the Oakbrook/Hewitt disagreement in tomorrow’s post.

Kristin started beating on this drum when she looked at a set of 232 Treasury regulation projects published in the Federal Register in 2003, 2004, and 2005.  She concluded that Treasury had not followed what she considered the appropriate APA promulgation procedure in 40% of those projects.  Those were almost all Temp Regs.  In that article she was not entirely sure that this violated the APA because she was not entirely sure what was a “legislative rule” for APA promulgation purposes.  Kristin studied the matter, wrote a couple more law review articles, and adopted the idea that if a regulation has “the force of law” it must be categorized as a legislative regulation under the APA, and therefore must follow the “appropriate” notice and comment procedure.  And Kristin believes all Treasury Regulations have “force of law” because of Mayo.  Once the Supreme Court said that courts should defer to Treasury Regulations on the same basis as other agency regulations, then that made them “force of law” in Kristin’s view.  Again, she writes: “the Supreme Court laid the jurisprudential groundwork for treating all Treasury regulations as legally binding for APA purposes.”

So the first myth that Kristin invokes to support her claim that all Treasury Regulations are properly categorized as legislative regulations is the myth of Mayo.  You only get to her conclusion if you follow her logic.  But her logic ignores the distinction Jack presents, the distinction between the rules governing issuance of agency rules (which is in the APA) and the rules governing what weight courts ought to give agency regulations (which is judge-made).  And her logic creates a second myth, the myth of Tax Exceptionalism. 

2. The Myth of Tax Exceptionalism

Once Kristin concludes that all Treasury regulations have the magic “force of law” she concludes that makes them legislative regulations and so they must be issued, per the APA, thorough the au currant judicial interpretation of APA notice and comment requirements. As a good textualist, Kristin believes all agencies are strictly bound by the APA unless and until Congress specifically exempts them.  So one must find a specific statutory exception to avoid the APA.  She finds no text in the Tax Code that excludes tax regulations from the APA.  Simple!  Case closed! 

And that’s how we get the myth of tax exceptionalism. That myth says that anyone who disagrees with her analysis must be saying that tax administration is not bound by the APA, must be trying to—gasp!—avoid the law!  

No one, ever, has said that the APA does not apply to Treasury regulations.  No one is trying to avoid the law.  It’s an intellectually empty claim.  It’s what in debate we used to call a straw man fallacy.  Remember the difference that Jack explains (and that Kristin simply ignores) between questions of how must an agency issue regulations and how must a court give deference to agency regulations.  In neither branch of the analysis has there ever been a claim that Treasury regulations are somehow exempted from the APA.  Let’s look at each separately.

First, as to on what deference to give regulations, Jack points out correctly that the APA is simply silent on the deference issue.  So as to that there is nothing to be exceptional from!  What courts used to say is that they would give Treasury regulations different authoritative effect than they gave other agency regulations.  Courts did that because the S.Ct. told them to.  See National Muffler.  However, as Kristin rightly points out, the winds of law have changed.  The S.Ct. changed its mind in Mayo.  But, again, that opinion did not turn on whether the regulation there was interpretive or legislative.  The Court was there dealing with the question of what deference to give a 2004 amendment to a 1951 regulation and not whether either had been validly promulgated.  Promulgation was not at issue.  There is nary a word in Mayo about whether the regulations at issue in that case were legislative or interpretive.  It simply did not matter.  And the money quote from Mayo says nothing about promulgation!  It’s all about deference.  Here’s the standard money quote: “we are not inclined to carve out an approach to administrative review good for tax law only. To the contrary, we have expressly recognized the importance of maintaining a uniform approach to judicial review of administrative action.” 562 U.S. at 55. (cleaned up, emphasis supplied).  It’s all about “review” and not about “promulgation.”  Oh, and funny note: Kristin keeps chastising the Treasury Department for claiming “tax exceptionalism.”  But in Mayo it was the government that was asking the Court to apply Chevron. 

Second, as to what is the proper process for promulgation of Treasury Regulations, no one, ever, has said Treasury Regulations are not subject to the APA.  The disagreement is how the APA applies, and how should it apply, to Treasury Regulations.  Kristin’s answer is simplicity itself: she links the deference issue to the promulgation issue.  Read her sentence again: “the Supreme Court [in Mayo] laid the jurisprudential groundwork for treating all Treasury regulations as legally binding for APA purposes.”

Her rationale is that because Mayo blessed ALL Treasury regulations with what Kristin calls “force of law,” then by doing so the Supreme Court, unwittingly, transformed ALL Treasury Regulations into legislative regulations, obliterating without comment over 60 years of understanding.

How can that be?  Well, this takes us to the third myth: the myth of change. 

3. The Myth That Tax Administration Has Changed.

No one, ever, has argued that all Treasury regulations are interpretive for APA purposes.  Jack points out, correctly, that when the APA was first enacted, in the 1940’s, everyone did believe that most Treasury regulations fell into the interpretive category of APA.  I go in to tedious detail on why that is so in “A History Of Tax Regulations Prior to the Administrative Procedure Act,” 63 Duke L.J. 1673 (2014). 

Importantly, Kristin does not (and cannot) deny Jack’s basic point.  Her response is basically “that was then, this is now.”  Her longer explanation is in “Administering the Tax System We Have,” 63 Duke L.J. 1717 (2014).

Her point is well taken, but can easily be pushed too far.  It is certainly possible that even though tax regulations were considered mostly as interpretive regulations under the APA, circumstances now require them to be moved into the legislative regulation box.  Or perhaps we should have a different criteria for typing tax regulations than those who wrote the APA came up with in the 1940’s.

In tomorrow’s post I’ll examine Kristin’s claims on why that should now be different and try to give some refinement to her stark claim that ALL Treasury Regulations are legislative rules under the APA.   I think Kristin’s claim that tax administration has changed has some definite truth to it, but is considerably overstated. 

Again, neither Jack nor I assert that all Treasury regulations are interpretive.  Some are.  Some are legislative.  Kristin, in contrast, asserts that ALL Treasury regulations are legislative (although she leaves open—for now—the question of whether sub-regulatory guidance issued by the IRS are APA legislative rules).  What troubles me about that claim, aside from my inherent distrust of categorical claims, is its reliance on a hugely abstract and amorphous concept called “force of law” to classify claims.  It’s a very top-down approach, which is understandable as Kristin is an academician and is used to taking the 30,000 foot view.  But that approach is not particularly helpful for agency attorneys and those they advise on how to produce timely and effective guidance.  More on that tomorrow.