Lesson From The Tax Court: Don’t Confuse Dummy Returns With Substitutes For Returns

We welcome back Professor Bryan Camp, the George Mahon Professor of Law at Texas Tech School of Law, who offers guidance on the §6020 SFR process and the §6212 deficiency process. Every Monday, Professor Camp publishes posts like this one in his “Lesson From The Tax Court” series on the TaxProf blog. This post is a cross post that originally appeared on the TaxProf blog on October 3rd.

The act of filing a return is central to tax administration. Section 6011 sets out the general requirement: “any person made liable for any tax imposed by this title” must file a return “according to the forms and regulations prescribed by the Secretary.”  Section 6012 gets more granular and gives more specific requirements and exemptions from filing.

When a taxpayer fails to file a return, even after being reminded to do so, the IRS can simply send the taxpayer a Notice of Deficiency (NOD), and let the taxpayer either agree to the proposed tax liability or petition Tax Court.  Or the IRS can follow the §6020 Substitute For Return (SFR) process whereby it creates a return for the taxpayer either with or without the taxpayer’s cooperation.

Regardless of how the IRS deals with the non-filer, an IRS employee first needs to create an account in the computer system for the relevant tax period.  They do that by inputting the proper Transaction Code and preparing what is called a “dummy return” to support it.  But there is one important difference between dummy returns used to set up the NOD process and dummy returns used to set up the SFR process: the §6651(a)(2) failure to pay penalties only apply to the failure to pay taxes shown on a “return.”  Thus, the penalties do not apply to bare NODs.  They do apply to SFRs.  That’s why today’s lesson is useful.

In William T. Ashford v. Commissioner, T.C. Memo. 2022-101 (Sept. 29, 2022) (Judge Vasquez), we learn what to look for in the IRS files to see whether a dummy return used by the IRS leads to a proper SFR or not.  We also learn why you cannot always trust the advice you see on the IRS website.  Details below the fold.

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The IRS has a choice of two ways to proceed when it determines a taxpayer has failed to file a required return: the §6020 SFR process or the §6212 deficiency process.  Let’s take a quick look at both.

    A.  The §6020 SFR Process

Section 6020 has two subsections.  Section 6020(a) permits the IRS to prepare the taxpayer’s return with the cooperation of the taxpayer.  I call that the friendly SFR because that return will be treated as the return of the taxpayer for all purposes.  For example, it starts the §6501 assessment limitation period.  It counts as triggering the various bankruptcy discharge clocks. 11 U.S.C. §523(a) (flush language).  It means the taxpayer cannot be tagged as a non-filer.  That’s not really on the plate for today’s lesson, although the difference between what constitutes a 6020(a) and 6020(b) SFR is very interesting and not entirely intuitive.  See Bryan T. Camp, “The Never-Ending Battle,” 111 Tax Notes 373 (Apr. 17, 2006).

Section 6020(b) is the unfriendly SFR.  It provides that when the taxpayer does not cooperate, the IRS is authorized to “make such return from [its] own knowledge and from such information as [it] can obtain through testimony or otherwise.”  Unlike §6020(a), §6020(b) SFRs are not always treated as returns of the taxpayer.  Generally, it’s a heads-I-win, tails-you-lose proposition.

On the one hand, for example, almost all courts refuse to construe a §6020(b) SFR as the taxpayer’s return when to do so would permit the taxpayer to discharge of a tax liability in bankruptcy.  See generally Ken Weil’s excellent post on the exception that proves the rule: “Rare Discharge in Bankruptcy for Taxpayers with a Return Filed After an SFR Assessment,” Procedurally Taxing Blog (May 22, 2022).

On the other hand, §6651(g) provides that such a return will count as the return of the taxpayer for purposes of computing the §6651(a)(2) penalty for failure to pay the tax owed. That’s an important point for today’s lesson.  Until 1996, a §6020(b) SFR was not deemed to be a “return” within the meaning of §6651(a)(2).  See generally Rev. Rul. 76-562, 1976-2 C.B. 430.  That is because §6651(a)(2) imposes the failure to pay penalty only as to what is “shown as tax on any return.” Before 1996, both courts and the IRS interpreted that to mean the return of the taxpayer.  That perverse situation rewarded obstreperous taxpayers and penalized cooperative ones.  Congress fixed the problem (at the urging of the IRS and Treasury) by adding §6651(g).  Section 6651(g) now properly aligns the consequences with the behavior.

Construing a §6020(b) SFR against a taxpayer this way makes sense, if you view it as a result of taxpayer noncompliance with the §6011 filing duty.  To treat it the same as voluntary returns would undermine compliance.  That is what happened before 1996 as to the §6651(a)(2) failure to pay penalties.  But it is not always clear that a 6020(b) SFR results from bad-acting taxpayers, because the process is almost entirely automated and relies upon taxpayers responding to automated notices.  As we all know, a notice properly sent is not always actually received.  A taxpayer’s failure to respond thus may or may not be due to bad faith.

The §6020(b) SFR process is pretty much run by computers with minimal human oversight in a system called the Automated Substitute for Return (ASFR) process.  See generally IRM 5.18.1 (Automated Substitute for Return (ASFR) Program)(March 11, 2020).  The ASFR draws from the Information Return Program (IRP) where the IRS collects and stores everything received on third party information returns such as W-2s and 1099’s.  The ASFR creates an SFR package and sends it to the taxpayer’s last known address giving the taxpayer 30 days to respond.  The 30-Day Letter package is fully automated.  See generally, IRM, Letter 2566. If the taxpayer makes no response, the computers then generate an NOD, giving the taxpayer the usual time to petition Tax Court.  For a more complete description of the ASFR process, see TIGTA Report 2017-30-078, “A Significantly Reduced Automated Substitute for Return Program Negatively Affected Collection and Filing Compliance,” (Sept. 29, 2017). 

Note too that the traditional TC 150 used to open a Tax Module using a dummy return seems to have now been changed to TC 971 with Action Code (AC) 143.  Whenever you see a TC 971 on a transcript you have no idea what it means unless you look carefully at the associated AC because the TC 971 is the Swiss Army knife of transactions codes: it’s used for a wide variety of situations unanticipated when the Automated Data Processing system was first constructed long, long, long ago.

Back to the SFR.  If the IRS chooses to use the SFR process, it thus needs to be sure to create an SFR.  Otherwise, the NOD it sends out will not be treated as resulting from an SFR but will instead be treated as arising from the second way the IRS can deal with non-filers.  Let’s take a look at that first before we get to the lesson on how to tell whether the IRS has created an SFR.

    B. The Deficiency Process

From 1862 to 1924, the SFR process was the only way for the IRS to deal with non-filers.  And once it prepared the SFR it could immediately assess the tax.  There was no deficiency process.  See e.g. Revenue Act of 1913, 38 Stat. 114, at 178 (mandating immediate assessment).

The Revenue Act of 1924, 43 Stat. 253, 296 created the deficiency procedures now codified in §6211 et. seq.  That worked a profound change in tax administration.  While the law had long allowed taxpayers who disagreed with proposed increases to tax a right to conferences within the IRS, the 1924 Act now forbade the IRS from assessing an income, estate or gift tax against a non-consenting taxpayer until after the taxpayer had the chance for pre-payment review by an independent quasi-judicial body.  That body started out as the Board of Tax Appeals (BTA) and morphed over time to its current status as the Tax Court.

In the early days the IRS tried to argue that it did not have to use the deficiency procedures to assess the tax it created on a §6020(b) SFR, but the BTA quickly rejected that position. See Taylor v. Commissioner, 36 B.T.A. 427 (1937) (requiring IRS to follow deficiency procedures when it had prepared return without consent or cooperation of the taxpayer).

Thus the IRS must issue an NOD even after it creates an SFR.  But it does not have to create an SFR in order to issue an NOD to a non-filer.  Courts have long rejected taxpayer arguments that the IRS was limited to the SFR process and that an NOD was invalid against a non-filer unless the IRS’s first prepared an SFR.  See United States v. Harrison, 72-2 USTC ¶ 9573 (S.D.N.Y. 1972)(I cannot find free link, but Judge Weinstein gives an excellent discussion of legislative history); see also Hartman v. Commissioner, 65 T.C. 542, 545 (1975)(taxpayer’s failure to file a return and IRS decision not to prepare a substitute for the return under §6020 did not invalidate the NOD).

So the IRS can choose how to address a non-filer.  However, even though the IRS has the option to forgo the SFR process, it generally chooses the SFR route, for several reasons.  First, perhaps most importantly, encouraging and helping taxpayers prepare and file their own returns has long been recognized as an important part of the IRS mission.  It makes sense administratively to use upstream resources to get as many taxpayers into compliance as possible before using downstream resources for enforced collection.  See e.g. Policy Statement P-5-133, IRM (08-04-2006).  Before a taxpayer’s account goes into the ASFR program, the IRS will have sent the taxpayer at least two “soft” notices asking the taxpayer to file.  Again, however, that sending does not ensure actual receipt.

Second, preparing a §6020(b) return betters serves compliance purposes because §6020(b) SFRs now trigger the §6651(a)(2) addition to tax for failure to pay the amount shown on the “return.”  No such addition can be proposed if the IRS simply sends an NOD.

Finally, a §6020(b) SFR will almost always preclude the taxpayer from obtaining a discharge of the taxes in bankruptcy. See e.g. In Re: Payne, 431 F.3d 1055 (7th Cir. 2005), and cases cited therein.

In contrast to the SFR, if the IRS just sends out an NOD, the well-advised non-filer will promptly file returns to minimize penalties, set up a potential bankruptcy discharge, and start the §6501 limitations period running.  I’m not saying that will always work, but the taxpayer certainly has a better shot than if the IRS has sent the NOD based on a §6020(b) SFR. See e.g. Mendes v. Commissioner, 121 T.C. 308 (2003) (Form 1040 reporting zero tax liability filed 48 months after receiving a notice of deficiency and 22 months after Tax Court petition was not a valid for §6654(d)(1)(B) safe harbor purposes).

    C. The Dummy Return Problem: How To Tell Which Process The IRS Is Using?

So how do you tell whether the NOD being issued is based on an SFR or just a bare NOD?  After all, both processes result in an NOD.  And yet they have some very different consequences for taxpayers.

Part of the problem is that the IRS initiates both the 6020(b) process and the notice of deficiency process the same way:  it opens what is called a Tax Module on the computer system in order to process documents and track the work done.  Because of various and ancient computer design decisions dating back to the 1950’s, the IRS employee who creates a Tax Module needs a return to do so.  If there is no taxpayer-prepared Form 1040 to use (for income taxes), the employee will use what is basically a fake 1040 to support opening the module.  That fake form is often called a “dummy return.” In the ASFR program, the Tax Module often opens before the IRS pulls enough information from third parties together to come up with a proposed tax liability.

But while that dummy return helps create the Tax Module it cannot, in and of itself, create an SFR.  The Tax Court has held that dummy returns do not serve as a §6020(b) return.  They need something more.  Only when the IRS also creates records which support an assessment, properly associates those documents contemporaneously, and some authorized IRS employees signs off on the package will the dummy return caterpillar transform into a beautiful §6020(b) butterfly.  Millsap v. Commissioner, 91 T.C.  926 (1988).  For example, in Cabirac v. Commissioner, 120 T.C. 163 (2003), the Court denied the §6651(a)(2) failure to pay penalties because it decided that while the revenue agent’s report dated May 31, 2000, “contained sufficient information from which to calculate petitioner’s tax liability” it was not sufficiently contemporaneous with the dummy return used to open the Tax Module on February 23, 2000.

For years there was litigation over whether and when the IRS had properly created an SFR.  In 2008 Treasury issued final regulations to try and create more certainty.  See 73 Fed. Register 9188.  As you might expect, the regulations make it pretty easy for the IRS.  For example, while the regulations say that the SFR must be “signed” by an authorized official, they are very generous on what meets that requirement, providing that an SFR “may be signed by the name or title of an Internal Revenue Officer or employee being handwritten, stamped, typed, printed or otherwise mechanically affixed to the return” and that the “signature may be in written or electronic form.”  Treas. Reg. 301.6020-1(b)(2) (emphasis supplied).

The regulations also give the IRS flexibility as to what documents to associate together in a package, but what the regulations also require is some form to forge the documents together into an SFR.  Typically, the IRS will associate a Revenue Agent’s Report (often on a Form 886 series), and a Form 4549.  But it seems that the key document to look for is “Form 13496, IRC Section 6020(b) Certification.” That Form is what forges all those other documents into an SFR. See e.g. IRM (07-08-2021)(“All SFRs having tax adjustments that follow deficiency procedures with the failure to pay (FTP) penalty applied under IRC 6651(g) must have a Form 13496, IRC Section 6020(b) Certification, completed.”).  See generally IRM (01-05-2010) (Form 13496 Certification Procedures).  In fact, I would not be surprised if that Form—mentioned specifically in the regulation—becomes the bright-line test for the proper creation of an SFR, even though the regulation generously says it is not the exclusive form the IRS must use.

Facts and Lesson

The tax years at issue are 2013 and 2014.  In those years Mr. Ashford received self-employment income for services provided to Aviation Managed Solutions, earning just about $90,000 in 2013 and $100,000 in 2014.  Although he had filed returns for prior years, it appears that at some point in 2013 Mr. Ashford unintelligently came to believe that he was not required to file returns or pay taxes.

Eventually the IRS caught the error—likely through IRP—and sent NODs to Mr. Ashford in 2018.  The NODs asserted taxes and failure to file penalties, and also asserted the §6651(a)(2) failure to pay penalty.  Mr. Ashford petitioned Tax Court arguing, in part, that the NODs were not based on proper SFRs because the IRS had used dummy returns to open the Tax Module.  He argued that the use of dummy returns resulted in no SFRs and that, in turn, invalidated both the asserted deficiencies and the asserted penalties.

As to the deficiencies, Judge Vasquez explains that the mere use of a dummy return does not affect the validity of the proposed deficiencies.  Op. at 6. That is because the IRS has a choice in how to proceed against non-filers.  It can issue its NOD based either on an SFR it prepares or simply on the basis of an examination.

As to the §6651(a)(2) penalties, however, is does matter whether the NOD was based on an SFR.  Again, however, the use of dummy returns is irrelevant.  Here, Judge Vasquez explains that the NODs in this case were indeed based on an SFR and recites how each one contained the magic Form 13496.  Op. at footnote 9.

Bottom line: The IRS had properly transformed the dummy returns to create §6020(b) SFRs.

Comment:  Misleading IRS Website?  I am not clear on what soft Notices or Letters the IRS uses to ask for unfiled returns before it sends out a 6020(b) SFR package.  It appears that if you or your client gets the CP2566, then you must really be careful to prevent an unfriendly SFR.  The CP2566 is the 30-day letter sent out by the ASFR, as part of the 6020(b) SFR package.  And the IRS takes the position that once a taxpayer is presented with that package, the taxpayer is helpless to prevent a 6020(b) SFR if the taxpayer simply signs the accompanying Form 4549.  In a reversal of prior rulings, the IRS now says the taxpayer’s consent to the proposed deficiencies on Form 4549 does not result in a 6020(a) SFR.  See Rev. Rul. 2005-59.  For details and critiques on why this is one of the most inane Rev. Rules ever, see Bryan Camp, “The Function of Forms in the Substitute-for-Return Process,” 111 Tax Notes 1511 (June 26, 2006).  But there it is.  As best I can tell, it’s only been discussed by one court, a bankruptcy court in Texas in 2017, where the debtor had many other problems.

But the IRS website ignores the Rev. Rule!  It thus gives bad advice to taxpayers.  It says that taxpayers who receive the CP2566 can either “File your tax return immediately” or “Accept our proposed assessment by signing and returning the Response Form.”  Well, gosh, that’s pretty misleading if signing the forms included in the CP2566 create a §6020(b) SFR!  That is definitely not the same as properly filling in a Form 1040, signing it and filing it!  So it would be useful to know what CPs get issued before the taxpayer’s account gets loaded into the ASFR system and it becomes too late to create a friendly SFR.  BTW, CP stands for “Computer Paragraph,” meaning that any notice containing a “CP” before the number is a totally automated notice. I welcome any comments to address my confusion here.

Coda: There is some weirdness in this case.  In 2019 Mr. Ashford received a notice from the Social Security Administration that it was reducing his 2013 self-employment income from the amounts reported on the Form 1099 to zero.  That may have resulted from the IRS’s premature assessment of the deficiency while the case was pending in Tax Court, and then its abatement of that assessment.  That’s kind of a rough justice for Mr. Ashford, especially if he was arguing to the effect that “I don’t have to pay self-employment taxes on the income but I still get to use it to generate Social Security benefits.”  Now he’s got to figure out how to straighten out the SSA records. 

The More Things Change The More They Remain The Same

Today’s post is the last in the three-part series from Professor Bryan Camp addressing how to classify tax regulations under the APA. In today’s post, Bryan considers whether current tax administration involves social policies and non revenue raising functions more so today than the past. He concludes by offering observations on two recent cases, Oakbrook Land Holdings v Commissioner and Rogerson v Commissioner. Les

To recap: we are concerned with the question of how must Treasury regulations be promulgated to be in conformity with the APA.  All agencies must conform to the APA.  No one doubts that.  The discussion is about the proper relationship—or fit—of Treasury Regulations to the APA.  Jack Townsend posted his views that the APA does not require most Treasury regulations to be issued through the notice and comment process because they are interpretive regulations and not legislative regulations.  Kristin Hickman posted her views that ALL Treasury Regulations are legislative.  And she says her views are the new orthodoxy. 

But if hers is the new orthodoxy, there are still heretics.  I’m one.  I agree with Jack that most Treasury Regulations are properly classified as interpretive regulations.


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 tariffsHistorical 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 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 11th 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. 

The APA Is Not A Hammer

Professor Bryan Camp follows up from his post yesterday, as he explores the history of the APA and tax regulations to support his view that all tax regulations are not legislative rules under the APA. For Professor Hickman’s post, see It’s Time To Let Go: Treasury Regulations Are Not Interpretative Rules. While this issue may seem a bit academic, it is important, as litigants increasingly challenge the procedural validity of tax guidance in cases like Oakbrook Land Holdings v Comm’r and Hewitt v Comm’r. Les

Kristin Hickman loves the APA.  To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love.  It’s her Hammer, her righteous Mjölnir

And when you have a hammer, everything looks like a nail.  Including ALL Treasury regulations.  This is a follow-up post from yesterday to explain why I disagree with Kristin’s contention that ALL Treasury regulations are “legislative” for APA purposes. 


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. 

It’s Time To Get Real: Treasury Regulations Can Certainly Be Interpretive Rules

Professor Bryan Camp, the George Mahon Professor of Law at Texas Tech School of Law, offers his perspective on the recent posts from Jack Townsend and Kristin Hickman that have addressed the controversial and difficult issue concerning the proper classification of tax regulations under the APA. For Jack’s original post, see here. Kristin’s response. Jack’s reply (on his blog), see here. Les

It was interesting to read the recent back-and-forth between Jack Townsend and Kristin Hickman.  Jack takes the position that most Treasury Regulations are properly categorized as interpretive rules under the APA for purposes of evaluating whether they are validly promulgated.  Kristin disagrees, telling Jack “it’s time to let go.” She says that anyone who fails to recognize that ALL Treasury Regulations are legislative rules under the APA is clinging to an outdated concept of tax exceptionalism and has simply failed to see that ship has sailed.

So I guess I’m blind, too.  I also know, moreover, that ships have a habit of returning to port.  The law has never been static and just because the winds may favor one direction now does not mean they will not change.  I think Jack is mostly right in what he says.  I think Kristin’s assertion that ALL Treasury regulations are “legislative” for APA purposes is incorrect, both as a descriptive and normative matter.  Kristin is a prolific and entrepreneurial academic activist with an impressive list of articles to her credit.  More than I will ever write, that’s for sure.  But that does not make her right.  And it certainly does not give her the right to condescend.

Les and the PT gang have kindly agreed to let me offer you my thoughts on the matter in two posts, one today and one tomorrow.  In my view, Kristin’s conclusion is based on three myths: the myth of Mayo, the myth of Tax Exceptionalism, and the Myth of Change. 


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 11th Cir. in Hewitt (proceeds regs did not follow proper APA procedure) and the 6th 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.   

Juneteenth And Section 7503: A New Federal Holiday Give a New “Last Chance” For Some

Today guest blogger Bryan Camp discuses the implications for tax procedure of the new federal holiday celebrating Juneteenth. National recognition of Juneteenth resulted from a years-long campaign by many including the incredible 94-year old activist and survivor of white supremacist violence Opal Lee. Christine

Yesterday, President Biden signed legislation that made June 19th a federal holiday. It’s the first new federal holiday since President Reagan signed on to the creation of Martin Luther King Day back in 1983.

The new holiday means paid time off for some. Certainly all federal workers will get it, and other workers, too, to the extent one’s employer automatically pegs paid holidays to the federal calendar.

But the first thought for tax procedure nerds is, of course, IRC §7503. That statute provides that when any deadline for performing “any act” required under “this title” falls on Saturday, Sunday, or a “legal holiday,” why then “the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.” The Tax Court piggybacks off of this rule, saying that §7503 also applies to deadlines for Tax Court petitions. TC Rule 22.


Section 7503 will apply to the new holiday just like it applies to others. This year, for example, June 19th falls on a Saturday. The enacting legislation says that when that happens, the holiday will be celebrated on the preceding Friday, June 18th. And THAT means that June 18th is now a legal holiday, so §7503 acts to defer any act due today until Monday, June 21st. I have not read the legislation, but I am guessing that when June 19th falls on a Sunday, the holiday will be celebrated on the next day, Monday. After all, we cannot let holidays go to waste.

Let’s call that the 3-day weekend rule!

This is also a good moment to review a couple of other quirks about §7503 associated with the statute’s definition of “legal holiday.” Surprisingly, the term is not defined to mean a federal holiday, at least not directly. Let me explain.

The term encompasses two types of holidays. First, the term means any federal holiday. Technically, the statute actually says that the term just refers to “a legal holiday in the District of Columbia.” However, since DC is currently under federal jurisdiction that statutory definition means that any federal holiday is a “legal holiday.”

One quirk involving this definition is that DC celebrates a holiday called “Emancipation Day.” That day is supposed to fall on April 16th but the enacting legislation also contains a 3-day weekend rule. The result is that when April 15th falls on a Saturday, that means that Monday April 17th is a legal holiday in DC, which means that §7503 kicks in and pushes the April 15th filing date to April 18th. That is what happened in 2017 for tax year 2016 returns.

The second type of holiday that triggers operation of §7503 is trickier to figure out. It provides that when any act is required “to be performed, at any office of the Secretary or at any other office of the United States or any agency thereof, located outside the District of Columbia but within an internal revenue district” then the term “legal holiday” also means “a Statewide legal holiday in the State where such office is located.”

One example of a statewide legal holiday that sometimes affects the April 15th filing deadline is the Patriots Day holiday. No, it’s not about the sports team. It is designated to be celebrated on the third Monday in April (so no need for a 3-day weekend rule). Several states have that day as a statewide holiday.

So what happens when the third Monday in April is the 15th, 16th, or 17th (do you see why it matters that it falls on the 16th or 17th?). So far, the IRS has taken the position that only those taxpayers who live in the states that celebrate the holiday can use §7503, to push their filing deadline to Tuesday, even if they are required to file in an IRS Campus that is not in a state celebrating that holiday. See IRS Notice 2006-23. That does not make much sense to me. The statutory language would appear to key the effect of a statewide holiday to whether the IRS office where a document must be filed is in the state, not where the taxpayer required to file happens to live. Thus, because there is a a returns processing center in Andover Massachusetts, a state that observes Patriots Day, then §7503 should apply to all taxpayers required to file in Andover.

Section 7503 is woefully outdated. The reason for the two separate definitions was that in the old days, taxpayers filed their returns in local offices but much of the processing and assessment work was done in Washington D.C. And when I say “the old days” folks, I mean the really old days, before the introduction of the Computing Centers and centralized returns processing in the early 1960’s! That’s how outdated the language is.

Further, alert readers will also notice that the statute refers to “internal revenue districts.” They no longer exist. They were abolished by the 1998 IRS Restructuring and Reform Act. But did Congress think to change the language in §7503? Noooooo. So we just stumble along, applying outdated statutory language to new situations as best we can. Thankfully, the creation of a new federal holiday fits very nicely within the definition of “legal holiday” contained in §7503. ….until D.C. achieves statehood.

Supreme Court Reverses the Sixth Circuit in CIC Services – Viewpoint

Today, the Supreme Court handed down a unanimous opinion in CIC Services.  The Court holds that the Anti-Injunction Act does not bar a suit challenging a IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty.  Today, we bring an observation about the case from Professor Bryan Camp who has blogged with us several times before.  Professor Camp filed an amicus brief with the Supreme Court in support of the government’s position that the AIA did bar this action.  Soon, depending on how grading exams goes, we will publish a counterpoint to Professor Camp’s post by Les.  Les joined the tax clinic at Harvard Law School in filing an amicus brief on behalf of the Center for Taxpayer Rights supporting the plaintiff in this case.  Here is a copy of the amicus brief filed by Professor Camp and here is a copy of the amicus brief filed by the Center for Taxpayer Rights.  We have previously blogged this case many times.  A sample of prior posts can be found here (in a post by authors of another amicus brief in support of the government whom we hope might have more to say here in coming days), here and here.


Here’s what it got wrong.  Justice Kagan rests her opinion on a distinction between “information gathering” on the one hand and “assessment/collection” on the other hand.  The Anti Injunction Act, 26 USC §7421, prohibits suits to restrain the latter, she says, not the former.  All CIC Services was doing was seeking to restrain the IRS from collecting information from it.  

Here’s why that’s wrong.  Assessment is a process, not an event.  And the process starts with reporting information to the IRS!  Heck, lots of folks are doing that today.  The wrinkle in this case is that it was not a taxpayer reporting information to the IRS; it was a third party (CIC Services).  So the Court says hey, information reporting by taxpayers may be part of assessment (because the IRS, after all, assesses tax in large part based on the information taxpayers self-report).   You see this most explicitly in Justice Sotomayor’s concurrence.   But information reporting by third parties, says the Court, is not part of assessment or collection tax.

The heck it isn’t!  

Saying that information reporting by third parties is different than information reporting by taxpayers reflects a deep confusion about tax administration.  Congress created third-party information reporting requirements in the first place as an integral part of the tax assessment and collection process.  When Congress re-started the income tax in 1913 it experimented with what we are now very used to: third party withholding of taxes.  That’s what employers now routinely do for employees.  But Congress got lots of blow-back for that.  So it quickly abandoned the requirement for third parties to withhold actual dollars.  Instead, Congress substituted third-party information reporting for withholding.  This was in the War Revenue Act of 1917, 40 Stat. 300.  The Senate Finance Committee explained that third-party information reporting was a “substitute for the previous collection strategy of tax withholding.”  It was “conducive to a more effective administration of the law in that it will enable the Government to locate more effectively all individuals subject to the income tax and to determine more accurately their tax liability. This is of prime importance from a viewpoint of collections.” Sen. Rpt. 65-103 (August 6, 1917) at 20 (emphasis added).  

Since 1917 Congress has added dozens and dozens of third-party information reporting requirements to the Tax Code.  And always for the same reason: such reporting is integral, is vital, to the proper assessment and collection of tax.  When the IRS did its tax gap studies it found that taxpayers are far more likely to properly self-report transactions (and the income from such transactions) when they know a third party is reporting as well.  No duh!  So that is why a suit attempting to restrain a third-party information reporting requirement is well within the scope of the Anti-Injunction Act’s prohibition against suits to restrain the “assessment or collection” of “any tax” regardless of whether the person suing “is the person against whom such tax was assessed.”  That’s the language in §7421.

Here’s what getting it wrong means.  As Justice Kavanaugh pointed out, this decision creates a new exception to the Anti Injunction Act.  It will require litigation for courts to figure out just how big or small that exception is.  For example, when Justice Kavanaugh was on the D.C. Circuit he authored an opinion in Florida Bankers Association holding for the IRS on a very, very, very similar issue.  This CIC Services opinion nukes Florida Bankers.  …or DOES it??  Hello litigation!  

The bigger picture here is the Court is revisiting what it thinks should be the proper relationship of courts and the IRS.  This decision allows courts to give greater and closer supervision of how the IRS administers the tax system.  It has the potential to greatly slow down the IRS’s ability to detect tax cheats, such as the micro-captive insurance arrangements that CIC was promoting.  That will lead to significant losses in tax revenue while companies like CIC will continue to be able to create and promote new ways for wealthy taxpayers to avoid paying taxes.  

But there are two silver linings.  First, the decision might spur Congress to actually revise the Anti-Injunction Act to bring it into the 21st Century.  Congress wrote the AIA in 1867, after all and the basic operative language is unchanged.  For example, there was no third party reporting in 1867 the way there is now.   Second, even without the AIA, this ruling does not mean that courts will suddenly stop all third-party information reporting.  A court will not enjoin the IRS from enforcing a contested reporting requirement unless the party seeking the injunction can meet the traditional requirements to obtain an injunction: (1) the party is likely to win on the merits; and (2) the party will suffer irreparable harm if the court does not enjoin. 

Can The IRS Even Implement Payroll Deferral?

Guest blogger Professor Bryan Camp provides an analysis of the President’s recent Executive Order on payroll taxes, which suggests that the IRS may lack the authority to implement the EO. Christine

Carl’s post yesterday inspired me to look at §7508A and the regulations more closely.  It is not clear to me how the IRS will be able to implement Executive Order (“EO”) “Deferring Payroll Tax Obligations.”   

Section 7508A gives the IRS broad discretion.  Subsection (a) provides that “the Secretary may specify a period of up to 1 year that may be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer.” 

When a tax statute gives the IRS broad discretion to do something, you need to look to regulations to see how the Treasury Department has limited or cabined that discretion.  It is no different here.  Treas. Reg. 301.7508A-1(a) explicitly says “This section provides rules by which the Internal Revenue Service (IRS) may postpone deadlines for performing certain acts with respect to taxes….” 

So what are those rules?  Well, subsection (b) sets out the rules for what periods of time will be postponed.  Subsection (c) then explains the rules for which acts are eligible for postponement.   Subsection (d) defines which taxpayers are eligible to be covered by any postponements the IRS gives out. 


It’s subsection (c) which creates the problem here for the IRS to implement the EO.  Specifically, Treas. Reg. 301.7508A-1(c)(1) provides that any postponement “applies to the following acts performed by affected taxpayers” and then lists several acts.  Paragraph (c)(1)(i) says this:

Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax (chapter 32, section 4181); harbor maintenance tax (chapter 36, section 4461); and alcohol and tobacco taxes (subtitle E)), employment tax (including income tax withheld at source and income tax imposed by subtitle C or any law superseded thereby), any installment of those taxes (including payment under section 6159 relating to installment agreements), or of any other liability to the United States in respect thereof, but not including deposits of taxes pursuant to section 6302 and the regulations under section 6302;

You see the emphasized language?  It limits the IRS discretion under §7508A.  It says the IRS cannot postpone the time for making “deposits of taxes pursuant to section 6302.”

So let’s go look at §6302.  Subsection (a) says what the purpose of this statute is: “If the mode or time for collecting any tax is not provided for by this title, the Secretary may establish the same by regulations.”

Remember that the taxes the EO directs the IRS to postpone are the taxes imposed by §3101(a) (and the equivalent portion of employment taxes imposed under the Railroad Retirement Act at section 3201).  Section 3101(a) imposes a 6.2 % Social Security tax on employees, which is withheld from their wages under the rules in §3102.  But §3102 says nothing about timing.  Therefore, you have to look at the rules under §6302 and its regulation to find the rules for timing.

You find the timing rules in Treas. Reg. 31.6302-1.  Subsection (a) gives the basic timing rules and subsection (e) explicitly ties those rules to the employment taxes imposed by §3101.

Do you see the problem for the IRS?  The EO says “postpone withholding of employee’s share of employment taxes.”  But §7508A, as implemented by the regulations, does not permit the IRS to postpone the deposits required by §6302 which, under it’s regulations, include all the amounts withheld from employee’s paychecks under §3102 to satisfy the tax imposed by §3101.

Alert readers will notice that the blockage occurs in a regulation.  That means that Treasury could modify that regulation.  But the IRS certainly cannot do this on its own via a Notice or any other guidance document.  It would have to go through Treasury and, most likely, go out as a Temp. Reg. 

Whoever wrote that EO should have checked with a tax advisor.   As usual, it may be me who is missing something, so I would love to hear others’ thinking on this.

Of Mountains and Molehills: A Further Analysis of EIP To Dead People

Earlier today Nina Olson discussed EIP being issued to deceased taxpayers. Professor Bryan Camp responds to that post below. Les

I agree with much of Nina Olson’s thoughtful post this morning on PT.  However, I also think both Nina’s analysis and the IRS FAQ may be wrong to make no distinction between people who died before or after January 1, 2020.  

This post will first explain why date of death may be an important distinction.  It will then argue that concerns about the IRS making erroneous EIP payments to dead people is making a mountain out of a molehill.


(1) It May Matter When Death Occurred

Section 6428(a) creates an entitlement to a refundable credit for tax years starting in 2020.  My take is to start with the entitlement.  The question of who is entitled to what amount of refundable credit is covered by (a).  It allows an “eligible individual” a “credit against the tax imposed by subtitle A for the first taxable year beginning in 2020.”  

I do not read §6428(f) as creating an entitlement separate from subsection (a). Its purpose is to authorize the advance payment of that to which an “eligible individual” is entitled.  It both authorizes the IRS to send out a payment of the 2020 refundable credit in advance of taxpayers claiming the credit and it requires the IRS to figure to whom it should send the advance credit based on 2019 or 2018 returns.    

Supporting my reading of how these two subsections work together is the true-up language in subsection (e).  It creates a one-way ratchet that directs taxpayers to offset their claimed 2020 credits against the advanced payments they actually received.  Thus advanced payments will reduce the amount of credit taxpayers can claim on the 2020 returns.  Importantly, however, the amount offset cannot reduce their 2020 credit below zero.  That permits taxpayers to keep excess advance payments while being able to claim underpaid credits. 

The true up provisions are the reasons why taxpayers whose 2018 or 2019 returns show the existence of a dependent do not have to return the $500 they receive if the dependent has ceased being a dependent in 2020, for whatever reason (including death of the dependent).  The $500 will have turned out to have been erroneous because—again go to (a)—the basic entitlement is that this is a refundable credit for tax year 2020.  

I think it important to note that the true-up (and consequent forgiveness of erroneous advance payment) occurs only when determining the tax obligations for 2020, which for most people will happen on a 2020 return.

Folks who died before January 1, 2020, are not entitled to the refundable credit authorized by subsection (a).  Perhaps obviously, neither will such folks be able to file a return for 2020 on which to have errors forgiven by the subsection (f) true up provisions.  

Ms. Olson references the definition of “eligible individual” in §6428(d)(1).  That provision says that an “eligible individual” must actually be an individual.  It seems to me pretty plain that taxpayers who died before 2020 are no longer individuals in 2020.  Therefore, they cannot be “eligible” individuals.   

In short, I do not agree that (f) creates a separate entitlement to an amount.  It creates an entitlement to timing of an amount.  But that is just my reading.  I think Ms. Olson and others have a reasonable position that taxpayers who died in 2018 or 2019 are indeed eligible to receive the advance payment of the 2020 refundable credit.  You get there by reading subsection (f) as creating an entirely separate entitlement from subsection (a).  The strongest support for doing that is the language in subsection (f)(1) and (f)(2) that seems to create a counter-factual that pretends the credit allowed by (a) “would have been allowed as a credit under this section for such taxable year.”  

I disagree with that interpretation but for purposes of keeping this post short let’s just leave it that this: I think everyone agrees (or should agree) that EIP payments sent to taxpayers who died after January 1, 2020 are proper but there is disagreement about the legality of payments made to taxpayers who died before January 1, 2020.  Given that, the more important question is perhaps, what should be done?

Here’s my answer.

(2) Chill

Assuming some payments to dead people are erroneous, what should the IRS or Congress do about it and what should taxpayers do about it?

(A) IRS and Congress

The IRS does an amazing and fantastic job in determining and collection the correct tax for taxpayers.   But when you are dealing with over 150 million individual taxpayers and trillions of tax dollars, a small percentage of error looks like a really big number.  That is the political game that Congress and others repeatedly and disingenuously play with the IRS.  Various so-called “oversight” functions repeatedly express horror! horror! that the IRS either erroneously over-collects or erroneously under-collects billions of dollars per year. 

Get a grip.  Chill out.  If you want perfection, die and go to Heaven.  Otherwise, you have to evaluate the nature of the errors and what it costs to fix them.  

So it is here.  In 2018 this CDC report said about 2.8 million people died.  Let’s say 2.5 million of them were taxpayers.  And let’s say another 2.5 million died in 2019.  So that’s 5 million erroneous payments of $1,200 each.  Looking at the back of my envelope that adds up to $6 billion in erroneous refunds.  Max.  Heck, I bet that’s just a drop compared to the money Congress wastes in spending each year. 

The IRS has more important matters to deal with than to go chasing some theoretical 5 million payments made to taxpayers who died in 2018 or 2019.    

Also, the IRS has extremely limited tools to collect back those amounts.  That is because these erroneous EIP payments are very much like non-rebate erroneous refunds.  When the IRS sends an erroneous refund because of some error in determining a taxpayer’s correct tax (such as mistakenly allowing a deduction or exclusion that should not have been allowed) such refunds create a deficiency that the IRS can get back by either acting with the appropriate limitation period to re-assess the tax (and then collect administratively by offset or lien or levy) or by filing suit to recover the erroneous refund under §7422 within the time permitted by §6532.  

In contrast, erroneous refunds that result from some action that is not connected to a determination of liability (such as a clerical error in inputting a $100 as $1,000 and sending $900 back to the taxpayer) are called non-rebate erroneous refunds and those may only be collected by filing suit. United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995)(“The money the O’Bryants have now is not the money that the IRS’ original assessment contemplated, since that amount was already paid.  Rather, it is a payment the IRS accidentally sent them. They owe it to the government because they have been unjustly enriched by it, not because they have not paid their taxes.”).

I think the EIPs sent to folks who died before 2020 would be, technically, rebate refunds because they would be connected to a substantive determination that they were entitled to the refund, based on their 2018 or 2019 filed returns.  The determination would be erroneous.  But they would be, functionally, like non-rebate refunds because a TP who died before Jan 2020 cannot, by definition, have a deficiency of tax for 2020.  So forget re-assessment. Also, fun fact: that also means there is no transferee liability for the heir or family member who cashed the EIP check and used the erroneous EIP payment.

So if my reading is correct, there is no opportunity to re-assess and the only action the IRS can take is to beg the Department of Justice Tax Division to file suit.

Good luck with that.  The DOJ is unlikely to file suit.  It’s a busy place and filing a suit for $1,200 is just not worth their time and effort.  

So to the IRS I would say: Chill out.  Let it go.  To Congress I say: move on.  Go do some actual oversight on the huge opportunities you have created for graft and corruption in the distribution of various relief funds you created.  Leave the dead alone.  

(B) Taxpayers 

Just because the IRS may not have the proper tools to collect an erroneous refund, however, does not mean a taxpayer has no legal duty to return it.  

I would advise a client who received an EIP check or direct deposit for a taxpayer who died before January 1, 2020 to contact the Service for instructions on how to return the EIP.  My reading of the law is that the client has a legal duty to return the money.  The notion that there is no legal duty to return a payment made to you in error by the federal government is not only a dangerous notion, it is flat out wrong.  Taking something that is not yours and to which you have no right to is generally called stealing.  The notion that you cannot steal from the federal government denigrates the rule of law by suggesting legal rules do not apply as between a citizen and the government.  

More importantly the notion is also belied by 18 USC §641.  That statute makes it a felony to steal more than $1,000 from the federal government.  

This type of scenario is not limited to EIP.  The IRS sends out billions of non-rebate erroneous refunds each year.  I tell my students that they need to advise their clients who receive a non-rebate erroneous refund to contact the Service for instructions on how to return the money.  They should explain 18 USC 641 to their clients.  There is, in fact, a legal duty to return that to which you are not entitled.  

So yes, taxpayers who got EIP payments for folks who died in 2018 or 2019 do, IMHO, have a legal duty to return the money. However, the IRS is unlikely to be able to enforce it.  That is why the FAQ uses the word “should” which is similar to the language that the Service uses in letters to TPs asking them to return non-rebate erroneous refunds.  

But to say that a taxpayer has no legal duty just because the IRS cannot easily enforce the duty is not good.  It undermines the rule of law to say one need not comply with the law just because one is unlikely to get caught or punished.  We already have a HUUUGE problem with the guy currently stinking up the White House undermining the rule of law in this country.  Just because he is corrupt does not mean we have to be.