At the most recent ABA Tax Section meeting in Dallas there were multiple panels exploring the intersection of administrative law and tax procedure. One of the hottest issues is the continued attack on the IRS for issuing Internal Revenue Bulletin (IRB) guidance and regulations for violating requirements under the APA and related case law. It is squarely at issue in Oakbrook Land Holdings v Commissioner, where the Sixth Circuit upheld the validity of a 1980’s era regulation addressing the contribution of conservation easements. The Oakbrook court directly disagreed with the Eleventh Circuit’s approach in Hewitt, setting up a circuit split and the possibility of the Supreme Court wading into some murky waters.
read more...As a quick refresher, under 5 USC § 553, the APA ensures public participation in the informal rulemaking process, requiring agencies to provide the public with adequate notice of a proposed rule followed by a meaningful opportunity to comment on the rule’s content. After comment, the APA directs the agency to consider the “relevant matter presented” and incorporate into the adopted rule a “concise general statement” of the “basis and purpose” of the final rule. As an aside, the APA does have separate trial-like formal rulemaking requirements, but those apply in very limited circumstances, generally requiring explicit Congressional requirements and rarely at issue.
So, most of what agencies do in the rulemaking sphere is classified as informal. Not all informal agency rulemaking is required to be issued under the notice and comment process. Agencies can issue rules without notice and comment if they are “interpretative”, “general statements of policy”, or rules of agency “organization, procedure, or practice”. In addition, an agency, including the IRS, can dispense with the notice and comment requirements if it has good cause and explains why the “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
Whether an agency rule is interpretative and thus exempt from the notice and comment procedures is a difficult issue. It was the subject of a Teaching Tax Committee panel I moderated at the recent ABA Tax Section meeting in Dallas. That panel grew from a series of Procedurally Taxing blog posts this past summer from Professor Kristin Hickman, Professor Bryan Camp and Jack Townsend concerning the proper classification of tax regulations. Suffice to say, reasonable people disagree as to whether all tax regulations are required to be issued under notice and comment. (See Bryan’s last post, The More Things Change The More They Remain The Same, which links the series)
On the panel I moderated, Professor Hickman and Jack, joined with Gil Rothenberg, the former head of DOJ Tax Division Appellate Section, had a spirited and informative discussion. We highlighted some recent developments, including the recent filing of a cert petition in Oakbrook Land Holdings.
Recall the Sixth Circuit in Oakbrook and Eleventh Circuit in Hewitt have split on whether the IRS violated the APA by failing to address comments concerning how a donor should divvy up the proceeds if a conservation easement was judicially extinguished. The proposed and final regs basically provide that on extinguishment, the value of any improvements to the underlying property do not revert to the donor. Many deeds, including the one in Oakbrook, do not conform to the regulation’s requirements for dividing the proceeds in the unlikely event of the easement’s extinguishment. Some of the comments disagreed with that regulatory approach. Whether a comment is significant, and thus warrants an agency discussion, is the key point of divergence in Hewitt and Oakbrook. If the Supreme Court grants cert, the Court will have an opportunity to expand on when and how extensively an agency must respond in the comment process, an issue that is important not just for tax but all agencies.
Conclusion
Not at issue in Oakbrook is whether the regulation at issue was in fact required to be issued using notice and comment. The IRS position is that most of its regulations are interpretative, thus not compelling the agency to subject the regs to the notice and comment process. Yet IRS almost always use the notice and comment process, as it did in the Section 170 reg project at issue in Oakbrook. And if uses that process, even it was not required to do so, an agency that ignores meaningful comments is at risk that a court would find its actions arbitrary and capricious. In any event, the government seems to have abandoned arguing in court that its regs are interpretative, thus in effect conceding that in most cases its regulations are subject to the notice and comment regime.
The tax regulatory process has changed considerably in the past few decades, with preambles now more extensive and engaging. It seems odd indeed for litigants and courts to be wrangling over four-decade old rules and whether the government did enough for its actions to pass muster. With the IRS on notice that parties are gearing up to challenge it for procedural irregularities, modern day preambles more closely resemble documents that the agency expects to be the subject of litigation.
The effect of the above and IRS now gearing up for procedural APA challenges to its regs is that the future APA struggles concern whether IRB guidance is required to be issued under the notice and comment procedures. Those issues are front and center in other cases like CIC Services. That issue that will continue to be one that courts confront. To be sure, to the extent that a taxpayer faces adverse consequences from the application of an old reg, taxpayers and their advisors will likely consider and raise APA procedural challenges similar to the issue in Oakbrook. In a follow up post, I will discuss recent Appeals proposed policy to remove APA validity issues from its hazards of litigation equation. That has generated some practitioner blowback for what some argue is an intrusion with Appeals’ independence and discretion to settle cases.
About Leslie Book
Modern preambles may designed to be explanatory lines of defense in the event of litigation, but they may be every bit as effective as the Maginot Line. Too many preambles contain too many ipse-dixits and conclusory responses to comments along the lines of “Treasury did not view this comment to have merit.” Sometimes that is all that can be expected when Treasury is playing with a losing hand, such as in the § 163(j) regulations, where an astonishingly overbroad and, in my view, invalid edifice is erected on a thin foundation of statutory language “interest on indebtedness” that cannot support it, where Treasury could not ignore the dissonance and the only reason provided in the preamble is essentially the parental scold “Because we said so.” Not all that many regulations violate the first prong of Chevron in so obvious a way (and even then, weak courts can of gloss over it), but, more broadly, Treasury would be well advised to remember that Chevron is a judicial construction that can, and I believe will, be swept away in short order when the Supreme Court truly focuses on the extent to which agencies, including but not just Treasury, have been usurping congressional legislative power, the most recent example being the W. Va. V. EPA case from last term.
Thanks, Les.
Four points (with subpoints):
1. You state “the government seems to have abandoned arguing in court that its regs are interpretative, thus in effect conceding that in most cases its regulations are subject to the notice and comment regime.” Your premise earlier stated is that the Treasury uses notice and comment for its regulations. The government thus need not argue whether the regs are interpretive or not; once issued as notice and comment regulations, the regulations are “subject to” the notice and comment regime, including “arbitrary and capricious” review. I am not sure that that was ever an issue in contention. (To be sure the government did argue at one time that its regulations only interpreting the statutory text were not required to be adopted by the notice and comment process, but I don’t see how that could have exempted them from “arbitrary and capricious” review that applies to notice and comment regulations; that is to say that, once Treasury voluntarily invokes the notice and comment process, it cannot ignore the mandates of the procedure without being “arbitrary and capricious”.)
2. You state that “The tax regulatory process has changed considerably in the past few decades, with preambles now more extensive and engaging.” I suspect that is true of most agency regulations after the courts increasingly adopted “hard look” review after State Farm in 1983. My hunch (caveat hunch) is that the reasoned decisionmaking practices varied a lot among the various agencies and that Treasury Regulations were not stand-alone outliers in terms of reasoned decisionmaking.
3. The question presented in the Oakbrook cert petition is: Whether Treasury’s failure to respond to comments raising concerns about the Proceeds Regulation, 26 C.F.R. § 1.170A14(g)(6)(ii), violated the Administrative Procedure Act? Even assuming that the Treasury’s reasoned decisionmaking was faulty on the critical point, the effect would be only to invalidate the regulation with the only practical effect being to deny Chevron deference to the interpretation. The interpretation in the regulation, if the best interpretation without deference (but with Skidmore respect), could still cause Oakbrook to lose the case. In this regard, it is important to remember the truism that Chevron’s domain is only for agency not best interpretations. See What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (Federal Tax Procedure Blog 10/21/22; 10/25/22),
https://federaltaxprocedure.blogspot.com/2022/10/what-is-best-interpretation-for.html
4. You state: “an agency, including the IRS, can dispense with the notice and comment requirements if it has good cause and explains why the ‘notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.’” The good cause requirement—as a statutory requirement- (i) applies only to legislative regulations which otherwise cannot be effective until 30 days after the final notice and comment regulation and (ii) in all events only makes the regulation immediately effective (but not retroactively effective). For good cause to permit immediate effectiveness, most agencies issue the good cause statement upon first publishing the regulation–generally called “interim final rule” (for Treasury called Temporary Regulation)—which is then followed with the notice and comment process. Although not required for interpretive regulations (which are the bulk of Treasury Regulations), Treasury as a matter of “sound regulatory policy” (as opposed to statutory requirement) will issue a good cause statement with Temporary Regulations. (For most Treasury Temporary Regulations, the need for immediate effect (as well, in appropriate cases, retroactive effect) will likely be obvious, but Treasury commits to incant “good cause” and state the obvious; of course, regardless of immediate effect (the only domain of the good cause statement), Treasury interpretive regulations for statutes enacted prior to 7805(b)’s amendment in 1996 can be fully retroactive and for statutes enacted after 7805(b)’s amendment subject to the limits in 7805(b) (as amended in 1996); the current 7805(b) limits on retroactive only affect the validity of the regulation and not the validity of the interpretation, which if valid, applies retroactively.)