The Solicitor General Embraces Phantom Tax Regulations

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Today we welcome back Professor Andy Grewal, the Orville L. and Ermina D. Dykstra Professor in Income Tax Law at the University of Iowa College of Law. In this post, which originally appeared in the blog Notice & Comment, Professor Grewal discusses the Sixth Circuit decision in Whirlpool v Commissioner, Whirlpool’s  petition for certiorari and the issue of phantom regulations. Following Andy’s original post, Whirlpool filed a reply to the government’s brief in opposition. And last week the Supreme Court announced that the case has been distributed for consideration at its upcoming conference on November 18, 2022. Les

As discussed in a prior post, the Sixth Circuit in Whirlpool v. Commissioner, 19 F.4th 944 (6th Cir. 2021), embraced phantom regulations. The court concluded that a statute that contemplated rules applying “under regulations” could operate regardless of whether regulations had been issued under the statute. Though in Whirlpool the Treasury had issued regulations relevant to the dispute, the court ignored them and decided the case based on its own beliefs of what the regulations should say (i.e., the court applied phantom regulations).

In June, Whirlpool filed a petition for certiorari. The Solicitor General recently filed her brief in opposition. Somewhat surprisingly, she has embraced phantom tax regulations.


Whirlpool involves a complex statutory regime relating to U.S. corporations and their foreign business activities. However, one only needs to understand the basics to appreciate the significant administrative law issue raised by the case. A provision in the tax code, Section 954(d)(2), contemplates that a U.S. company may conduct foreign operations directly (i.e., through a branch) rather than through a separate subsidiary. The statute further contemplates that using a branch rather than a subsidiary may generate tax benefits for the U.S. company. If a U.S. company’s arrangements reveal these elements—that is, if the U.S. company (1) uses a branch and (2) would get tax benefits from using that branch—then, “under regulations prescribed by the Secretary,” the branch will be treated like a subsidiary. This means the U.S. company would lose out on its tax benefits. 

Section 954(d)(2)’s structure seems quite clear: If two conditions are met then, “under regulations,” claimed tax benefits may be denied. In Whirlpool, the Solicitor General maintains that the statute does not require regulations to operate. That is, to the Solicitor General, the statute exhibits a “self-executing nature.” Brief at 14. Though the Solicitor General acknowledges “Congress does sometimes ‘expressly condition’ the operation of a statute on agency regulations,” she claims that Congress has not done so under Section 954(d)(2).  One must wonder what words the Solicitor General would have wanted Congress to use here. Section 954(d)(2) covers complex material but any English speaker can understand its structure. If two conditions are met, regulations will prescribe a result. If someone were told that she faced consequences “under the law,” she would quite naturally assume that the law must be examined to determine those consequences.

To varying degrees, the Solicitor General, the Sixth Circuit, and the Tax Court claim that Section 954(d)(2)’s “literal” language independently mandates the denial of tax benefits. See Brief at 13-14. But by “literal” language, they mean Section 954(d)(2)’s language, shorn of its reference to regulations. They do not use “literal” literally.

The allegedly literal approach to Section 954(d)(2) becomes even more confounding when one sees how the government interprets “under regulations” in other contexts. In IRS Chief Counsel Adv. 201009013, the taxpayer attempted to claim tax benefits under Section 336(e). Section 336(e), like Section 954(d)(2), states that tax consequences will proceed “[u]nder regulations prescribed by the Secretary.” But unlike Section 954(d)(2), Section 336(e) prescribes favorable tax consequences. In this context, IRS Chief Counsel personnel found that the statute could not apply until regulations were issued, and that the taxpayer’s claim should fail. See also Regulations Enabling Elections for Certain Transactions Under Section 336(e), T.D. 9619, 78 Fed. Reg. 28467 (May 15, 2013) (regulations “permit” taxpayers to invoke Section 336(e) only as of the specified effective date). The government somehow believes that the phrase “under regulations” must be observed in Section 336(e) but ignored in Section 954(d)(2).

If the Supreme Court granted certiorari in Whirlpool, it likely would not bless the government’s opportunistic approach to statutory interpretation. Instead, the Supreme Court would remand the case to the Sixth Circuit. That court simply ignored the regulations issued under Section 954(d)(2). The Supreme Court would likely direct the Sixth Circuit to examine whether and how the regulations affected Whirlpool’s claimed tax benefits. Section 954(d)(2) alone could not dictate the result.

Possibly sensing a remand, and to discourage further review, the Solicitor General claims that the Sixth Circuit made a “statute-specific holding.” Brief at 16. That claim is true, in the sense that courts always reach holdings specific to the statutes in front of them. But there is nothing terribly unique about a statute that contemplates results “under regulations” prescribed by an agency. Statutes in that form pervade the United States Code. In that sense, Whirlpool is hardly “specific.” Instead, it raises tensions with the various Supreme Court and circuit court decisions that say references to regulations mean precisely what they say. See Grewal, Substance Over Form? Phantom Regulations and the Internal Revenue Code, 7 Houston Bus. & Tax J. 42 (2006). As always, whether the Court will grant certiorari remains unpredictable. The Solicitor General’s brief does a perhaps admirable job in opposing certiorari. It takes a relatively straightforward question presented and makes it appear wildly impenetrable, which discourages review. However, even if the Court does not now grant certiorari, issues over phantom regulations demand eventual clarification. As the last four decades have shown, the lower courts’ inconsistent and haphazard approach to them has yielded substantial confusion over numerous major areas of federal tax law. 


  1. Norman Diamond says

    “The government somehow believes that the phrase “under regulations” must be observed in Section 336(e) but ignored in Section 954(d)(2).”

    The rules are incredibly trivial. If a statute benefits the government then courts should uphold the statute. If a statute benefits someone who has been abused by the government, then courts should ignore the statute.

    Sovereign immunity would not be needed if governments obeyed laws.

  2. Robert Kantowitz says

    1. It is clear to me that if the statute says “to the extent provided in regulations” or “except to the extent provided in regulations” then the statute cannot be self-executing without the regulations.

    2. It is also clear to me that if regulations have been issued, a court has no warrant to disregard what they say and substitute its own judgment unless the regulations are invalid (under State Farm, or currently under Chevron, but under general principles after Chevron is, I hope, overruled).

    3. In those cases, there also should be no recourse to legislative history.

    4. The phrase “under regulations . . .” is less clear in my view. Congress may or may not have intended the directive that is modified by that phrase to operate as seems right and courts would interpret it unless and until regulations are issued addressing the details more specifically. I would look at two things: (i) how and where the “under regulations . . .” phrase appears and (ii) legislative history. In this case, I have not looked at the latter, the former is as follows:

    “under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation.”

    The phrase “under regulations” modifies the entire directive that follows it, and as a result, in my view, that directive is NOT self-executing.

    5. For the sake of clarity and predictability, I would be OK with an interpretation that “under regulations . . .” means that the directive is nonexistent unless and until there are regulations,

    6. Whichever is the correct approach, there must be consistency: either always no dice until there are regulations, or in all cases look and the syntax and context in the same way. The resolution cannot have a driver whether the statutory provision in question benefits taxpayers or the government. That is a nontrivial point because when the provision helps the government, Treasury will almost invariably insist that the statute was enacted to “crack down” on abuses or that the provision in question was an integral part of the legislative scheme, and when it helps a taxpayer it will be dismissed by Treasury as having been placed in the law only to be effective after careful study by Treasury and the consequent promulgation of detailed regulations with guardrails and limitations. Courts have to resist falling for that kind of ipse dixit.

    7. Conversely, there comes a point where the failure to issue regulations must constitute an abandonment by Treasury of the right to do so and of the right to insist that none are needed to effectuate the provision. It has, for example, been 44 years since section 1058(b)(4) was enacted.

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