When Regulatory and Sub-Regulatory Guidance Collides… (Part Two)

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My previous post covered the curious case of IRS Notice 2006-68 and it’s (seemingly) direct contradiction of Treasury Regulation § 301.7122-1(h). As I’ve covered before (here, here and here), IRS Notice 2006-68 takes an extremely taxpayer unfriendly (and I believe substantively wrong) interpretation of the “deemed acceptance” rule of IRC § 7122(f).

It turns out IRS Notice 2006-68 also takes a rather taxpayer unfriendly interpretation of whether taxpayers may be entitled to a return of payments they submit with an Offer in Compromise that is returned or rejected. The rule used to be “you get the money back, because it is a deposit.” Indeed, that is arguably still the rule under the Treasury Regulation… but not under the Notice that came later, when the underlying statute was changed in TIPRA. What controls?

I would say a very strong case exists for challenging Notice 2006-68, should someone find their way into court on it (which as a jurisdictional matter would be done most easily through Collection Due Process, as I’ve suggested here). Let’s look at why it is susceptible to challenge…


Three Reasons Why Notice 2006-68 Is Unpersuasive Under Admin Law Principles

First Reason: An Agency Can Only Amend a Final Regulation Through Proper Procedures

As far as I can tell, it is an uncontroversial proposition that an agency can only amend a final rule through new rulemaking. See Columbia Falls Aluminum Co. v. E.P.A., 139 F.3d 914, 919 (D.C. Cir. 1998) and Sierra Club v. E.P.A., 755 F.3d 968, 977 (D.C. Cir. 2014).

In this instance, there is a final rule (specifically, the Treasury Regulation) that unambiguously says payments made with an Offer that is withdrawn or returned are refundable deposits. If the Treasury wants to change this rule they are free to do so… but only if they follow the proper procedures. This flows pretty clearly from the APA: specifically, 5 § 551(5) which includes “amending or repealing” a rule as an act of “rule-making” and 5 § 553 which requires notice and comment for the rulemaking at issue here.

As it stands, it appears that the final rule (Treas Reg. § 301.7122-1(h)) was amended through Notice 2006-68 -how else to explain the direct contradiction in treatment of payments sent with Offers? But Notice 2006-68 did not go through notice and comment… if anything, it acted as the notice for comments and never did anything after that.

This is a problem for Notice 2006-68. But perhaps not an insurmountable one. Maybe, the argument goes, Notice 2006-68 isn’t amending the Treasury Regulation because it is addressing an entirely different issue -the TIPRA payments are qualitatively different than the “sums submitted with an Offer in Compromise” referred to in the regulation…

Second Reason: The IRS Is Bound to Its Regulations

Hopefully I didn’t set up a straw-man argument, but the idea that Notice 2006-68 can ignore the regulation because the TIPRA language came after the regulation is a tough one for me to swallow. Yes, the Treasury Regulations predate the specific TIPRA language. But does that change the fact that the Treasury Regulations unambiguously addresses “sums submitted with an offer in compromise,” which is exactly what TIPRA payments are?

I don’t think the IRS can just ignore its regulation on that point. Note that the TIPRA statute is ambiguous, and could reasonably allow for TIPRA payments to be treated as deposits. This isn’t an instance of a later statute directly changing the law underpinning an earlier regulation. There is an argument that under the “Accardi Doctrine” (so named for the Supreme Court case) the IRS has to follow the regulation.

Judge Holmes has discussed the Accardi Doctrine in an interesting order I blogged on before, and frankly I think the time is nigh for it to step into the limelight in (non-criminal) tax controversy.

The crux of Accardi is that agencies have to follow their own “rules” when individual rights would be affected if they deviated from them. The rules the agency must follow sometimes include sub-regulatory guidance, but always include “legislative” regulations. Which, as a matter of fact, Treas. Reg. § 301.7122-1(h) would be. Sounds to me like the IRS has to follow the Treasury Regulation, at least so long as it can be said to “affect individual rights” by failing to return the TIPRA payments on non-processed Offers.

I’ve also read some Accardi adjacent (non-tax cases) that quote the Supreme Court case of Morton v. Ruiz, 415 U.S. 199 (1974) for the proposition that where “the rights of individuals are affected, it is incumbent upon agencies to follow their own procedures.” That case is particularly interesting in the context of Notice 2006-68, since it involved an agency (the Bureau of Indian Affairs) trying to restrict payments to certain individuals through sub-regulatory guidance (an internal manual) rather than publishing in the Federal Register (which was supposed to be their practice). The Supreme Court was not impressed with this attempted end-run around the APA…

Third Reason: No Deference Under Auer/Seminole Rock

At the end of the day, practitioners just want to know how much the Court is going to persuaded or “bound” by the agency interpretation. (At least in litigation… but litigation isn’t easy to come by in tax collection issues. I will cover more on that and why Notice 2006-68 is so toxic as a non-litigated issue in a following post.)

Should a challenge to Notice 2006-68 ever actually make it to a judge, the court should find that it’s interpretations of the statute are not entitled to much, if any, real deference. The general rule is that sub-regulatory guidance gets Skidmore deference. (A point made in the Feigh case I argued and blogged on.) I often call this “worthless” deference, because it frequently isn’t much more than the deference that IRS Counsel gets for making a good point on a brief -the court isn’t really “deferring” to that good point, it is just being persuaded by its own force of reasoning.

To the extent that the IRS would want to “shoehorn” Notice 2006-68 into some level of deference “above” Skidmore, its only real option is Auer deference: the level of deference agencies can sometimes be given on their interpretation of their own regulations. But even if the IRS changed course and decided to actually argue for Auer deference (it has a policy of not doing so) that wouldn’t work in this instance.

The Supreme Court does not defer to an agency interpretation of a regulation when the regulation itself is not ambiguous. The reason why makes good sense, so I’ll go ahead and quote the Supreme Court on it: “To defer to the agency’s position would be to permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.” Christensen v. Harris County, 529 U.S. 576, 588 (2000). In other words, it would give the agency an end-run around their need to go through notice and comment to amend a final regulation.

The regulation on point is blessedly unambiguous. There is no way the IRS could argue that Notice 2006-68 is merely an interpretation of it. So no Auer deference. And probably no deference at all.

…And Yet It Persisted.

I’ve laid out a lot of reasons why Notice 2006-68 is susceptible to serious challenges, both for its interpretation of IRC § 7122(f) and its denial of TIPRA payments as deposits. I think it is largely indefensible on its interpretation of the statutory language, and clearly problematic as sub-regulatory guidance masquerading as a legislative rule.

Yet the fact remains that Notice 2006-68 is celebrating its 16th birthday, essentially unscathed, after affecting likely tens-of-thousands of taxpayers. Why might that be? Are my arguments just nonsense?

Perhaps. Nonetheless, in an eventual follow-up post I’ll go into why I really think Notice 2006-68 has survived without challenge, why it is a problem we need to fix, and why it is a good example of the checks we need on agency rulemaking in the tax world.

Caleb Smith About Caleb Smith

Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.


  1. Robert Kantowitz says

    A few comments.

    1. In yesterday’s post, I would not use the word “regale” relative to a “tale of woe.”

    2. Has this EVER gotten before a judge? Why has not someone asked for a writ of mandamus ordering the government to withdraw the Notice and to return all the money that it was holding in contravention of the regulation, and if the government did not comply within 48 hours for the judge to hold the Secretary of the Treasury personally in civil contempt? Given the near-impossibility of challenging this after all these years, the exceptions to the Anti Injunction Act for irreparable harm and for when there is no other remedy should apply.

    3. Having trouble getting into court? Find a local prosecutor or judge willing to treat the refusal to return the money as theft and attach the leasehold and furnishings of the local IRS office. Of course the IRS will be in court, probably federal court, right away. Then . . . see #2 above.

  2. Jack Townsend says

    Thanks, Caleb.

    Just a few comments

    You argue that a regulation that correctly applies existing law when promulgated to offer a taxpayer-favorable benefit (at least compared to a less taxpayer-friendly amendment to the law) remains the “law” the IRS must apply after the statute is amended. The finer point is that subregulatory guidance applying the amended statute is improper if the regulation under the pre-amendment statute remains.

    That phenomenon arose in the FBAR willful penalty context in recent cases. A 2004 amendment to the statute substantially increased the FBAR willful penalty maximum. However, the regulations interpreting the pre-amendment statute were not amended until recently. In the meantime, the IRS applied the amended statute maximums in subregulatory guidance (IRM) and in implementing the willful FBAR penalty. Appellate courts routinely held that the amended statute trumped the pre-amendment regulations. E.g., United States v. Toth, 33 F.4th 1, 11-15 (1st Cir. 4/29./22), pet for cert on another issue filed 8/26/22.

    As an aside, the Toth Court says (p. 12) that the notice and comment regulation, superseded by the statute amendment, was “an interpretive rule,” which was clarifying rather than substantive “with no effect beyond the statute.” Under classic administrative law, the statute is the law; the interpretive clarifying notice and comment regulation is not the law and not legislative in character. Hence, since the statute is the law, an amendment to the statute necessarily changes the law.

    For clarity, technically, the willful FBAR penalty regulation at the time of the 2004 amendment was in notice and comment regulations; the statute amendment came after the NPRM but was included in the final regulation text. See United States v. Kahn, 5 F. 4th 167, 176-177 (2nd Circuit 2021).

    For this reason, I quibble with your statement that the subregulatory guidance (the Notice) “amended” the regulation. Rather, the subregulatory guidance simply applied the current state of the law which was unaffected by the regulations under the old statute.

    I don’t think the Accardi doctrine is applicable. My research for my Federal Tax Procedure book indicates (at p. 71, n. 330) that the Accardi doctrine applies only to legislative rules rather than interpretive rules. Of course, that gets us to the swamp of the distinction between legislative regulations and interpretive regulations. You characterize the applicable regulation as “legislative.” The tenor of Toth and Kahn is that interpretations in notice and comment regulations are interpretive rather than legislative. I think that is the right characterization of notice and comment regulations that interpret statutory text.

  3. Joseph Barry Schimmel says

    There seems to be plenty of opportunity to get into court.
    Based upon your first post, it seems indisputable that the taxpayer can earmark their “deposit” to a particular tax year. In almost all of my OIC cases, we have multiple years with varying magnitudes of liability. A 20% deposit would usually satisfy at least one year, being the ticket needed to get to District Court on a refund suit.

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