Department of the Treasury—Policy Statement on the Tax Regulatory Process
The Treasury Department and IRS have issued a policy statement which contains clarifications of, and changes to, its policies regarding the issuance of tax guidance including temporary regs and notices. Under one of the changes, IRS will include a statement of good cause in the preamble to make clear its reasons for issuing immediately-effective temporary regs.
Background—judicial deference to administrative agencies. The Supreme Court has defined various levels of deference to administrative agencies.
In Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., (Sup Ct 1984) 467 U.S. 837, the Supreme Court set out a two-step analysis for a court to apply in reviewing an agency’s construction of a statute that it administers: (1) if the intent of Congress is clear, IRS and the courts must give effect to the unambiguously expressed intent of Congress; (2) if the statute is silent or ambiguous as to a specific issue, the question for a court is whether the agency’s answer is based on a permissible construction of the statute. An agency’s regs are given controlling weight unless they are “arbitrary, capricious, and manifestly contrary to the statute.”
A similar deference applies when an agency interprets its own regs. That interpretation, regardless of the formality of the procedures used to formulate it, is “controlling unless plainly erroneous or inconsistent with the reg[s].” (Auer v. Robbins, (S Ct 1997) 519 U.S. 452)
Notice-and-comment rulemaking. The notice-and-comment process established by the Administrative Procedure Act (APA) allows the public to participate before any final rule becomes effective and ensures that all views are adequately considered. The APA generally requires notice and comment for legislative rules. The APA exempts interpretive rules from notice-and-comment requirements.
IRS has now announced that, notwithstanding the APA exemption, IRS will continue to adhere to its longstanding practice of using the notice-and-comment process for interpretive tax rules published in the Code of Federal Regulations.
Temporary regs. Under the APA, if an agency finds that it has “good cause” to do so, it may issue an interim final rule that becomes effective immediately without notice and comment. The interim final rule must be promulgated with a statement of good cause explaining the basis for that finding. However, IRS has long interpreted the Code to permit the issuance of immediately-effective temporary tax regs without a statement of good cause.
IRS has now announced a change. When it issues temporary regs, IRS will make its reasons for issuing such immediately-effective regs clear by including a statement of good cause in the preamble.
IRS also says that it will continue to adhere to the Code’s mandate that temporary regs must expire within three years of issuance and that proposed regs must be issued simultaneously with any temporary regs. As a result, even where good cause justifies immediate action without notice and comment, any resulting final regs will be subject to notice and comment.
Rulings and other subregulatory guidance documents. IRS uses a variety of forms of guidance to interpret and implement tax laws that are below the level of regs. These include revenue rulings, revenue procedures, notices and announcements. Such guidance is intended to provide taxpayers with clarity and certainty concerning the legal interpretation that IRS intends to apply.
Noting that subregulatory guidance should not be used to modify existing legislative rules or create new legislative rules, IRS has announced that it will not argue that subregulatory guidance has the force and effect of law. In litigation before the U.S. Tax Court, as a matter of policy, IRS will not seek judicial deference under Auer or Chevron to interpretations set forth only in subregulatory guidance.
IRS also announced policy with respect to notice and comment issues with respect to subregulatory guidance. If the intended interpretation or position would have the effect of modifying existing legislative rules or creating new legislative rules on matters not addressed in existing regs, the interpretation or position will generally be issued through notice-and-comment rulemaking, absent exceptional circumstances. Where IRS intends to provide only an interpretation of existing law applied to a limited set of facts, a statutorily prescribed form of relief, a statement of agency procedure or practice, a public announcement of intent to issue proposed legislative rules, or an announcement that has only immediate or short-term value, the intended interpretation or position will generally be issued as subregulatory guidance rather than through notice-and-comment rulemaking.
IRS notes that these policy statements do not apply to regs issued jointly with the Department of Health and Human Services and the Department of Labor under Code Sec. 9833.
Notices announcing intent to proposed regs. Before issuing certain proposed regs, IRS may publish a notice in the Internal Revenue Bulletin that announces its intention to issue the proposed regs. Such notices generally describe the scope and content of the intended proposed regs and sometimes state that taxpayers may rely on the notice in taking tax positions on upcoming tax returns.
IRS notes that failure to promulgate regs previewed in notices on a timely basis can cause confusion or uncertainty for taxpayers. To limit the uncertainty that these situations may create, IRS will include a statement in each future notice of intent to issue proposed regs stating that if no proposed regs or other guidance is released within 18 months after the date the notice is published, a) taxpayers may continue to rely on the notice; and b) until additional guidance is issued, IRS will not assert a position adverse to the taxpayer based in whole or in part on the notice.
References: For IRS regs, see FTC 2d/FIN ¶T-10101; United States Tax Reporter ¶79,006.75.