Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Judicial Deference to Tax Regulations: A Reconsideration in Light
of National Cable, Swallows Holding, and Other Developments
Mark E. Berg*
*Partner, Feingold & Alpert, LLP, New York, N.Y.; Columbia Law School, J.D., 1984.
In a brief before the United States Supreme Court filed in 2007, the Justice Department took the remarkable position that the Court should deny a taxpayer’s petition for certiorari on the basis of a regulation that the Treasury Department had not yet promulgated or even proposed. While this argument seems far-fetched, was rejected by the Court, and has since been disavowed by the Justice Department, that the government could make such an argument is a good indication of just how unclear the standards for determining the degree of deference to be accorded tax regulations have become in recent years.
Indeed, several developments over recent years have caused this observer, at least, to reconsider whether the standards long applied in determining the extent to which a tax regulation is to be accorded deference still correctly articulate the applicable standard. These developments include:
1. The increasingly diverse ways in which Congress delegates regulation-writing authority to the Treasury Department, abandoning the traditional binary approach under which all delegations other than under the general authority delegated by Congress to the Treasury Department under section 7805(a) were considered “legislative” in nature.
2. The Supreme Court’s opinions in the non-tax cases United States v. Mead Corporation ( Mead) in 2001 and National Cable & Telecommunications Association v. Brand X Internet Services ( National Cable) in 2005, which amplified its prior non-tax opinion in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. ( Chevron), and have been perceived as casting doubt on the continuing vitality of the standard enunciated in the tax context in National Muffler Association v. United States ( National Muffler) and on what had theretofore been viewed as fairly settled standards in this regard.
3. The Treasury Department’s apparent inclination, to a much greater degree than would have been imaginable previously, to take on the role of lawmaker in the absence of a specific congressional mandate to do so.
4. Two 2007 court of appeals decisions rejecting taxpayers’ challenges to the validity of regulations promulgated under the general authority delegated by Congress to the Treasury Department in section 7805(a), the validity of which had appeared to many to be questionable under the standards traditionally thought to be applicable.
5. A 2008 court of appeals decision reversing the Tax Court’s invalidation of a section 7805(a) regulation and casting further doubt on the continuing vitality of the National Muffler standard.
6. Recent United States Tax Court opinions regarding the validity of regulations issued pursuant to the authority of section 7805(a), one of which invalidated the regulation in question and in certain of which numerous individual judges wrote separate, widely divergent opinions stating their views regarding the impact of Chevron, Mead, and National Cable on the validity of section 7805(a) regulations.This Article is one observer’s attempt to make sense of these developments and to derive from the relevant Supreme Court opinions and other authorities a set of sensible and workable rules for determining the degree to which courts should accord deference to regulations promulgated under the various types of congressional delegations to the Treasury Department. Part II of this Article examines the various ways in which Congress has articulated its delegations of regulation-writing authority to the Treasury Department, rendering largely obsolete the traditional “legislative” versus “interpretive” dichotomy, and addresses certain terminology issues in an attempt to cut through some of the sources of confusion in this area. This Article then takes a close look at the relevant Supreme Court cases (in Part III) as well as certain recent Tax Court and court of appeals cases (in Parts IV and V) in which the judges have attempted to apply the principles set out in the Supreme Court cases. Part VI concludes that, confusing semantics in the cases aside, the traditional distinction between the high level of deference accorded to tax regulations promulgated pursuant to an explicit delegation of authority to issue regulations dealing with a specific subject matter and the much lower level of deference given to regulations promulgated pursuant to the general grant of authority in section 7805(a) continues to articulate the applicable (and appropriate) standard, as far as it goes; suggests a framework for determining the level of deference that should be applied to regulations promulgated pursuant to the many types of congressional delegations of authority falling between these two categories; and discusses the application of these rules in a variety of circumstances, including so-called anti-abuse rules, regulations that represent a change in a longstanding regulatory policy, regulations that deviate from one or more prior judicial interpretations of the underlying statute, regulations that deviate from one or more prior judicial enunciations of a non-interpretive substantive tax principle, and regulations that do not interpret a word or phrase in the Code but rather provide non-interpretive administrative rules.