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  VOL. 56
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 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.
 Phantom Tax Regulations: The Curse of Spurned Delegations
Phillip Gall*

*Partner, Kronish Lieb Weiner & Hellman LLP, and Adjunct Professor, Brooklyn Law School; Washington University, B.S.B.A, 1991; New York University, J.D., 1994, LL.M., 1996. An earlier version of this article was presented to The Tax Club on May 15, 2002.


The phone rings. The concerned voice on the other end asks whether doing "X, Y & Z" will cause a "tax disaster." You vaguely recall something about "X, Y & Z," so you request time to investigate. As you return the telephone receiver to its cradle, you confidently reach for the volume of your loose-leaf service that contains what you suspect will be the pertinent section of the Code. Muttering a barnyard epithet as you accidentally tear part of a random page from the metal rings that had previously kept it flush with the rest, you find the relevant section. ("Always start with the Code" echoes nostalgically in your head.) Noticing that the section was enacted over 20 years ago, you carefully begin reading, starting, of course, with subsection (a), searching for a sign as to whether doing "X, Y & Z" will cause a tax disaster. Subsection (a) is fine; (b) and (c) are no problem; (d), (e), and (f) are irrelevant. Then you come to subsection (g):

REGULATIONS.-The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to cause a tax disaster when X, Y & Z are done.

You ferociously flip the flimsy pages, not caring if they're ripped from their shackles, hunting for the nail-in-the-coffin regulations. You pass the "-1" regulations, then the "-2" regulations, then the - you've reached the next Code section. There are no regulations under subsection (g): no final, temporary, or proposed regulations. You refer back to the delegation in subsection (g), and two words glow at you: "shall prescribe." You look up from the binder, roll your eyes, and stare across the room like the bus-riding Dustin Hoffman in the final shot of The Graduate. Questions race through your mind. What advice can you give? Is it OK to do "X, Y & Z"? Will a tax disaster occur? What is the phone number of your malpractice carrier? After a few seconds, Rod Serling enters your office, stands in front of your desk with his back to you, and begins speaking.

It may feel as though you are in The Twilight Zone when you make the unsatisfying discovery that congressionally mandated regulations have not been written. However, over the past couple of decades, a sizeable body of law has been quietly developing to deal with that increasingly common phenomenon. You may be surprised to learn that courts and the Service have generally been willing to wink at the delegatory language in the Code and conjure "phantom" regulations to achieve the result that was meant to be achieved in actual regulations. Though the practice began in situations where taxpayers would have otherwise been deprived of an intended tax benefit, it has expanded beyond that. This article addresses whether the current approach is appropriate.

Courts have generally not been so bold as to apply phantom regulations where the absence of regulations could itself reflect the exercise of discretionary authority delegated to the Secretary, such as where the delegation provides that a rule is to apply "only to the extent provided in regulations." However, when Congress has ordered the Secretary to prescribe regulations, the courts will almost inevitably apply phantom regulations under the guise of enforcing the will of Congress. The problem is that the application of phantom regulations may, instead, thwart the will of Congress.

As with any statutory provision, congressional intent is best discerned from the language of the delegation itself. A delegation that requires regulations to be written to achieve a particular result (a "mandatory delegation") does not merely state Congress's intention for a particular rule to become law; it also states Congress's intention for the parameters and contours of the rule to be developed comprehensively through the normal regulatory process by those who possess the relevant expertise. When actual regulations do not exist, the use of phantom regulations bypasses the normal regulatory process and allows the parameters and contours of the rule to be developed on an ad hoc basis by judges, who do not possess the relevant expertise. The use of phantom regulations, therefore, elevates the congressional intention for a particular rule to become law over the congressional intention for that rule to develop in the normal regulatory process. While that may not always be inappropriate, the current approach fails even to consider the second intention.

The willingness of courts to get involved in the regulation-writing business is troubling, particularly in light of the large number of spurned mandatory delegations. There are currently hundreds of delegations requiring regulations to be issued to achieve a particular result. In a great many of those cases, no regulation project has even been announced. If the current approach to spurned delegations is continued, it is likely that courts will be applying phantom regulations far more regularly.

For background, Part II of this article describes the process that is bypassed when phantom regulations are used, i.e., the normal regulatory process. Part III follows the interesting progression of the case law that has developed to deal with spurned delegations. Finally, Part IV provides a critical analysis of the pervasive use of phantom regulations under the current approach and suggests a different approach that may provide a better balancing of the dual intentions of Congress.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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