Treasury Department Promises Not to Seek Judicial Deference for Subregulatory Guidance

(Parker Tax Publishing April 2019)

The Treasury Department released a policy statement which provides that the Treasury Department and the IRS are committed to including a statement of good cause when issuing any future temporary regulations and that, in certain exceptional circumstances, sound tax administration may require temporary regulations to be issued without notice and comment. The statement further provides that, in litigation before the Tax Court, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997), or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance. Treasury Policy Statement on the Tax Regulatory Process (March 2019).

Last month, the Department of the Treasury and the IRS issued a Policy Statement on the Tax Regulatory Process in which they reaffirmed their commitment to a tax regulatory process that encourages public participation, fosters transparency, affords fair notice, and ensures adherence to the rule of law. Consistent with those regulatory principles, the Department of the Treasury and the IRS clarified and affirmed their commitment to sound regulatory practices. The Policy Statement consists of the following five parts: (1) Commitment to Notice-and-Comment Rulemaking; (2) Limited Use of Temporary Regulations; (3) Proper Scope of Subregulatory Guidance Documents; (4) Limit on Notices Announcing Intent to Propose Regulations; and (5) General Provision.

Commitment to Notice-and-Comment Rulemaking

In the Policy Statement, the Treasury Department notes that the best practice for agency rulemaking is the notice-and-comment process established by the Administrative Procedure Act (APA). This process allows the public to participate before any final rule becomes effective and ensures that all views are adequately considered. It also enables the public to apprise the government of relevant information that the government may not possess or to alert the government to consequences that it may not foresee.

The APA generally requires notice and comment for legislative rules but exempts interpretive rules from notice-and-comment requirements. Nonetheless, as a matter of sound regulatory policy, the Policy Statement provides that the Treasury Department and the IRS will continue to adhere to their longstanding practice of using the notice-and-comment process for interpretive tax rules published in the Code of Federal Regulations.

Limited Use of Temporary Regulations

The Policy Statement notes that, 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 issued with a statement of good cause explaining the basis for that finding. According to the Policy Statement, the Treasury Department and the IRS have long interpreted the Internal Revenue Code, however, to permit the issuance of immediately-effective temporary tax regulations without a statement of good cause.

As a matter of sound regulatory policy, the Policy Statement provides that the Treasury Department and the IRS are committed to including a statement of good cause when issuing any future temporary regulations under the Internal Revenue Code. According to the Policy Statement, in certain exceptional circumstances, sound tax administration may require temporary regulations to be issued without notice and comment. For example, such regulations may be necessary and appropriate to stop abusive practices or to immediately resolve an injurious inconsistency between existing regulations and a new statute or judicial decision. When sound tax administration does warrant temporary regulations, the Treasury Department and the IRS said that they will make their reasons for issuing such immediately-effective regulations clear by including a statement of good cause in the preamble.

Proper Scope of Subregulatory Guidance Documents

The Policy Statement notes that a variety of forms of guidance are used to interpret and implement federal tax laws, including revenue rulings, revenue procedures, notices, and announcements. Such subregulatory guidance often provides taxpayers much-needed clarity and certainty concerning the legal interpretation that the IRS intends to apply, and taxpayers thus regularly request such guidance.

The Policy Statement observes that subregulatory guidance is not intended to affect taxpayer rights or obligations independent from underlying statutes or regulations and that, unlike statutes and regulations, subregulatory guidance does not have the force and effect of law. However, the Policy Statement notes, taxpayers can have confidence that the IRS will not take positions inconsistent with its subregulatory guidance when such guidance is in effect and that, in applying subregulatory guidance, the effect of subsequent legislation, court decisions, rulings, and procedures must be considered.

According to the Policy Statement, when proper limits are observed, subregulatory guidance can provide taxpayers the certainty required to make informed decisions about their tax obligations; but such guidance cannot, and should not, be used to modify existing legislative rules or create new legislative rules. The Policy Statement provides that the Treasury Department and the IRS will adhere to these limits and will not argue that subregulatory guidance has the force and effect of law. Further, in litigation before the Tax Court, as a matter of policy, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997) or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance.

Limit on Notices Announcing Intent to Propose Regulations

Before the issuance of certain proposed regulations, the IRS may publish a notice in the Internal Revenue Bulletin that announces the intention of the Treasury Department and the IRS to issue proposed regulations. Such notices generally describe the scope and content of the intended proposed regulations and sometimes state that taxpayers may rely on the notice in taking tax positions on upcoming tax returns. The notices also may invite comments and encourage a dialogue with taxpayers regarding the content of future proposed regulations before any such regulations are proposed.

The Policy Statement notes that the failure to issue regulations previewed in notices on a timely basis can cause confusion or uncertainty for taxpayers. To limit the uncertainty that these situations may create, the Policy Statement provides that the Treasury Department and the IRS will include a statement in each future notice of intent to issue proposed regulations stating that if no proposed regulations or other guidance is released within 18 months after the date the notice is published, taxpayers may continue to rely on the notice but, until additional guidance is issued, the Treasury Department and the IRS will not assert a position adverse to the taxpayer based in whole or in part on the notice.

General Provision

Finally, the Policy Statement provides that it is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

For a discussion of the types of authority upon which tax preparers may rely when preparing returns, see Parker Tax ¶270,520.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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