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Enactment of Proposed Regulatory Reform Bill Could Have Substantial Tax Impact

With all of the attention on health care and tax reform, as well as executive orders on a variety of subjects, other legislative activity may have gone unnoticed.  One such action was the passage of the broad based Regulatory Accountability Act of 2017 earlier this year by the House of Representatives.  This bill has yet to be considered by the Senate, though behind the scenes maneuvering has increased.  Included in that bill is a section entitled the “Separation of Powers Restoration Act.” 

What is the significance of that section? If enacted into law, it could have a dramatic impact on the rule-making power of the Treasury and IRS (and other government agencies).  Some background is in order.  Under a doctrine known as “Chevron deference,” derived from the 1984 U.S. Supreme Court case Chevron USA v. National Resources Defense Council Inc., the federal courts have applied a 2-step process in evaluating a challenged regulation based on a civil (i.e., non-criminal) statute.

In Chevron, the Supreme Court said the following: “When a court reviews an agency’s construction of the statute which it administers, it is confronted with two questions.  First, always, is the question whether Congress has directly spoken to the precise question at issue.  If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.  If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation.  Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency is based on a permissible construction of the statute…. If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation.  Such legislative regulations are given the controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.  Sometimes the legislative delegation to an agency on a particular question is implicit, rather than explicit.  In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by an administrator of any agency.” 

After Chevron was decided, there was some uncertainty as to the level of deference that courts should grant to Treasury regulations -- whether tax law should be treated differently than other administrative law.  That was resolved in the Supreme Court’s 2011 unanimous decision in Mayo Foundation for Medical Education & Research v. United States.  In Mayo Foundation, the Court held that the Chevron test did apply to Treasury regulations and that courts should defer to properly issued Treasury regulations – whether issued pursuant to the general grant of rulemaking authority of Internal Revenue Code Section 7805(a) or pursuant to a more specific Congressional grant --  if the regulations reasonably resolved a statutory ambiguity.  

The proposed law change would repeal the Chevron doctrine so as to end judicial deference to statutory and regulatory interpretations by government agencies, including the Treasury and IRS.  Specifically, the proposal would have the courts decide “de novo” all relevant questions of law, including the interpretation of constitutional and statutory provisions and rules made by agencies.  If the reviewing court determined that a statutory or regulatory provision relevant to its decision contained a gap or ambiguity, the court by statute would be instructed not to interpret that gap or ambiguity as an implicit delegation to the agency of legislative rule making authority and not rely on such gap or ambiguity as a justification either for interpreting agency authority expansively or for deferring to the agency’s interpretation on the question of law.

While the intricacies of administrative law are outside the scope of this Alert, the repeal of Chevron deference would significantly shift the authority on tax (and other regulatory) matters from government agencies to the courts.  Critics of expansive rulemaking have taken the position that Chevron deference has given too much flexibility to regulators to act according to their policy preferences whether or not shared by Congress.  Indeed, Chevron is often cited and applied in tax cases where the status and interpretation of Treasury regulations is at issue.  Without Chevron deference, courts would not be required to give agencies the benefit of the doubt and would be free to disagree if they felt the agency was in error, even if the agency position was arguably reasonable. 

The continued movement of the Regulatory Accountability Act through the legislative process bears careful watching, independent of the higher profile tax reform initiative. 

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has over 35 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.

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