Congress’s frequent, numerous, and complicated changes to the tax laws make the Internal Revenue Service's task among the Executive Branch’s most difficult. The continuous stream of regulations and other guidance IRS must publish to inform the public how it is going to implement, administer, and enforce the laws, and the high dollar stakes involved, create constant opportunities and incentives to challenge the IRS.

Like a large building collapsing slowly into itself in a planned demolition, IRS’s ability to defend itself against these challenges seems to be vanishing in clouds of smoke as one recent court defeat after another has the IRS trying to work its way out of the rubble of its former exceptionalism.

First, some background: In 1979, in National Muffler Dealers Association v. U.S., the Supreme Court enunciated six factors courts should consider in weighing challenges to tax regulations. In 1984, the Supreme Court in Chevron USA Inc. v. Natural Resources Defense Council Inc. established a two-step analysis it used in reviewing environmental regulations. Then, in 2011, in deciding Mayo Foundation for Medical Education & Research v. United States for the government, the Supreme Court jettisoned the six-factor National Muffler test and applied Chevron to the tax regulations at issue in that case.

Mayo put an end to tax exceptionalism, the special standard of review for tax guidance. This was the result administrative law scholars—most notably the University of Minnesota Law School’s Prof. Kristin Hickman—had been working toward for years. See, for example, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference.

In 2018, the Treasury Department and the Office of Management and Budget expanded OIRA review of IRS guidance. In a column published before they did that, I urged Tweak, Don’t Discard, the 1983 IRS/OIRA Agreement. In this Hill article about the new protocols, Treasury and OMB officials confirmed that each of their offices was hiring ten more employees to handle the resulting additional workload.

Among other developments in just the past year:

• In another case involving Mayo (May 13, 2021), the Eighth Circuit ruled that the IRS not only had implemented the relevant statutory requirements, but also had added to them. To the latter extent, the regulation was invalid.

• In CIC Services v. Commissioner (May 17, 2021), the Supreme Court unanimously ruled that the Anti-Injunction Act did not bar a challenge to Notice 2016-16. The Notice had been the IRS’s attempt—by imposing a reporting requirement and a penalty for failure to comply with it—to enforce a congressional crackdown on sophisticated “tax shelters.” On remand, the district court struck down the requirement (see below).

• In Hewitt v. Commissioner (December 29, 2021), the Eleventh Circuit ruled a regulation IRS issued nearly 40 years ago was invalid because its preamble had not responded to “significant comments” received from the public during the notice and comment period. Although the government sought and the Supreme Court granted additional time within which to file a petition for certiorari, it did not follow through.

• In Mann Construction v. U.S. (March 3, 2022), the Sixth Circuit painstakingly delineated legislative versus interpretive rules and held that certain IRS guidance was invalid because it was a legislative rule and therefore should have been issued with the notice and comment formalities required by the Administrative Procedure Act.

• In CIC Services v. IRS (March 21, 2022), - on remand from the Supreme Court decision a year earlier that a suit to enjoin enforcement of an IRS tax shelter reporting requirement was not barred by the Anti-Injunction Act –  on cross-motions for summary judgment, on remand from the Supreme Court, the U.S. District Court for the Eastern District of Tennessee enjoined enforcement of Notice 2016-16, and ordered the IRS to return to taxpayers and material advisors all documents and information that had been produced pursuant to it.

• In Liberty Global (April 4, 2022), the U.S. District Court for the District of Colorado ruled that Treasury’s attempt to use a temporary regulation to plug a loophole Congress inadvertently created in the 2017 tax act was invalid because it did not comply with the APA’s notice and comment procedures. At stake in this one case is nearly $110 million in taxes, penalties, and interest.

• On May 20, 2022, the government notified the U.S. District Court for the Northern District of Ohio that, in the Sixth Circuit at least, it is abandoning its defense of Notice 2017-10, another of its attempts to nip in the bud what it considered another illegal tax avoidance scheme. GBX Associates LLC v U.S. (Case # 1:22-cv-00401)

On the other hand:

• In Oakbrook Land Holdings v. Commissioner (March 14, 2022), the Sixth Circuit affirmed the decision of the Tax Court that IRS regulations were valid, finding unpersuasive, as did the Tax Court, the petitioners’ challenge that when it issued the regulations at issue in 1983, the IRS had not adequately explained its rationale nor responded to significant comments submitted during the APA notice and comment period. As of this writing, the time for petitioning the Supreme Court for certiorari has not yet expired.

Tax and administrative law scholars will be watching the Internal Revenue Service and the Treasury Department for changes in the manner in which they issue guidance. Similarly, people who care about tax law will be watching Congress for clues to whether it will do a better job drafting laws and providing instructions and guidance about how they are to be implemented, administered, and enforced.


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