Paul L. Caron

Wednesday, November 30, 2022

Avi-Yonah: Fixing Tax Law's APA Problem

Reuven S. Avi-Yonah (Michigan; Google Scholar), Fixing Tax Law's APA Problem, 177 Tax Notes Fed. 981 (Nov. 14, 2022):

Tax Notes Federal (2022)In this article, Avi-Yonah examines the post-Mayo revolution that has occurred in the application of the Administrative Procedure Act to tax regulations, and he offers two solutions to the problem of using notice and comment for those regs.

The APA Tax Revolution
Since the Supreme Court decided in Mayo that tax regulations are subject to the Administrative Procedure Act’s notice and comment procedures because they are not always interpretive rules (as Treasury had previously believed), there has been a revolution in applying the APA to tax regulations. In many cases, courts have declared tax regulations and notices invalid because they either did not follow proper APA notice and comment procedures, or did not adequately take into consideration adverse comments received during the procedure.

This revolution was led to a significant extent by one academic — professor Kristin Hickman of the University of Minnesota Law School — who has repeatedly argued that all tax regulations issued under section 7805 are legislative and therefore must be adopted through notice and comment [Coloring Outside the Lines: Examining Treasury's (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements, 82 Notre Dame L. Rev. 1727 (2007)].

While other academics have disputed Hickman’s position as a distortion of the APA, many courts have adopted it, and Treasury has stopped arguing that tax regulations are interpretive in litigation, even though this position still appears in the Internal Revenue Manual. Hickman has won the debate, and the APA revolution in tax law is here to stay.

If that is the case, tax law faces a significant problem, similar to problems identified in the administrative law literature. The problem is that participation in notice and comment is costly and requires expertise, and the only participants who are likely to have the resources and expertise are the affected taxpayers — that have an incentive to oppose the regulations. The public interest in the proper administration of tax law to protect the fisc is not represented. Not-for-profit tax advocacy groups and some tax professors sometimes take the opposite side, but they tend to be outgunned.

In what follows, I first illustrate the problem with the unanimous reviewed opinion of the Tax Court in Altera. I then propose two solutions: First, Treasury needs to clearly articulate the alternative to its approach and why it rejected it; second, Congress should create a public advocate to represent the interest of the broader public in the proper administration of tax law.

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