Paul L. Caron

Friday, February 10, 2023

Weekly SSRN Tax Article Review And Roundup: Saito Reviews Admin Law And The Crisis Of Tax Administration By Galle & Shay

This week, Blaine Saito (Northeastern; Google Scholar) reviews a new work by Brian Galle (Georgetown; Google Scholar) & Stephen Shay (Boston College; Google Scholar), Admin Law and the Crisis of Tax Administration, 101  N.C. L. Rev. __ (2023).


One of the major issues in taxation is the application of administrative law principles, derived from the Administrative Procedure Act (APA) and the case law interpreting it. Scholars like Professor Kristin Hickman have persuasively shown that tax is not exceptional, and the federal courts, starting with Mayo Foundation for Medical Education & Research v. United States, have followed. This author too has fallen closer to the line of applying these administrative law doctrines to the IRS and Treasury’s administrative actions. But in their article, Admin Law and the Crisis of Tax Administration, Professors Brian Galle and Stephen Shay force us to grapple with some of the effects of this revolution. 

And some of their normative suggestions may not do as much violence to the synthesis of administrative law and taxation as people may suppose. Furthermore, the article itself may have broader application outside of taxation to other areas of administrative law.

The piece first begins with a description of the procedural formalism under the APA, as interpreted over the years by the federal courts, and how they ossify tax rulemaking. The first is the requirement that informal rulemaking follow notice and comment procedures. The authors note that if one takes a broad view, many of the actions of Treasury and the IRS, like promulgating a Revenue Ruling, have the then “force and effect of law.” That makes these actions legislative rules subject to notice and comment and the attendant State Farm hard look review. But that slows the development of needed guidance. Second, they note that failure to have that type of formal procedures means that courts will not defer to the agency’s decision under Chevron. Third, they observe that with CIC Services, LLC v. Internal Revenue Service, the Supreme Court has narrowed the limitations of the Anti-Injunction Act (AIA), allowing pre-collection suits. Without the AIA, revenue collection, a core function is harmed by people raising pre-enforcement suits to stop the collection of taxation. Finally, they mention that Office of Information and Regulatory Affairs review slows down tax guidance, because it both requires cost benefit analysis and allows other parties to further throw sand into the gears.

This procedural formalism is supposed to do a few things. It is supposed to make the process of tax guidance more responsive and transparent. It is also meant to improve regulations by having differing views.

But there is a darker side. Much of it stems from how tax may be different in substance and scope from other areas of the regulatory state. Tax is unusual because it raises revenue, and without that revenue, the rest of the government does not function. Tax is also broad in scale. More guidance helps taxpayers to by not only reducing compliance costs, but also a certain mental cost that comes when the treatment of a certain position is uncertain. Tax can also be arbitraged in ways that say, the Clean Air Act is not. After all, if you have a facility emitting a lot of stuff into the air, it is hard to say it is not polluting. But in tax, through the structuring of transactions, one can hide the “bad” behavior.

It gets worse because of a limitation on judicial review in taxation. The standing doctrines and the lack of citizen suit provisions in the Code means that ordinary people who are annoyed that people are getting tax breaks cannot sue. As a result, the tilt here is one way. Only the “regulated,” i.e., well-off parties that see their taxes increase, can sue. As a result, Treasury and the IRS will either steer their actions away from annoying these groups and toward reducing revenue or just not issue guidance.

To show this tilt, the authors look at the development of the regulations around the Global Intangible Low-Tax Income (GILTI). On one issue, Treasury proposed a regulation that would allow taxpayers subject to the regime, mainly multinationals, to make an election that allowed taxpayers to exempt certain high-tax income items from the GILTI regime that would never be considered Subpart F income, even if it were not highly taxed items of income. This election was contrary to the language of the Code, but allowing the election was highly taxpayer friendly. Here, almost no one commented against this election. And no one had standing to sue to protect the fisc. Treasury adopted the election.

On the other hand, when Treasury sought to reduce certain benefits in the transition to the GILIT regime through stricter rules around effective dates, negative comments flooded into Treasury. Treasury nevertheless adopted the rule, and now some of these multinationals have sued in court. Thus, the GILIT regulations show the way that the tilt plays out in favor of either pro-taxpayer actions or no action.

The result then of all of this is that there is a tilt against agency action. As a whole that helps wealthy taxpayers and hurts those who are less well-off.

The authors then make a series of suggestions. These are based on the idea that much of what we think of as the APA is really judge-made doctrine. First, they argue that perhaps more tax guidance should fall under the category of interpretive rules, which are exempt from notice and comment. The doctrine of what distinguishes interpretive from legislative rules, the “force of law” idea, is flexible. They argue, then, that courts in determining this situation try to understand the context of what is going on and undertake some balancing.

Second, they call courts to use the exceptions to notice and comment of good cause and harmless error. While good cause is narrow, in many instances in tax, good cause may be warranted to protect the fisc and avoid some of the structural issues alluded to here. To prevent an agency from abusing this power, it should outline the criteria it uses and require it to justify why a particular action fits its outlined framework here or risk having it overturned.

A quick read of the piece would lead some to conclude that this view is incompatible with the concept that serves as a bedrock in administrative law, which is that administrative procedure is trans-substantive. But the article recognizes a conflict that is there in almost any matter of trans-substantive procedure; while we want a default of similar rules, in some instances, context can and should make some changes to make the overall system work better.

This also highlights an important tension in almost any area of administrative law, which is formalism and pragmatic functionalism. Galle and Shay’s piece pushes against being overly formal about administrative procedure. Rather, it calls for pragmatic balancing tests by the courts to examine context and other matters when applying exceptions to notice and comment. But they also do not do away with form. After all, they call on agencies to outline the criteria for when the agency will invoke good cause. Thus, the piece recognizes that form is important, as it can help ensure protections. But when thinking about any regulatory project, we need to thread a needle between the strictures, certainty, and protections of form with the context and the need to act.

Overall, the thrust of Galle and Shay’s piece, at least to this author who is, again, a bit more formalistic, is not to fetishize formalism itself. It is a call to engage in a form of nuanced balancing and avoid absolutes. And in that sense, its message extends further out than just tax itself.

Here’s the rest of this week’s SSRN Tax Roundup:

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