Notice & Comment

Auer Symposium: Deference by Bootstrap

If the Supreme Court abandons the deferential approach articulated in Auer v. Robbins, will agencies lose interpretive power over their own regulations?  Not necessarily.

Under Auer and various predecessor cases, an agency’s interpretation of its own regulation controls, unless that interpretation is plainly erroneous or inconsistent with the regulation.  Courts do not always precisely explain why they defer to agencies in this context, but respect for an agency’s expertise likely plays a role, as does the belief that deference comports with Congressional intent.  See generally Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 696–97 (1991).  Given that Auer stems from these “soft” or prudential concerns, and not from an inexorable Constitutional or statutory command, the Court apparently remains free to abandon Auer in favor of a less deferential approach.  

But what happens if courts abandon Auer and the agency itself then claims, through a regulation, the independent power to control the application of those regulations?  Must a court defer to the agency?

Various tax regulations present that issue.  In RLC Industries v. Commissioner, 58 F.3d 413 (9th Cir. 1995), for example, the taxpayer challenged a regulation dealing with timber deductions.  The relevant regulations instructed that, to compute the appropriate deductions, the taxpayer had to divide its timber into various “accounts,” and the regulations set forth various general principles under which timber should be assigned to such “accounts.”  See 26 C.F.R. 1.611-3(d)(1).  

The taxpayer believed that its timber account should be defined one way under section (1), but the IRS disagreed.  It claimed Auer-style deference for its different interpretation of the regulation but, for somewhat inscrutable reasons that are better discussed in a separate post, the court rejected that claim.

Though it could not earn deference for its interpretation of section (1), the IRS claimed that another provision granted it the overriding power to re-write that regulation.  Under section (5) of the same regulation, the standards described in section (1) for establishing “accounts” could be readjusted for “good and substantial reasons satisfactory” to the IRS, including through “dividing individual accounts, by combining two or more accounts, or by dividing and recombining accounts.”

The 9th Circuit scoffed at this assertion of the power to decide how IRS regulations apply to individual cases. Nothing in the statute authorized that power, and the IRS’s regulation “eviscerate[d] the fundamental distinction that is deeply embedded in administrative law between quasi-legislative and quasi-judicial power,” 58 F.3d at 418.  The court consequently held that the regulation was invalid.  

RLC Industries would seemingly curb efforts by the IRS or other federal agencies to receive quasi-Auer deference through “bootstrapping” regulations, but it does not seem to have had any effect.  Numerous tax regulations continue to set forth standards for the application of a statute but then go on to grant the IRS the authority to modify those standards, determine how those standards apply, and so on.  If these provisions are given their plain meaning, then Auer may mean very little for such regulations.  The IRS doesn’t need Auer if it can issue regulations setting forth an interpretation of a statute while reserving the power to disregard or modify that interpretation as it sees fit.

If Auer were abandoned, the IRS’s different sorts of bootstrapping regulations would present some fun questions.  RLC Industries hardly resolves all the issues, and whether and to what extent “Auer by bootstrap” works necessarily depend on the context and the statutory provision at issue. Also, though various scholars have advanced justifications for Auer (see, for example, “The Unbearable Rightness of Auer,”  by Cass Sunstein and Adrian Vermeule), those justifications do not necessarily extend to claims created by the agency itself.  Consequently, discussions over the potential dangers related to the commingling of quasi-legislative and quasi-judicial functions should continue, whatever the Court does or does not do with Auer.

This post is part of an online symposium entitled Reflections on Seminole Rock: The Past, Present, and Future of Deference to Agency Regulatory Interpretations. You can read the entire series here.