Notice & Comment

Deferring to the IRS

Given the Chief Justice’s near-silence at oral argument in King v. Burwell yesterday, much will be made of Justice Kennedy’s sensitivity to the argument that accepting the plaintiffs’ interpretation of the statute would raise serious federalism concerns. That’s completely appropriate.

But I want to call attention to a different question that Kennedy asked the government’s attorney. In a seminal case, Chevron v. Natural Resources Defense Council, the Supreme Court held that the courts should generally defer to an agency when it resolves an ambiguity in the statute that it administers. Kennedy wondered about the application of Chevron in this case.

Well, if [the statute is] ambiguous, then we think about Chevron. But it seems to me a drastic step for us to say that the Department of Internal Revenue and its director can make this call one way or the other when there are, what, billions of dollars of subsidies involved here? … And it—it seems to me our cases say that if the Internal Revenue Service is going to allow deductions using these, that it has to be very, very clear.

In this, Kennedy is picking up on an argument made in the plaintiffs’ brief that the Court shouldn’t read the ACA to delegate to the Treasury Department (which houses the IRS) the authority to resolve a question this big and important, especially where it involves something akin to an exemption from federal taxation.

Given this so-called “major questions” exception to Chevron,Kennedy could be hinting that he’s reluctant to construe the statute to contain the sort of ambiguity that would normally trigger Chevrondeference. Then again, he might just be putting the government through its paces. It’s tough to say.

Fortunately, there’s an answer to Kennedy’s question. I drafted an amicus brief explaining why deferring to Treasury here would be entirely appropriate. As the brief explains in part:

It is true—but irrelevant—that “when an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy, this Court typically greets its announcement with a measure of skepticism.” … [Yet, f]ar from unexpectedly arrogating to itself regulatory powers on the basis of statutes enacted some decades earlier, Treasury has issued a predictable—indeed, indispensable—rule that articulates the basic parameters governing the availability of new tax credits. It is unclear how Treasury could have implemented the tax-credit provision at all without first resolving whether tax credits were available in states that declined to establish their own exchanges.

Chevron deference is all the more appropriate when agencies confront big, difficult questions that arise in the course of administration. “It is then that the agency’s expertise and political accountability are most essential—and where the structure of the federal government most forcefully counsels judicial restraint.”

The plaintiffs are also flat wrong to suggest that Chevron has no application where the statute in question involves tax credits. In a 2011 decision, Mayo Foundation for Medical Education & Research v. United States, the Supreme Court held that Chevron supplied the right framework for measuring the legality of a Treasury Department interpretation of a statutory tax exemption. As the amicus briefexplains:

Although petitioners claim fidelity to Mayo Foundation, their argument, if accepted, would effectively wipe that decision from the U.S. Reports. Tax law is so arcane mainly because of the thousands of exemptions and deductions that stud the Internal Revenue Code. Interpreting those provisions occupies much of Treasury’s administrative time and attention. …

As this Court reasoned in Mayo Foundation, the complexity of this task—the difficulty of interpreting all those exemptions and deductions—militates in favor of, not against, Chevrondeference. [The plaintiffs], by contrast, invite the federal courts, not the experts at Treasury, to take the lead in administering huge swathes of the tax code.

In other words, the IRS rule is precisely the sort of agency action that is owed deference underChevron. Here’s hoping that Justice Kennedy sees it the same way.

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