Notice & Comment

Involuntary Rulemaking?

As the various entries in this Symposium show, agencies enjoy considerable flexibility in determining whether, when, and how to publicly communicate their enforcement priorities and legal interpretations. But sometimes, through statutes like the Freedom of Information Act, an agency may be forced to reveal things that it would otherwise keep out of the public’s eye. For the IRS, this type of involuntary disclosure poses a particularly significant challenge.

Though FOIA generally applies to all agencies, Congress has imposed special, additional disclosure obligations on the IRS. Section 6110(a) of the tax code requires that the IRS make publicly available any of its written determinations and any related background files. Though the IRS has resisted a broad reading of this provision, litigants have compelled disclosure of many IRS documents under Section 6110. See, e.g., Tax Analysts v. IRS, 117 F.3d 607 (D.C. Cir. 1997).

In 1998, Congress further bolstered Section 6110 by bringing “Chief Counsel Advice” documents within the disclosure regime. CCAs generally include written advice provided from the IRS headquarters (that is, the National Office in Washington) to different IRS field offices or service centers. The conference report associated with the 1998 legislation explained that these disclosures would ensure public “access to the ‘considered view of the Chief Counsel’s national office on significant tax issues.’” U.S. Tax Rep. P 61,101.98 (quoting Tax Analysts, 117 F.3d at 617).

Though broad disclosure provides obvious benefits, it also creates potential costs. Given the complexity in the tax law, there is always a risk that a taxpayer will misconstrue or exploit an ambiguity contained in an IRS document. So-called tax protestors already come up with bizarre interpretations to evade taxes, and disclosed CCAs provide another source of material for ill-advised or ill-intentioned taxpayers to abuse. Also CCAs pose special risks because they do not necessarily reflect lengthy or considered decision-making — they may take the form of a short email. See Voss v. Commissioner, 796 F.3d 1051, 1067 (9th Cir. 2015) (although a CCA may be helpful in trying to determine the IRS’s view on an issue, “it is an internal IRS memorandum prepared by an individual IRS attorney”).

Congress seemingly addressed improper reliance on CCAs through Section 6110(k)(3), which says that CCAs and similar written determinations generally cannot be used or cited as precedent. See Elbaz v. Commissioner, T.C. Memo 2015-49 (“we may not use or cite as precedent IRS Chief Counsel Advice 200842002 in deciding this case”). But it is hard to un-ring a bell. Some courts have stated that they will at least consider the reasoning in CCAs, for example. See Voss, 796 F.3d at 1065-66 (rejecting reliance on CCA 200911007 but noting that such documents may potentially be followed to the extent they are persuasive).

The recent controversy involving the states’ response to the new tax bill illustrates how CCAs may influence behavior. According to recent reports, states like California and New York are considering changes to their laws, such that tax payments made by their residents will be re-characterized as charitable contributions. (For further discussion, see here.)  The IRS has never issued any official guidance on this strategy, but the states have pointed to a 2011 CCA that allegedly blesses it. Various commentators have also treated the 2011 CCA as a statement of the IRS’s position, even though the document plainly states that it “may not be used or cited as precedent,” and even though similar memos have suggested that the taxes/contributions issue should be addressed through official guidance. See, e.g., Bankman et. al., How states can undo one of the most potentially destructive elements of the Republican tax law, Slate (Jan. 11, 2018) (stating that the IRS has provided guidance on the charitable contribution strategy through the 2011 CCA, without noting its lack of precedential value).

When even sophisticated persons give precedential weight to CCAs, the IRS may be justifiably concerned that other taxpayers will improperly rely on them. But it is unclear what, if anything, the agency can do. The likelihood that Congress would narrow Section 6110 seems remote, and it is far from clear that it should. The public release of CCAs provides substantial benefits to the tax community that probably outweigh the costs associated with improper reliance, though matters of this sort don’t lend themselves to easy quantitative comparisons.

Based on my own discussions with some IRS officials, the CCA disclosure rules have mainly led to a more cautious approach for written communications between the IRS National Office and the field offices. That is, given the prospect of forced disclosure, IRS attorneys are less likely to put their complete analysis in the written documents they send to the field. In this particular respect, the CCA disclosure rules impose a cost (absence of written communications) but no benefits (the public can’t see advice that was never written).

Because CCA disclosures are still relatively new, it is difficult to fully their assess effects on tax administration. However, as practices develop, scholars should keep an eye on how forced disclosure could short-circuit the traditional notice & comment rulemaking process. The public may deem the IRS to have opined on issues before it has intended to, and the agency may have to devote rulemaking resources towards issues tentatively discussed in CCAs, when it might otherwise have chosen to pursue other projects.

Follow me on Twitter: @AndyGrewal

This post is part of a symposium entitled How Agencies Communicate. You can read all the posts here.

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