Under the Congressional Review Act, the effective date of so-called “major” regulations must be delayed to give Congress a chance to veto them via a joint resolution. Major regulations are generally those that would have a $100+ million effect on the economy. See 5 USC 804(2)(A). See also 5 USC 804(2)(B) & (C) (providing other categories of major rules). However, as discussed in recent news stories, the White House and the IRS have signed a memo that exempts tax regulations from the CRA’s definition of a major rule. The IRS apparently believes that tax regulations merely implement statutes and thus do not have a significant effect on the economy. Consequently, they do not require congressional review.
At first blush, the IRS’s position might seem unfathomable. Of course tax regulations significantly affect the economy — otherwise they would not raise so many controversies The IRS’s notices and regulations on inversion transactions, for example, essentially killed multiple cross border deals, including the $160 billion Pfizer-Allergan merger. And when the IRS interpreted Section 36B to extend ACA tax credits for policies purchased on HealthCare.Gov, that had potentially billion-dollar consequences. Senator Orrin Hatch has consequently raised concerns about the IRS’s failure to observe the CRA and is currently awaiting a response from Treasury Secretary Jack Lew.
However, the IRS’s position may be correct whenever regulations are unnecessary to implement a statute. The King v. Burwell litigation, for example, addressed competing (broad versus narrow) interpretations of the phrase “exchange established by the state” in Section 36B. The IRS regulations favored a broad interpretation, but its regulations were not necessary to establish the breadth of the statute. That is, if a court were to interpret Section 36B without the benefit of any regulations, the court could find that the statutory language alone lent itself to a broad interpretation. (In fact, this is essentially the approach the Supreme Court took in deciding the case.) So, it’s plausible to argue that the statute itself created the “major” effect on the economy, and the regulations were mere implementations.
This argument carries the most force if we view regulatory interpretations as simply an attempt to find the single, true meaning of a statute. However, regulations are generally viewed differently. Agencies customarily exercise policy discretion when issuing regulations, and the IRS may have a choice between (for example) adopting one interpretation of a statute that has a $5 million effect on the economy and another that has a $200 million effect. If the IRS chooses the latter interpretation, one could plausibly argue that the IRS has issued a major regulation. Nonetheless, I would probably side with the IRS in these circumstances. If both the $5 million and $200 million interpretation are plausible readings of the statutory language, then it’s not the agency regulation that has created major effects — it’s simply ambiguous whether the statute has major effects, and the regulation (or a court opinion interpreting the statute) resolves that ambiguity.
But when the IRS issues regulations that are necessary to implement a statute, I’m far less sympathetic to the IRS’s position. Section 7874, for example, sets out various rules that limit tax benefits related to inversions. Under subsection (g), the IRS has the authority to issue regulations “adjust[ing] the application” of Section 7874. Pursuant to that grant of regulatory authority, the IRS has issued regulations that add requirements beyond those found in the statute including, for example, a “tax residency” test for some inverted companies.
Here, the regulations themselves create potentially major economic effects. Unlike the Section 36B regulations — which adopted an interpretation that a court could (and did) reach by independently examining the statutory language, the anti-inversion regulations change the law on the books. That is, a court interpreting Section 7874 could not read a “tax residency” test into the statute. That test applies, if at all, only because of the IRS’s actions. For this reason, the economic effects of the IRS’s regulations are directly traceable to the agency’s activities, and the IRS cannot fairly say that it is simply implementing a statute. Like Senator Hatch, I thus hope that the IRS releases the private memos that explain why it does not follow the CRA, and that memo may shed further light on the issues raised here.
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