On May 7, 2011, the Department of Justice announced it will no longer argue for Chevron deference to apply to revenue rulings and revenue procedures. The announcement comes in the wake of the Supreme Courts recent decision in Mayo Found. for Med. Educ. & Research v. U.S., 131 S. Ct. 704 (2011) in which the Court held all regulations should be analyzed using Chevron deference regardless of the agency which promulgated them.
A basic principle of administrative law is that, generally, courts will tend to defer to an agencys interpretation of the statute that it administers. The Supreme Court expanded upon this idea in Chevron U.S.A. Inc. v. Natural Resource Defense Counsel, 467 U.S. 837 (1984). In Chevron, the Court established a two part test to determine whether to grant deference to an administrative agencys interpretation of a statute. First, the Court will look to see if Congress has directly spoken to the matter at issue. If so, the Courts analysis is complete and the administrative agencys interpretation is not entitled to deference. However, if the Court determines that issue is ambiguous, the Court will proceed to step two of the Chevron analysis. Under step two, the question for the court is whether the agency’s interpretation is based on a permissible construction of the statute. So long as the agencys interpretation is a permissible construction, the Court will not substitute its own judgment for that of the administrative agency and will uphold the agencys interpretation.
Not all agency actions are entitled to the highly deferential standard of Chevron deference. While Chevron deference applies to agency interpretations contained within properly promulgated regulations, interpretations such as those in opinion letters and interpretations contained in policy statements, agency manuals, and enforcement guidelines — all of which lack the force of law — do not warrant Chevron deference. Instead, they are “entitled to respect,” but only to the extent that they are persuasive. See Skidmore v. Swift & Co., 323 U.S. 134 (1944). Revenue rulings, which are official pronouncements of the IRS addressing the application of the Internal Revenue Code (“I.R.C.”) and regulations to particular factual situations, and revenue procedures, which are official statements of a procedure that affect the rights or duties of taxpayers under the law, would fall into this latter category.
Prior to the Mayo decision, debate raged as to whether Treasury regulations were to be analyzed under the highly deferential Chevron standard or whether the older, less deferential. multi-factored analysis of National Muffler Dealers. Assn., Inc. v. United States, 440 U.S. 472 (1979), used by the Court previously to analyze tax regulations, still governed. Under National Muffler, when evaluating a regulations validity, the Court looked to numerous factors to determine whether the Commissioners interpretation of the statute in question should receive deference including: 1) whether the regulation was promulgated contemporaneously with the statute in question; 2) the length of time the regulation had been in effect; 3) the reliance placed on the regulation by the Commissioner; 4) the consistency of the Commissioners interpretation over time; and 5) the degree of scrutiny Congress has devoted to the regulation during subsequent reenactments of the statute. National Muffler Dealers Assn., Inc., 440 U.S. at 477. As a result, while a regulation could pass muster as being a permissible construction under the Chevron test, “[u]nder National Muffler, . . ., a court might view an agencys interpretation of a statute with heightened skepticism when it has not been consistent over time, when it was promulgated years after the relevant statute was enacted, or because of the way the regulation evolved.” Mayo Found. for Med. Educ. & Research, 131 S. Ct. 104.
Moreover, prior to Chevron, the Court emphasized that rules passed pursuant to the Treasury Departments “general authority” under 26 U.S.C. § 7805(a), such as the rule in Mayo, were entitled to less deference than those rules under a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision. See Rowan Cos. v. United States, 452 U.S. 247 (1981); United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982). As a result of these Pre-Chevron decisions, the deference afforded to the Commissioners interpretation of ambiguous IRC provisions varied depending on not only the multiple National Muffler considerations but also the authority under which the regulation was promulgated.
In Mayo, the Court found that as a result of Chevron and its progeny, the administrative law landscape had changed substantially since National Muffler, Rowan, and Vogel. The Court found that the underlying principles of Chevron applied to the tax context and that the Court in previous decisions had recognized the importance of maintaining a uniform approach to the judicial review of administrative agency actions. Therefore, the National Muffler analysis was no longer appropriate and the more deferential Chevron deference applied. Additionally, as a result of Mayo, all regulations promulgated by the Commissioner, regardless of whether promulgated under a specific grant of authority, will be analyzed under Chevron and entitled to the same deference.
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