TEI tells Supreme Court ... revenue rulings are mere litigating positions and not entitled to deference.

In a brief amicus curiae filed with the Supreme Court of the United States, Tax Executives Institute called revenue rulings mere litigating positions of the Internal Revenue Service that are not entitled to deference by the courts. The case, United States v. Mead Corporation (No. 99-1434), is scheduled to be argued before the Supreme Court on November 8. TEI's brief, which was filed by with the Court on August 14, is reprinted in this issue, beginning on page 385.

The Mead case involves a decision by the U.S. Court of Appeals for the Federal Circuit that classification rulings issued by the Customs Service are not entitled to deference under the Supreme Court's 1984 decision in Chevron U.S.A. Inc. v. National Resources Defense Council, Inc. In reaching its decision, the Federal Circuit relied heavily on the lack of deference accorded IRS revenue rulings, noting that such interpretative rulings "do not have the force and effect of regulations." The parallels between Customs rulings and IRS rulings -- neither of which is subject to a notice-and-comment process -- convinced the circuit court that Customs rulings "do not require Chevron deference." This aspect of the appellate opinion also led the tax organization to take the unusual step of filing a brief in a Customs case, according to TEI President Betty M. Wilson of MGM MIRAGE.

"Mead raises a fundamental question of administrative law," Ms. Wilson explained. "In reviewing interpretative rulings by a federal agency, how much should a court defer to the agency's interpretation of the law? The Tax Court has adopted the position that IRS revenue rulings are mere litigating positions. We believe that the Tax Court and the Federal Circuit got it right."

In its brief, TEI stated that the issue of the deference to be accorded an agency's interpretative ruling "requires a careful balance and the answer properly depends on the extent of public involvement in the development of the agency rule." Although an administrative agency may develop expertise in the subject matters within its jurisdiction, the public has an indispensable role to play in ensuring that an agency is well informed and its position does not overreach.

"Simply stated, without notice and comment, an agency's decision could become capricious," the Institute said. "Without meaningful judicial review of interpretative rules, agencies could arrogate to themselves the power to unreasonably interpret or apply the law. A careful balance must be struck, and the courts are properly wary of deferring too much to agency interpretative rulings." Because the Federal Circuit struck the proper balance in Mead, the organization urged the Supreme Court to affirm its opinion.

Chevron and Its Progeny

In Chevron, the Supreme Court established a two-step test for determining the deference to be afforded interpretative rules by the courts. First, the court must review the intent of Congress. If it is clear, "that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." If Congress has not directly addressed the matter, however, the question becomes whether the agency's answer is based on a permissible construction of the statute. If the regulatory scheme is a "reasonable accommodation of manifestly competing interests," the agency's interpretation is entitled to deference.

In a 1999 decision in United States v. Haggar Apparel Co., the high court applied the Chevron standard in determining the deference to be accorded regulations relating to the Customs classification of certain imported goods, analogizing Customs regulations to tax regulations. The Court found that -- in light of the Customs Service's use of the notice-and-comment rulemaking process -- the regulations at issue were entitled to Chevron deference.

In its brief in Mead, the Institute noted that rulings are not the same as regulations. The organization explained that the Federal Circuit looked to the deference to be accorded IRS revenue rulings because the parallels between IRS and Customs rulings convinced it that "the latter, like the former, do not require Chevron deference." "The Federal Circuit's analysis of the deference owed to Customs and IRS interpretative rulings is correct," TEI stated.

The Importance of Notice and Comment

TEI explained that not all agency rulemaking is entitled to deference. Referring to a May 2000 decision by the Supreme Court in Christensen v. Harris County, the Institute averred that Chevron deference was properly denied in respect of an opinion letter issued by the U.S. Department of Labor. The interpretation at issue in that case was "not one arrived at after, for example, a formal adjudication or notice-and-comment rulemaking" and thus did not warrant Chevron deference.

Like the opinion letter at issue in Christensen, TEI stated, Customs classification rulings and IRS revenue rulings are not subject to notice and comment and are not published in either the Federal Register or the Code of Federal Regulations. "These safeguards are required by the Administrative Procedure Act to afford an opportunity for interested persons to comment on agency interpretations before they become final," the Institute said, adding that public participation in an agency's rulemaking process is important for two reasons.

"First, the combined expertise of the agency and the public produces better rules, and second, the procedure enables interested parties to express their views to agency officials who are not directly accountable to the voters." The discipline and openness engendered by the notice-and-comment procedure deter casual or arbitrary action, forestall confusion, and ultimately produce more effective regulations, all to the benefit of the government and the public, TEI stated. "This same process is not normally followed with interpretative rules such as Customs classification rulings and IRS revenue rulings, and accordingly a higher quantum of judicial scrutiny is appropriate to counterbalance the absence of notice and comment."

The organization urged the Supreme Court not to treat a Customs Service or IRS ruling as a policy decision that courts must accept if it is minimally rational. "To do so would permit and perhaps even encourage agencies to circumvent the intent of Congress because it is more expedient to create rules without public scrutiny," it stated. "Equally troublesome, according Chevron deference to interpretative rulings may encourage the agencies to issue rulings to improve the likelihood of success in litigation."

Regulations and interpretative rulings are not the same, TEI reiterated. In the case of regulations, Chevron deference may be sensible because the public has participated in the rulemaking process. In contrast, in respect of interpretative rulings, judicial scrutiny must serve as a counterbalance to the lack of public participation in the process. "Thus, the Federal Circuit correctly determined that Chevron deference should not be extended to standard Customs Service rulings."

The Correct Standard of Judicial Deference

The Institute next addressed the correct standard to be applied to Customs classification rulings. It urged the Supreme Court to sustain the lower court's decision that Customs classification rulings, like IRS revenue rulings, are not entitled to deference.

TEI's brief went into considerable detail about the procedure for issuing revenue rulings, which it described as mere litigating positions and not entitled to any deference. "This is not merely the view of amicus TEI, but, more important, it is the view adopted by the United States Tax Court, a court uniquely qualified to assess the efficacy of IRS pronouncements," the Institute noted. According to the Tax Court, a revenue ruling represents the Commissioner's position with respect to a specific factual situation and is merely the opinion of a lawyer in the agency. Thus, rulings are not binding on the courts and are only as persuasive as the IRS's reasoning and the precedents upon which it relies.

The Tax Court's position is consistent with other holdings of the Court that deference to "an agency's convenient litigating position" is "entirely inappropriate," the organization stated.

An Alternative Standard

TEI argued alternatively that if deference is to be accorded, it should be limited to the standard set forth in Skidmore v. Swift & Co., as "a body of experience and informed judgment to which courts and litigants may properly resort for guidance." Applying Skidmore here would place the burden of persuasion on the agency to convince the court of the meaning of the relevant statute. It would also encourage agencies to issue clear regulations, while acknowledging that an agency may have superior insights into regulatory meaning, the Institute said.

The Institute closed by noting that Mead provides an opportunity to clarify the standard for reviewing agency interpretations. The courts according Chevron deference to such rules have inappropriately distended the doctrine, it avowed. "Applying Skidmore to interpretative rules such as those involved here will provide needed guidance to the lower courts and reserve Chevron deference, at most, to substantive rules subject to the notice-and-comment process."

Like the opinion letter in Christensen, "agency interpretations contained in Customs classification and IRS revenue rulings should be entitled to respect, but only to the extent that those interpretations have the power to persuade." Because the Federal Circuit found the Customs classification ruling unpersuasive, its opinion should be affirmed, TEI concluded.

TEI's brief prompted a rebuttal by the government in its reply brief in the case. The reply brief is the subject of a separate commentary in this issue.