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Administering the Tax System We Have
Abstract
Traditional perceptions of tax exceptionalism from administrative law doctrines and requirements have been predicated at least in part on the importance of the tax code's revenue-raising function. Yet, Congress increasingly relies on the Internal Revenue Service to administer government programs that have little to do with raising revenue and much more to do with distributing government benefits to the economically disadvantaged, subsidizing approved activities, and regulating outright certain economic sectors like nonprofits, pensions, and health care. As the attentions of the Treasury Department and Internal Revenue Service shift away from raising revenue and toward these other matters, the revenue-based justification for tax exceptionalism from general administrative-law norms fades. To demonstrate the shift, the Article incorporates empirical analysis of Treasury Department and Internal Revenue Service regulatory activity over time.
... On the other hand, raising revenue is not the only, or even necessarily the primary, focus of all provisions in the IRC or tax regulations. Congress increasingly uses the IRC as its preferred vehicle for incentivizing or discouraging certain activities or for pursuing other regulatory and social welfare goals (Tahk, 2013;Hickman, 2014). According to one study, roughly 30-40% of tax regulatory actions from 2008 through 2012 were more closely associated with social welfare and regulatory goals, while another 15-20% of tax regulatory actions concerned matters of tax administration and procedure (Hickman, 2014). ...
... Congress increasingly uses the IRC as its preferred vehicle for incentivizing or discouraging certain activities or for pursuing other regulatory and social welfare goals (Tahk, 2013;Hickman, 2014). According to one study, roughly 30-40% of tax regulatory actions from 2008 through 2012 were more closely associated with social welfare and regulatory goals, while another 15-20% of tax regulatory actions concerned matters of tax administration and procedure (Hickman, 2014). ...
... Recent decades have seen a dramatic escalation in tax programs and provisions serving purposes other than traditional revenue raising (Hickman, 2014). Congress has expanded its use of tax expenditures in the form of exclusions, deductions, credits, deferrals, and preferences, rather than direct spending, to achieve social welfare and regulatory policy goals. ...
An invited contribution to an issue of the Journal of Benefit–Cost Analysis honoring the work of the late Dr. Jerry Ellig, this essay recognizes and draws upon the Regulatory Report Card methodology developed by Ellig and Dr. Patrick McLaughlin to evaluate the quality of regulatory impact analysis published by federal government agencies in conjunction with notice-and-comment rulemaking. The essay anticipates a forthcoming study of changes to tax regulatory practices as a result of a 2018 Memorandum of Agreement between the Treasury Department and the Office of Information and Regulatory Affairs – a study the authors discussed and hoped to conduct with Ellig before he passed away. The essay summarizes the Regulatory Report Card methodology, offers a brief typology of tax regulations, addresses why regulatory impact analysis and the Regulatory Report Card methodology are appropriate for the tax context, but also documents a few tax-specific adjustments to the Regulatory Report Card methodology.
Recent events have highlighted the difficulties the Internal Revenue Service faces when attempting to ensure that purportedly tax-exempt organizations in fact qualify for that status. The problems in this area go much deeper than a group of IRS employees subjecting certain organizations to greater scrutiny based on their political leanings, however. For decades members of the public, the media, the academy, and Congress have criticized the limited ability of the IRS to ensure that organizations claiming exemption from federal income tax in fact deserve that categorization. Yet examples of IRS failings in this area continue to arise with depressing frequency. This is not surprising given that oversight of exempt organizations is but one of many areas that suffers from major difficulties faced by the IRS as a whole, including shrinking resources, growing responsibilities, and increasing responsibility for determinations that go beyond those necessary for revenue collection. As detailed in Part I of this Article, these difficulties have rendered the IRS unable to keep pace with the growth of the exempt organizations sector over the past 40 years.
One of the latest such initiatives suggests a new approach, however. In 2014 the IRS introduced the much shorter and simpler Form 1023-EZ application for nonprofit organizations that claim exempt charitable status and expect to have only modest financial resources, accompanied by faster procedures for handling all applications for recognition of exemption. These innovations represent the first significant permanent reduction in the level of oversight the IRS provides in this area since the introduction of a shorter version of the annual information return required for most exempt organizations. The questions they raise are whether such a reduction of oversight is in fact prudent, and whether other reductions might also be advisable. Part II of this Article draws on tax compliance literature to explore how the current level and methods of oversight for exempt organizations could be modified to improve compliance even given the existing resource constraints. It concludes that while marginal improvements in oversight are possible, there is no silver bullet to counter the IRS’s growing inability to oversee this area.
Part III of this Article therefore turns to more radical proposals that would move the locus of oversight for exempt and particularly charitable organizations out of the IRS. The proposal that shows the most promise, but also is the most risky, would shift much of this role to a private, self-regulatory body overseen by the IRS. The current crisis highlights the need to pursue this proposal now.
The Anti-Injunction Act of 1867 (MA or the Act) has never been more important. Originally enacted to expedite the collection of revenue-raising taxes, courts and scholars have for years assumed that the statute imposes a jurisdictional bar on any pre-enforcement challenge to a tax. On this interpretation, taxpayers subject to an invalid tax have two choices only: comply or pay the tax and pursue a refund. Read this way, the Act is a marked departure from the general rule that pre-enforcement challenges are permissible so long as justiciability requirements are met. And it imposes a marked burden on aggrieved taxpayers that grows all the more significant as the federal government regulates more and more activity through the tax code. This Article argues that the conventional wisdom is wrong. Scholars and courts have too readily relied on the Supreme Court's past permissive use of the term jurisdiction. But the Supreme Court has recently backed away from this jurisprudence, and more to the point, the traditional tools of statutory interpretation indicate that the MA is not jurisdictional after all at least, not in the traditional way. This Article examines the text, structure, history, and early interpretation of the MA and comes to a novel conclusion: the Act is not jurisdictional in the usual sense, but rather governs the equity jurisdiction of the federal courts. While "equity jurisdiction" is now a term unfamiliar to us, it governed the exercise of extraordinary remedies like injunctions for over a century. And it functioned much differently than jurisdiction does today. That the MA refers to equity jurisdiction will change the landscape of tax litigation: contrary to the conventional wisdom, pre-enforcement tax challenges may go forward where the government waives or forfeits reliance on the AIA and in certain extraordinary circumstances.
Tax exceptionalism — the view that tax law does not have to play by the administrative law rules that govern the rest of the regulatory state — has come under attack in recent years. In 2011, the Supreme Court rejected such exceptionalism by holding that judicial review of the Treasury Department’s interpretations of the tax code is subject to the same Chevron deference regime that applies throughout the administrative state. The D.C. Circuit followed suit by rejecting the IRS’s position that its notices are not subject to judicial review under the Administrative Procedure Act (APA). This Article calls for the demise of another instance of tax exceptionalism: the United States Tax Court’s longstanding view that it is not governed by the APA.In addition to presenting the legal case against Tax Court exceptionalism, the Article explores administrative law and tax policy considerations that favor the Tax Court following traditional administrative law, including consistent application of the law, efficient allocation of resources, horizontal and vertical equity, comparative agency expertise, and a proper separation of powers. Moreover, by following administrative law principles that may be more deferential to the IRS in a particular case, the Tax Court can establish a richer dialogue with the IRS to improve agency procedures and decision-making — thus advancing tax policy’s interest in protecting less sophisticated taxpayers while increasing economic efficiency. With a growing circuit conflict as to whether the Tax Court is bound by the APA, the Tax Court should reverse course now before the Supreme Court intervenes to declare the death of tax exceptionalism in yet another area of tax law.
As a field of legal study and practice, administrative law rests on the premise that legal principles concerning agency structure, administrative process, and judicial review cut across multiple agencies. In practice, however, judicial precedents addressing the application of administrative law doctrines to a given agency tend to rely most heavily on other cases involving the same agency, and use verbal formulations or doctrinal approaches reflected in those cases. Over time, the doctrine often begins to develop its own unique characteristics when applied to that particular agency. These “agency-specific precedents” deviate from the conventional understanding of the relevant principles as a matter of administrative law and raise fundamental questions for administrative law scholars and practitioners.Our central thesis is that agency-specific precedents are a manifestation of the “silo effect,” a phrase commonly used in the literature concerning the operation of large organizations to describe the tendency of subdivisions to develop their own bureaucratic imperatives that create obstacles to information sharing and other forms of cooperation. After describing the emergence of administrative law as a body of generally applicable legal doctrine and introducing the silo effect and the related concept of information silos, the article presents five case studies of agency-specific precedents: (1) the treatment of “interpretive regulations” promulgated by the IRS; (2) the “reasoned decisionmaking” concept in judicial review of the FCC (and a few other agencies); (3) the requirement that EPA must docket ex parte communications of “central relevance” in rulemaking; (4) the treating physician rule in judicial review of SSA disability determinations; and (5) cases limiting the NLRB’s ability to overturn an administrative law judge’s credibility determinations based on demeanor. These agency-specific precedents cannot be fully explained by agency-specific statutes, programs, or practices that prompt specific judicial responses.We postulate that agency-specific precedents are a manifestation of the silo effect and discuss how the dynamics of information costs, the specialized bar, and the process of judicial review tend to produce them. Precedents are a type of information that is costly to gather and apply and whose value in litigation depends on its precedential weight or authority. Because attorneys who practice in most administrative law fields tend to be specialized, the information costs of finding and citing cases involving the agency are much lower than the costs of doing so for cases involving other agencies, while the precedential weight of decisions involving the agency will be higher than that of cases involving other agencies. Courts rely heavily on the attorneys litigating a case to gather and present information concerning precedent, so the information costs of finding and analyzing precedents outside the agency in question will be passed along to the courts. In addition to considering the dynamic that contributes to the formation of agency-specific precedents, we discuss their normative implications in terms of consistency with statutory provisions (particularly the APA), promoting legal certainty, and the development of optimal administrative law doctrines. Although the balance of costs and benefits from agency-specific precedents varies according to the circumstances, some agency-specific precedents would appear to be unjustified. We suggest that greater attention to the phenomenon by attorneys, courts, and scholars would help to break down such undesirable agency-specific precedential silos.
In contrast to major legislative reform packages in the 20th century, the Affordable Care Act of 2010 took the form of a tax bill. Although this legislation is the first massive social and regulatory overhaul completed through the tax code, in the past twenty-five years the U.S. Congress and presidential administrations have substantially increased their use of tax law for non-revenue-raising purposes. Growing reliance on the tax code represents a structural transformation of how Congress and presidential administrations have come to approach lawmaking goals. This transformation defies the near-consensus of previous tax scholarship, which, following Stanley Surrey, disapproves of embedding social and regulatory programs in the tax code. However, that dominant view rests on assumptions that have become outdated. This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.
The practice of exempting charitable and religious organizations,mutual benefit groups, and a variety of other nonprofit associationsfrom federal income taxation has persisted, with surprising consistencydespite minor variations in coverage, for many years. With rootsreaching back to the British Statute of Charitable Uses of 1601 and toearly state constitutional provisions,' most of today's exemptions fromincome taxation date from the Revenue Act of 1894 and were reenactedin the corporation income tax of 1909 and the Revenue Actof 1913. But neither upon their initial enactment nor during theensuing decades have these exemptions elicited more than cursorylegislative explanation, save for matters of technical detail. Commentatorshave been almost equally silent. These decades of benign neglectmay have reflected a conviction that the wisdom of tax exemptionwas self-evident, that the basic policy was politically invulnerableto change, or that taxation in this area would bring in little revenue.But there have been several departures from this legislative tolerancein recent years. This change in attitude, in our view, amply warrantsa re-examination of a policy long accepted almost without question.
The Internal Revenue Service is aggressively investigating churches for their alleged political endorsements of candidates in the 2008 presidential election. At issue is whether these churches have violated section 501(c)(3) of the Internal Revenue Code, which imposes a ban on electioneering by churches and other charities as a condition of maintaining federal income tax exemption. The ban has been justified as necessary to ensure the proper separation of church and state. Building on Is the Ban on Participation in Political Campaigns by Charities Essential to their Vitality and Democracy?, 42 U. Rich. L. Rev. 1057 (2008), available at http://ssrn.com/abstract=1021601, Not Even a Peep? The Regulation of Political Campaign Activity by Charities through Federal Tax Law, 75 U. Cin. L. Rev. 1071 (2007), available at http://ssrn.com/abstract=931262, and The Community Income Theory of the Charitable Contributions Deduction, 80 Ind. L. J. 947 (2005), available at http://ssrn.com/abstract=842325, this article critically analyzes the separationist rationales for the ban. Four major variants of the separationist argument are articulated and thoroughly analyzed in the context of relevant Supreme Court case law, statutory law, administrative guidance, and the norms that underlie the First Amendment. After critically reflecting upon each version of the separationist defense of the ban, as well as the underlying assumptions of each variant, this article concludes that the separation norm not only fails to support the ban, but also counsels against it. This article concludes by briefly explaining the implications of this analysis for public policy.
The Treasury Department and the Internal Revenue Service have a strange relationship with Administrative Procedure Act notice-and-comment rulemaking procedures. Treasury acknowledges the general applicability of APA procedural requirements when it promulgates regulations interpreting the Internal Revenue Code. Treasury also maintains that most Treasury regulations are exempt from the APA's public notice and comment requirements. Nevertheless, Treasury purports to utilize those same procedures anyway in promulgating most Treasury regulations. This Article documents a study of 232 separate Treasury regulation projects for which Treasury published Treasury Decisions and notices of proposed rulemaking in the Federal Register between January 1, 2003, and December 31, 2005. In connection with this study, this Article compares Treasury's actual practices and exemption claims with current doctrinal trends in courts evaluating compliance with APA requirements across administrative agencies. The Article documents the study's finding that, in 40.9% of the projects studied, Treasury failed to follow APA notice and comment requirements. The Article also concludes that, as interpreted by the courts, established exceptions from those requirements generally do not apply to excuse this noncompliance. Consequently, among other implications, many Treasury regulations, including some of Treasury's most complex and controversial rulemaking efforts, are susceptible to legal challenge for failure to adhere to APA rulemaking requirements.
Professor Breyer presents here a framework for analysis and reform of economic regulation. The framework consists of three basic elements: justifications for regulation, modes of classical regulation and the problems they entail, and "less restrictive alternatives" to regulation, including taxation and disclosure. Using contemporary regulatory programs as examples, Professor Breyer argues that many such programs are ill designed to meet their objectives, and that the problems inherent in such regulatory regimes are severe. Finally, he briefly sketches how one might, as a practical matter, go about achieving reform, citing as an example the recent change in airline regulation.
acknowledging that regulatory goals were present but considering them secondary
- Steven A Bank
- From Sword
- Shield
- The
- Of
- Corporate
- Tax
STEVEN A. BANK, FROM SWORD TO SHIELD: THE TRANSFORMATION OF THE
CORPORATE INCOME TAX, 1861 TO PRESENT 43–44 (2010) (acknowledging that regulatory
goals were present but considering them secondary);
487, 710. 42. I.R.C. § 162 (e)
- Stat
Stat. 487, 710.
42. I.R.C. § 162 (e).
The deduction limitations for political lobbying and excessive compensation were both adopted in 1993 Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66
- Id
Id. § 162(m). The deduction limitations for political lobbying and excessive
compensation were both adopted in 1993. Omnibus Budget Reconciliation Act of 1993, Pub. L.
No. 103-66, § § 13211(a), 13222(a), 107 Stat. 312, 469–71, 477–79 (codified as amended at I.R.C.
§ 162(e), (m) (2012)).
§ 5001 (imposing taxes on distilled spirits and wines produced in or imported into the United States) These taxes have existed since at least 1958. Excise Tax Changes Act of
- E G See
See, e.g., I.R.C. § 5001 (imposing taxes on distilled spirits and wines produced in or
imported into the United States). These taxes have existed since at least 1958. Excise Tax
Changes Act of 1958, Pub. L. No. 85-859, § 201, 72 Stat. 1275, 1313–14 (1958) (codified as
amended at I.R.C. § § 5001–5693 (2012)).
§ 5701 (imposing taxes on cigars, cigarettes, and other tobacco products manufactured in or imported into the United States) These taxes have existed since at least 1954. See Internal Revenue Code of
- I R C See
See I.R.C. § 5701 (imposing taxes on cigars, cigarettes, and other tobacco products
manufactured in or imported into the United States). These taxes have existed since at least
1954. See Internal Revenue Code of 1954, ch. 52, § 5701, 68A Stat. 1, 705 (1954) (codified as
amended at I.R.C. § 5701 (2012)).
See Revenue Act of 1913, ch. 16, § II(B), 38 Stat
- Christopher Howard
- The Hidden
- State
See Revenue Act of 1913, ch. 16, § II(B), 38 Stat. 114, 167; CHRISTOPHER HOWARD,
THE HIDDEN WELFARE STATE: TAX EXPENDITURES AND SOCIAL POLICY IN THE UNITED
STATES 49 (1997).
codified as amended at I.R.C. § 7428(a) (2012) and 28 U.S.C. § 2201(a)). 144. United States v
Tax Reform Act of 1976, Pub. L. No. 94-455, § 1306(a), (b)(8), 90 Stat. 1520, 1717,
1719–20 (1976) (codified as amended at I.R.C. § 7428(a) (2012) and 28 U.S.C. § 2201(a)).
144. United States v. Am. Friends Serv. Comm., 419 U.S. 7, 10–12 (1974) (per curiam).
Bankers Ass'n. v. U.S. Dep't of Treasury
- Fla
Fla. Bankers Ass'n. v. U.S. Dep't of Treasury, No. 13-529 (JEB), 2014 WL 114519
(D.D.C. Jan. 13, 2014).
154. Id. at *6–7.
United States, No. CV 06-07371-JFW(RZx), 2009 WL 4907033, at *19 & n) ( " [T]he Treasury Department simply applied the pre-existing rule contained in Revenue Ruling 88–77 to address the possibility of abuse
- Maguire Partners-Master Invs
Maguire Partners-Master Invs., LLC v. United States, No. CV 06-07371-JFW(RZx),
2009 WL 4907033, at *19 & n.4 (C.D. Cal. Dec. 11, 2009) ( " [T]he Treasury Department simply
applied the pre-existing rule contained in Revenue Ruling 88–77 to address the possibility of
abuse.... " (emphasis added)).
United States, 552 F. Supp rev'd on other grounds, 613 F); Murfam Farms, LLC v. United States, 88 Fed
- Sala V
Sala v. United States, 552 F. Supp. 2d 1167 (2008), rev'd on other grounds, 613 F.3d
1249 (10th Cir. 2010); Murfam Farms, LLC v. United States, 88 Fed. Cl. 516 (2009);
United States, 82 Fed
- Stobie Creek Invs
Stobie
Creek Invs., LLC v. United States, 82 Fed. Cl. 636 (2008).
) 72 Fed) 72 Fed) 72 Fed Fed
REG-111583-07
2008-4 I.R.B. 319 (Jan. 28, 2008)
72 Fed. Reg. 74,233
(Dec. 31, 2007)
REG-139236-07
2008-9 I.R.B. 491 (Mar. 3, 2008)
72 Fed. Reg. 74,215
(Dec. 31, 2007)
REG-147290-05
2008-10 I.R.B. 576 (Mar. 10, 2008)
72 Fed. Reg. 74,213
(Dec. 31, 2007)
REG-104946-07
2008-11 I.R.B. 596 (Mar. 17, 2008)
72 Fed. Reg. 73,680
(Dec. 28, 2007)
REG-104713-07
2008-6 I.R.B. 409 (Feb. 11, 2008)
72 Fed. Reg. 72,970
(Dec. 26, 2007)
REG-141399-07
2008-8 I.R.B. 470 (Feb. 25, 2008)
72 Fed. Reg. 72,646
(Dec. 21, 2007)
REG-114126-07
2008-6 I.R.B. 410 (Feb. 11, 2008)
72 Fed. Reg. 72,645
(Dec. 21, 2007)
REG-147832-07
2008-8 I.R.B. 472 (Feb. 25, 2008)
72 Fed. Reg. 74,246
(Dec. 21, 2007)
at 846. The D.C. Circuit went on to uphold the regulation as reasonable. Id. at 847
- Id
Id. at 846. The D.C. Circuit went on to uphold the regulation as reasonable. Id. at 847.
DUKE LAW JOURNAL
[Vol. 63:1717
Allowing judicial review of Appellants' APA suit is consistent with the APA's underlying purpose
- Id
Id. at 734 ("Allowing judicial review of Appellants' APA suit is consistent with the
APA's underlying purpose....")
152. Id. at 725-26.
104-168, § 1101(a), 110 Stat. 1452, 1468 (1996) (codified as amended at I.R.C. § 7805). The amended statute applies only to regulations relating to statutory provisions enacted on or after
Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 1101(a), 110 Stat. 1452, 1468 (1996)
(codified as amended at I.R.C. § 7805). The amended statute applies only to regulations relating
to statutory provisions enacted on or after July 30, 1996. Id. § 1101(b).
United States, 748 F.2d 1465
- Baker V
Baker v. United
States, 748 F.2d 1465, 1467 (11th Cir. 1984);
More recently, courts have taken the approach that any retroactive application of a regulation may be reviewed for abuse of discretion, although such abuse is rarely found
- John S Nolan
- Victor Thuronyi
John S. Nolan & Victor Thuronyi, Retroactive Application of Changes in IRS or
Treasury Department Position, 61 TAXES 777, 783 (1983) ("More recently, courts have taken the
approach that any retroactive application of a regulation may be reviewed for abuse of
discretion, although such abuse is rarely found.").
171. Treas. Reg. § 1.752-6 (2005).
United States, 88 Fed
- Murfam Farms
Murfam Farms, LLC v. United States, 88 Fed. Cl. 516 (2009);
For an interesting discussion of judicial review of Treasury regulation retroactivity under the current I.R.C. § 7805(b), see generally Shannon Weeks McCormack, Tax Abuse According to Whom?
For an interesting discussion of judicial review of Treasury regulation retroactivity
under the current I.R.C. § 7805(b), see generally Shannon Weeks McCormack, Tax Abuse
According to Whom?, 15 FLA. TAX REV. 1 (2013).