Stephanie McMahon, “Tax as Part of a Broken Budget: Good Taxes are Good Cause Enough”

By: Leandra Lederman

Left to right: David Gamage, Leandra Lederman, Stephanie McMahon, Matt Metz (JD/MPA student)

On February 28, Prof. Stephanie McMahon from the University of Cincinnati College of Law gave a faculty workshop at the Indiana University Maurer School of Law. She presented her paper titled “Tax as Part of a Broken Budget: Good Taxes are Good Cause Enough.” The thesis of the paper is that Treasury regulations are needed to effectuate the statutory tax laws consistent with Congress’s budgeting expectations, and that given the importance of the revenue raised by taxes to the functioning of the U.S. federal government, tax regulations should be excused from the Administrative Procedure Act’s pre-promulgation notice-and-comment process under the APA’s “good cause” exception. The paper thus tackles two arguments that Prof. Kristin Hickman has advanced in her work: post-promulgation notice and comment is insufficient for tax regulations, and there is no reason for “tax exceptionalism” in administrative procedures. Stephanie’s paper also contains a detailed explanation of the tax legislative process.

Given the importance of tax rulemaking and the difficulties the IRS has suffered with its well-known budget cuts, it is very nice to see a paper defending Treasury’s rulemaking strategy. Moreover, Stephanie’s argument is creative and thoughtful. However, the argument seems to depend on regulations being a critical part of the revenue-raising process, as the need for revenue is what Stephanie relies on to justify application of the good-cause exception. But are regulations needed for that? In explaining the budget process, Stephanie’s paper points out that regulations are not scored as part of that process. I think she agrees that tax statutes can raise revenue even in the absence of regulations. Instead, she argues that regulations help effectuate, albeit imperfectly, Congress’s scoring of the tax legislation. But some Internal Revenue Code sections do not expressly call for regulations. Others do, but some of the latter never actually see regulations promulgated. Yet, the tax laws are applied despite these “spurned delegations.” And given President Trump’s anti-regulation Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, we may see more tax statutes operating without regulations.

If a revenue-raising statute is unclear without agency guidance—which could burden taxpayers and/or increase the risk of abuse—it is also possible for the IRS to issue sub-regulatory guidance, such as Revenue Rulings or Notices. Those documents have not traditionally been issued with notice and comment. Although Kristin Hickman has argued that such IRB guidance documents, which are enforceable through penalties, may require notice and comment because they have the “force of law,” that generally is not current law, and Kristin’s article on this issue recognizes the difficulties such an approach would cause. Given that Stephanie is arguing that notice and comment should not be required even for regulations, she presumably would support the idea that it should not be required for IRS rulings. It is hard, therefore, to argue that sub-regulatory guidance is not available to promptly interpret tax statutes. However, IRB guidance currently generally does not receive as much deference from courts as Treasury regulations do, and thus might not be the government’s first choice in all cases.

In short, this is a very interesting project that presents an original argument that the Treasury Department could consider using to justify its use of simultaneous Temporary and Proposed regulations. The argument may be strongest where the statute is in some way not self-executing or is missing an important aspect that would affect its ability to raise revenue. Thank you again to Stephanie for sharing her interesting and thoughtful paper with us, and for a terrific faculty workshop!

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