The Fight Over "Fighting Regs" and Judicial Deference in Tax Litigation

Courts typically accord some level of deference to agency interpretations of statutes. Should that change for a "fighting" regulation that an agency has issued during the course of related litigation? The Treasury Department has done that many times, as highlighted by the 2011 U.S. Supreme Court decision in Mayo Foundation for Medical Education and Research v. United States and a series of recent courts of appeals cases that led to a grant of certiorari in Home Concrete & Supply, LLC v. United States.To answer the question of how "fighting regs" and other litigation-oriented tax guidance should be treated, this Article first analyzes the law on judicial deference to tax authorities generally, making sense of the confused taxspecific historical approach. It then considers the context of rulings issued during pending litigation. The Article explains that, following the 2011 decision in Mayo, deference under the famous Chevron case applies to all Treasury regulations issued in accordance with the requirements of the Administrative Procedure Act. It further argues that Revenue Rulings - formal guidance issued by the Internal Revenue Service - should receive deference under Skidmore v. Swift& Co., in accordance with United States v. Mead Corp. and Mayo. The Article proposes that regulations and rulings issued during related litigation receive the applicable level of deference (Chevron or Skidmore) but that the deference inquiry take into account the retroactivity and surprise issues raised by the timing of the guidance.INTRODUCTIONImagine a corporation that sells its own stock at a time when the applicable Treasury regulation provides that such sales are tax-free, yet the government claims in litigation that the sale should be taxable. The Treasury Department amends the regulation during the litigation to state that such sales are taxable, retroactive to the year of the taxpayer's transaction. That is essentially what happened in Helvering v. R.J. Reynolds Tobacco Co.,1 and resembles the facts of a number of very recent cases.2 Should courts defer to the regulation in such a context?The question of how much deference courts should accord agency interpretations of statutes is an important issue that cuts across distinct areas of substantive law, including banking law,3 communications law,4 environmental law,5 labor law,6 and tax law.7 The level of judicial deference matters because greater deference increases the likelihood that an agency regulation or ruling will be upheld, which in turn provides agencies with greater discretion in their rulemaking.8As is well known, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.9 is the leading judicial deference case, setting forth a famously deferential two-step test.10 As the U.S. Supreme Court explained in a footnote in Chevron, "The court need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding."11 Thus, Chevron extended substantial deference to agency guidance.Despite its prominence, Chevron did not necessarily displace agencyspecific precedents.12 In tax cases, courts sometimes applied National Muffler Dealers Ass'n v. United States13 - an earlier, tax-specific precedent - instead of Chevron. Which standard to apply in tax cases remained a source of confusion until 2011, when the Supreme Court decided Mayo Foundation for Medical Education & Research v. United States.14 In that case, the Court emphasized the importance of consistency between tax and other areas of law, holding that Chevron, not National Muffler, applies to tax regulations.15Adding to the confusion regarding judicial deference, decades prior to Chevron, the Supreme Court decided Skidmore v. Swift& Co.,16 under which some agency rulings are merely persuasive.17 In Skidmore, the Court explained that the respect accorded a ruling "will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control. …