Academic journal article Accounting & Taxation

Is the IRS a Sore Loser?

Academic journal article Accounting & Taxation

Is the IRS a Sore Loser?

Article excerpt


Like all administrative agencies, the Internal Revenue Service is given a fair amount of authority to enforce the laws enacted by Congress. Taxpayers often question the amount of authority granted to the Internal Revenue Service, and whether such authority is abused. In some situations this questioning of authority leads to litigation, resulting in both wins and losses for the Internal Revenue Service. From time to time, the Internal Revenue Service will respond to losses by creating a new rule or amending an existing one. Recent examples in the judicial system highlight the issue of administrative authority, and beg the question: Is the Internal Revenue Service a sore loser?

JEL: H24, H26, H32, M42, M48

KEYWORDS: Administrative authority, Internal Revenue Service, response to litigation


Congress delegates certain authority to the Treasury Department through the Internal Revenue Code (Code). For example, Congress states that "the administration and enforcement of [the Code] shall be performed by or under the supervision of the Secretary of the Treasury" (26 USC § 7801). In addition, "the Secretary shall prescribe all needful rules and regulations for the enforcement" of the Code (26 USC § 7805). It is pursuant to these grants of power from Congress that the Treasury Department and the Internal Revenue Service (IRS) issue regulations. Taxpayers have questioned the IRS' s powers in a series of recent cases, and the IRS has responded by exercising even more authority.

The issue addressed in this paper is whether the Treasury Department and IRS are permitted to change regulations following a loss in court. Prior literature has addressed issues relating to deference, conflict between administrative rules and judicial decisions, proper rulemaking procedures and policy aspects of tax litigation. This paper adds to the literature by describing how courts are responding to regulations that are issued or changed in direct response to adverse litigation. Although the particular issues in these cases relate to taxation, the outcomes relating to the authority of the Treasury Department are wide reaching in that the holdings are not limited to the Treasury Department, but rather are applicable to all administrative agencies.

The next section summarizes previous literature related to the topic. The Recent Cases section describes the facts and outcomes of two judicial proceedings that the Treasury Department directly responded to by issuing or amending regulations. The next sections, Discussion and Unresolved Issues, describe how the courts are responding to these regulations, followed by Concluding Comments.


Much of the literature relates to the deference given by courts to the rules and regulations of administrative agencies. Gans (2002) tracked how the deference standard changed over time in the context of tax law, noting that Chevron v. U.S. had a "transformative impact" on administrative authority. His discussion of deference centered on two cases decided by circuit courts of appeals in the 1 990s, both having similar generation-skipping tax issues. Although the government had been successful in one of the cases, it had lost the other. Following the loss, it amended the relevant regulation to conform to the arguments that had resulted in success, an act that Gans described as "the government declaring] victory by regulation." The article does not indicate whether a taxpayer sought invalidation of the amended regulation in the court system, but rather the author himself questioned whether the amended regulation was valid given changes to the deference landscape, including the Supreme Court's decision in Chevron. Berg (2008) provided a more recent review of judicial deference.

Before the Supreme Court handed down its 201 1 decision in Mayo Foundation, Pruitt (201 1) argued that National Muffler rather than Chevron provided the correct standard of deference for interpreting Code section 7805(b). …

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