Jon Choi

Tax regulations and subregulatory guidance abound with apparent giveaways to taxpayers, favorable interpretations with little or no statutory justification. Examples include the check-the-box rules, the waiver of 382(l)(5) net operate loss carryforward limitations during the financial crisis, and many more. On the other hand, it’s hard to think of cases where Treasury or the IRS has deviated from the statute at taxpayers’ expense. The typical explanation for this asymmetry is standing doctrine: if my tax bill is too high because of an agency rule, I can sue the government, but if it’s too low, nobody can sue to raise it. Now, a terrific new article by Brian Galle and Stephen Shay considers the implications of this “tilt against revenue” for administrative law.

Galle and Shay bring a fresh perspective to the classic debate on administrative tax exceptionalism. They suggest that the tilt against revenue cuts against the formalist, anti-exceptionalist position (most famously promoted by Kristin Hickman) that tax regulations should follow the same procedural rules that apply to all other regulations. Instead, they suggest that courts should counter-act the tilt against revenue by applying administrative law requirements more leniently to Treasury and the IRS.

To illustrate their arguments, Galle and Shay consider as case studies two regulatory interpretations of the GILTI rules, one pro-taxpayer and one anti-taxpayer. The pro-taxpayer regulation was lauded by comments submitted by interested parties and will likely never be challenged due to lack of standing; the anti-taxpayer regulation was heavily criticized (again by interested parties) and will likely be challenged in court. The article also helpfully summarizes existing literature on the standing asymmetry in tax law, written by scholars like Larry Zelenak and Daniel Hemel.

And although Galle and Shay begin with the problem of standing, they don’t end there. They catalog how a variety of current administrative conditions create a bias against the collection of revenue. For example, the current IRS resource deficit makes it difficult for existing tax regulations to be adequately enforced as written, making IRS action more difficult and further favoring taxpayers.

So what’s the solution? Galle and Shay essentially propose a thumb on the scale against taxpayers in tax administration, essentially a tilt toward revenue to counteract the existing tilt against revenue. They lay out some concrete suggestions relating to ongoing debates in administrative tax law: for example, they suggest that courts should be more lenient in declaring tax regulations “interpretive” and therefore exempt from notice and comment, and more generous in applying the exceptions to notice and comment for “good cause” or “harmless error.”

One of the article’s best features is that it deftly navigates the difficult line between normative and positive arguments. Many tax scholars may find Galle and Shay’s arguments persuasive as a normative matter but have lingering doubts as a matter of positive law. Consider the basic case against exceptionalist tax administration: the Administrative Procedure Act purports to apply to all agencies equally, and nothing in the statute justifies special treatment for the IRS. But as Galle and Shay argue, courts must make normative policy judgments all the time in tough cases, and their normative judgments are the basis of much of the common law surrounding the APA. Thus normative judgments are unavoidable, and perhaps even desirable, even when one takes a positivist view of statutory administrative law.

Whether you agree or disagree, Galle and Shay’s new article makes a valuable contribution to the literature on tax administration and is well worth a read.