A Framework for Testing Regulatory Authority

Abstract

In this article, we consider whether certain provisions of the Regulatory Package (including regulations proposed and issued under Section 385, Section 956, Section 7701(l) and Section 7874) are outside the scope of the IRS’s authority. We approach these questions first by formulating our own set of “underlying principles” that we believe are necessary guideposts to any question of regulatory authority. We believe using our own “underlying principles” as the lens through which to focus the question allows us to develop tax-specific examples to illustrate the limits of regulatory authority rather than rely on the facts of non-tax cases in which similar questions of regulatory authority were considered. Not surprisingly, the principles we outline below are echoed in the case law involving questions of statutory interpretation and the Administrative Procedure Act (the “APA”). Even with the changes to the Regulatory Package, as well as potential tax reform which may further limit the impact of any Section 385 regulations,[11] attempting to define the limits of regulatory authority is as important a task as ever. The expansion of executive power, the seeming impossibility of bipartisan legislation, and the potential of radical tax reform which would involve, inevitably, Congress charging the Treasury Department and the IRS to fill in statutory gaps mean the limits of administrative authority will continue to be tested in the near future