The United States Court of Appeals for the District of Columbia today schooled the Internal Revenue Service (IRS) and the Department of the Treasury (DOTr or Treasury) on statutory construction and the limits of delegated regulatory authority in Loving v. IRS, affirming the district court decision by the same name. The court found that the IRS interpretation failed at the traditional Chevron Step 1 analysis because it conflicted with the statute under the cannons of statutory construction and that the IRS interpretation failed at Chevron Step 2 analysis because the interpretation was unreasonable in light of the statute’s text, history, structure, and context. The court firmly applied well established precedent to the IRS’s attempt to arrogate a 130 year old statute into more than it permits.
Background: The IRS addressed what it perceived as problems in the tax-preparation industry in 2011 by issuing a rule requiring that 600,000 – 700,000 paid tax return preparers (who are not attorneys, Certified Public Accountants, or otherwise enrolled agents) to pass a qualifying examination, register with the IRS, pay a fee, and take continuing education courses. The IRS purported to propound the rule under 31 U.S.C. § 330 – a statute enacted in 1884 with a broad sweep to permit the Treasury to regulate representation of persons making claims against the Treasury. The statute was recodified in 1982 “without substantive change” and otherwise remained unamended.
The United States District Court for the District of Columbia enjoined enforcement of the rule concluding that “together the statutory text and context unambiguously foreclose the IRS’s interpretation” of this authorizing statute. The IRS appealed.
The Decision: The court of appeals enunciated the core question before it from the United States Supreme Court (SCOTUS) recent decision in City of Arlington v. FCC:
No matter how it is framed, the question a court faces when confronted with an agency’s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.
Applied to the case at hand:
The precise question is whether the IRS’s statutory authority to “regulate the practice of representatives of persons before the Department of the Treasury” encompasses authority to regulate tax-return preparers. The District Court ruled against the IRS, relying on the text, history, structure, and context of the statute. We agree with the District Court that the IRS’s statutory authority under Section 330 cannot be stretched so broadly as to encompass authority to regulate tax-return preparers. We therefore affirm the judgment of the District Court.
The court of appeals explained that “at least six considerations” foreclosed the IRS’s broad interpretation of its authority:
- “Tax preparers” are not “representatives” of the taxpayer as that latter term is generally defined and the statutory term permits regulation of “representatives.”
- “Tax preparation” does not qualify as “representation before the Department of the Treasury” in the traditional self-assessment tax system – citing the district court’s analysis: “Filing a tax return would never, in normal usage, be described as ‘presenting a case.’ At the time of filing, the taxpayer has no dispute with the IRS; there is no ‘case’ to present. This definition makes sense only in connection with those who assist taxpayers in the examination and appeals stages of the process.”
- The pre-IRS history of the statute does not support the IRS use of the statute – and Congress’ later recodification – to use Congress’ own recodification signal “without substantive change” – does not support its use now. One might say that the IRS’s century of silence tells the truth.
- The context of the general statute used by the IRS is contextually not supported by the specific targeted statutory requirements that Congress has enacted specific to tax-return preparers, “covering precise conduct ranging from a tax-return preparer’s failing to sign returns to knowingly understating a taxpayer’s liability.” Citing another recent SCOTUS decision: “It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”
- The IRS interpretation of this delegation of regulatory authority exceeds the bounds of Congressional intent: “Here, as in Brown & Williamson, we are confident that the enacting Congress did not intend to grow such a large elephant in such a small mousehole.”
- Finally, the IRS itself, as recently as 2005, took the contrary position before Congress that tax preparers do not represent individuals before the IRS.
In concluding, the court noted the– a silence over 120 years.
In our judgment, the traditional tools of statutory interpretation – including the statute’s text, history, structure, and context – foreclose and render unreasonable the IRS’s interpretation of Section 330. Put in Chevron parlance, the IRS’s interpretation fails at Chevron step 1 because it is foreclosed by the statute. In any event, the IRS’s interpretation would also fail at Chevron step 2 because it is unreasonable in light of the statute’s text, history, structure, and context. It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation. The “role of this Court is to apply the statute as it is written – even if we think some other approach might accord with good policy.” …. The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330. As the Supreme Court has directed in words that are right on point here, the “fox-in-the-henhouse syndrome is to be avoided . . . by taking seriously, and applying rigorously, in all cases, statutory limits on agencies’ authority.”
Statutory construction or interpretation begins always with the statute and canons that courts have developed to interpret what Congress has wrought, to assist Congress in the drafting of new statutes, and to guide the agencies in the implementation of statutory delegations of rulemaking authority. Here the Treasury and IRS overstepped the bounds of its delegated authority and the court firmly rejection its rules. Whether Congress may wish now to grant authority that the IRS does not possess will be for Congress to decide.