The IRS Isn’t an Expert?

by Andy Grewal — Monday, June 29, 2015

Today, the Supreme Court issued its much-anticipated decision in King v. Burwell, holding that the Section 36B premium tax credit extends to taxpayers who acquire healthcare policies on federally established exchanges. The decision probably will not bear much on core tax provisions, but the Court’s reasoning could have major implications for the IRS’s administration of the various social programs littered throughout the tax code.

To uphold the government’s position, the Court might have been expected to employ the familiar Chevron framework, under which it generally defers to agency interpretations of ambiguous statutory provisions. However, in King, the Court refused to offer the IRS any deference on the question presented, even though it acknowledged the ambiguity in the contested statutory provision. The meaning of the contested phrase, referring to credits for policies purchased on an Exchange established by the State, implicated major questions of health care policy, and “[t]his is not a case for the IRS.” The IRS “has no expertise in crafting health insurance policy,” so the Court believed that it should resolve the ambiguity in the statutory scheme. It ultimately did so through an examination of Section 36B and various related Affordable Care Act provisions.

If the “expertise” point were taken to its logical extreme, the IRS would face significant limitations on its rulemaking authority. There are many, many provisions of the tax code where IRS expertise is likely lacking. Section 45, for example, includes credits for creating electricity from biomass, and I’m skeptical that anyone at the IRS is an expert at converting cow dung into energy. Even for more traditional code provisions, like the Section 901 foreign tax credit, one can question whether the IRS is really an expert at setting international economic policy.

In dismissing Chevron deference for the IRS, the Court misunderstood the nature of agency’s claimed expertise. The IRS doesn’t purport to be a master of health care reform, renewable energy, or international economic policy. Rather, the IRS’s expertise relates to understanding how complex tax code provisions bear on those things. This is a much more modest task and involves exploring different interpretations within statutorily defined parameters.

The Court seemed to lump the IRS with agencies that focus on particular industries or sectors, but this is an unfair comparison. The tax law touches on everything under the sun, so, by necessity, the IRS will rules relating to many sectors of the economy over which it has no special expertise. The IRS offering an interpretation of the Section 36B premium tax credit is completely different from, say, the Environmental Protection Agency establishing the price of a postage stamp. If the IRS loses Chevron deference for health insurance matters, then it arguably loses deference for everything.

Of course, that’s not where we’re likely headed. The Court also emphasized that King involved an unusually important question, and prior precedents support abandoning deference doctrines for “extraordinary cases.” FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000). The IRS will receive deference on smaller issues, even when they relate to renewable energy credits or other social programs.

However, every social program has a lynchpin, and given the Court’s warm embrace of Congress’s taxing powers in NFIB v. Sebelius, it seems likely that more lynchpins will be added to the Internal Revenue Code. Thus, while King undoubtedly reflects a major IRS victory, it may curtail the agency’s power in areas that are classified as outside of the agency’s expertise. I think that, in the context of deference doctrines, attempts at such classifications may be difficult or self-defeating, so King  will sow confusion on this point of law.

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