To the Editor:
Regulation preambles are a part of the reading cycle of a tax professional. The first thing I do when reviewing a regulation package is look carefully through the regulation preamble before reviewing the regulation text. This is because the regulation preamble, much like legislative history to a statute, provides meaning and context to the regulation text.
Regulation preambles add one additional feature that is more difficult to discern as to its legal significance. Not infrequently, a regulation preamble contains a substantive rule that is not in the regulation text itself. (A recent example are the final section 163(j) regulations (T.D. 9943) issued on January 13; they contain a rule only in the preamble that items omitted from the final regulation but that are contained in the proposed regulations can be relied on until new final rules are issued for the omitted items.)
At that point it would be appropriate to ask the question: What legal import, if any, does this “special preamble rule,” if I may call it that, have?
It’s Just Unclear
Unfortunately, it’s unclear that a taxpayer can rely on statements in a preamble that are not in the text of the regulation as “authority” for purposes of avoiding accuracy-related penalties under section 6662 of the code. Reg. section 1.6662-4(d)(3)(iii), which determines the types of authority that can be relied on to avoid the substantial understatement penalty, states that “proposed, temporary and final regulations construing” the IRC, is an authority.
However, the next question is whether the regulation preamble is considered part of “the regulation” construing the statute for this purpose, as the quoted language from reg. section 1.6662-4(d)(3)(iii) does not say anything on this question one way or the other. (A search for the regulatory history on this particular regulation has not turned up anything relevant. The ability to rely on regulations for this purpose is derived from section 6661, the predecessor to section 6662, which references only “Treasury regulations.”1)
Can We Rely On Preambles Then?
As much as logic dictates that the preamble should be considered part of “the regulation” for this purpose, where does it expressly say that in the regulation text or even in a regulation preamble dealing with the subject? I can find nothing.
It is not subject to doubt that a regulation preamble can be used as background and context much like legislative history in interpreting a regulation. But the key question at issue here is what if the preamble contains a substantive rule of law that is not contained in the text of the regulation itself as sometimes occurs? Is that naked (non-textual) statement in the preamble an authority that can be relied on?
The Office of the Federal Register Document Drafting Handbook, chapter 2.2, requires a preamble, for whatever it is worth, to be part of the submission to the Federal Register. However, the preamble is not published in the Code of Federal Regulations (CFR) as it is not regulation text. (1 CFR section 18.12 also requires a preamble to be part of a regulation in order to be published in the Federal Register.) The Administrative Procedure Act at 5 U.S.C. section 552 requires federal agencies to publish their regulations in the Federal Register in order to be legally effective, and 5 U.S.C. section 553(c) requires a regulation to contain the basis and purpose of or for the rule.
The reg. section 1.6662-4 rules were issued in December 1991 (T.D. 8381) but 1 CFR section 18.12 was issued in 1976 and amended in 1989. Thus, there can be no doubt that the requirement to have a regulation preamble existed before reg. section 1.6662-4 was finalized or even proposed.
Does this mean that the reference to the term “regulation” in reg. section 1.6662-4 must mean it includes a preamble because regulations had to have one to be published in the Federal Register? Or, since the CFR does not include regulation preambles when they are published there (IRS regulations are in title 26 of the CFR), does it mean that the term “regulation” does not include preambles because they are not expressly included when published there? Which inference, if any, should you draw here?
This issue needs regulatory text clarification, more urgently now than ever as there is an increasing trend to include substantive or applicability date rules and reliance rules in only the regulation preamble.
A Closing Comment
The Congressional Review Act (CRA) contains a requirement that absent “good cause,” regulations shall not take effect for 60 days after they are published in the Federal Register (or when submitted to Congress if later).2 In a recent slate of regulations scheduled for publication in the Federal Register on January 19, the day before inauguration day (and the assumed date of President Biden’s regulatory freeze order for regulations not published by then), the IRS asserted that there was “good cause” for the waiving of the 60-day CRA period. This was done so the regulations could be both effective and published before the new administration assumes power on January 20. (Prior coverage: Tax Notes Federal, Jan. 18, 2021, p. 461.)
The statute provides that “good cause” means that the 60-day delay is impractical, unnecessary, or contrary to the public interest.3 (The good cause language also appears in the Administrative Procedure Act at 5 U.S.C. section 553(b)(3)(B).) The justification used by the IRS in these waiver cases is principally that the rules at issue explain or clarify the law and therefore should be effective immediately. Well, if that is the case, a vast number of regulations could avoid the 60-day period because most rules explain or clarify the law — that is their principal purpose.
If the new administration finds that the CRA was violated, that should mean that the regulations were not legally effective when filed with the Federal Register, and therefore not lawfully published there. But matters under the CRA are not subject to judicial review (5 U.S.C. 805), and, most likely, the Biden administration
cannot revoke rules that it thinks violated the CRA without prior notice and comment under the APA. The Biden administration issued a regulatory freeze memorandum on January 20 and that memorandum allows for regulations published before January 20 to be subject to review, if it is later determined that action was taken on a pre-January 20 published regulation to circumvent the intent of the freeze memorandum. (Related coverage: p. 633) Can taxpayers then safely assume that the CRA 60-day delay rule was effectively waived for reliance purposes? It seems that the answer is yes. But it’s possible that the Biden administration could nevertheless review those regulations under the authority of the freeze memorandum, although the APA could preclude any changes or delays without prior notice and comment. Time will tell.
Comments and insight are clearly welcome.