Substance Over Form? Phantom Regulations and the Internal Revenue Code

Abstract

What happens when Congress commands the Secretary of an administrative agency to issue regulations, but the Secretary fails to act?

In most areas of the law, the answer is obvious: a party aggrieved by the Secretary's delay should file a suit (under 5 U.S.C. 706 or a similar provision) asking a court to compel the Secretary to issue regulations.

In the tax area, however, a different pattern has emerged. When Congress enacts a statute commanding the Secretary of the Treasury to act, the courts generally have not bothered to issue an order compelling him to do so. Rather, the reviewing court steps into the Secretary's shoes and creates phantom regulations, announcing the rules that it thinks the Secretary should promulgate pursuant to Congress's directive.

As is often the case, tax lawyers, the IRS, and courts have ignored generally applicable law in favor of a solution that seems "right" as a policy matter. This paper addresses the propriety of that unusual approach and concludes that phantom regulations should never be employed by courts, the IRS, or taxpayers.

Keywords: Tax, taxation, IRC, APA, regulations, Secretary, 553, 706(1), phantom, self-executing