In a recent essay on what he identifies as “customary deviations” from the dictates of the Internal Revenue Code, Professor Larry Zelenak asserts that the Internal Revenue Service has regularly created administrative deviations from the Code that produce taxpayer-favorable results that cannot be challenged in the courts because taxpayers lack standing to bring such challenges.[1] He worries that “the lack of any judicial check on unauthorized giveaways by tax administrators threatens rule-of-law values,” [2] and he concludes by proposing “legislation aimed at retaining the practical advantages of customary deviations while assuaging rule-of-law concerns.” [3] To illustrate the customary deviations that he identifies, Professor Zelenak analyzes the IRS’s announced decision not to take the position that employee-retained frequent flyer miles earned on employer-funded or business travel produce income when used for personal travel by employees, but observes that other examples abound.
As Professor Zelenak notes, we have devoted some effort to exploring the gap between the expansive literal meaning of various statutory and judicial definitions of income and the narrower meaning that emerges from IRS policies and practices. [4] Professor Zelenak’s concern is that our view “stretches beyond the breaking point the concept of what counts as an interpretation.” [5] As he explains:
According to Professors Abreu and Greenstein, the statutory definition of gross income (as glossed by Glenshaw Glass) “gives the IRS the flexibility to navigate the shoals of social opinion regarding income taxation, thereby . . . permitting the evolution of a concept of income that serves . . . important values in taxation,” including “a variety of noneconomic values.” This stretches beyond the breaking point the concept of what counts as an interpretation. Nothing in the language or legislative history of § 61, and nothing in Glenshaw Glass, suggests (for example) that employee-retained frequent-flier miles are not within the definition of gross income. [6]
While there is actually much that the three of us agree about, disagreement remains: What we view as interpretation, Professor Zelenak views as deviation. A deviation requires identifying a clear path (or rule) from which the deviation occurs. Professor Zelenak finds that path in what he refers to as “the Code as written.” [7] It seems that, for him, the Code provides rules that are to be strictly interpreted, so IRS positions that are inconsistent with that strict interpretation are deviations. We offer a different analysis. We posit that what may look like a rule can, upon closer inspection, reveal itself to be a standard. Such a closer inspection involves consideration of how the provision has been administered. In the specific case of the definition of income under section 61(a) of the Code, [8] we asserted in Defining Income that both the IRS and the courts have treated the definition of income as a standard rather than a rule, and that acknowledging the provision to be a standard clarifies its non-linear construction. [9] If there is no rule that all accessions are income, there is no need to find an exception or posit a deviation in order to conclude that a particular accession is not income. In short, where Professor Zelenak sees a deviation that threatens rule-of-law values, we see a non-exceptional, fully lawful interpretation of a standard. We do not claim that all provisions of the Code are standards. Many are rules—but not the definition of income.
Professor Zelenak’s essay makes an important contribution by clearly identifying a central concern regarding the IRS’s treatment of income: respect for the rule of law. Professor Zelenak’s concern is that
[t]o anyone who takes the rule of law seriously, it is troubling to contemplate that the Treasury and the IRS are almost unconstrained in their ability to make de facto revisions to the Internal Revenue Code enacted by Congress, as long as those revisions are in a taxpayer-favorable direction. It is especially troubling to think that the relatively innocent customary deviations in the gross income context may have bred a disrespect for the rule of law on the part of the Treasury and the IRS, so that tax administrators now believe they have the power and the authority to disregard any Code section when doing so would further their notion (notCongress’s notion) of good tax policy. [10]
Addressing this concern directly allows us to refine our analysis of the role of rules and standards in federal income tax law. For Professor Zelenak, respect for the rule of law entails an obligation of the Treasury and the IRS not to “disregard [the] Code,” [11] i.e., to follow the dictates of the statute. This, in turn, assumes that the Code, properly interpreted, specifies the answers to questions about its correct application—answers that Treasury and the IRS are bound to follow. In other words, it assumes that the Code is properly read as a compendium of rules whose meaning is independent of the interpreter.
This Essay seeks to demonstrate that the interpretive use of standards in applying provisions of the Code is not inconsistent with the rule of law. Part I discusses the relationship between rules and the rule of law and explains why we think so many tax scholars are drawn to a view of the tax law as consisting primarily of rules. We then demonstrate that the definition of income is properly understood as a standard. Part II addresses the descriptive dimension of this claim, summarizing and expanding our previous discussion of the definition of income to determine whether the term is susceptible to construction as a rule. We show that even a brief trip through some of the litigation required to determine whether certain items are income leads to the conclusion that the definition of income is not a rule. Part III addresses the normative dimension of our claim. There, we tease out the functions served by interpreting income as a standard and question where the interpretive authority lies with respect to the Code in order to argue that income ought to betreated as a standard. Part IV turns to several examples of what Professor Zelenak regards as either a “disregard” or an “underenforcement” of the law to clarify our understanding of interpretation. We then conclude by observing that the Code does not “read itself”: Deciding whether a provision is itself a rule or a standard is itself an act of interpretation. Moreover, interpreting a provision as a standard is fully consistent with the rule of law.
Full article available at the Duke Law Journal.
