Amicus Curiae Brief — United States v. Mead Corp.

AUG 14 2000

AUG /4 2000

No. 99-1434

IN THE

Supreme Court of the Anited States

UNITED STATES OF AMERICA,

Petitioner.

\.

THE MEAD CORPORATION,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF OF

TAX EXECUTIVES INSTITUTE, INC.

AS AMICUS CURTAE

IN SUPPORT OF RESPONDENT

TIMOTHY J. MCCORMALLY

MARY L. FAHEY

TAX EXECUTIVES INSTITUTE, INC.

1200 G Street, N.W.

Suite 300

Washington, D.C. 20005-3814

(202) 638-5601

Counsel for Amicus Curiae

* Counsel of Record Tax Executives Institute, Ine.

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001

BEST AVAILABLE COPY

TABLE OF CONTENTS

SOSH ESHEETS ERE EEO Ee

SESH EEE EEEEEEEEEEHESESEEEEEES EERE REE EEE E EEE SEES

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23

ii

TABLE OF AUTHORITIES

CASES: Page

Atchison, Topeka & Santa Fe Ry. v. Pena, 44

F.3d 437 (7th Cir. 1994) (en banc), aff'd, 516

U.S. ESB (ID BED ccccocsscsnsssvenensanmmnananananaane 21

Atlantic Mutual Insurance Co. v. Commissioner,

SSS UB. TGS CIGGE) cxcececescecessnmensunannaaae 11

Biddle v. Commissioner, 302 U.S. 573 (1938) ..... 17

Bowen v. Georgetown University Hospital, 488

Ue BO (TDG) .ccccrcccssescassciibensmsinenniee 7,19

Busse v. Commissioner, 419 F.2d 1147 (7th Cir.

|) NT 15

Caruso v. Blockbuster-Sony Music Entertain-

ment Centre, 174 F.3d 166 (3d Cir. 1999) ........ 15

Chevron U.S.A. Inc. v. National Resources

Defense Council, Inc., 467 U.S. 837 (1984)...... passim

Christensen v. Harris County, 120 S. Ct. 1655

1 TT 3, 5, 9, 12, 20, 22

Commissioner v. Keystone Consolidated Indus-

tries, Imc.. THB UB. 1S2 CIGBS) ecceccccceccecccececseens 18

Commissioner v. Schleier, 515 U.S. 323 (1995) ... 6, 11,

12, 17-18

Connecticut General Life Insurance Co. vy.

Commissioner, 177 F.3d 136, cert. denied, 120

SB. Co. SGD CIGIP) .cceccccssccnsicnicnsiaiaseianaaseannnaa 22

Correll v. United States, 369 F.2d 87 (6th Cir.

| 19

Davis v. United States, 495 U.S. 472 (1990) ......... 12, 18

DePaolis v. Commissioner, 69 T.C. 283 (1977).... 19

EEOC v. Arabian American Oil Co., 499 U.S.

BOE (EDD E ) nncccocessscencsessonssensnniiaiaumeanenanannnnnn 20, 21

Elizabeth Blackwell Health Center for Women v.

Knoll, 61 F.3d 170 (3d Cir. 1995)........ccccccceceeees 21-22

Estate of Kosow v. Commissioner, 45 F.3d 1524

C1 BGs Cale, BB). nccocesessenscensessinsiioesnnianiniiaaannee 16

ili

TABLE OF AUTHORITIES—Continued

Page

First Chicago NBD Corp. v. Commissioner, 135

F.3d. 457 (7th Cir. 1998) .......cccccccsscerseseesseeenenens 16

Fribourg Navigation Co. v. Commissioner, 383

SRE, aed op cccssecesescccevsscscessscccscsssccsnsecsenssevese 15

Garcia v. Secretary of Health and Human

Services, 46 F.3d 552 (6th Cir. 1995) .........0000 21

Gillespie v. United States, 23 F.3d 36 (2d Cir.

iil canercessenecesnecspseneosnncssssscesvecscssscssesessezesnesssseee 16

Halliburton Co. v. Commissioner, 100 T.C. 216

(1993), aff'd without published opinion, 25

F.3d 1043 (Sth Cir, 1994) .......cccccccccsseeeeeeneeeenes 19

Helvering v. New York Trust Co., 292 U.S. 455

iI eesnnistenensenenntsennecsssnccssnessnecsssesesseeseeseeccsesece 17

Johnson City Medical Center v. United States,

999 F.2d 973 (6th Cir. 1993) ........ccccccceeeeeeeereees 14, 16

Ludwig v. Commissioner, 68 T.C. 979 (1977)....... 15

Martin v. Occupational Safety and Health

Review Commission, 499 U.S. 144 (1991) ........ 20

National Muffler Dealers Association v. United

States, 440 U.S. 472 (1979) .....ccccccccceeceeeseeeeeeeees 22

National Tour Brokers Association v. United

States, 591 F.2d 896 (D.C. Cir. 1978) ........:004 14

Northern Indiana Public Service Co. v.

Commissioner, 105 T.C. 341 (1995), aff'd, 115

F, 3d 506 (7th Cir. 1997) .......ccccccccscrsssssressseseees 18-19

Reno v. Koray, 515 U.S. 50 (1995).....cccccccceeseeeeees 12

Rowan Cos. v. United States, 452 U.S. 247

SI ccsiicesinsenetaatsneqnenencnncenenezsensenaqsesqsecqqncserecesece 22

Skidmore v. Swift & Co., 323 U.S. 134 (1944).... 7, 20-22

Stark v. Commissioner, 86 T.C. 243 (1986) .......... 18

Stubbs, Overbeck & Associates, Inc. v. United

States, 445 F.2d 1142 (Sth Cir. 1971).......c0000e 15, 19

Tandy Corp. v. Commissioner, 92 T.C. 1165

iv

TABLE OF AUTHORITIES—Continued

Page

Thomas Jefferson University v. Shalala, 512 U.S.

SPO pee ae cnatenasaseinnscemmiansnnentanniannininnntaieniaees 15

Trans Union Corp. v. Federal Trade Com-

mission, 81 F.3d 228 (D.C. Cir. 1996)............... 21

United States v. Allen-Bradley Co., 352 U.S. 306

(INO Pusatenssnsceveenessnesneceensannnnsiagnesememmenmnnnnnneten 18

United States v. Correll, 389 U.S. 299 (1967)....... 19

United States v. Haggar Apparel Co., 526 U.S.

Fe eee crentnrscnsennerttennnenaislnniaannideiins 4, 8, 10-11

United States v. Thompson/Center Arms Co., 504

ule SD Core rassssenenesnmnerenpriisetmnamestatannnins 18

United States v. Vogel Fertilizer Co., 455 U.S. 16

(GU er nccsscsmsansencentegapentieainiiintnnnneneenenassniitineneenns 22

STATUTES AND REGULATIONS:

Administrative Procedure Act, 5 U.S.C. § 553

(UI crcsnsnssensnensenseertensenemnenmnennsinneemminsieis 5, 12, 13

Harmonized Tariff Schedules of the United

States, 19 U.S.C. § 1202 (Supp. IV 1998)......... 8

Internal Revenue Code:

a in TP Ge i cccesntsncrnernsctrencenenmomneneen 17-18

BP es B08 Ga teem 13

aes Oe Ce ee ceneennstenmentnicnnmesinions 17

ee 17

MISCELLANEOUS:

DAVIS, KENNETH CULP, & RICHARD J. PIERCE,

JR., ADMINISTRATIVE LAW TREATISE (3d ed.

PUTT cxensensceseueomsmnatiemennnagemnansnnnapibiatmemagmnenaiiie 10, 21, 22

Galler, Linda, Judicial Deference to Revenue

Rulings: Reconciling Divergent Standards, 56

Os ST. LJ. 1037 (1995S) .....cccccccceccceccrsccsoees 13, 16-17

Vv

TABLE OF AUTHORITIES—Continued

Headquarters Ruling 955937, 1994 WL 712863

H.R. Rep. No. 1980, 79th Cong., 2d Sess.

Manning, John F., Constitutional Structure and

Judicial Deference to Agency Interpretations

of Agency Rules, 96 CoLtuM. L. REv. 612

Notice of Proposed Rulemaking and Notice of

Public Hearing: Special Rules Regarding

Optional Forms of Benefit under Qualified

Retirement Plans, 65 Fed. Reg. 16546 (March

29, 2000), reprinted in 2000-16 LR.B. 903

(April 17, 2000) ........ccccrecscccscsersesecsecsecseseessssssses

Rev. Proc. 89-14, 1989-1 C.B. 814.........ccccccsseeeeees

SALTZMAN, MICHAEL L, IRS PRACTICE AND

PROCEDURE (2d ed. 1991).......ccccccccsserseeerseensenees

SCHWARTZ, BERNARD, ADMINISTRATIVE LAW

(3d ed. 1991)........... suemmusngsnrnsssnnenesestanenensemnansense

S. Rep. No. 752, 79th Cong., Ist Sess. (1945).......

Page

12

21

13-14

12, 19

14

22

12-13

IN THE

Supreme Court of the Anited States

No. 99-1434

UNITED STATES OF AMERICA,

Petitioner,

Vv.

THE MEAD CORPORATION,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF OF

TAX EXECUTIVES INSTITUTE, INC.

AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT

INTEREST OF AMICUS CURIAE

Pursuant to Rule 37 of the Rules of the Supreme Court,

Tax Executives Institute, Inc. respectfully submits this brief

as amicus curiae in support of Respondent.' Tax Executives

Institute (hereinafter “TEI” or “the Institute”) is a voluntary,

' Pursuant to Rule 37.6, amicus TEI states that no counsel for a party

has written this brief in whole or in part and that no person or entity, other

than amicus, its members, or its counsel, has made a monetary contribu-

tion to the preparation or submission of this brief. Tax Executives Insti-

tute has received the written consents of Petitioner and Respondent to the

filing of this brief; those consents have been filed with the Clerk of the

Court.

2

nonprofit assoeMition of corporate and other business execu-

tives, managers, and administrators who are responsible for

the tax affairs of their employers. The Institute was organ-

ized in 1944 and currently has approximately 5,200 members

who represent nearly 2,800 of the leading businesses in the

United States, Canada, and Europe.

The members of the Institute represent a cross-section of

the business community in North America. The Institute is

dedicated to promoting the uniform and equitable en-

forcement of the tax laws and to reducing the costs and bur-

dens of administration and compliance to the benefit of both

the government and taxpayers.

This case revolves around the deference granted classifica-

tion rulings issued by the Customs Service. But it is not

merely a Customs case. It is a case involving fundamental

questions of administrative law. In reviewing interpretative

rulings by a federal agency—such as the Customs Service—

how much should a court defer to the agency’s interpretation

of the law? In its decision below, the United States Court of

Appeals for the Federal Circuit held that classification rulings

are not entitled to deference under the Supreme Court’s semi-

nal decision in Chevron U.S.A. Inc. v. National Resources

Defense Council, Inc., 467 U.S. 837 (1984). In reaching that

decision, the Federal Circuit reasoned by analogy to revenue

rulings issued by the Internal Revenue Service (IRS), noting

that such “interpretive rulings . . . do not have the force and

effect of regulations.” The parallels between Customs rulings

and IRS rulings, neither of which is subject to the notice-and-

comment process, convinced the circuit court that Customs

rulings “do not require Chevron deference.”

This case is manifestly important to companies that import

goods into the United States. It has broader ramifications,

however, for other agency interpretations, including those by

the IRS. As the individuals who must contend daily with the

- interpretation and administration of the nation’s tax laws,

3

TEI’s members have a vital interest in the deference to be ac-

corded IRS interpretative rules by the courts. The decision

will affect the balance between the orderly and reasonable

administration of a statute and potentially unchecked and

even arbitrary agency power. Many TEI members have first-

hand knowledge that an agency may seek to bolster its litigat-

ing position by issuing rulings, even after a case has been

docketed in the courts. Meaningful, albeit measured, judicial

review of agency interpretative rulings is critical in safe-

guarding the public from unreasonable agency actions. Be-

cause TEI] members and the businesses by which they are

employed will be materially affected by the Court's decision

in this case, the Institute has a special interest in the outcome.

SUMMARY OF ARGUMENT

1. This case involves a fundamental question of adminis-

trative law. In reviewing interpretative rulings by a federal

agency, how much should a court defer to the agency’s inter-

pretation of the law? In its decision below, the United States

Court of Appeals for the Federal Circuit held that Customs

classification rulings are not entitled to deference under the

Supreme Court’s seminal decision in Chevron U.S.A. Inc. v.

National Resources Defense Council, Inc., 467 U.S. 837

(1984). The Federal Circuit’s decision is correct.

The issue of the deference to be accorded an agency’s in-

terpretative ruling requires a careful balance and the answer

properly depends on the extent of public involvement in the

development of the agency rule. See Christensen v. Harris

County, 120 S. Ct. 1655, 1662 (2000). To be sure, administra-

tive agencies develop expertise in the subject matters within

their jurisdiction, but the public has an indispensable role to

play in ensuring that an agency is well informed and its posi-

tion does not overreach. Simply stated, without notice and

comment, an agency’s decision could become capricious.

Without meaningful judicial review of interpretative rules,

4

agencies could arrogate to themselves the power to unrea-

sonably interpret or apply the law. A careful balance must be

struck, and the courts are properly wary of deferring too

much to agency interpretative rulings. Amicus TEI submits

that the Federal Circuit struck the proper balance here and

that its decision on the deference to be granted to the Customs

Service’s classification ruling fully accords with this Court’s

decisions in Chevron and subsequent cases.

2. In Chevron, this Court established a two-step test for

determining the deference to be afforded interpretative rules

by the courts. First, the court must review the intent of Con-

gress. If it is clear, “that is the end of the matter; for the

court, as well as the agency, must give effect to the unambi-

guously expressed intent of Congress.” If Congress has not

directly addressed the matter, however, the question becomes

whether the agency’s answer is based on a permissible con-

struction of the statute. 467 U.S. at 842-83. If the regulatory

scheme is a “reasonable accommodation of manifestly com-

peting interests,” the agency’s interpretation is entitled to def-

erence. /d. at 865.

In United States v. Haggar Apparel Co., 526 U.S. 380

(1999), the Court applied the Chevron standard in determin-

ing the deference to be accorded regulations relating to the

Customs classification of certain imported goods, analogizing

Customs regulations to tax regulations. The Court found

that—in light of the Customs Service’s use of the notice-and-

comment rulemaking process—the regulations at issue were

entitled to Chevron deference. 526 U.S. at 394.

Rulings are not, however, the same as regulations. In its

analysis of this case, the Federal Circuit looked to the defer-

ence to be accorded revenue rulings issued by the Internal

Revenue Service, noting that the parallels between IRS and

Customs rulings convinced it that “the latter, like the former,

do not require Chevron deference.” The Federal Circuit’s

5

analysis of the deference owed to Customs and IRS interpre-

tative rulings is correct.

3. Under Chevron and Haggar, not all agency rulemaking

is entitled to deference. Only four months ago, the Court

properly declined to extend such deference to an opinion let-

ter issued by the U.S. Department of Labor. See Christensen,

120 S. Ct. at 1662-63. The Court explained that the interpre-

tation at issue was “not one arrived at after, for example, a

formal adjudication or notice-and-comment rulemaking” and

thus did not warrant Chevron deference. /d. at 1662.

Like the opinion letter at issue in Christensen, Customs

classification rulings (such as the one at issue here) and IRS

revenue rulings are not subject to notice and comment and are

not published in either the Federal Register or the Code of

Federal Regulations. These safeguards are required by the

Administrative Procedure Act (APA) to afford an opportunity

for interested persons to comment on agency interpretations

before they become final. 5 U.S.C. § 553 (1994). Public par-

ticipation in an agency’s rulemaking process is important for

two reasons. First, the combined expertise of the agency and

the public produces better rules, and second, the procedure

enables interested parties to express their views to agency of-

ficials who are not directly accountable to the voters.

Amicus TEI submits that the discipline and openness en-

gendered by the notice-and-comment procedure deter casual

or arbitrary action, forestall confusion, and ultimately pro-

duce more effective regulations, all to the benefit of the gov-

ernment and the public. This same process is not normally

followed with interpretative rules such as Customs classifica-

tion rulings and IRS revenue rulings, and accordingly a

higher quantum of judicial scrutiny is appropriate to counter-

balance the absence of notice and comment.

A Customs Service (or IRS) ruling should not be treated as

a policy decision that courts must accept if it is minimally ra-

6

tional. To do so would permit and perhaps even encourage

agencies to circumvent the intent of Congress because it is

more expedient to create rules without public scrutiny.

Equally troublesome, according Chevron deference to inter-

pretative rulings may encourage the agencies to issue rulings

to improve the likelihood of success in litigation.

Regulations and interpretative rulings are not the same. In

the case of regulations, Chevron deference may be sensible

because the public has participated in the rulemaking process.

In contrast, in respect of interpretative rulings, judicial scru-

tiny must serve as a counterbalance to the lack of public par-

ticipation in the process. Thus, the Federal Circuit correctly

determined that Chevron deference should not be extended to

standard Customs Service rulings.

4. What is the correct standard to be applied to Customs

classification rulings? Following this Court’s lead in Haggar,

the Federal Circuit looked to the standard utilized in analyz-

ing IRS revenue rulings. The appeals court found that Cus-

toms classification rulings, like IRS revenue rulings, were not

entitled to deference. Its reasoning should be sustained.

Although an official interpretation of the IRS, revenue rul-

ings are limited to the facts under consideration and are not

published in the Federal Register or the Code of Federal

Regulations. Most recently, in Commissioner v. Schleier,

515 U.S. 323 (1995), the Court wisely noted that the IRS’s

rulings do not have the force and effect of regulations, and

“may not be used to overturn the plain language of a statute.”

Id. at 336 n.8.

IRS revenue rulings are mere litigating positions and not

entitled to any deference. This is not merely the view of

amicus TEI, but, more important, it is the view adopted by the

United States Tax Court, a court uniquely qualified to assess

the efficacy of IRS pronouncements. According to the Tax

Court, a revenue ruling represents the Commissioner’s posi-

ee ee ee

7

tion with respect to a specific factual situation and is merely

the opinion of a lawyer in the agency. Thus, rulings are not

binding on the courts and are only as persuasive as the IRS’s

reasoning and the precedents upon which the agency relies.

The Tax Court’s position is consistent with this Court’s

holding in Bowen v. Georgetown University Hospital, 488

U.S. 204 (1988), that deference to “an agency’s convenient

litigating position” is “entirely inappropriate.” /d. at 213.

Amicus TEI submits that, given the similarity between IRS

revenue rulings and Customs classification rulings, the Fed-

eral Circuit correctly held that neither should be accorded any

deference.

5. Alternatively, if the Court concludes that an intermedi-

ate level of deference should be accorded Customs rulings,

the proper standard may be found in this Court’s decision in

Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), i.e., “a

body of experience and informed judgment to which courts

and litigants may properly resort for guidance.” Applying

Skidmore here would place the burden of persuasion on the

agency to convince the court of the meaning of the relevant

statute. It would also encourage agencies to issue clear regu-

lations, while acknowledging that an agency may have supe-

rior insights into regulatory meaning.

This case provides an opportunity for the Court to clarify

the standard for reviewing agency interpretations. Amicus

TEI respectfully submits that the courts according Chevron

deference to such rules have inappropriately distended the

doctrine. Applying Skidmore to interpretative rules such as

those involved here will provide needed guidance to the

lower courts and reserve Chevron deference, at most, to sub-

stantive rules subject to the notice-and-comment process.

Like the opinion letter in Christensen, agency interpreta-

tions contained in Customs classification and IRS revenue

rulings should be “entitled to respect,” but only to the extent

8

that those interpretations have the “power to persuade.” The

Federal Circuit found the Customs classification ruling in this

case unpersuasive. Its opinion should be affirmed.

ARGUMENT

I.

Customs duties are imposed on imported goods in accor-

dance with the Harmonized Tariff Schedules of the United

States (HTSUS), 19 U.S.C. § 1202 (Supp. IV 1998). This

case involves whether five categories of Respondent Mead

Corporation’s loose-leaf day planners (sometimes called

“Filofaxes”) should be assessed as a “bound diary” under

subheading 4820.10.20 of the HTSUS or comes under the

“other” provision of subheading 4820.10.40. The outcome—

which will cause the tariff to be either zero or up to four per-

cent—turns on the deference accorded rulings of the U.S.

Customs Service under this Court’s decision in Chevron

U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467

U.S. 837 (1984).

In an interpretative ruling dated January 11, 1993, the Cus-

toms Service classified Mead’s day planners as bound diaries

subject to a four-percent tariff. Headquarters Ruling 955937,

1994 WL 712863 (Customs), reprinted at App. 28a-47a.’

Mead sought review in the Court of International Trade,

which affirmed the Customs Service’s classification. (App.

19a-27a.) The United States Court of Appeals for the Federal

Circuit reversed, holding that the day planners were neither

“diaries” nor “bound” under common and commercial defini-

tions of the terms. (App. la-16a.) Applying the standard set

forth in Chevron, as recently interpreted by this Court in

United States v. Haggar Apparel Co., 526 U.S. 380 (1999),

* References to “App.” are to the appendix filed with the United States’

Petition for a Writ of Certiorari to the United States Court of Appeals for

the Federal Circuit.

9

the Federal Circuit found that the Customs Service ruling is-

sued to Mead was not entitled to deference. (App. 6a-7a.)

This Court subsequently granted the government’s petition

for a writ of certiorari to consider two issues:

e Whether classification rulings issued by the Cus-

toms Service are entitled to deference in deter-

mining the proper tariff classification of imported

goods, and

e Whether the Customs Service reasonably inter-

preted the statutory phrase “diaries, notebooks, and

address books, bound” in subheading 4820.10.20 of

the HTSUS to include the spiral-ring and ring-

bound day planners imported by Mead.

Amicus TEI’s interest is with the first issue, for the ques-

tion of the courts’ deference to agency pronouncements lies at

the heart of administrative law. The issue requires a careful

balance, and the answer properly depends on the extent of

public involvement in the development of the agency rule.

See Christensen v. Harris County, 120 S. Ct. 1655, 1662

(2000). To be sure, agencies develop expertise in the subject

matters within their jurisdiction, but the public has a vital role

to play in ensuring that an agency is well informed and its po-

sitions do not overreach. The importance of the notice-and-

comment process in aiding an agency’s efforts to administer a

statute in a reasonable manner and preventing arbitrary ac-

tions cannot be overstated. Simply stated, without notice and

comment, an agency’s decision could be capricious. Without

meaningful judicial review of interpretative rules, agencies

could arrogate to themselves the power to unreasonably inter-

pret or apply the law. Thus, a careful balance must be struck,

and the courts are properly wary of deferring too much to

agency interpretative rulings. Amicus TEI submits that the

Federal Circuit struck the proper balance. Its decision on the

deference to be granted to the Customs Service’s classifica-

10

tion ruling fully accords with this Court’s decisions in Chev-

ron and subsequent cases and should be affirmed.

Chevron has been called “one of the most important deci-

sions in the history of administrative law.” 1 KENNETH CULP

DAVIS & RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW

TREATISE § 3.2, at 110 (3d ed. 1994) (hereinafter cited as

“DAVIS & PIERCE”). In that case, the Court considered the

Environmental Protection Agency’s construction of the Clean

Air Act and set forth the following standard of review:

When a court reviews an agency’s construction of the

statute which it administers, it is confronted with two

questions. First, always, is the question whether Con-

gress has directly spoken to the precise question at issue.

If the intent of Congress is clear, that is the end of the

matter; for the court, as well as the agency, must give ef-

fect to the unambiguously expressed intent of Con-

gress. If, however, the court determines Congress has

not directly addressed the precise question at issue, the

court does not simply impose its own construction on the

Statute, as would be necessary in the absence of an ad-

ministrative interpretation. Rather, if the statute is silent

or ambiguous with respect to the specific issue, the ques-

tion for the court is whether the agency’s answer is

based on a permissible construction of the statute.

467 U.S. at 842-83 (footnote omitted). The Court noted that

“considerable weight should be accorded to an executive de-

partment’s construction of a statutory scheme it is entrusted

to administer.” /d. at 844. Because the Court viewed the

regulatory scheme in Chevron to be a “reasonable accommo-

dation of manifestly competing interests,” it held that the

agency’s interpretation was entitled to deference. /d. at 865.

Subsequently, in Haggar, the Court applied this standard in

determining the deference to be accorded regulations relating

to the Customs classification of certain imported goods,

analogizing Customs regulations to tax regulations. 526 U.S.

at 394 (citing Atlantic Mutual Insurance Co. v. Commis-

sioner, 523 U.S. 382, 389 (1998) (when a term in the Internal

Revenue Code is ambiguous, “the task that confronts us is to

decide, not whether the Treasury regulation represents the

best interpretation of the statute, but whether it represents a

reasonable one.” (emphasis added)). The Court then found

that—in light of the Customs Service's use of the notice-and-

comment rulemaking process—the regulations at issue were

entitled to Chevron deference. 526 U.S. at 394.

The Chevron and Haggar decisions, however, do not mean

that all agency rulemaking is entitled to deference. Indeed,

not according deference to the Customs ruling here at issue is

wholly consistent with those decisions. The Federal Circuit

explained that, unlike the regulations at issue in Haggar, or-

dinary classification rulings do not have the force of law and

are not issued with procedural safeguards such as public no-

tice and comment. (App. 6a-7a.) The court held that the

Customs Service’s classification ruling did not warrant the

deference owed to regulations that “fill[] a gap or define[] a

term” of an ambiguous I{TSUS provision. (App. 5a.) In

reaching this conclusion, the court relied heavily on the def-

erence standard applied to revenue rulings issued by the In-

ternal Revenue Service (IRS). Citing Commissioner v.

Schleier, 515 U.S. 323 (1995), the court noted that IRS rul-

ings do “not have the force and effect of regulations.” It con-

cluded that “the parallels between IRS Revenue Rulings and

Customs rulings further convince this court that the latter, like

the former, do not require Chevron deference.” (App. 8a.)

The Federal Circuit’s analysis of the deference owed to Cus-

toms and IRS interpretative rulings is correct.

Not all agency interpretations are entitled to Chevron def-

erence. Only four months ago, the Court properly declined to

12

extend such deference to an opinion letter issued by the U.S.

Department of Labor. In Christensen, the Court noted that

the interpretation at issue was “not one arrived at after, for

example, a formal adjudication or notice-and-comment rule-

making.” 120 S. Ct. at 1662-63. Labor Department opinion

letters—like interpretations set forth in policy statements,

agency manuals and enforcement guidelines, all of which

lack the force of law—thus do not warrant Chevron defer-

ence. /d. at 1662 (citing Reno v. Koray, 515 U.S. 50, 61

(1995) and other cases).

Like the opinion letter at issue in Christensen, Customs

classification rulings (such as the one at issue here) and IRS

revenue rulings are not subject to notice and comment and are

not published in either the Federal Register or the Code of

Federal Regulations. As such, they are an agency inter-

pretation that should not be given “the force and effect of

regulations.” Cf. Schleier, 515 U.S. at 336 n.8 (quoting Davis

v. United States, 495 U.S. 472, 484 (1990)).’

As the Federal Circuit recognized below (App. Sa-6a), the

Administrative Procedure Act (APA) generally requires pub-

lication of a notice of proposed rulemaking, an opportunity

for interested persons to comment, and a hearing before the

adoption of “legislative” regulations, i.e., regulations specifi-

cally authorized by statute. 5 U.S.C. § 553 (1994). The leg-

islative history confirms what is apparent from the face of the

statute: Section 553’s principal purpose is “to provide that

the legislative functions of administrative agencies shall so

far as possible be exercised only upon public participation on

notice.” H.R. Rep. No. 1980, 79th Cong., 2d Sess. 23 (1946).

To ensure the effectiveness of those safeguards, “notice must

* Moreover, the IRS does not claim for revenue rulings the force and

effect of Treasury Department regulations. Rev. Proc. 89-14, § 7.01(4),

1989-1 C.B. 814, 815 (“Revenue rulings published in the [Internal Reve-

nue] Bulletin do not have the force and effect of Treasury Department

regulations (including Treasury Decisions) . . .”’).

eo? 2 Pa

13

be sufficient to fairly apprise interested parties of the issues

involved, so that they may present responsive data or argu-

ment relating thereto.” S. REP. NO. 752, 79th Cong., Ist Sess.

14 (1945). An exception is provided from the notice-and

comment requirements, however, for agency interpretative

rules. 5 U.S.C. § 553(b)(3)(A) (1994).

Public participation in an agency’s rulemaking process is

important for two reasons. First, the combined expertise of

the agency and the public produces better rules since public

input leaves the agency better informed and may offset any

institutional bias for or against a particular rule. Second, the

procedure guarantees an open process by enabling interested

parties to express their views to agency officials who are not

directly accountable to the voters. Thus, opportunities for

closed-door or back-room deals can be minimized. See gen-

erally Linda Galler, Judicial Deference to Revenue Rulings:

Reconciling Divergent Standards, 56 Ounio St. LJ. 1037,

1086 (1995) (hereinafter cited as “Galler’’).

Organizations such as amicus TEI frequently comment on

proposed regulations and its members’ experience and exper-

tise are often sought by the Treasury Department and IRS,

particularly in administrative matters involving large corpora-

tions. Amicus TEI submits that the discipline and openness

engendered by the notice-and-comment procedure deter cas-

ual or arbitrary action, forestall confusion, and ultimately

produce more effective regulations, all to the benefit of the

government and the public alike.

For example, the IRS and Treasury Department recently is-

sued proposed regulations under section 411(d)(6) of the In-

ternal Revenue Code (26 U.S.C.), relating to the technical re-

quirements for qualified retirement plans. Comments sub-

mitted by amicus TEI and others to the IRS in response to an

earlier notice were reflected in the proposed rulemaking and

additional assistance was requested on several outstanding is-

sues. See Notice of Proposed Rulemaking and Notice of Pub-

14

lic Hearing: Special Rules Regarding Optional Forms of

Benefit under Qualified Retirement Plans, 65 Fed. Reg.

16546 (March 29, 2000), reprinted in 2000-16 LR.B. 903

(April 17, 2000). Although the IRS and Treasury Department

are still reviewing comments on the proposed regulations,

amicus TEI predicts that the final regulations will be better

reasoned—and the public will be better served—as a result of

the notice-and-comment process.

This same process is not normally followed with interpreta-

tive rules such as Customs classification rulings and IRS

revenue rulings,’ and a higher quantum of judicial scrutiny is

appropriate to counterbalance the absence of notice and

comment. “It would be contrary to the intent of the APA

(and thus of Congress) to permit an agency to do by interpre-

tive rule what Congress intended it to do by legislative rule-

making. For the court to then defer to the ‘agency’s answer’

where that answer is an interpretive rule would be not only

contrary to congressional intent but also a neglect of judicial

duty in reviewing agency determinations under 5 U.S.C. sec-

tion 702.” Johnson City Medical Center v. United States, 999

F.2d 973, 979-80 (6th Cir. 1993) (Batchelder, J., dissenting)

(footnote omitted). Allowing public comment before a ruling

is issued keeps the agency open-minded and flexible. See

National Tour Brokers Association v. United States, 59\ F.2d

896, 902 (D.C. Cir. 1978) (“People naturally tend to be more

close-minded and defensive once they have made a ‘final’ de-

termination.” (footnote omitted)).

A Customs Service (or IRS) ruling should not be treated as

a policy decision that courts must accept if it is minimally ra-

tional. To do so would permit and perhaps even encourage

agencies to circumvent the intent of Congress because it is

* Although not required to do so by the APA, the Treasury Department

normally follows the APA notice-and-comment procedures in respect of

interpretative tax regulations. MICHAEL I. SALTZMAN, IRS PRACTICE AND

PROCEDURE 4] 3.02{3] (2d ed. 1991).

15

more expedient to create rules without public scrutiny. It

would also facilitate the issuance of vague or one-sided regu-

lations, which the agency could later interpret to its own end.

See Thomas Jefferson University v. Shalala, 512 U.S. 504,

525 (1994) (Thomas, J., dissenting) (“It is perfectly under-

standable, of course, for an agency to issue vague regulations,

because to do so maximizes agency power and allows the

agency greater latitude to make law through adjudication,

rather than through the more cumbersome rulemaking proc-

ess.”); Caruso v. Blockbuster-Sony Music Entertainment Cen-

tre, 174 F.3d 166, 174 (3d Cir. 1999) (“It is certainly not open

to an agency to promulgate mush and then give it concrete

form only through subsequent less formal ‘interpretations.’ ”

(citation omitted)).

Equally troublesome, according Chevron deference to in-

terpretative rulings may encourage agencies such as the Cus-

toms Service and the IRS to issue rulings to improve the like-

lihood of success in litigation. See, e.g., Stubbs, Overbeck &

Associates, Inc. v. United States, 445 F.2d 1142, 1147 (Sth

Cir. 1971) (refusing to follow a revenue ruling because it was

not a reasonable interpretation of the statute and appeared as

if the “drafter of the Ruling did a bit of legislating for the

convenience of the IRS”); Tandy Corp. v. Commissioner, 92

T.C. 1165, 1170 (1989) (refusing to follow a revenue ruling

because it represented “a thinly veiled attempt to influence

this litigation, judging from the similarity of the facts and the

timing of its issuance”). The Tax Court and other courts have

routinely looked upon “bootstrapping revenue rulings” with

disfavor. Id.; Ludwig v. Commissioner, 68 T.C. 979, 986 n.4

(1977). See also Fribourg Navigation Co. v. Commissioner,

383 U.S. 272, 279-81 (1966); Busse v. Commissioner, 419

F.2d 1147, 1152 n.12 (7th Cir. 1973).

If the Court extends the Chevron deference standard to

administrative rulings such as those issued by the Customs

Service or the IRS, it will imbue those pronouncements with

16

the same status as regulations. Although the government at-

tempts to blur the distinction between legislative regulations

and interpretative rulings, they are not the same. In the case

of regulations, Chevron deference may be salutary because

the public has participated in the rulemaking process. It

makes no sense, however, in respect of interpretative rulings.

Judicial scrutiny must counterbalance the lack of public par-

ticipation in the process. Thus, the Federal Circuit’s determi-

nation that Chevron deference should not be extended to

standard Customs Service rulings is correct.°

IV.

What is the correct quantum of deference for Customs

classification rulings? Following this Court’s lead in Hag-

gar—which noted the similarity of trade and tax issues—the

Federal Circuit looked to the standard utilized in analyzing

IRS revenue rulings. (App. 7a-8a.) After reviewing the ap-

plicable Treasury Regulations and case law, the appeals court

found that Customs classification rulings, like IRS revenue

rulings, were not entitled to deference. The Federal Circuit's

analysis of IRS revenue rulings is well founded’ and should

* Brief for the Petitioner United States, United States v. Mead Corp.

(No. 19-1434) at 19-20.

° This is not to say that Customs classification and IRS revenue rulings

have no value. The rulings give the public notice of agency positions and

promote consistency. These attributes, however, do not mean that the rul-

ings should be granted the same status as regulations where public com-

ment has been sought before issuance. See Galler at 1045-46.

’ The proper standard of deference to be accorded revenue rulings has

led to confusion, with courts adopting divergent standards. See, e.g., Es-

tate of Kosow v. Commissioner, 45 F.3d 1524, 1528 n.4 (11th Cir. 1995)

(holding that revenue rulings are merely an opinion of an IRS attorney),

Johnson City Medical Center, 999 F.2d at 976 (finding “some defer-

ence”); Gillespie v. United States, 23 F.3d 36, 39 (2d Cir. 1994) (granting

“great deference”); First Chicago NBD Corp. v. Commissioner, 135 F.3d.

457, 459 (7th Cir. 1998) (granting “some weight”). One commentator has

suggested that generalist judges may be more willing to accept IRS reve-

17

serve as the standard for analyzing Customs classification rul-

ings.

Revenue rulings are issued under the general grant of au-

thority set forth in section 7805(a) of the Internal Revenue

Code (26 U.S.C.), which gives the Treasury Department au-

thority to prescribe “all needful rules and regulations.” Al-

though a ruling is an official interpretation of the IRS, the

vast majority are adopted without public comment. 26 C.F.R.

§ 601.601(d)(2)(b)(v)(f) (2000) (comments may be solicited,

but only if justified by “special circumstances”). Rulings are

limited to the facts under consideration and may be changed

by subsequent legislation, regulations, court decisions, or

even other rulings. 26 C.F.R. §§ 601.601(d)(2)(b)(v)(a), (e).

(2000). They are not published in the Federal Register or the

Code of Federal Regulations. See 26 C.F.R. § 601.601(d)(1)

(2000).”

This Court has not definitively ruled on the deference to be

accorded modern IRS revenue rulings, though in early cases

they were found to be of “little aid” in interpreting the tax

laws because they were not subject to Treasury Department

review. See, e.g., Biddle v. Commissioner, 302 U.S. 573, 582

(1938) (citing Helvering v. New York Trust Co., 292 US.

455, 468 (1934)). Most recently, in Commissioner vy.

Schleier, the Court considered a taxpayer argument that the

liquidated damages received under an Age Discrimination in

Employment Act claim should be excluded from gross in-

come as “damages received . . . on account of personal inju-

ries or sickness” under section 104(a)(2) of the Internal

Revenue Code (26 U.S.C.). 515 U.S. at 327. The taxpayer

nue rulings “simply because they prefer to leave tax cases alone.” Galler

at 1077.

* The court below also noted that in some ways Customs classification

rulings are a less formal interpretation than revenue rulings because the

latter are issued by the IRS’s National Office, while the former may also

be issued by a port office. (App. 7a-8a.)

18

claimed that under a Treasury Regulation the damages were

amounts received based upon “torts or tort type rights” and

therefore non-taxable. In support of her position, the tax-

payer cited a revenue ruling. Recognizing that the ruling

seemed to rely upon the same reading urged by the taxpayer,

this Court stated that the IRS’s “ ‘interpretive rulings do not

have the force and effect of regulations,’ and they may not be

used to overturn the plain language of a statute.” /d. at 336

n.8 (citing Davis v. United States, 495 U.S. 472, 484 (1990)).’

See also Commissioner v. Keystone Consolidated Industries,

Inc., 508 U.S. 152, 162 n.3 (1993) (deferring the question of

the deference to be accorded revenue rulings “to another

day”); United States v. Thompson/Center Arms Co., 504 U.S.

505, 518 n.9 (1992) (“Even if they were entitled to deference,

neither of the [revenue] rulings . . . goes to the narrow ques-

tion presented here.”).

IRS revenue rulings are mere litigating positions and are

not entitled to any deference. This is not merely the view of

amicus TEI, whose members frequently find themselves at

odds with the IRS. It is, more important, the view adopted by

the United States Tax Court, a court uniquely qualified to as-

sess the efficacy of IRS pronouncements. United States v. Al-

len-Bradley Co., 352 U.S. 306, 311 (1957) (Harlan, J., con-

curring) (Tax Court holds “special expertise in tax matters”).

According to the Tax Court, “a revenue ruling merely repre-

sents the Commissioner’s position with respect to a specific

factual situation.” Stark v. Commissioner, 86 T.C. 243, 250-

51 (1986). They are “merely the opinion of a lawyer in the

agency and must be accepted as such” and are “not binding

” In Davis, the Court suggested that revenue rulings were entitled to

“considerable weight” where they involve the contemnoraneous con-

struction of a statute, have been in long use, and heve survived reenact-

ment of the statute they construe. 495 U.S. at 484. The Court did not,

however, cite Chevron, thereby intimating that a high level of deference is

not warranted. Moreover, many revenue rulings do not meet the condi-

tions set forth in Davis.

* (ieee oe

i a

19

on the .. . courts.” Northern Indiana Public Service Co. v.

Commissioner, 105 T.C. 341, 350 (1995), aff'd, 115 F. 3d

506 (7th Cir. 1997) (citing Stubbs, Overbeck & Associates,

Inc., 445 F.2d at 1146-47). Hence, “a ruling or other interpre-

tation by the Commissioner is only as persuasive as her rea-

soning and the precedents upon which she relies.” Hallibur-

ton Co. v. Commissioner, 100 T.C. 216, 232 (1993), aff'd

without published opinion, 25 F.3d 1043 (Sth Cir. 1994). See

also DePaolis v. Commissioner, 69 T.C. 283, 292 (1977)

(Hall, J., dissenting) (“[t]o treat a ruling as more than the po-

sition of one of the litigants before us is to permit a man to be

judge in his own cause—a principle abhorrent to law since the

days of Hammurabi’). The Tax Court’s position is consistent

with this Court’s holding in Bowen v. Georgetown University

Hospital, 488 U.S. 204 (1988), that deference to “an agency’s

convenient litigating position” is “entirely inappropriate.” /d.

at 213. Amicus TEI submits that, given the similarity be-

tween IRS revenue rulings and Customs classification rulings,

the Federal Circuit correctly held that neither should be ac-

corded any deference."

" In its brief on the merits, the United States relies heavily on United

Spates v. Correll, 389 U.S. 299 (1967), for the proposition that the Federal

Circuit erred in suggesteng that deference may not be owed to revenue rul-

ings. Brief for the Petitioner United States, United States v. Mead Corp.

(No. 99-1434) at 16, 24-27, 31, 38. The government's citation of Correll

is incorrect, disingenuous, and umpersuasive. That case involved the def-

erence 10 be goamted interpretative regulations that had been issued as a

Treasury Decrswon (and subject to notice and comment), not a revenue rul-

ing. See Corvell \. United States, 369 F.2d 87, 89 n.2 (6th Cir. 1966). To

be sure, the Court noted in passing that the IRS Commissioner’s position

if the case was first anounced in a revenue ruling, 389 U.S. at 302 n.10,

but the decision is inappesite to the question at issue here, See Rev. Proc.

89-14. supra a.3 (IRS admitting revenue rulings do not have same force

of law as Treasury Decisions). Thus, the Federal Circuit's discussion of

the deference owed to revenue rulings is consistent with this Court’s deci-

sion in Correll. See note 12 infra, for a discussion of the deference to be

accorded interpretative tax regulations.

20

V.

Alternatively, if the Court concludes that an intermediate

level of deference should be accorded Customs rulings, the

proper standard may be found in this Court’s decision in

Skidmore v. Swift & Co., 323 U.S. 134 (1944). In that case,

the Court held:

We consider that the rulings, interpretations and opin-

ions of the Administrator under this [Fair Labor Stan-

dards] Act, while not controlling upon the courts by rea-

son of their authority, do constitute a body of experience

and informed judgment to which courts and litigants

may properly resort for guidance.

Id. at 140 (emphasis added). Under Skidmore, the weight to

be given the interpretation depends upon a variety of factors,

including the ruling’s thoroughness, the validity of its reason-

ing, its consistency with earlier and later interpretations, and

“all those factors which give it power to persuade, if lacking

power to control.” Id."

Thus, the Court has held that, although not entitled to def-

erence, informal interpretations are entitled to some respect or

weight on judicial review. Martin v. Occupational Safety and

Health Review Commission, 499 U.S. 144, 157 (1991). “A

reviewing court may certainly consult them to determine

whether the Secretary has consistently applied the interpreta-

tion embodied in the citation, a factor bearing on the reason-

ableness of the Secretary’s position.” /d. Applying Skidmore

here would place the burden of persuasion on the agency to

convince a court that its interpretation of the statute is correct.

'' Although Skidmore was decided 40 years before Chevron, its reason-

ing is not vitiated by the Court's decision. Only four months ago, this

Court cited Skidmore in holding that Department of Labor opinion letters

were not entitled to Chevron’s higher standard of deference. Christensen,

120 S. Ct. at 1663. See also EEOC vy. Arabian American Oil Co., 499

U.S. 244, 256-57 (1991) (citing Skidmore in holding that interpretative

guidelines are not entitled to Chevron deference).

Mah tne e rpeem

SEO ge OTTO

21

It would also encourage agencies to issue clear regulations,

while acknowledging that an agency may have superior in-

sights into regulatory meaning. See John F. Manning, Consti-

tutional Structure and Judicial Deference to Agency Interpre-

tations of Agency Rules, 96 COLUM. L. REV. 612, 687-88

(1996).

That a need exists for this Court to clarify the interaction of

Skidmore and Chevron is demonstrated by the lower courts’

confusion about the deference to be accorded agency interpre-

tations such as Customs classification rulings and IRS reve-

nue rulings. Some courts have held that revenue rulings are

entitled to Chevron deference while others have limited the

weight given to interpretative rulings.'? This case provides an

opportunity for the Court to clarify the standard. Amicus TEI

respectfully submits that the courts according Chevron defer-

ence to such rules have inappropriately distended the doc-

trine, as most recently delineated in Christensen. See DAVIS

& PIERCE § 3.5, at 119 (Chevron “should not be held to apply

to agency pronouncements in less formal formats, e.g., manu-

als, letters, guidelines, interpretative rules, or litigating posi-

tions.”). “[D]Jeference is not abdication.” EEOC v. Arabian

American Oil Co., 499 U.S. 244, 260 (1991) (Scalia, J., con-

curring). Similarly, “deference cannot be allowed to slip into

a judicial inertia which results in the unauthorized assumption

by an agency of major policy decisions properly made by

Congress.” Elizabeth Blackwell Health Center for Women v.

'? Compare Trans Union C orp. v. Federal Trade Commission, 81 F.3d

228, 230 (D.C. Cir. 1996) (“[Wle have extended Chevron deference to

agency interpretive rules”); Elizabeth Blackwell Health Center for Women

v. Knoll, 61 F.3d 170, 182 (3d Cir. 1995) (equal deference); and Garcia v.

Secretary of Health and Human Services, 46 F.3d 552, 557 (6th Cir.

1995) (same); with Atchison, Topeka & Santa Fe Ry. v. Pena, 44 F.3d

437, 441 (7th Cir. 1994) (en banc), aff'd on other grounds, 516 U.S. 152

(1996) (concluding that interpretative rules are “undeserving of substan-

tial deference under Chevron”). See generally DAvis & PIERCE

§ 3.5 (Chevron should not apply to informal pronouncements and inter-

pretative rules).

22

Knoll, 61 F.3d 170, 185 (3d Cir. 1995), (Nygaard, J., dissent-

ing) (citations and internal quotation marks omitted).

The Court’s half-century old decision in Skidmore provides

the guidepost that the lower courts need. Applying Skidmore

to interpretative rules such as those involved here will pro-

vide needed guidance to the lower courts, while reserving

Chevron deference, at most, to rules subject to the notice-and-

comment process. It will avoid absurdities such as the Third

Circuit’s opinion in Connecticut General Life Insurance Co.

v. Commissioner, 177 F.3d 136, cert. denied, 120 S. Ct. 469

(1999), where the court deferred to an IRS interpretation of a

regulation that was advanced for the first time in litigation. ”*

Such bootstrapping pronouncements are “particularly unreli-

able evidence of an agency’s policy, given the powerful in-

centive for lawyers to take any position that is likely to fur-

ther their clients’ interest and the uneven level of supervision

of work product of agency lawyers.” DAvis & PIERCE § 3.5,

at 120.

Like the opinion letter in Christensen, agency interpreta-

tions contained in Customs classification and IRS revenue

rulings may be “entitled to respect,” but only to the extent

that those interpretations have the “power to persuade.”

Christensen, 120 S. Ct. at 1663 (citation omitted). The Fed-

'* Even in Connecticut General, the regulation at issue was “legisla-

tive” (or substantive), rather than interpretative, and thus entitled to

great deference. See BERNARD SCHWARTZ, ADMINISTRATIVE LAW § 4.8,

at 181-82 (3d ed. 1991). Even legislative regulations—those promul-

gated under a specific legislative grant of authority—must represent a rea-

sonable interpretation of the statute. Chevron, 467 U.S. at 865. In con-

trast, interpretative regulations are entitled to less deference. United

States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982) (quoting Rowan

Cos. v. United States, 452 U.S. 247, 253 (1981)). They may have “par-

ticular force” if they are a substantially contemporaneous construction of

the statute, longstanding, consistently applied, and scrutinized by Con-

gress during subsequent re-enactments of the statute. National Muffler

Dealers Association v. United States, 440 U.S. 472, 477 (1979). None of

these conditions is satisfied here.

23

eral Circuit found the Customs classification ruling in this

case unpersuasive. Its opinion should be affirmed.

CONCLUSION

For the foregoing reasons, the Court should affirm the de-

cision below.

Respectfully submitted,

TIMOTHY J. MCCORMALLY *

MARY L. FAHEY

TAX EXECUTIVES INSTITUTE, INC.

1200 G Street, N.W.

Suite 300

Washington, D.C. 20005-2814

(202) 638-5601

Counsel for Amicus Curiae

* Counsel of Record Tax Executives Institute, Inc.

August 14, 2000