BRIEF OF TAX EXECUTIVES INSTITUTE, INC. AS AMICUS CURIAE IN SUPPORT OF RESPONDENT.

Supreme Court of the United States

No. 99-1434

UNITED STATES OF AMERICA, Petitioner,

v.

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

On August 14, 2000, Tax Executives Institute filed the following brief with the Supreme Court of the United States concerning the deference to be accorded revenue rulings issued by the Internal Revenue Service. The case is scheduled to be argued before the Court on November 8, 2000.

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.(1) Tax Executives Institute (hereinafter "TEI" or "the Institute") is a voluntary, nonprofit association of corporate and other business executives, managers, and administrators who are responsible for the tax affairs of their employers. The Institute was organized 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 enforcement of the tax laws and to reducing the costs and burdens of administration and compliance to the benefit of both the government and taxpayers.

This case revolves around the deference granted classification 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 seminal 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, TEI's members have a vital interest in the deference to be accorded 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 litigating 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 safeguarding the public from unreasonable agency actions. Because 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 administrative law. In reviewing interpretative rulings by a federal agency, 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 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 interpretative 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, administrative 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 position does not overreach. Simply stated, without notice and comment, an agency's decision could become capricious. Without meaningful judicial review of interpretative rules, agencies could arrogate to themselves the power to unreasonably 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 Congress. If it is clear, "that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously 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 construction of the statute. 467 U.S. at 842-83. If the regulatory scheme is a "reasonable accommodation of manifestly competing interests," the agency's interpretation is entitled to deference. Id. at 865.

   In United States v. Haggar Apparel Co., 526 U.S. 380 (1999), the Court applied the Chevron standard in determining 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 deference 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 analysis of the deference owed to Customs and IRS interpretative 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 letter issued by the U.S. Department of Labor. See Christensen, 120 S. Ct. at 1662-63. The Court explained that the interpretation 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. Id. 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. [sections] 553 (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, and second, the procedure enables interested parties to express their views to agency officials who are not directly accountable to the voters.

   Amicus TEI submits that the discipline and openness engendered by the notice-and-comment procedure deter casual or arbitrary action, forestall confusion, and ultimately produce more effective regulations, all to the benefit of the government and the public. This same process is not normally followed with interpretative rules such as Customs classification rulings and IRS revenue rulings, and accordingly a higher quantum of judicial scrutiny is appropriate to counterbalance 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 rational. 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 interpretative 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 scrutiny must serve as a counterbalance to the lack of public participation 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 analyzing IRS revenue rulings. The appeals court found that Customs classification rulings, like IRS revenue rulings, were not entitled to deference. Its reasoning should be sustained.

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