Why lenity has no place in the income tax laws.

• Author: Grewal, Andy S.
• Position: Symposium: A Future Without the Administrative State? Exploring the Administrative State

In recent Terms, members of the Supreme Court have maintained an open attitude towards administrative deference doctrines. Justices have revived the "major questions" doctrine, (1) have examined the possibility of overruling Auer v. Robbins, (2) and have even retreated from Chevron itself. (3)

Any new Supreme Court limitations on administrative deference could affect the Internal Revenue Service's rulemaking and interpretive authority, even if those limitations arise in non-tax cases. Though it is often loathe to admit it, "[t]he IRS is not special," (4) and general administrative law deference principles extend to the tax area. (5) However, there is one potentially evolving area of administrative deference, relating to the rule of lenity, for which the income tax laws should receive special treatment.

Under the rule of lenity, courts generally resolve statutory ambiguities in favor of the criminal defendant. (6) But under administrative deference doctrines, courts generally defer to an agency's resolution of a statutory ambiguity. (7) These two principles clash when the violation of a given statute carries both civil and criminal consequences (8) and an agency resolves an ambiguity in the "dual enforcement statute" in a way adverse to criminal defendants. When this happens, the court must decide whether it should defer to the agency or instead apply the rule of lenity. (9)

Scholars have warned that active government prosecution against those involved in tax shelter transactions could bring this interpretive question to the income tax system, with unpredictable results. (10) Tax shelters often stem from ambiguities in the tax code, (11) and to determine whether a tax shelter works, a court must usually resolve those ambiguities. (12) A taxpayer might argue that the court should use the rule of lenity to resolve the ambiguity in his favor, over any IRS claim for deference.

This Article shows that courts should reject such arguments because the rule of lenity has no place in the construction of the income tax provisions in Subtitle A of the tax code. (13) The rule of lenity makes sense when applied to a statute that compels or prohibits some type of behavior, but income tax provisions do not compel or prohibit anything. Those provisions simply describe consequences associated with particular transactions. Consequently, applying the rule of lenity can lead to anomalous results.

If the Supreme Court considered how the rule of lenity applied in an income tax case, it would likely recognize these anomalies. But the Court takes few tax cases. (14) If the Court addresses the relationship between the rule of lenity and agency deference doctrines, it will likely do so in a non-tax case. And if it holds that lenity trumps deference, it might use generic language suggesting that its holding applies to all agencies, including the IRS. Taxpayers and the IRS would then struggle to apply the Court's holding, given the conceptual difficulties associated with applying the rule of lenity to the income tax provisions. To avoid this problem, the Court should explicitly exempt income tax provisions from the rule of lenity.

1. THE RULE OF LENITY IN CIVIL CASES

   The Supreme Court has interpreted dual enforcement statutes on several occasions, though no opinion exhaustively addresses the interpretive difficulties surrounding them. (15) In one of the leading cases on the issues, United States v. Thompson/Center Arms Co., (16) the Court applied the rule of lenity but left unanswered some key questions. (17)

   Thompson/Center Arms involved a dispute over provisions of the National Firearms Act. (18) Under this Act, codified in the tax code, Congress established various pre-approval and registration requirements (19) for firearm makers. Through [section] 5281(a), it also imposed a $200 tax on the making of a "firearm," (20) which for purposes of the Act included short-barreled rifles but not long-barreled ones. (21) Criminal sanctions potentially applied to a failure to satisfy the Act's requirements, (22) although Thompson/Center Arms involved a civil tax dispute. (23)

   The taxpayer in Thompson/Center Arms sold a package of gun components that could be assembled into a short- or a long-barreled rifle, and an ambiguity arose over whether the taxpayer had made a firearm within the meaning of the Act. (24) The taxpayer argued that it only made long-barreled rifles, if it made rifles at all, (25) and should thus escape the [section] 5281(a) tax. The government countered that the taxpayer's packaging of gun components that might be assembled into a short-barreled rifle constituted the "making of a firearm." (26)

   To determine whether the taxpayer had "ma[de] a firearm" under [section] 5281(a), the Court first examined related provisions and the statute's legislative history. (27) However, after applying these "ordinary rules of statutory construction," it remained ambiguous whether the tax applied to the taxpayer. (28) The Court's three-member plurality, along with two concurring Justices, ultimately concluded that the rule of lenity resolved the statutory ambiguity. (29) Although Thompson Center/Arms involved interpreting a tax statute in a civil setting, the Act had "criminal applications that carr[ied] no additional requirement of willfulness." (30) This justified invocation of the lenity rule and a holding in the taxpayer's favor. (31)

   At first glance, it seems that Thompson Center/Arms definitively resolves interpretive questions surrounding dual enforcement statutes. That is, a majority of Justices agreed that the rule of lenity applies to a statute backed by criminal enforcement mechanisms, even if the interpretive dispute arises in a purely civil proceeding. This implies that the rule of lenity should always resolve ambiguities in dual enforcement statutes. However, Thompson Center/Arms did not address whether agency deference doctrines could displace the rule of lenity, because the government had not issued any guidance on the phrase "making a firearm." (32)

   Had the government issued guidance under [section] 5281(a), a conflict would have arisen. The rule of lenity resolves ambiguities in favor of defendants, but deference principles resolve ambiguities in favor of the government. For example, had the government issued an interpretive rule stating that the assembly of packages like Thompson Center/Arms qualified as the "making of a firearm," it likely would have claimed so-called Skidmore deference, under which its interpretation would be "entitled to respect" to the extent that it had the "power to persuade." (33) Or, if the government had issued a legislative regulation, it likely would have claimed Chevron deference, which, shorn of nuance, blesses any agency view as long as it is reasonable. If the Court applied either of these deference doctrines, rather than the rule of lenity, the government would have won.

   Later court cases provide no clear indication of whether agency deference doctrines trump lenity principles. (34) Numerous circuit courts defer to an agency's interpretation of dual enforcement statutes, (35) but a concurring opinion by Judge Sutton of the Sixth Circuit raises serious concerns about this practice. (36) Those concerns have advanced an active debate on the issues. (37)

2. THE RULE OF LENITY AND INCOME TAX STATUTES

   For ambiguities in Subtitle A of the tax code, agency deference doctrines should always trump the rule of lenity because that rule has no place in the construction of income tax statutes. To understand why this is so, first consider some hypothetical non-tax statutes that prohibit or require various behaviors. These statutes might direct that no person shall travel in excess of a reasonable speed, that manufacturers cannot emit pollutants into the environment, or that companies that sell stock must make financial disclosures.

   For each of these statutes, we can easily identify potential ambiguities, which, if resolved one way rather than the other, would necessarily favor defendants rather than the government. With the traffic statute, for example, interpreting "reasonable" to incorporate a higher number rather than a lower number will favor the defendant; with the environmental statute, interpreting a narrower rather than broader definition of "pollutant" will also favor the...