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Florida Tax Review

Abstract

Before 1996, the Internal Revenue Code presumed that tax regulations applied to transactions executed before their enactment, giving the Treasury Department broad authority to regulate retroactively. In 1996, however, Congress reversed this presumption, requiring regulations relating to Code sections enacted after 1996 to operate prospectively. Congress also provided an important exception in section 7805(b)(3), allowing tax regulations to apply retroactively “to prevent abuse.” Congress did not, however, explicitly define abuse; nor did it designate to any specific actor the power to do so. This Article provides a comprehensive look at the level of deference reviewing courts owe a Treasury Regulation’s interpretation of section 7805(b)(3)’s abuse exception. Generally, an agency’s statutory interpretation is entitled to receive either the strong standard of deference articulated in Chevron v. Natural Resource Defense Council, or the lesser degree of deference articulated in Skidmore v. Swift & Co. To date, the courts reviewing retroactive tax regulations enacted to prevent abuse have declined to apply Chevron deference, relying on administrative law principles recently rejected by the Supreme Court in Mayo Foundation v. United States. This Article, therefore, provides a needed guide to future courts by applying the post-Mayo deference framework to Treasury Regulations that interpret section 7805(b)(3). This Article concludes that, under this framework, a Treasury Regulation’s interpretation of section 7805(b)(3)’s abuse exception should receive strong Chevron deference so long as it is promulgated under proper administrative procedures. This analysis provides a significant contribution. Through the issuance of retroactive regulations, Treasury promotes the efficient enforcement of the tax laws and deters egregious abuse. But case law suggests that the courts and Treasury Department have very different interpretations of the Code’s abuse exception. Therefore, the ability of Treasury to respond to and prevent aggressive tax behavior through retroactive tax regulation may turn largely on which actor possesses primary authority to define tax abuse.

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