clearly and convincingly that the agency made an error in its calculations and should have totalled up an amount over the trigger amount. Frankly, very few of these regulatory analyses will be reviewed successfully (from the regulated firm's viewpoint), because few challengers will ever meet that tough standard. If you read the Ad Hoc Committee's Report it looks like judicial review of regulatory analysis is the honey that draws the flies of new litigation, litigation which otherwise would not have been brought. But I doubt many courts will do more than review the pleadings before deciding these appeals from regulatory analyses. Here again, important compromises have been made over many months.42 That news did not reach the Ad Hoc Committee, so the Report reflects yesterday's news rather than an analysis fit for tomorrow, next year, and the next two decades.

RIP VAN WINKLE

I will close with two quotes, one on the merits and one on the timing. Griffin Bell said recently that:43

"We should not give the people the right of judicial review with one hand, and then take most of it away with the other through the heavy burden imposed on them by this presumption of validity."

And one of my colleagues on the ABA Business Law Section regulatory reform group gave the shortest summation of all:

"The Judicial Conference appears to have been suddenly awakened by inveterate opponents of the Amendment, and like Rip Van Winkle appears startled to find that George III is no longer King."

I conclude that the "Rip Van Winkle Report" is not an adequate study of the Bumpers Amendment as it exists today. Thank you.

42 Compare H.R. 3263, 96th Cong. 2d Sess. with S. 1080, 97th Cong. 1st Sess., as to the

regulatory analyses and judicial review aspects of such analyses.

43 Letter of Griffin Bell, supra n. 11 at 2.

REGULATORY PROCEDURES ACT OF 1981

THURSDAY, MAY 14, 1981

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE on AdministRATIVE LAW

AND GOVERNMENTAL RELATIONS,
COMMITTEE ON THE JUDICIARY,
Washington, D.C.

The subcommittee met at 10:10 a.m. in room 2237, Rayburn House Office Building, Hon. George E. Danielson (chairman of the subcommittee) presiding.

Present: Representatives Danielson, Evans, McClory, Moorhead, and Kindness.

Staff present: William P. Shattuck, counsel; Janet S. Potts, assistant counsel; Alan F. Coffey, Jr., associate counsel; and Florence McGrady, clerk.

Mr. DANIELSON. The subcommittee will come to order.

This morning we will continue our hearings on the bill, H.R. 746 and related bills relating to proposed changes in the Administrative Procedure Act.

We are honored this morning by having with us as our first witnesses two gentlemen from the Department of the Treasury, Mr. Roscoe Egger, Commissioner of the Internal Revenue Service; and Mr. John E. Chapoton, Assistant Secretary, Tax Policy.

Gentlemen, do you have a written statement of any kind?

Mr. EGGER. Mr. Chairman, unfortunately, the two of us came from another meeting and someone from my office is bringing the testimony with him and we beat him over here.

Mr. DANIELSON. Well, I'd like to accommodate your wishes. In the first place, we're not at all troubled by your not having written testimony because I think we'd much prefer to have you tell us just what you have on your mind.

Mr. EGGER. We will have a statement for the record, but I would be most happy to summarize.

Mr. DANIELSON. If you prefer to wait until it arrives, fine; but truly, I think that all witnesses do better if they just tell us what's worrying them.

Mr. EGGER. All right. We would be happy to do that.

Mr. DANIELSON. We have a quorum for the purpose of taking testimony and you gentlemen may just proceed. Which of you wish to carry the laboring oar?

Mr. EGGER. I will.

Mr. DANIELSON. Mr. Egger, it's all yours, and we'll hear from you

now.

TESTIMONY OF ROSCOE EGGER, COMMISSIONER, INTERNAL REVENUE SERVICE, AND JOHN E. CHAPOTON, ASSISTANT SECRETARY, TAX POLICY, TREASURY DEPARTMENT

Mr. EGGER. I think I'm perhaps more directly involved than is the Treasury in the sense of living with the problems of putting the regulations together. The Treasury reviews all of our regulations and rulings. Let me just give a little bit of background about how tax regulations and published rulings get put together.

I believe it will be useful to the committee for me to briefly review it in case there are some parts of the process that have escaped your attention.

The Chief Counsel's office and the office of the Assistant Commissioner (Technical), are the drafters of most regulations and rulings which get published in the Federal Register or the Internal Revenue Bulletin. Each of those regulations and rulings go through about three levels of review in the Internal Revenue Service. The last level of review is my desk. They are then sent to the Treasury, to the Assistant Secretary for Tax Policy, and he can elaborate on the review that takes place there. Following the review in that office, if there are any differences or any questions, they are reviewed by the Policy Committee, made up of the two of us together with other key members of our staffs. We meet on each of the issues, we discuss them in depth, and reach agreement. If, for any reason, we cannot reach agreement, then we would have to go to the Secretary of the Treasury to have the issue resolved.

In instances where our regulations and rulings have significant economic impact or when we believe they have impact of another sort, then they are always called to the attention of the Secretary of the Treasury and to the Office of Management and Budget. This has been historic practice. We don't intend to change it and I will talk a little bit more about the referral of regulations to OMB a little bit later.

Let me come back, with that background, to say we have looked at the proposal, H.R. 746, for the purpose of ascertaining how it would apply to income tax regulations. We first looked at the objectives of the bill and we believe that they are right on target. The objectives to be accomplished by this piece of legislation are totally in keeping with the President's economic recovery proposal, and we believe, therefore, that the legislation itself is to be recommended.

On the other hand, we looked at it from the standpoint of how it would apply to income tax regulations and with some exceptions which I will refer to a little bit later, we feel that it would not really accomplish anything.

The reason is that, with very few exceptions, all of the regulations which we write are merely interpretative of the Internal Revenue Code itself. The Internal Revenue Code is perhaps the most comprehensive legislation in the entire Federal Code and, therefore, when we're issuing interpretative regulations, we have little or no room to make decisions on our own. We are merely explaining how the code section that is involved would work in a given situation, how it would work in a series of applications, or how the taxpayers can expect we would interpret that particular code section in their situations.

We have almost no latitude to give effect to major cost impacts or economic consequences. That decision, by and large, has already been made by the Congress when it enacted the statute. To the extent that such factors are involved, as I have already explained, we review them with the Secretary of the Treasury and with the Office of Management and Budget.

As you know, Executive Order 12291, has many of the same features as the proposed legislation. We sat down with OMB and worked out very carefully an arrangement whereby most Internal Revenue regulations and rulings are exempt from the Executive order. This was done for all the reasons I have just explained. Still covered by the Executive order are regulations which are, for lack of a better term, legislative regulations. These are regulations where Congress, for whatever reason, simply enacts a section in the Internal Revenue Code, gives little or no guidance, and then says that the section will be implemented pursuant to regulations to be developed by Treasury, and that broad grant of authority gives us considerable latitude for drafting those regulations. Such regulations, to the extent they constitute major regulations under the Executive order, are presently subject to the same kind of analysis and review that is contemplated in the bill.

That seems to be working quite well. We haven't run into any difficulties there. We also continue, on a voluntary basis, to refer specific problems to OMB so that they are kept informed of what we are doing and have an opportunity to comment on the economic consequences. An example of this would be the foreign tax credit regulations which are coming up for hearings later this month. Those proposed regulations have considerable impact both for the affected industries and the Internal Revenue Service. That would be typical of an item we would want to have reviewed up and down the line in the administration.

There are certain parts of your bill which we believe may be interpreted as requiring that our published rulings be subjected to either legislative veto or to review and comment pursuant to the Administrative Procedures Act. We would strongly urge that rulings not be subject to either provision. We publish about 500 revenue rulings in our bulletin each year. These are interpretative rulings which deal with a fairly narrow set of circumstances involving a particular area of the code or the tax laws and are for the guidance of the taxpayers who happen to fit in there. They arise almost entirely as a result of request for private letter rulings where we believe that the issue involved ruling should get broader attention. Occasionally they arise when an issue is referred to the national office of Internal Revenue from the field, and we believe that the resolution of the issue is one that needs to be published for guidance.

These revenue rulings do not have a favorable presumption under the law, as our regulations have. If the rulings were subjected to the type of review through public notice and comment that our regulations receive it would significantly slow down the process. We would no longer be able to get them out as quickly as we presently can.

I might call to your attention that we now publish about 500 of these rulings a year. Back in the late forties and early fifties, we

83-519 0-82- 47

published only a fraction of that amount and it was through urging from the Congress that we began to publish more rulings in order to let taxpayers know of our positions on as many areas of the code as possible.

Mr. DANIELSON. May I interject a question which is pertinent here? Do you consider these more or less 500 to be interpretative rules?

Mr. EGGER. They are interpretations only, they do not enjoy the favorable presumption our regulations do.

Mr. DANIELSON. But I'm thinking, as you know, we have an exemption for interpretative rules, and your opinion is that they fall within that category?

Mr. EGGER. Our opinion is that they might, but we would like to see your bill make it clear that these are not covered. The best way to do that is, as you have done earlier in the bill, to simply say they do not apply to rulings and other interpretative rules of the Internal Revenue Service. That makes it clear.

Just a few more comments on rulings. We think they are a great help to taxpayers by keeping them informed as to our thinking. We would not want to subject the rulings to any further review than they already receive from the Service and Treasury. By the way, these rulings get a similar kind of review from IRS and Treasury as do regulations. So we think they get a very careful look. We look at them from the standpoint of is this a fair interpretation of the statute; does it hit taxpayers evenly and equitably? The Treasury looks at it from the standpoint of, is it consistent with tax policy and so on? We believe that we do a pretty fair job of getting these rulings out and that they are a service to the taxpayer.

We are not a regulatory agency in the sense in which that term is usually used. We don't regulate anything. We simply apply and interpret the tax laws.

Mr. Chairman, that covers most of the areas. Perhaps Mr. Chapoton would like to make a few comments.

Mr. DANIELSON. Mr. Chapoton, certainly we're pleased to have you help us with what you can suggest.

Mr. CHAPOTON. Thank you, Mr. Chairman. I really will not take a lot of the subcommittee's time. I just want to support what Mr. Egger has said.

We have a very workable process. The one complaint we constantly hear from the professionals and from taxpayers is that our interpretations are not forthcoming quickly enough and are not clear enough. We do hear indications, I might add, that sometimes the language could be a little easier to understand, and we are very sympathetic to that and we try to improve the language. But, by and large, the complaints are that we ought to come out with our interpretations of a statutory provision as quickly as possible because the taxpayers are at a loss to know what to do and the advisers are at a loss to know what to do between the time the statute is enacted and the time that some interpretation is forthcoming. This complaint applies by and large to regulations, and we try to accommodate it. It's a very difficult process, however, and we have to be very careful to try to think of all of the situations that the interpretation applies to.