Legal Memorandum: Interpretation of 26 U.S.C. 4252(b)(1)

Issue: Whether the internal revenue service’s proposal to adopt a regulation interpreting 26 U.S.C.  4252(b)(1), so that the definition of ‘toll telephone service’ no longer requires that the rate vary with both time and distance usurps the power of Congress to decide who is subject to the excise tax and who is exempt?

The proposed regulation changes the plain language of a definitional statute.  Agencies can only exercise the authority Congress grants to them.  The governing the communications excise tax do not contain any specific grant of authority to regulate. Thus, the IRS’s authority must derive from its general authority to interpret the statute and “prescribe all needful rules.” I.R.C. § 7805(a).   If it adds to or amends the unambiguous language of a statute, it violates the separation of powers doctrine. 

It is well established that when a regulatory agency proposes an “interpretive” regulation, it must carry out the expressed intent of the Congress.  In Manhattan General Equipment Co. v. Commissioner of Internal Revenue, a case decided in 1936, the United States Supreme Court the Court laid down the law about agencies creating new law.  It stated:

            The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law, for no such power can be delegated by Congress, but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.  A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity. . . .

            . . . The statute defines the rights of the taxpayer and fixes a standard by which such rights are to be measured.  The regulation constitutes only […]

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