Substance over Form? Phantom Regulations and the Internal Revenue Code


This paper addresses the appropriate response to tax statutes that call for the issuance of regulations, but that have been ignored by the Secretary. The courts and the IRS have taken the unusual step of treating these statutes as self-executing, notwithstanding the absence of regulations, and have invoked phantom regulations to enforce the statutes. Several commentators have analyzed the Tax Court's and the IRS's approaches, but have focused mostly on cases interpreting delegations found in the Internal Revenue Code. Because those cases themselves are inconsistent, it is not possible to extract a clear rule from analysis of those cases alone. Surprisingly, a close examination of non-tax sources reveals a clear (if imperfect) solution to the problems posed by spurned delegations.

This paper examines these overlooked authorities, and concludes that phantom regulations should never be employed by courts, the IRS, or taxpayers. Rather, if the IRS wishes to give effect to a delegation, it must promulgate rules pursuant to the statutorily mandated method (i.e. notice-and-comment rulemaking). Though the IRS has issued informal notices purporting to give effect to statutory delegations, these notices lack the force and effect of law, the government's arguments notwithstanding.

If the taxpayer is aggrieved by the Secretary's failure to promulgate regulations, his only recourse is found in section 706(1) of the Administrative Procedure Act, which allows the taxpayer to compel the Secretary to issue regulations.


Administrative Law | Taxation-Federal | Tax Law

Date of this Version

July 2006