DOJ Argues that 28 U.S.C. § 2401(a) Doesn’t Bar Altera’s APA Challenge to a Tax Regulation Made More Than 6 Years After Adoption

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We welcome frequent guest blogger Carl Smith with breaking news about the Altera appeal pending in the 9th Circuit. Today’s news is not dispositive but does provide interesting insight on the Government’s view of a new issue raised by the 9th Circuit as the new panel reviewed the case. Keith

PT readers are no doubt aware of Altera v. Commissioner, 145 T.C. 91 (2015). In the case, the Tax Court invalidated a regulation under § 482 concerning the inclusion of stock option compensation in related-party cost-sharing arrangements. The two Tax Court dockets involved in the case were under the Tax Court’s deficiency jurisdiction in 2012. In those cases, Altera sought to invalidate a 2003 regulation both under the Chevron standard (i.e., not reasonable) and under the Administrative Procedure Act (APA). The Tax Court invalidated the regulation under both theories. The Tax Court found APA violations including the IRS’ (1) failure to respond to significant comments submitted by taxpayers and (2) in light of the administrative record showing otherwise, the IRS’ failure to support its belief that unrelated parties entering into cost sharing arrangement would allocate stock-based compensation costs.

As we blogged here, on July 24, 2018, the Ninth Circuit issued an opinion upholding the regulation. But that opinion was later withdrawn because one of the judges in the majority had died before the opinion was issued. After a new judge was assigned to rehear the case, the parties were invited to (and did) submit supplemental briefs. (Four supplemental amicus briefs were also submitted.) On the day all of these supplemental briefs were submitted, September 28, 2018, the Ninth Circuit panel issued an order inviting further briefing from the parties by October 9 on an issue that had never before been argued in the case. The case is set for reargument before the new Ninth Circuit panel on October 16.

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The recent order stated concerning this additional briefing issue:

The parties should be prepared to discuss at oral argument the question as to whether the six-year statute of limitations applicable to procedural challenges under the Administrative Procedure Act, 28 U.S.C. § 2401(a), applies to this case and, if it does, what the implications are for this appeal. Perez-Guzman v. Lynch, 835 F.3d 1066, 1077-79 (9th Cir. 2016), cert. denied, 138 S. Ct. 737 (2018).

In Perez-Guzman, the Ninth Circuit had held that procedural challenges to regulatory authority (unlike Chevron substantive challenges) must be raised in a court suit within the 6-year catch-all federal statute of limitations at 28 U.S.C. § 2401(a). Since the Altera deficiency cases had been brought more than six years after the pertinent regulation was adopted, the Ninth Circuit was, in effect, wondering whether all APA arguments in the case were time barred.

On October 9, however, the DOJ, rather than file a supplemental brief, filed a 5-page letter disclaiming any reliance on the statute of limitations under 28 U.S.C. § 2401(a). The letter states, in part:

It is the Commissioner’s position that any pre-enforcement challenge to the regulations at issue here – including a purely procedural challenge under the APA, cf. Perez-Guzman, 835 F.3d at 1077-79 – would have been barred by the Anti-Injunction Act. See 26 U.S.C. (“I.R.C.” or “Code”) § 7421(a) (stating that, “[e]xcept as provided in” various Code sections (the most significant of which, I.R.C. § 6213(a), allows the pre-payment filing of a Tax Court petition in response to a statutory notice of deficiency), “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person”) . . . . Thus, Altera properly asserted its challenge to the regulations in two Tax Court actions contesting notices of deficiency that reflected the enforcement of the regulations against it. See Redhouse v. Commissioner, 728 F.2d 1249, 1253 (9th Cir. 1984).

If Altera’s procedural APA challenge to the regulations were nonetheless subject to the six-year statute of limitations set forth in 28 U.S.C. § 2401(a) (which would have started running on the date of issuance of the final regulation, see Perez-Guzman, 835 F.3d at 1077), then Altera would have had to pay the tax and file a refund claim within the six-year window – thereby forfeiting the opportunity to contest the enforcement of the regulations against it in the pre-payment forum of the Tax Court – in order to comply with that time limit. Because the Commissioner has never expressed the view that the six-year statute of limitations applies to a procedural APA challenge to a tax regulation in the context of a Tax Court deficiency proceeding, and because the IRS issued the notices of deficiency in this case outside the six-year APA window, it would have been unfair to argue below that Altera’s procedural APA claims are time-barred. And, given this Court’s holding that the six-year statute of limitations set forth in 28 U.S.C. § 2401(a) is not jurisdictional, Cedars-Sinai Med. Ctr. v. Shalala, 125 F.3d 765, 770 (9th Cir. 1997), the Commissioner waived any defense under that provision by not raising it in the Tax Court.

In sum, it is the Commissioner’s position that the six-year statute of limitations that is generally applicable to procedural challenges to regulations under the APA, see 28 U.S.C. § 2401(a), does not apply to this case.

Observation

Some people wonder why I litigate so much over whether or not filing deadlines are jurisdictional. The Altera case demonstrates again why this can often be a critical issue, since only nonjurisdictional filing deadlines are subject to waiver, forfeiture, estoppel, and equitable tolling.

 

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