Tax Court Holds President’s Removal Power Constitutional, Part I

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We welcome back frequent guest blogger, Carl Smith.  When Carl, Frank Agostino, and my Villanova colleague, Tuan Samahon, began making the removal argument in the Kuretski case, I confess I thought it was “Much Ado about Nothing.”  That was before the guilty plea of a Tax Court judge for actions I never expected and before we elected a Chief Executive who likes to take on judges and has a TV show inspired reputation for firing people.  If you want more background on Kuretski, I recommend the recent article published by Tax Court scholar and Washington and Lee Dean, Brant Hellwig, in which Les says Brant basically throws up his hands saying any home is troublesome. 

In communicating with Carl about this case, he told me that the situation reminded him of a famous line from a Broadway musical.  He was reluctant to use the line because he was not sure about being misunderstood if he brought up Nathan Detroit in Guys and Dolls running the “Oldest Established Permanent Floating Crap Game in New York”.  After Judge Colvin in Battat held that the Tax Court isn’t in the Executive Branch, but says he won’t say where it is, Carl allowed me to include the query in the introduction of whether the Tax Court is now running the “Oldest Established Permanent Floating Court in the United States”.  For those of you who are fans of Guys and Dolls or just fans of the Tax Court, here is the latest on where the Tax Court fits into the federal judiciary.  Keith  

In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), the D.C. Circuit held that the Tax Court is an Executive Branch entity, so there is no separation of powers problem in the fact that, under section 7443(f), the President – the head of the Executive Branch – can remove a Tax Court judge on the grounds of “inefficiency, neglect of duty, or malfeasance in office”.  Deciding to face the issue for the first time, last week in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), the Tax Court disagreed with the D.C. Circuit’s reasoning, but came to the same result.  The Tax Court held that it does not reside in the Executive Branch (though the Tax Court wouldn’t say where it did reside).  However, the Tax Court held that, while its judges exercise a portion of the judicial power of the United States; Freytag v. Commissioner, 501 U.S. 868, 890-891 (1991); its judges exercise no portion of the judicial power reserved to Article III judges.  Thus, Presidential removal authority cannot interfere with the Article III judicial power, regardless of the Tax Court’s placement in the Branches of Government.

This Tax Court holding in Battat and similar holdings in other cases brought by the same attorney, Joe DiRuzzo, including Thompson v. Commissioner, 148 T.C. No. 3 (also decided on Feb. 2, 2017), are destined to be appealed to several Circuit courts of appeals other than the D.C. Circuit.  Joe is seeking a split among the Circuits that only the Supreme Court can resolve.

In part one of this two-part post, I provide the taxpayers’ argument and what the D.C. Circuit held in Kuretski.  In the second part of the post, I set out in detail (and comment on) the Tax Court’s reasoning in Battat.

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Warning:  This is a biased post, since I was one of three principal attorneys who brought the constitutional argument initially in Kuretski – the other two attorneys being Professor Tuan Samahon of Villanova (who developed the taxpayers’ argument from a comment of Justice Scalia’s in his Freytag concurrence) and Frank Agostino.  But, I will try to be fair to all sides.  Indeed, even though I disagree with parts of the Battat opinion, I commend Judge Colvin (its author) for doing an excellent and exceedingly fair job of summarizing the Tax Court’s history and the pertinent separation of powers case law.  He presents far more information than was in the D.C. Circuit’s Kuretski opinion or was in the parties’ briefs in Battat.  Indeed, he even, unbidden, went back and read the briefing in Kuretski to determine what in fact had been argued in Kuretski.

There have been, to date, 32 posts on PT that mentioned one aspect or another of the Kuretski case – which must be a record.  However, I won’t refer you back to any, but I will here provide a condensed version of the Kuretski case, both at the Tax Court and the D.C. Circuit. This is necessary to understand how the reasoning in the Battat opinion significantly differs from that of the D.C. Circuit’s opinion in Kuretski.

Separation of Powers Theory

There are at least half a dozen highly-relevant Supreme Court opinions on the separation of powers doctrine, and the Kuretski and Battat opinions discuss them.  However, for this post, I will just point to Bowsher v. Synar, 478 U.S. 714 (1986) (authored by Chief Justice Berger) and Freytag.

The Framers envisioned a government in which three powers – the Legislative Power, the Executive Power, and the Judicial Power – each balanced the other.  As Judge Colvin notes in Battat, the Framers generally spoke about “Powers”, not using the more modern references to three “Branches” of government.  This distinction is important, since Congress sometimes creates entities that hold one or more powers, but which are placed in a Branch that one would not expect.  That’s permissible.  What’s not permissible is for actors holding one power to have control over actors holding another power.  That can upset the separation of the powers.  The powers must stay separated to function properly.

In Bowsher v. Synar, a mid-1980s balanced budget law gave to a Congressional employee, the Comptroller General, certain additional powers to cut expenditures that the Court held were Executive Powers.  Congress, which holds the Legislative Power, had long possessed statutory authority to remove the Comptroller General for cause, including for inefficiency, neglect of duty, and malfeasance in office – the same grounds specified for removal of Tax Court judges in section 7443(f).  The Court held this arrangement unconstitutional as a violation of the separation of powers, since, it observed, a person who is subject to a removal power is likely to act subservient to the actor who has the power to remove him or her.  It is a subtle pressure, one that can upset the balance of the powers.  In Bowsher, Congress (holding the Legislative Power) had removal power over a person in its Branch, but who held a portion of the Executive Power.  In response to the argument that the for-cause limitations were a sufficient check on Congress abusing its power, the Court wrote:  “[T]he dissent’s assessment of the statute fails to recognize the breadth of the grounds for removal. The statute permits removal for ‘inefficiency,’ ‘neglect of duty,’ or ‘malfeasance.’ These terms are very broad and, as interpreted by Congress, could sustain removal of a Comptroller General for any number of actual or perceived transgressions of the legislative will.” 478 U.S. at 729.

In Freytag, the issue was whether Tax Court Special Trial Judges needed to be appointed under the Constitution’s Appointments Clause.  The Supreme Court held that they did, which next raised the question of whether their appointment was consistent with the limitations of the Appointments Clause because Tax Court STJs are appointed by the Chief Judge of the Tax Court.  The Appointments Clause permits Congress to delegate power to appoint such “inferior Officers” only to the President, the “Heads of [Executive] Departments”, or “the Courts of Law”.  Thus, the statutory appointment power would only be valid if the Tax Court Chief Judge was either the head of an Executive Department or acted for one of the Courts of Law.

As originally created, the Board of Tax Appeals was made an “independent agency” in the Executive Branch.  In 1969, however, Congress amended what is now section 7441 to instead provide:  “There is hereby established, under article I of the Constitution of the United States, a court of record to be known as the United States Tax Court.”  Using a largely functional analysis, in Freytag, the Supreme Court held that the Tax Court performs judicial functions to the exclusion of any Legislative or Executive functions, even though the Tax Court is not an Article III court where judges have life tenure.  The Supreme Court rejected the government’s argument that the Tax Court was an Executive Department, but instead found that the Tax Court was one of the Courts of Law.  It wrote:

The Tax Court exercises judicial, rather than executive, legislative, or administrative, power. It was established by Congress to interpret and apply the Internal Revenue Code in disputes between taxpayers and the Government. By resolving these disputes, the court exercises a portion of the judicial power of the United States. . . .

The Tax Court remains independent of the Executive and Legislative Branches. . . .

The Tax Court’s exclusively judicial role distinguishes it from other non-Article III tribunals that perform multiple functions . . . .

501 U.S. 890-892.

In a concurring opinion, Justice Scalia held that the appointment of Special Trial Judges was valid, but only because the Tax Court was still, after 1969, an Executive Department.  He scoffed at the idea that any non-Article III actor could hold any portion of the Judicial Power.  In attacking the majority opinion, he wrote:

When the Tax Court was statutorily denominated an “Article I Court” in 1969, its judges did not magically acquire the judicial power. They still lack life tenure; their salaries may still be diminished; they are still removable by the President for “inefficiency, neglect of duty, or malfeasance in office.” 26 U.S.C. § 7443(f).   (In Bowsher v. Synar, supra, at 729, we held that these latter terms are “very broad” and “could sustain removal . . . for any number of actual or perceived transgressions.”) How anyone with these characteristics can exercise judicial power “independent . . . [of] the Executive Branch” is a complete mystery. It seems to me entirely obvious that the Tax Court, like the Internal Revenue Service, the FCC, and the NLRB, exercises executive power.

501 U.S. at 912 (emphasis in original; some citations omitted).

Kuretski in the Tax Court                                  

Professor Tuan Samahon of Villanova, who is a separation of powers scholar (not a tax professor), noticed Justice Scalia’s comment that the Freytag majority’s holding seemed incompatible with the Presidential removal power over Tax Court judges, and, in 2012, mentioned this issue to me.  Frank Agostino had just lost a Collection Due Process case before Judge Wherry, Kuretski v. Commissioner, T.C. Memo. 2012-262.  Frank was about to file a motion for reconsideration on certain other issues.  I persuaded him to add to that motion a motion to vacate the decision on the ground that the Tax Court was impermissibly and unconstitutionally biased against taxpayers because the judges operated under a removal power subtly pressuring them to rule for the IRS, the President’s instrument.  We moved for the Tax Court to declare the power unconstitutional and inoperative.  We argued that the Tax Court was likely in the Judicial or Legislative Branch, but even if it was in the Executive Branch, since the President held the Executive Power, and the Tax Court held a portion of the Judicial Power, just as in Bowsher (where the Congress and Comptroller General were in the same Branch), the removal power violated Bowsher and could not be rescued by its for cause limitations.

In an unpublished order, Judge Wherry denied both motions.  He thought the motion for reconsideration was just a rehash of arguments that he had already rejected.  With respect to the removal power argument in the motion to vacate, he held that it was raised too late in the case for him to consider it, and, since the argument was that he was biased, he questioned whether he should be the person issuing a ruling on the issue.  That is why Battat is the first opinion of the Tax Court that actually addresses the removal power argument.

Kuretski in the D.C. Circuit

The Kuretskis appealed to the D.C. Circuit.  There, the D.C. Circuit also made quick work of their arguments not involving the removal power.  But, as to the removal power, the court held that it could exercise its discretion to hear separation of powers arguments at any point in a case (as was done in Freytag).  It also held that the taxpayers’ proposed remedy – striking the removal power – was a permissible cure for the problem, if there was a problem.  But, the D.C. Circuit found no constitutional problem.  It did so in a curious way:

First, as noted by Judge Colvin in footnote 29 of Battat, the D.C. Circuit mischaracterized the Kuretskis’ primary argument as being that the Tax Court exercises a portion of the Judicial Power under Article III.  Writes Judge Colvin:  “It is not apparent to us that the taxpayers in that case made that obviously incorrect argument. In fact, in their answering brief at p. 11 the Kuretskis state that they ‘do not challenge the Tax Court Judges’ non-Article III status.’”

Next, the D.C. Circuit rejected the argument that the Tax Court Judges are in the Article III Judicial Branch, observing that Tax Court judges don’t possess life tenure, so can’t be.

Third, the D.C. Circuit rejected an alternative argument made by the Kuretskis that the Tax Court was part of the Legislative Branch.  The D.C. Circuit also correctly observed that the Tax Court does no legislating.  As to the fact that section 7441 purports to establish the Tax Court as a court of record “under Article I,” the D.C. Circuit felt that this was just a statement that the Tax Court was established pursuant to Congress’ Article I powers to lay and collect taxes and make necessary and proper laws for carrying into execution the taxing power.  The D.C. Circuit did not think this meant that the Tax Court was established in the Legislative Branch.

So, by process of elimination, the Tax Court was still an Executive Branch entity (though the Circuit court carefully never called the Tax Court an “agency” anymore).

The D.C. Circuit wrote:  “We need not explore the precise circumstances in which interbranch removal may present a separation-of-powers concern because this case does not involve the prospect of presidential removal of officers in another branch. Rather, the Kuretskis have failed to persuade us that Tax Court judges exercise their authority as part of any branch other than the Executive.”  755 F.3d at 939.

The D.C. Circuit noted that the Supreme Court has stated that Congress may give non-Article III tribunals jurisdiction to hear “public rights” cases – i.e., cases involving disputes between the citizen and sovereign, which did not exist at common law.  The D.C. Circuit saw no problem with the Tax Court sitting in review of other Executive agencies, noting that other Executive agencies do so – like the Merit Systems Protection Board and the Federal Labor Relations Authority.

The D.C. Circuit observed that the Tax Court was like another Article I court, the Court of Appeals for the Armed Forces, which the Supreme Court had held to be in the Executive Branch in Edmond v. United States, 520 U.S. 651 (1997).  The D.C. Circuit failed to discuss the Court of Federal Claims, which, the Kuretskis pointed out, was an Article I court whose judges are removable, for similar causes, by judges of the Article III Court of Appeals for the Federal Circuit, under 28 U.S.C. § 176(a).  The Kuretskis couldn’t see how the Court of Federal Claims should have judicial actors holding a judicial removal power, while the Tax Court should have an Executive actor holding a judicial removal power.  Both can’t be constitutional.

The D.C. Circuit admitted that the Supreme Court’s opinion in Freytag “adds a wrinkle to what would otherwise be a straightforward analysis”; 755 F.3d at 940; but the D.C. Circuit thought the majority opinion in Freytag could be harmonized with the D.C. Circuit’s holding that the Tax Court was still in the Executive Branch:

The Freytag majority rejected the argument that the Tax Court is an executive “Department” for purposes of the Appointments Clause.  But, the majority also made clear that an entity can be a part of the Executive Branch without being an executive “Department.” See id.at 885 (“We cannot accept the Commissioner’s assumption that every part of the Executive Branch is a department, the head of which is eligible to receive the appointment power.”) . . . .

The Freytag majority also observed that the Tax Court “remains independent of the Executive . . . Branch[],” and in that sense exercises something other than “executive” power. 501 U.S. at 891. We understand that statement to describe the Tax Court’s functional independence rather than to speak to its constitutional status. The Supreme Court has used similar language to describe “quasilegislative” and “quasijudicial” agencies such as the Federal Trade Commission, noting that such agencies are “wholly disconnected from the executive department” and that their members must “act in discharge of their duties independently of executive control.”

755 F.3d at 943 (some citations omitted).

A number of independent observers who read the D.C. Circuit’s opinion, however, felt that it essentially adopted the reasoning of Justice Scalia’s Freytag concurrence concerning the location of the Tax Court, not the Freytag majority opinion.

Moreover, the D.C. Circuit wholly failed to discuss the Kuretskis’ further argument that, even if the Tax Court is located in the Executive Branch, Bowsher v. Synar indicates that intrabranch removal powers can be unconstitutional when actors holding one power hold removal power over actors holding a different constitutional power – the situation that would be presented with the President holding the Executive Power and the Tax Court holding a portion of the Judicial Power while being in the Executive Branch.

In the second part of this post, I will explain both Congress’ and Joe DiRuzzo’s responses to the D.C. Circuit’s Kuretski opinion and the Tax Court’s new opinion in Battat, which disagrees with much of the reasoning of the D.C. Circuit in Kuretski.

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