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About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Tax Court To Consider IRS Procedure For Imposing Information Reporting Penalties

In Information Return Penalty Assessment Fight Coming to a Head [$] Andrew Velarde highlights a major tax procedure issue before the Tax Court. It concerns allegedly improper IRS procedures with respect to the assessment of penalties associated with the delinquent or erroneous filing of information returns. As Velarde notes, in Farhy v Commissioner, the IRS assessed significant penalties under Section 6038 stemming from the taxpayer’s failure to File 5471 “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” for his Belize foreign corporations. The stakes of the case are high, with the potential for upending the IRS’s longstanding practice for imposing civil penalties for the failure to file certain information based returns.

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Farhy, a CDP case, squarely focuses on whether the IRS was entitled to use its summary assessment procedures with respect to the taxpayer’s failure to file the required Form 5471 for a number of years. A side question in the case is whether in a CDP case the IRS’s assessment authority with respect to the penalty is part of the requirement that the court verify that the IRS followed all applicable laws or a challenge to the underlying liability. Liability challenges are not properly before the court if the taxpayer has had a prior opportunity to challenge the determination. The government in Farhy has conceded that the taxpayer did not have a prior opportunity to dispute the penalty so that allows the Tax Court to proceed to the substantive legal issue.

Back to the heart of the matter, and some context, simplified for purposes of this blog. The IRC provides that some tax penalties are subject to the deficiency procedures, requiring that the IRS assert the penalties in a stat notice or in pleadings in Tax Court for a case that is otherwise before the Tax Court. Other civil penalties are explicitly identified in the Code as “assessable penalties” provided in Subtitle F, Chapter 68, Subchapter B. These are found within §§ 6671-6725 and are not subject to the Code’s deficiency regime.  IRC 6665(a) provides a similar statutory hook for penalties found within Subchapter A of Chapter 68.

For penalties in Chapter 68 the IRS is entitled to use its summary assessment powers, meaning that the IRS can assess those penalties immediately upon receipt of the taxpayer’s return.

What makes this case interesting and important is that the Section 6038 penalty is not found within Chapter 68 and is also not (at least explicitly) subject to the deficiency procedures.

The taxpayer in Farhy asserts in its opening brief that for decades the IRS has been acting ultra vires by using its summary assessment powers when the proper course is to refer the 6038 penalties to the Department of Justice “for collection like other tax judgments.”  While Farhy involves an assessment with respect to Section 6038 and the failure to file Form 5471, as the brief notes the same issue presents itself with other penalties that are located outside Chapter 68, including:

  • Section 6038A: Information returns required for certain foreign-owned U.S. corporations (Form 5472); the associated penalty is in the text of section 6038A all in Chapter 61 all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038B: information returns required for certain transfers to foreign persons (Forms 926 and 8865); the associated penalty is in the text of section 6038B all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038C: Information returns required for certain foreign corporations engaged in U.S. business (Form 5472); the associated penalty is in the text of sections 6038C all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038D: Information returns regarding foreign financial assets (Form 8938); the associated penalty is in the text of section 6038D all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

Prior to this case, a number of commentators and practitioners have written that collection of the Section 6038 penalty and similar non Chapter 68 penalties can only be accomplished via referral to the Justice Department and litigation. See for example Robert Horwitz, Can the IRS Assess or Collect Foreign Information Reporting Penalties? TAX NOTES TODAY (Jan. 31, 2019) 301-305. Others, including Frank Agostino and co-authors Phil Colasanto and Inhyuk Yoo, have concluded that the assessments are improper and have claimed that the Section 6038 penalty should be considered an “additional amount” under Section 6214(a) and subject to deficiency procedures. A nice summary of the critical commentary can be found on pages 123 and 124 of the 2020 NTA Annual Report to Congress; NTA Erin Collins, prior to her appointment, was one of the first to highlight the issue in a 2018 Tax Notes article she wrote with Garrett Hahn.

The argument that the collection of penalties is required to be accomplished via DOJ referral turns in large part on the placement of the information reporting penalties outside Chapter 68 of the Code. It seems that the key assumption for that argument is that immediately assessable penalties are limited to those explicitly identified in Chapter 68.

I confess to not having given the issue my full attention, in part because my assumption has been that absent a specific Congressional requirement the IRS has discretion to summarily assess and in effect use whatever process it chooses, subject to very weak procedural due process limitations that would allow for a taxpayer, following full payment, to bring a post payment refund suit. (As an aside: the procedural due process treatment of taxpayers is a separate issue and one which I have written about and discussed most recently here, where I presented on the issue at the 2021 Center for Taxpayer Rights International Conference on Taxpayer Rights; Keith has also discussed the procedural due process issue in tax penalties in Assessable Penalties Do Not Violate Due Process).

My prior statutory take on this issue is that the default, absent special Congressional direction, is the summary assessment procedure that IRS has been using. To be sure, Congress has occasionally spoken and required additional process prior to assessment. For example a century ago Congress injected the deficiency notice and pre-assessment review procedures, and in 1998 Congress (albeit sloppily) provided that no assessment for some Title 26 penalties is valid unless there was adequate written supervisory approval.

All of this focuses attention on Section 6201, which provides the IRS broad authority to assess taxes, providing that the IRS via delegation “is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title…”

As Professor Bryan Camp shared with me via email, the wording of Section 6201 supports the Service view that it can use its summary assessment power with respect to the non-Chapter 68 information reporting penalties:

In looking at 6201, the word “including” is the important word to the analysis.  The parenthetical instructs us that the word “taxes” is to be broadly construed to mean liabilities other than taxes.  Examples of such liabilities are given in the parenthetical, but the word “including” tells us that what is listed in the parenthetical is not to be read as the exclusive set of liabilities that count as “taxes” within the scope of 6201. 

In its opening brief the government makes a similar argument:

The parenthetical reference in section 6201(a) to taxes “including . . . assessable penalties” includes the section 6038(b) penalty. As recently recognized by this Court, whether a penalty falls within the meaning of the term “taxes” as used in section 6201(a) is dependent on context. Grajales v. Commissioner, 156 T.C. 55, 61 (2021). Rather than limit the definition of “taxes,” the parenthetical reference in section 6201(a) includes “interest, additional amounts, additions to the tax, and assessable penalties,” which demonstrates that Congress intended to use “taxes” in an expansive sense rather than a narrow one. The modifier “all” preceding “taxes” also reflects that Congress intended to define the “taxes” to be interpreted under the broadest construction. The only limitation to respondent’s broad assessment authority under section 6201(a) is to limit that authority to assessments imposed under Title 26.

The dispute at issue highlights the labyrinth of the statutory authority to assess taxes and penalties. For example, Section 6202 addresses the process “mode or time for the assessment of any internal revenue tax (including interest, additional amounts, additions to the tax, and assessable penalties).” 6202 notes that the IRS “may” (but is not required) to establish a process for assessment if it is not otherwise mandated.

So IRS and Treasury could and should mandate additional procedural protections in connection with Section 6038 and similar penalties. Practitioners and the NTA have flagged the difficulties with the information penalty process, including what appears to be the IRS’s disregarding of apparent claims of reasonable cause and a high abatement rate for the penalties. These are serious problems that impinge on taxpayer rights and merit legislative attention. In fact the NTA has recommended that Congress extend deficiency procedures for these penalties, and others (including Keith), have highlighted how Congress needs to modify the Flora rule, which effectively keeps some taxpayers from ever getting the chance to get court review of potentially crippling penalties.

In any event, now that this issue is teed up in a case, we can expect to see the Tax Court’s take on what is looming to be one of the biggest issues in tax procedure and tax administration in 2023.

For those who want to dig deeper, the government and taxpayer opening briefs can be found here and here, and the response briefs can be found here and here [$$$$].

Court Orders Enforcement Of A Summons Request From Abroad Allegedly To Harass Prominent Members Of Opposition Political Party

Tax agencies face problems enforcing tax laws when their citizens have investments located abroad. One tool that countries use to address that problem is to include exchange of information provisions in tax treaties.  Another tool is a specific exchange of information treaty, or a tax information exchange agreement. The general effect of these treaties and agreements is that a requesting country can rely on the other country’s process to gather information that be relevant for ascertaining compliance with the requesting country’s tax obligations.

Recent appellate opinions address non US country requests that lead to the IRS issuing a third party summons to obtain information about US-sourced investments. I discuss the issue extensively in Saltzman and Book Chapter 13, but the upshot is that courts have essentially held that a challenge to the enforcement of the summons on the basis that the requesting nation is seeking the information for an improper purpose is not relevant to the inquiry.

What is relevant?

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The case law, essentially applying the well-known Supreme Court Powell standard, requires that the IRS must make a prima facie showing of its “good faith” in issuing the summons.  That is a minimal burden, and the IRS need only demonstrate its own good faith, not that of the requesting party.

Once that minimal hurdle is cleared the taxpayer then has the burden to challenge the government’s evidence or otherwise show that there are grounds to quash the summons.

This framework does not sit well with taxpayers who allege that the requesting country may have improper or nontax related motives in getting the US documents. For example, in Puri v US, a Ninth Circuit  nonprecedential case from earlier this year, the taxpayer alleged that the Indian tax authority sought investment information from Citibank to harass their family, who are prominent members of the Indian opposition political party.

Under the framework I discuss above, the court held that those allegations were not relevant, resulting in an order to enforce the summons.

One aspect of the Puri opinion that stood out is that it proceeded to analyze the merits of the allegations, stating that “in any event” Puri “does not present any plausible evidence suggesting that the Indian tax authorities acted in bad faith.” The opinion notes that Puri failed to connect how the requested bank statements could be used for harassment.

That discussion engendered a concurring opinion that joined in all but the “in any event” discussion:

Because courts are categorically forbidden from inquiring into the bad faith of a foreign government when deciding whether to quash an IRS summons, I see no need for us to reach the “in any event” argument in paragraph two

As the concurrence notes, an inquiry of any kind into a requesting state’s motives raises separation of powers concerns:

I have serious separation-of-powers concerns for even raising the prospect that courts can look through the Executive branch’s decision to comply with an international treaty and surmise the motives of a foreign government. That is clearly beyond our competence. 

Conclusion

We generally take for granted that US tax administration is a nonpartisan business, though recent events are starting to show that the norms are shifting.  Questions about the perhaps coincidental research audits of prominent opponents of the Trump Administration and allegations of pressure to audit from the former President’s Chief of Staff John Kelly have brought attention to that topic.  

There is a sense, perhaps more intuitive than empirical, that other tax administrators are less able to insulate their actions from political pressure. As Puri and other cases reflect, the norm is that US courts are to stay out of the messy inquiry of motive.

Free Tax Court Lunchtime Webinar Starts Soon!

Today PT’s own and my Villanova Law School colleague Christine Speidel is part of a lunchtime Tax Court webinar series. The event highlight changes to Tax Court practice made in response to the COVID-19 pandemic. It starts in ten minutes, at noon ET, is free, and registration is here

In addition to Christine, the panel includes Chief Judge Kathleen Kerrigan; Judge Cary Douglas Pugh; Judge Emin Toro; Sheri Dillon, Morgan Lewis & Bockius LLP;  Michael Garrett, IRS Office of Chief Counsel; and Andrew Tiktin, IRS Office of Chief Counsel. 

Tax Court Hands IRS Major Defeat In Its Battle Against Conservation Easement Transactions

Yesterday in Green Valley Investors v Commissioner, a reviewed opinion, the Tax Court held the IRS violated the APA when it issued Notice 2017-10 without complying with the notice and comment provisions of the APA or otherwise establishing that it was not required to subject the rule to the APA’s notice and comment procedures. The opinion is a major defeat for the IRS and is an important decision applying administrative law principles to IRS guidance.

The opinion follows up on recent cases like Mann Construction (blogged here) where other federal courts have held that the IRS’s issuance of a Notice ran afoul of the APA. Tax Notes’ Kristen Parillo does a bang-up job summarizing [$] and placing the opinions and dissents in that context. The opinion deserves a major write up, and I may return to do so in PT but in the interest of getting something to our readers here are a few initial observations and thoughts.

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In addition to the APA issue, the taxpayer also argued that penalties the IRS imposed under section 6662A were improper because they were assessed retroactively after the issuance of Notice 2017-10. The retroactivity issue is a tough one for taxpayers, but the Tax Court was able to sidestep the issue by holding that the IRS violated the APA with respect to the Notice’s issuance.

While there are two concurring opinions and a dissenting opinion, no opinion agreed with the IRS view that the rule in question was interpretive and thus not generally required to be issued under notice and comment. As such, Green Valley is another firm rebuke of the IRS’s take on how its subregulatory guidance fits in with broader administrative law and APA norms and requirements. The majority opinion defines a legislative rule as one that “impose[s] new rights or duties and change the legal status of regulated parties.” That low bar easily put the Notice at issue in that camp.

Elaborating on its holding that the Notice is a legislative rule, the majority states that “the act of identifying a transaction as a listed transaction by the IRS, by its very nature, is the creation of a substantive (i.e., legislative) rule and not merely an interpretative rule.” To reinforce its conclusion, the opinion details the effect of the IRS’s classification in the Notice on taxpayers and material advisors.

That majority’s framing suggests that many more pieces of subregulatory guidance are subject to procedural APA attacks.

The statutory framework at issue in this and other challenges highlights a separate legal question, namely whether Congress intended to displace the APA’s notice and comment regime. Section 6707A(c)(1) permits the Secretary to define reportable transactions “under regulations,” and respondent pointed out that Congress remained silent after Treasury issued regulations allowing the agency to define that crucial term through essentially any type of guidance, including IRB guidance at issue in this and other similar cases.

Displacing the APA is the prerogative of Congress, not the IRS. It is here that the Tax Court (and other courts) divided. For an agency to issue a legislative rule without notice and comment (and without good cause for skipping it) there needs to be an express statutory displacement of the APA. The different opinions in this case explore how or whether this principle should apply here. There is more nuance to unpack, and in a future post I may revisit the topic, but for now, the takeaway is that the majority opinion sets that hurdle pretty high.

Finding a violation of the APA leads to the hot issue of remedy, and whether a court could set aside the tainted IRS Notice for all, or only for those taxpayers who brought the challenge. The majority did not wade deeply into that issue but in footnote 22 essentially told the IRS that its opinion has the similar effect as vacating broadly, stating that “[a]lthough this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.”

This is a major development. But it is not the last development, for sure, either in the ongoing battle between IRS and those engaging or participating in easement transactions or in the broader issue of IRS compliance with the APA’s procedural requirements associated with rulemaking.

Treasury and IRS Guidance Plan Highlights Some Key Procedural Issues

Each year, the Treasury Department’s Office of Tax Policy and the IRS release at least one compilation where they highlight tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance.  Last week, Treasury and IRS released the 2022-23 Guidance Priority List and it flags issues for prioritizing agency resources during the 12-month period from July 1, 2022 through June 30, 2023.

As the release notes, the Guidance Priority List “focuses resources on guidance items that are most important to taxpayers and tax administration” The list includes many substantive areas but also 26 specific projects under the header “tax administration.”

As one might expect, items on the list often relate to relatively recent legislation. Many of the tax administration items fall in that category, including highly anticipated regulations addressing reporting requirements relating to digital assets, regulations under §7602(c)(1) regarding notifications of third-party contacts as updated by the Taxpayer First Act, more guidance on the BBA partnership audit regime, and clarification on the recent legislative changes addressing mandatory e-filing of certain returns.

There were a few items on the list that jumped out at me, some of which we have discussed many times on PT, including a project relating to supervisory approval of proposed penalties under § 6751(b), and the authority to postpone certain deadlines by reason of Federally declared disaster, significant fire, or terroristic or military actions under § 7508A.

A few other areas flagged in the list highlight some issues that have long needed administrative attention, including a revision of the woefully out of date Circular 230 rules addressing practice before the IRS, regulations under § 6501 to define the return that starts the limitations period on assessment (especially important in a world of e-filing, a backlog of unprocessed returns, and returns that may sweep in multiple schedules and taxes) and new guidance under § 6662 to address the accuracy related penalty.

Two procedural items relating to business taxpayers piqued my interest, as the list identifies a reg project looking at last known address for business taxpayers and guidance on the application of the qualified amended return penalty exception rules for corporate taxpayers. I was happy to see last known address rules on this list, though the whole last known address regime needs a careful review and could use additional guidance rather than a focus just on business taxpayers.

As our blog often flags, there are many procedural issues not on the list that we believe could use administrative attention or even a possible legislative correction. For example, the what looks like unintended consequence of the Taxpayer First Act’s potentially limiting the Tax Court from considering evidence in a case involving relief from joint and several liability is an area that needs careful reconsideration (see, e.g., Keith’s post discussing that issue), and Caleb’s thoughtful series on Section 7122(f) and offers in compromise (all linked in Samantha Galvin’s July digest)

As the list related to the period that started this past July, the Guidance List flags some projects that have been released, including the controversial proposed regs addressing the TFA’s legislative changes concerning access to and exclusions from Appeals consideration.

As the list notes, “published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.”  It is helpful to see what Treasury and IRS are prioritizing, but the list does not identify expected release dates and sometimes items that appear on these lists never result in outward facing projects.

Appeals Removes Challenges to Validity To Regs or IRB Guidance From Hazards of Litigation Analysis

On Wednesday, November 16, 2022 from noon to 1:15 the Tax Court will hold a webinar panel discussion moderated by Chief Judge Kerrigan highlighting changes to Tax Court practice made in response to the pandemic.  Christine Speidel will be among the panelist.  Registration is required.  Information about registration is available on the QR code in this document announcing the program

The other day I discussed a recent ABA Tax Section panel that addressed the growing number of procedural challenges to both regulations and guidance that the IRS issues in the Internal Revenue Bulletin. The challenges focus on whether the IRS failed to use the APA’s notice and comment procedures, or even if it did use those procedures, whether the IRS failed to do what was required under those procedures, such as responding to significant comments.

While the courts tackle these issues, IRS recently announced in both proposed regulations and interim guidance that the IRS Independent Office of Appeals is not to take into account the validity of regulations or IRB guidance in applying the hazards of litigation for possible settlement.

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To be sure, the regulations provide an exception if “there is an unreviewable decision from a Federal court” that  accepts the taxpayer’s position on the validity of the regulation or IRB guidance. But this rule limits Appeals’ discretion to resolve matters that may present significant litigation risks for the government.

Why take this off the table? The preamble explains that while Appeals is independent it is “an office within the Treasury Department and the IRS,” and is bound to follow the decisions of senior-level Treasury and IRS officials. In the interim guidance, IRS distinguishes challenges that implicate other substantive issues and states that “the judicial process is the appropriate forum for addressing taxpayer challenges regarding the validity of Treasury regulations or procedural validity of IRB notices and revenue procedures in the first instance.”

While I briefly discussed the proposed regulations when they came out, since then there has been some immediate reaction from some practitioners. In an excellent article in Tax Notes [$ paywall], Jeffrey Luechtefeld of Chamberlain Hrdlicka argues that the policy will curtail Appeals’ ability to resolve cases without litigation and have a longer term negative impact on tax administration:

The proposed regulations do not discuss or even acknowledge the potential negative effect on tax administration that will likely result from this invasion of Appeals’ independence. Taxpayers may well question whether a restrained Appeals function is capable of fairly resolving their case if one of these issues is present.

On Twitter, Professor Kristin Hickman, one of my co panelists on the ABA panel and a leading critic of the IRS for failing to comply with the APA, states that “Treasury and IRS have an established history of APA noncompliance, and it places a heavy burden on individual taxpayers to bear the litigation costs of taking these challenges to court when they could be settled as part of the IRS Appeals process.”

On the other hand, Professor Hickman also tweeted that “forcing these challenges into federal court is more transparent and long term will likely lead Treasury & IRS to better APA compliance. And my sense is lots of agency adjudicators are required to assume the validity of agency rules.” 

Conclusion

The proposed regulations comment period is open until November 14, and I suspect that the comments will largely be critical of the IRS position.

For what it is worth, I come down on the side of the IRS’s proposed position. To be sure, it does place an additional burden on taxpayers who may have good faith and reasonable disputes about the validity of guidance. Yet in my view the courts are in the best position to address these complex issues. The circuit split in Hewitt and Oakbrook Land Holdings, and the differing approaches that leading commentators have taken concerning whether guidance is indeed required to be issued under notice and comment, suggest a need for either a legislative fix or for the Supreme Court to clarify these challenging administrative law issues. While the proposed regulations and interim guidance limit Appeals’ independence, I wonder whether Appeals has previously factored the validity of regulations or other guidance into its settlement considerations.  If it did not, at least this puts parties on notice and can help focus litigation strategy. If it did, my sense is that Appeals would likely have a different perspective on the risks that a court would invalidate the rule in question.

Taxpayer Seeks Supreme Court Review in Oakbrook Land Holdings v Commissioner

At the most recent ABA Tax Section meeting in Dallas there were multiple panels exploring the intersection of administrative law and tax procedure. One of the hottest issues is the continued attack on the IRS for issuing Internal Revenue Bulletin (IRB) guidance and regulations for violating requirements under the APA and related case law. It is squarely at issue in Oakbrook Land Holdings v Commissioner, where the Sixth Circuit upheld the validity of a 1980’s era regulation addressing the contribution of conservation easements. The Oakbrook court directly disagreed with the Eleventh Circuit’s approach in Hewitt, setting up a circuit split and the possibility of the Supreme Court wading into some murky waters.

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As a quick refresher, under 5 USC § 553, the APA ensures public participation in the informal rulemaking process, requiring agencies to provide the public with adequate notice of a proposed rule followed by a meaningful opportunity to comment on the rule’s content. After comment, the APA directs the agency to consider the “relevant matter presented” and incorporate into the adopted rule a “concise general statement” of the “basis and purpose” of the final rule. As an aside, the APA does have separate trial-like formal rulemaking requirements, but those apply in very limited circumstances, generally requiring explicit Congressional requirements and rarely at issue.

So, most of what agencies do in the rulemaking sphere is classified as informal. Not all informal agency rulemaking is required to be issued under the notice and comment process. Agencies can issue rules without notice and comment if they are “interpretative”, “general statements of policy”, or rules of agency “organization, procedure, or practice”. In addition, an agency, including the IRS, can dispense with the notice and comment requirements if it has good cause and explains why the “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”

Whether an agency rule is interpretative and thus exempt from the notice and comment procedures is a difficult issue. It was the subject of a Teaching Tax Committee panel I moderated at the recent ABA Tax Section meeting in Dallas. That panel grew from a series of Procedurally Taxing blog posts this past summer from Professor Kristin Hickman, Professor Bryan Camp and Jack Townsend concerning the proper classification of tax regulations. Suffice to say, reasonable people disagree as to whether all tax regulations are required to be issued under notice and comment. (See Bryan’s last post, The More Things Change The More They Remain The Same, which links the series)

On the panel I moderated, Professor Hickman and Jack, joined with Gil Rothenberg, the former head of DOJ Tax Division Appellate Section, had a spirited and informative discussion. We highlighted some recent developments, including the recent filing of a cert petition in Oakbrook Land Holdings.

Recall the Sixth Circuit in Oakbrook and Eleventh Circuit in Hewitt have split on whether the IRS violated the APA by failing to address comments concerning how a donor should divvy up the proceeds if a conservation easement was judicially extinguished. The proposed and final regs basically provide that on extinguishment, the value of any improvements to the underlying property do not revert to the donor. Many deeds, including the one in Oakbrook, do not conform to the regulation’s requirements for dividing the proceeds in the unlikely event of the easement’s extinguishment. Some of the comments disagreed with that regulatory approach. Whether a comment is significant, and thus warrants an agency discussion, is the key point of divergence in Hewitt and Oakbrook. If the Supreme Court grants cert, the Court will have an opportunity to expand on when and how extensively an agency must respond in the comment process, an issue that is important not just for tax but all agencies.

Conclusion

Not at issue in Oakbrook is whether the regulation at issue was in fact required to be issued using notice and comment. The IRS position is that most of its regulations are interpretative, thus not compelling the agency to subject the regs to the notice and comment process. Yet IRS almost always use the notice and comment process, as it did in the Section 170 reg project at issue in Oakbrook. And if uses that process, even it was not required to do so, an agency that ignores meaningful comments is at risk that a court would find its actions arbitrary and capricious. In any event, the government seems to have abandoned arguing in court that its regs are interpretative, thus in effect conceding that in most cases its regulations are subject to the notice and comment regime.

The tax regulatory process has changed considerably in the past few decades, with preambles now more extensive and engaging. It seems odd indeed for litigants and courts to be wrangling over four-decade old rules and whether the government did enough for its actions to pass muster. With the IRS on notice that parties are gearing up to challenge it for procedural irregularities, modern day preambles more closely resemble documents that the agency expects to be the subject of litigation.

The effect of the above and IRS now gearing up for procedural APA challenges to its regs is that the future APA struggles concern whether IRB guidance is required to be issued under the notice and comment procedures. Those issues are front and center in other cases like CIC Services. That issue that will continue to be one that courts confront. To be sure, to the extent that a taxpayer faces adverse consequences from the application of an old reg, taxpayers and their advisors will likely consider and raise APA procedural challenges similar to the issue in Oakbrook. In a follow up post, I will discuss recent Appeals proposed policy to remove APA validity issues from its hazards of litigation equation. That has generated some practitioner blowback for what some argue is an intrusion with Appeals’ independence and discretion to settle cases.

Harper v Rettig Update: Government Petitions For Rehearing

This past August I discussed the government’s loss in Harper v Rettig. In Harper, the taxpayer sought a court order directing the IRS to expunge financial information allegedly obtained through  a John Doe summons. In reversing the district court, the First Circuit held that the Anti-Injunction Act was not a jurisdictional bar to a taxpayer’s suit challenging the summons.

Last week the government filed a petition for a panel rehearing. The government claims that even absent the AIA, the Administrative Procedure Act would not waive the government’s sovereign immunity. This led the government to request that the panel modify its remand order to direct the district court to consider an alternate ground for dismissal.

In its petition the government stated that it is “highly questionable whether the APA provides a basis for exercising jurisdiction in this case, and it is unclear from this Court’s opinion whether this Court definitively held that the APA provides jurisdiction. Moreover, this Court has previously held, in a case involving different facts, that the APA did not provide a basis for challenging an IRS summons.”

The issue turns on the relationship between the APA and Section 7609, the provision that opens the door to third party and taxpayer challenges to the IRS’s vast summons power.

APA Section 702 waives sovereign immunity for suits seeking nonmonetary relief and alleging wrongdoing by a federal agency. In its opinion, after concluding that the AIA did not bar the suit, the First Circuit stated that the taxpayer’s suit “appears to fit comfortably within the plain language of th[e] waiver” in Section 702.” 

Section 702 of the APA, however, also disclaims any “authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.” To similar effect is 701(a)(1), which state that provisions of APA do not apply where “statutes preclude judicial review”.  In its petition the government argues that Section 7609 is the exclusive means to challenge the government’s summons power, and that Congress protects third parties through the JDS ex parte approval process:

In Section 7609, Congress carefully delineated the limits of the waiver of sovereign immunity for challenging third-party summonses and chose not to provide persons (like taxpayer) who are not named in a summons with a procedure for challenging the summons. Instead, Congress chose to entrust the district courts with protecting the interests of third parties, such as taxpayer, whose information may be covered by a John Doe summons, by requiring that the ex parte procedures in § 7609(f) be satisfied before the summons may issue. I.R.C. § 7609(h). 

In discussing the issue, the government points to prior case law where the circuit has held that 7609 is the exclusive means for challenging a summons and that the APA did not provide jurisdiction for a challenge that was beyond the 7609 time limits.

In its petition, the government requests that permission to brief the panel so that it may wish to expand its remand order and asks that the lower court consider whether the intersection of 7609 and the APA is alternative grounds for dismissal for lack of subject-matter jurisdiction.

I suspect that the government’s failure to raise this issue previously relates to its pre and maybe even post CIC Services confidence that the AIA would independently bar a challenge to a summons. The petition is a reminder that even with the AIA not as formidable as it once was, it may not be easy to get into court to challenge what looks like an increasingly robust government use of its John Doe summons powers.

We will keep an eye on how this plays out.