How Does the Regulatory Flexibility Act Impact Tax Regulations?

In a decade in which the Administrative Procedure Act (APA) has become a mainstream topic for tax lawyers, the case of Silver v. United States, Case No. 1-19-cv-247-APM (D.D.C. 2019) decided on Christmas eve seeks to usher in for the next decade of administrative law the proper application of the Regulatory Flexibility Act (RFA) as it applies to tax regulations.  At issue in this case specifically are the regulations enacted to interpret new section 965 as enacted in the Tax Cuts and Jobs Act; however, the issue of the application of the RFA goes well beyond the specific regulations at issue in that case.

The government predictably moved to dismiss the case, asserting both a lack of standing on the part of the plaintiff and the application of the Anti Injunction Act (AIA).  The court’s decision allows the case to get past the initial procedural hurdles.  Plaintiff still must establish the RFA as a provision to which the IRS must pay much more attention.  Plaintiff’s argument raises an issue that reminds me of the early years of arguments about the APA following Kristin Hickman’s articles exposing the gap between the APA and the regulations as promulgated by the IRS/Treasury.

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Mr. Silver is a tax lawyer and a reader of PT.  Although a US citizen, he has a law office in Israel from which he dispenses advice on US tax issues.  He brought the suit because the recently enacted regulations interpreting IRC 965 create a significant recordkeeping burden.  While he did not owe any tax in 2018 as a result of this law change, he still seeks to challenge the regulations because of the burden and cost of compliance.  He was one of many who commented on the regulations and the burden they would impose on small businesses such as his.  He argues that the IRS inappropriately failed to address this burden.  Because he challenges the regulations outside of a deficiency or refund proceeding but rather in a straight up suit designed to strike the application of the regulations, the IRS began its defense by arguing that Mr. Silver lacked standing to challenge the regulations and that in any event the court lacked jurisdiction given the reach of the Anti Injunction Act.

The D.C. district court has allowed the challenge to move forward, marking a major victory for Mr. Silver.  In allowing the case to move forward and finding that Silver had standing to challenge the regs, the court found:

Here, Plaintiffs allege what is known as a “procedural injury,” that is, an injury resulting from the violation of a procedural right created by statute. See Ctr. for Law & Educ. v. Dep’t of Educ., 396 F.3d 1152, 1157 (D.C. Cir. 2005). In such cases, the redressability and imminence requirements of standing are relaxed. See Wildearth Guardians v. Jewell, 738 F.3d 298, 305 (D.C. Cir. 2013). The plaintiff need not show that “but for the alleged procedural deficiency the agency would have reached a different substantive result.” Id. at 306. Rather, she need only establish that the agency violated a procedural right designed to protect her interests, and that it is plausible “‘that the procedural breach will cause the essential injury to the plaintiff’s own interest.’” Ctr. for Law & Educ., 396 F.3d at 1159 (quoting Fl. Audubon Soc. v. Bentsen, 94 F.3d 658, 664–65 (D.C. Cir. 1996) (en banc)). In other words, “the requirement of injury in fact is a hard floor of Article III jurisdiction that cannot be removed by statute.” Summers v. Earth Island Inst., 555 U.S. 488, 497 (2009). “A procedural injury claim therefore must be tethered to some concrete interest adversely affected by the procedural deprivation . . . .” WildEarth Guardians, 738 F.3d at 305.

Plaintiffs’ alleged injury is the cost associated with complying with the TJCA’s transition tax regulations, which include certain “collection of information” and “recordkeeping obligations.”

As part of its efforts to dismiss the suit based on standing, the IRS argued that Mr. Silver’s real complaint was with the statute itself and not with the regulation.  As such, he could not attack the statute by seeking to change the regulation.  The district court disagreed, holding:

Plaintiffs are not challenging any specific regulation that might or might not be traceable directly to the TCJA. Rather, Plaintiffs allege that the agencies neglected to undertake procedural measures designed to protect small business from the burden of unwieldy and cost-intensive regulations—namely, the publishing of an initial and a final regulatory flexibility analysis, 5 U.S.C. §§ 601, 603(a), and a certification that the regulation has reduced compliance burdens on small businesses, 44 U.S.C. § 3506. Plaintiffs alleged injuries are therefore traceable to Defendants’ alleged violation of these separate statutory requirements, not the TCJA. Causation is easily satisfied.

In perhaps the most surprising aspect of the opinion, the court allowed the plaintiffs to move forward with its RFA challenge despite the broad reach of the AIA as typified by the DC Circuit’s prior opinions in Florida Bankers and Maze. (Guest blogger Pat Smith discussed Florida Bankers in two parts here and here, and Les blogged the Maze opinion here.) Readers may recall that the AIA prevents suits for the purpose of restraining the assessment or collection of taxes. The DC Circuit has previously taken a hard view on cases challenging the validity of regulations, and IRS predictably raised an AIA defense to the RFA challenge. Here, the district court suggested that courts may be willing to put the IRS to the burden of additional procedural hoops even if perhaps the AIA might ultimately prevent the court from granting the relief on the merits that Silver seeks, that is, a stay on enforcement of the regs.

With respect to the AIA, the district court disagreed with the IRS, stating:

Although “[t]he IRS envisions a world in which no challenge to its actions is ever outside the closed loop of its taxing authority[,]” the Act’s prohibition does not sweep so broadly: “‘assessment’ is not synonymous with the entire plan of taxation, but rather with the trigger for levy and collection efforts, and ‘collection’ is the actual imposition of a tax against a plaintiff.” Id. (cleaned up). Accordingly, the D.C. Circuit has refused to “read the [Anti-Injunction Act] to reach all disputes tangentially related to taxes.” Id. at 726–27. Rather, the Circuit has instructed that whether the Anti-Injunction Act prohibits a suit depends on whether the action is fundamentally a “tax collection claim,” id. at 727 (quoting We the People Found., Inc. v. United States, 485 F.3d 140, 143 (D.C. Cir. 2007)), which the court must determine based upon “a careful inquiry into the remedy sought, the statutory basis for that remedy, and any implication the remedy may have on assessment and collection,” id….
 
Plaintiffs do not seek a refund or to impede revenue collection. Instead, they challenge the IRS’s adopting of regulations without conducting statutorily mandated reviews designed to lessen the regulatory burden on small businesses. As relief, they ask the court simply to compel the agencies to do what the law requires—Regulatory Flexibility Act and Paperwork Reduction Act analyses. Tax revenues and their collection are unaffected by such relief. The Anti-Injunction Act therefore presents no barrier to Plaintiffs’ claims.

We hope to have Mr. Silver and his attorney, Stu Bassin, who has written several prior PT guest posts, write for us in the near future to expand on this brief introduction to the case.  For those interested in the issue, a good place to start is a GAO report discussing the failure of some agencies to appropriately follow the RFA.  According to the complaint in this case, the IRS regularly fails to comply with the RFA requirements.  For those interested in the specifics of this case please see the amended complaint, the motion to dismiss, the IRS brief in support of its motion and plaintiff’s brief opposing the motion.

The ability to challenge a regulation and overcome the hurdle of the AIA has become a hot issue.  Les wrote about it here in the context of CIC Services.  He has also recently added a significant discussion of the scope of AIA in the Saltzman-Book treatise, IRS Practice and Procedure at ¶1.6.  That revision is set to be published in the treatise next month. We expect CIC Services to seek cert and offer the Supreme Court the opportunity to step in and clear the murky waters surrounding the application of the AIA to challenges regarding tax regulations.  Of course, Mr. Silver’s case goes beyond raising the AIA challenge and throws down a significant challenge to the IRS practice of promulgating regulations as it relates to compliance with the RFA.  With the initial success here, it will not be surprising to see this issue raised much more frequently as parties challenge regulations.

Ninth Circuit Denies Request for En Banc Hearing by Altera

We have written about Altera v. Commissioner on many occasions because it was such an important decision by the Tax Court and because of the interesting twists in the case at the circuit level.  We have written many posts on this case.  You can find some here, here, here, here and here.  Today, the Ninth Circuit has rejected the request for an en banc hearing.  The rejection of the request is here.  Three judges dissented from the decision not to hear the case en banc.  This leaves Altera with the decision to press on to the Supreme Court or to accept the decision.  For those not following the case, the issue concerns the manner in which the IRS promulgated the regulations.  The Tax Court was so uncomfortable with the process that it struck down the applicable regulations in a unanimous vote of the full court.  The Ninth Circuit panel reversed the Tax Court in a 2-1 vote.

Time for the Supreme Court to Step In?: Sixth Circuit Denies Petition for Rehearing in CIC Services v IRS

Last month the Sixth Circuit declined to grant a petition for rehearing en banc in the case of CIC Services v IRS. The case, which I discussed following the original panel decision in In CIC Sixth Circuit Sides With IRS in Major Anti Injunction Act Case, involves the reach of the Anti Injunction Act (AIA). But the frank concurring opinions and the dissent accompanying the denial of the en banc petition reveal differing views on the role of the modern administrative state and how tax administration fits in with broader administrative law norms. At issue is when taxpayers or advisors can challenge tax rules: the AIA has pushed challenges to issues like IRS compliance with the Administrative Procedure Act (APA) rulemaking requirements (including whether the rule was issued under the APA’s notice and comment regime) to deficiency cases or refund proceedings. 

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CIC highlights some differences between the IRS and other federal agencies. First, tax practitioners and the IRS itself refer to regulations as guidance. IRS treats certain non-regulatory guidance published in its Internal Revenue Bulletin, including the Notice in the case at issue, as binding on the IRS (and for that matter taxpayers can rely on it). Other agencies distinguish between regulations and guidance, with those agencies treating regulations as binding but guidance as not.  In addition, other agencies generally expect that they will face pre-enforcement judicial challenges to the regulations that they issue. In contrast, pre-enforcement challenges to tax regulations or other binding IRS guidance are unusual, in large part because the AIA prevents suits to restrain the assessment or collection of tax.

So, tax administration rests somewhat uneasily within the broader framework of administrative law. To recap, the AIA generally pushes challenges to IRS rulemaking to traditional tax controversy venues, that is in Tax Court in deficiency cases (if the tax or penalty is subject to deficiency procedures) or federal courts in refund matters after having to fully pay and comply with the Flora full payment rule. Many other agencies gear up for challenges immediately after they promulgate binding rules rather than having to wait for enforcement proceedings. 

All of this comes into sharp focus in CIC. The IRS issued informal guidance (a Notice) without going through APA notice and comment. The Notice imposed additional reporting obligations on captive insurance companies and their advisors. Failure to comply with the requirements could trigger substantial civil penalties that are not subject to deficiency procedures. Failing to comply with the reporting theoretically could result in criminal sanctions for willful noncompliance. CIC, a manager of captive insurance companies, and an individual who also managed captives and provides tax advice to them, sued. They claimed that the Notice imposed substantial costs and that the IRS effectively promulgated legislative rules without complying with the APA’s notice and comment requirements. The plaintiffs sought to enjoin the IRS from enforcing the Notice and asked the district court to issue a declaratory judgment claiming that the notice was invalid.

The district court dismissed the suit, and the Sixth Circuit affirmed. That led to the petition for rehearing and last month’s brief but telling order accompanied by two concurring opinions and a dissent. In rejecting the petition for rehearing, one of the concurring opinions (authored by Judge Clay, who wrote the majority Sixth Circuit opinion), largely stuck to his guns and framed the issue as one that is covered by existing AIA precedent:

A suit seeking to preemptively challenge the regulatory aspect of a regulatory tax “necessarily” also seeks to preemptively challenge the tax aspect of a regulatory tax because invalidating the former would necessarily also invalidate the latter. Bob Jones Univ.,; see also NFIB, (“The present challenge to the mandate thus seeks to restrain the penalty’s future collection.” (emphasis added)). Otherwise, a taxpayer could simply “characterize” a challenge to a regulatory tax as a challenge to only the regulatory aspect of the tax and thereby evade the AIA. Fla. Bankers,. And “as the Supreme Court has explained time and again . . . the [AIA] is more than a pleading exercise.” see also RYO Machine, LLC v. U.S. Dep’t of Treasury, (6th Cir. 2012) (“Regardless of how the claim is labeled, the effect of an injunction here is to interfere with the assessment or collection of a tax. The plaintiff is not free to define the relief it seeks in terms permitted by the [AIA] while ignoring the ultimate deleterious effect such relief would have on the Government’s taxing ability.” (quotation and many citations omitted)).

Judge Sutton also concurred in the opinion denying the petition but his concurrence has a different flavor altogether.

(As an aside, this summer  I listened to the very entertaining Malcom Gladwell podcast Revisionist History. Season 4 Episode 1 (Puzzle Rush) and Episode 2 (The Tortoise and the Hare) feature Judge Sutton as one of the protagonists in Gladwell’s take down of the LSAT and the metrics for deciding who should gain entry into the nation’s elite law schools. Spoiler: Judge Sutton, who clerked for the late Justice Scalia and who attended the very respectable but not top five Moritz College of Law at THE Ohio State University is Gladwell’s poster child for why the LSAT and for that matter the way most law schools test students are in need of a major makeover).  

For one thing, Judge Sutton states that he agrees with the dissent’s view on the merits of whether the AIA prevents the courts from hearing the challenge to the Notice. Yet, Judge Sutton still believes that the case was not appropriate for an en banc hearing. His reason is that the Supreme Court, rather than the entire Sixth Circuit, should step in: 

[T] his case does not come to us on a fresh slate. Whatever we might do with the issue as an original matter is not the key question. As second-tier judges in a three-tier court system, our task is to figure out what the Supreme Court’s precedents mean in this setting. That is not easy because none of the Court’s precedents is precisely on point and because language from these one-off decisions leans in different directions.

Judge Sutton notes that the views are fairly well drawn on the issue—between the dissent in the panel opinion and the dissent in the denial of the petition by Judge Thapar, as well as the Florida Bankers DC Circuit opinion (authored by now Justice Kavanaugh) there is enough fodder for the Supreme Court to put together the seemingly (although not necessarily) contradictory approaches in the Direct Marketing and circuit court precedent on the reach of the AIA:

The last consideration is that we are not alone. The key complexity in this case—how to interpret Supreme Court decisions interpreting the statute—poses fewer difficulties for the Supreme Court than it does for us. In a dispute in which the Court’s decisions plausibly point in opposite directions, it’s worth asking what value we would add to the mix by en-bancing the case in order to create the very thing that generally prompts more review: a circuit split. As is, we have Judge Thapar’s dissental and Judge Nalbandian’s dissent at the panel stage on one side and Judge Clay’s opinion for the court on the other. These three opinions together with then-Judge Kavanaugh’s opinion say all there is to say about the issue from a lower court judge’s perspective. All of this leaves the Supreme Court in a well-informed position to resolve the point by action or inaction—either by granting review and reversing or by leaving the circuit court decisions in place.

The final part of the denial is Judge Thapar’s stinging dissent. Taking up the mantle of Judge Nalbandian’s dissent in the Sixth Circuit panel opinion, Judge Thapar discusses the differing legal takes on the reach of the AIA (and whether challenges to reporting requirements that are backstopped by penalties really count as a challenge to a tax rather than a challenge to the reporting requirement), but he also ups the rhetoric around how the majority approach to the AIA is out of sorts with broader principles of fairness. He warns of the parade of horribles associated with unchecked IRS power and a read of the AIA that requires parties to violate tax rules (and possibly have to go to jail) to get their day in court. For good measure, he points to how the IRS (at Congress’ direction) has taken on a more expansive role in society beyond collecting revenues.  This mission creep of the IRS makes the exceptional approach to the timing of when agency guidance is subject to challenge less justifiable. Absence of a right to pre-enforcement challenge, according to Judge Thapar, is inconsistent with principles of our constitutional system of checks and balances:

The Founders gave Congress the “Power To lay and collect Taxes.” U.S. Const. art. I , § 8 , cl. 1. They limited this power to Congress because they understood full well that “the power to tax involves the power to destroy.” M’Culloch v. Maryland, 17 U.S. 316 ,431 (1819) (Marshall, C.J.). But today, the IRS (an executive agency) exercises the power to tax and to destroy, in ways that the Founders never would have envisioned. E.g., In re United States ( NorCal Tea Party Patriots ), 817 F.3d 953 (6th Cir. 2016). Courts accepted this departure from constitutional principle on the promise that Congress would still constrain agency power through statutes like the Administrative Procedure Act. 5 U.S.C. § 500 et seq. We now see what many feared: that promise is often illusory.
 

Conclusion

Underlying the technical legal issues surrounding the reach of the AIA are fundamental policy questions concerning the power that the IRS has to issue guidance that is effectively and at times practically absent from meaningful court review. There are many good reasons for rethinking the path that requires taxpayers to not comply before having an institutional check on the IRS’s fidelity to the APA—especially if the challenged tax or penalty is not subject to deficiency procedures. As Judge Clay notes in his opinion affirming the denial of the petition, these policy questions raise issues that seem to call for a legislative fix. I discussed the need for possible legislation in a post earlier this year in the post Is it Time to Reconsider When IRS Guidance is Subject to Court Review?  In the absence of legislation, the opinions accompanying the denial of the request for en banc provide a strong signal that this issue is headed to the Supreme Court. CIC may be the vehicle that gets it there.

Supreme Court Reaffirms that Agencies Are Not Entitled to Chevron Deference on Their Interpretations of Judicial Review Issues

There have been occasions over the years where I have seen Collection Due Process or innocent spouse regulations place indirect limits on what the Tax Court may do.  For example, under section 6015(g)(3), refunds can be awarded as part of relief under subsections (b) and (f), but not (c).  Regulation § 1.6015-4 further provides that subsection (f) (which applies when relief is not available under subsections (b) or (c)) may not be used to circumvent the limitation of subsection (g)(3) of no refunds under (c):  “Therefore, relief is not available under [subsection (f)] to obtain a refund of liabilities paid for which the requesting spouse would otherwise qualify for relief under [subsection (c)].”  These are indirect limits on the Tax Court’s power, since they initially only limit what the IRS may do by way of awarding a refund under subsection (f).  But, I have wondered about whether such regulations deserve Chevron deference because they also impinge on the Tax Court’s powers.  In an amicus brief that Keith and I filed in a case challenging this particular regulation (but where the Court ultimately ruled so that it did not have to reach the regulation validity issue), we argued that Chevron deference should not be given to it – pointing to Supreme Court authority saying that deference is not owed to agency views as to judicial review matters.

I am still not sure that I am right as to no Chevron deference to such indirect limitations, but the Supreme Court recently decided a case, Smith v. Berryhill, 587 U. S. __ (2019) (May 28, 2019), where it repeated the rule that agencies are not entitled to Chevron deference as to their views on judicial review.  Because many are not familiar with this exception to Chevron deference, I thought it would be useful to quote what the Court said in this recent case.  

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The issue in the case was whether certain Social Security disability benefits rulings are subject to judicial review.  The rulings were those of an internal Appeals Council, holding that benefits applicant Mr. Smith’s appeal to that Council was untimely.  The Council rulings were made after a full hearing on the merits before an administrative law judge. Mr. Smith then sued for judicial review, and lost at both the district court and the court of appeals. 

In the Supreme Court, the government reversed its prior position and agreed that claimant Smith was entitled to judicial review of the Appeals Council’s determination regarding the timeliness of his administrative appeal. The Court appointed an amicus to argue the government’s prior position – that the rulings were not “final” under the Social Security Act, and therefore not subject to judicial review. In its argument, the amicus contended that the Court should give Chevron deference to the position of the agency (prior to its switch in the case) that these rulings were not “final” agency decisions.  Rejecting Chevron deference to this prior regulatory interpretation, the Court wrote:

Chevron deference “‘is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.’” King v. Burwell, 576 U. S. ___, ___ (2015) (slip op., at 8). The scope of judicial review, meanwhile, is hardly the kind of question that the Court presumes that Congress implicitly delegated to an agency.

Indeed, roughly six years after Chevron was decided, the Court declined to give Chevron deference to the Secretary of Labor’s interpretation of a federal statute that would have foreclosed private rights of action under certain circumstances. See Adams Fruit Co. v. Barrett, 494 U. S. 638, 649–650 (1990). As the Court explained, Congress’ having created “a role for the Department of Labor in administering the statute” did “not empower the Secretary to regulate the scope of the judicial power vested by the statute.” Id., at 650. Rather, “[a]lthough agency determinations within the scope of delegated authority are entitled to deference, it is fundamental ‘that an agency may not bootstrap itself into an area in which it has no jurisdiction.’” Ibid. Here, too, while Congress has empowered the SSA to create a scheme of administrative exhaustion, see Sims, 530 U. S., at 106, Congress did not delegate to the SSA the power to determine “the scope of the judicial power vested by” §405(g) or to determine conclusively when its dictates are satisfied. Adams Fruit Co., 494 U. S., at 650. Consequently, having concluded that Smith and the Government have the better reading of §405(g), we need go no further.


Slip op. at 14.

Of course, some justices on the Supreme Court currently think that Chevron deference should be abandoned entirely.  But, until it is (if ever), tax practitioners may consider whether to raise this exception to Chevron when litigating the validity of regulations that directly or indirectly impinge on the Tax Court’s powers.

AJAC and the APA, Designated Orders 4/8/2019 – 4/12/19

Did the Appeals’ Judicial Approach and Culture (AJAC) Project turn conversations with Appeals into adjudications governed by the Administrative Procedure Act (APA) and subject to judicial review by the Tax Court? A petitioner in a designated order during the week of April 8, 2019 (Docket No. 18021-13, EZ Lube v. CIR (order here)) thinks so and Tax Court finds itself addressing its relationship with the APA yet again.

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I spent time reviewing the history of the APA’s relationship with the IRS as well as the somewhat recent Tax Court cases that have addressed it (including Ax and Altera). The argument put forth by petitioner in this designated order appears to be novel – but ultimately the Tax Court’s response is similar to its holding in Ax, with perhaps even more insistence on the Tax Court’s jurisdictional limitations.  

Most recently, the Ninth Circuit withdrew its decision in the appeal of Altera, and we wait to see if it decides again to overturn the Tax Court’s decision which held that the IRS violated the APA when issuing regulations under section 482. For the most recent PT update on the case, see Stu Bassin’s post here.

The case in which this order was designated is also appealable to the Ninth Circuit. Is petitioner teeing up another APA argument before the Ninth Circuit depending on what happens in Altera? That’s a stretch – since petitioner is asking the Court to treat a phone call with Appeals as a adjudication – but it is possible that something more is going on than what is conveyed in the order.

First, let me provide some background: Petitioner is an LLC taxed as TEFRA partnership; it filed bankruptcy in 2008 but then reorganized. Part of the reorganization involved the conversion of debt that Goldman Sachs (or entities controlled by it) had in the old partnership into a controlling equity interest in the new partnership.  After the reorganization, the partnership filed tax returns taking the position that the partnership was terminated on the date of the reorganization because more than 50% of the partnership interests had been ousted through what was in substance a foreclosure of the old partners’ interests. Accordingly, the old partners treated the reorganization as a deemed sale of their property and reported $22 million in gain.

Then, in 2011, reorganized EZ Lube filed an Administrative Adjustment Request (AAR) taking a position contrary to the former partners’ previously filed returns. The position taken in the AAR was that the partnership was not technically terminated, and instead the exchange of debt for equity created $80 million in cancelled debt income.

The IRS agreed with the AAR and issued a final partnership administrative adjustment (FPAA) reflecting that the partners’ originally filed returns were wrong. But one of the former partners liked the old characterization so in response to the FPAA, he petitioned the Tax Court.

In due course the case was assigned to Appeals and this is where things start to get messy. The Appeals officer stated, over the phone, that she agreed with the former partner. In other words, that the FPAA should be conceded. The Appeals Officer’s manager concurred but explained that they would need to consult with Appeals National Office before the agreement could be conveyed in a TEFRA settlement.  Appeals National Office did not agree with the Appeals Officer’s position, so the case did not settle.

Petitioner argues that the phone conversation with the Appeals Officer was a determination and should end the case. The basis for petitioner’s argument is that the IRS’s Appeals Judicial Approach and Culture initiative transformed Appeals to a quasi-judicial part of the IRS which listens to each side and then issues a decision (like a court) instead of negotiating settlements to end litigation.

The IRS does not dispute that the phone call occurred, nor does it dispute the substance of what the Appeals Officer said, but it does dispute that the phone call was a determination. The IRS acknowledges that AJAC may have changed how Appeals processes cases, but maintains it did not set up a system of informal agency adjudication followed by judicial review as those terms are commonly used in administrative law.  

The Court tasks itself to answer the only question it sees fit for summary judgment, which is: what is the proper characterization of what the Appeals officer said?

The Court can decide, as it has in other cases, whether the parties actually reached a settlement by applying contract law and by making any subsidiary findings of fact. But petitioner argues that the call was not a settlement, it was a determination and the Court has jurisdiction to review such determinations.

This is where the Court insists on its jurisdictional limitations and goes on to review all the different code sections that grant it jurisdiction. It does not find anything in the Code that allows it to review determinations by Appeals in TEFRA, or deficiency, cases.

The petitioner agrees that nothing in the Code provides the Court with jurisdiction to review Appeals determinations in deficiency cases. Instead petitioner argues that the default rules of the APA give the Court jurisdiction, because the Appeals Officer was the presiding agency employee and she had the authority to make a recommended or initial decision as prescribed by 5 U.S.C. 554 and 557, and the Appeals Officer’s decision is subject to judicial review under 5 U.S.C. 702.

This is where the Tax Court revisits some of the arguments made in Ax – that the Internal Revenue Code assigns Tax Court jurisdiction. This arrangement is permissible under what the APA calls “special statutory review proceedings” under 5 U.S.C. 703. See Les’s post here and Stephanie Hoffer and Christopher J. Walker’s post here for more information.

If petitioner seeks review under default rules of the APA, the Court’s scope of review would be limited to the administrative record with an abuse of discretion standard. This creates two different standards for TEFRA cases, and the Court finds this impossible to reconcile.

The reality is that when a petitioner is unhappy with a decision made by Appeals in a docketed case, they can bring the case before the Court. It seems as though petitioner in this case is trying to treat a decision made by the Appeals Officer assigned to the case as something different than a decision made by Appeals National Office – but a decision has not been rendered until a decision document is issued and executed by both parties. The Court points out that phone calls can be a relevant fact in determining whether the parties have reached a settlement, but it doesn’t mean the Court has the jurisdiction to review phone calls. Petitioner says phone call itself is of jurisdictional importance, but if that’s the case, it is the District Court, not the Tax Court, that is the appropriate venue to review it.

Is this a situation where petitioner is unhappy because there was a glimmer of hope that the case would go his way which was ultimately destroyed by the National office? Or is something more going on here?  AJAC is called a project and caused changes to the IRM. It’s not a regulation or even guidance provided to taxpayers – rather it is a policy for IRS employees to follow and seems to be a permissible process and within the agency’s discretion to use. But it’s not even AJAC itself that petitioner seems to have a problem with, instead petitioner’s problem lies with the difference between the appeals officer’s position and the National Office’s position on the case.

The Court denies petitioner’s summary judgment motion and orders the parties to file a status report to identify any remaining issues and explain whether a trial will be necessary.

Other Orders Designated

There were no designated orders during the week of April 1, which is why there is no April post from Patrick. The Court seemingly got caught up during the following week and there were nine other orders designated during my week. In my opinion, they were less notable, but I’ve briefly summarized them here:

  • Docket No. 20237-16, Leon Max v. CIR (order here): the Court reviews the sufficiency of petitioner’s answers and objections on certain requests for admissions in a qualified research expenditure case.
  • Docket No. 24493-18, James H. Figueroa v. CIR (order here): the Court grants respondent’s motion to dismiss a pro se petitioner for failure to state a claim upon which relief can be granted.
  • Docket No. 5956-18, Rhonda Howard v. CIR (order here): the Court grants a motion to dismiss for failure to prosecute in a case with a nonresponsive petitioner.
  • Docket No. 12097-16, Trilogy, Inc & Subsidiaries v. CIR (order here): the Court grants petitioner’s motion in part to review the sufficiency of IRS’s responses to eight requests for admissions.
  • Docket No. 1092-18S, Pedro Manzueta v. CIR (order here): this is a bench opinion disallowing overstated schedule C deductions, dependency exemptions, the earned income credit, and the child tax credit.
  • Docket No. 13275-18S, Anthony S. Ventura & Suzanne M. Ventura v. CIR (order here): the Court grants a motion to dismiss for lack of jurisdiction due to a petition filed after 90 days.
  • Docket No. 14213-18L, Mohamed A. Hadid v. CIR (order here): a bench opinion finding no abuse of discretion and sustaining a levy in a case where the taxpayer proposed $30K/month installment agreement on condition that an NFTL not be filed, but the financial forms did not demonstrate that petitioner had the ability to pay that amount each month.
  • Docket No. 5323-18L, Percy Young v. CIR (order here): the Court grants respondent’s motion to dismiss in a CDP case where petitioner did not provide any information.
  • Docket No. 5323-18L, Ruben T. Varela v. CIR (order here): the Court denies petitioner’s motion for leave to file second amended petition.

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

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.

 

Challenges to Regulations Update: Government Withdraws Appeal in Chamber of Commerce and New Oral Argument Set for Altera

One of the more interesting cases from last year was Chamber of Commerce v IRS, where a federal district court in Texas invalidated temporary regulations that addressed inversion transactions. The case raised a number of interesting procedural issues, including the reach of the Anti-Injunction Act and the relationship between Section 7805(e) and the APA.

Not surprisingly, the government appealed Chamber of Commerce. Over the summer, Treasury issued final regs that were substantively similar to the temporary regs that the district court struck down, and then the government filed a motion with the Fifth Circuit to dismiss its appeal with prejudice.

Last month the Fifth Circuit granted the motion.

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The outcome in Chamber of Commerce illustrates the difficulty that taxpayers face when challenging regulations for process violations (i.e., failing to subject guidance to notice and comment) and in particular challenges to temporary regulations. After all, Treasury can (and did in this case) issue final regs, and Section 7805(b) provides that those regs take effect retroactively upon the earlier of the “date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register” or “the date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.”

Chamber of Commerce is to be contrasted with challenges to regs that focus on the substantive way that the regulations interpret a statute; for example, earlier this summer the DC Circuit reversed the Tax Court in Good Fortune Shipping.There, the DC Circuit applied Chevron Step Two and held that Treasury regulations that categorically restricted an exemption to foreign owners of bearer shares unreasonably interpreted the Internal Revenue Code. The taxpayer in Good Fortune challenged the reg the old fashioned way– in a deficiency case as contrasted with the pre-enforcement challenge in Chamber of Commerce.

Probably the most watched procedural case of the year, Altera v Commissioner, also tees up a procedural challenge to regs, and like Good Fortune is also situated in a deficiency case. One of the main arguments that the taxpayer is raising in Altera is a cousin to the challenge in Chamber of Commerce; that is the taxpayer is challenging the way that the reg was promulgated (and the case also involves a Chevron Step Two challenge). In particular, the issue turns on whether the agency action [the regulation] is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 USC 706(2)(A). Altera involves Treasury’s compliance with § 706 of the APA as expanded on in the 1983 Supreme Court State Farm’s “reasoned decisionmaking” understanding of the clause prohibiting “arbitrary” or “capricious” agency action.

As Keith flagged a few weeks ago, after the Ninth Circuit reversed the Tax Court and found that Treasury did enough in its rulemaking and held that the cost-sharing regulation was valid, the Ninth Circuit withdrew the opinion. The Ninth Circuit has now scheduled a new oral argument in Altera for October 16.

Stay tuned.

Ninth Circuit’s Opinion in Altera Withdrawn

Susan Morse and Steve Shay wrote last week about the significant Ninth Circuit opinion reversing the fully reviewed and unanimously decided Tax Court case in Altera. Earlier today the Ninth Circuit withdrew the July 24th opinion to allow time for a newly reconstituted panel to confer about the appeal.  The order occurred because Judge Stephen Reinhardt, one of the judges in the majority in the 2-1 decision, passed away five months after oral argument and before the publication of the opinion.

On August 2 the court issued an order selecting Judge Susan P. Graber to replace the late Judge Reinhardt on the three-judge panel in the case citing chapter 3.2(h) of the Ninth Circuit General Orders. This section provides that if a member of a three-judge panel becomes unavailable for certain stated reasons , including death, “the Clerk shall draw a replacement as needed, utilizing a list of active judges randomly drawn by lot.”

These events provide even more excitement for a case that did not need more procedural turns to draw attention to its importance.