Storm at SEC Over Appointments Clause Violations Concerning Its ALJs and Possible Implications as to Circular 230 ALJs , Part V

August 1, 2017 by 2 Comments
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Frequent guest poster Carl Smith updates us on important developments concerning SEC ALJs and reminds readers of possible implications for tax procedure. Les

Since September 2015, I have been following and posting about litigation concerning whether SEC ALJs need to be appointed in accordance with the Constitution’s Appointments Clause.  They currently are not appointed.  The SEC doesn’t think its ALJs need to be appointed because arguably its ALJs do not exercise final authority, since the SEC can review their rulings mostly de novo.

In my last post, I noted that the Tenth Circuit has held that these ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit has held that these ALJs need not be appointed. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).  I pointed out that, to see if it could resolve the Circuit split short of Supreme Court review, the D.C. Circuit agreed to rehear Lucia en banc.  That hearing took place on May 24, 2017.  But, the Circuit split evenly, so on June 26, 2017, it issued an order announcing that it split.  There is no opinion as a result.  This is to report that on July 21, 2017, Lucia filed a petition for cert. I fully expect the Supreme Court to grant that petition.

For more background on these SEC cases and why this may have an impact on ALJs that the Treasury uses to try Circular 230 violations (who also may not be properly appointed), see my prior posts here, here, here, and here.

This all boils down to a fight over the meaning of a part of Freytag v. Commissioner, 501 U.S. 868 (1991).  In Freytag,  the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges (STJs) because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  Before reaching these rulings, the Supreme Court first had to decide whether the STJs are “Officers” of the United States who need to be appointed under the Clause or are mere government workers, who don’t need to be appointed.  This question turned on the vague standard the Supreme Court has used in recent years to identify Officers – i.e., individuals who “exercise significant authority on behalf of the United States”.

In Freytag, the Supreme Court held that because of the judge-like duties of the STJs, they are Officers needing appointment under the Clause.  In going through a recitation of STJ duties and powers, the Court, at the end, noted that in some cases (under what is now section 7443A(b)(1)-(5)) STJs can make rulings that are final and not reviewable by regular Tax Court judges.  See section 7443A(c).  In deciding whether SEC ALJs are Officers, the D.C. Circuit and Tenth Circuit have split over whether the mention of these final decision instances for Tax Court STJs constituted a holding by the Supreme Court that, in the absence of final authority, no individual can be an Officer.  The Supreme Court in Lucia (if it grants cert.) will have to resolve this split over what it meant by the finality observation in Freytag.

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Carlton Smith About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.

Comments

  1. Carl Smith says
    August 2, 2017 at 7:46 am

    I just learned that on July 24, the SG obtained an extension of time to file a cert. petition in Bandimere to August 31. So, this makes even more likely the Supreme Court granting cert. in one or both of these SEC ALJ cases.

    Reply
  2. Steven Gremminger says
    August 2, 2017 at 4:20 pm

    Anyone who has ever practiced (tried a case) before an ALJ will understand the 10 Cir. concern. The judges are part of the agency– they park in the garage, eat in the cafeteria, kibbutz with the agency employees. Usually the best you can do with an ALJ is build a record that then goes to an Article III judge. Which costs the client a boatload of money.

    The ALJ system is out of control, should be abandoned or modified to require confirmation.

    The 10 Cir. holding is instructive.

    An important agency like IRS should have a system where adjudication is meaningful. It is quite appropriate that, as Keith says, IRS is watching what is going on.

    The reason why the agencies/departments do not like the 10 Cir view? Gee, guess it is that there will be fair confirmation proceedings and public hearings. Not sure why else there would be a problem.

    Reply

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