A Few More Words on Ax and the Future of Tax Court Exceptionalism

Today’s post is a follow up post discussing Ax v Commissioner. The original post has generated some thoughtful comments, and today Professors Stephanie Hoffer  & Christopher J. Walker from the Michael E. Moritz College of Law at Ohio State discuss Chenery and why perhaps Ax opens the door for a differing take on the APA in other types of cases.

Note we apologize if subscribers also received this post earlier today; our site has been having some technical issues. Les

As Les notes in his great write-up, the Tax Court reached the right outcome in this week’s Ax decision. We write here to add just a few words about Chenery and the Court’s use of § 703 (but not § 706) of the Administrative Procedure Act (“APA”).


In The Death of Tax Court Exceptionalism, 99 Minn. L. Rev. 221 (2014), we don’t tackle the part of Chenery raised by the petitioners in Ax—that agency reasons must have been raised at the agency decision-making level and not for the first time in court. But we do tackle another core principle from the Chenery decisions: the ordinary remand rule. That is, when a court concludes that an agency’s decision is erroneous, the ordinary rule is to remand to the agency to consider the issue anew (as opposed to the court deciding the issue itself).

These two Chenery principles are intertwined, and the analysis used to determine whether one applies in a given situation is arguably the same for either. Here’s what we had to say about the remand rule and deficiency actions (at 266-67, footnotes omitted):

This [ordinary remand rule] does not mean, however, that the Tax Court must remand every erroneous IRS determination to the IRS for reconsideration. As the ordinary remand rule suggests, it is the “ordinary” rule subject to exceptions for “rare circumstances.” These rare circumstances include when there are minor errors as to subsidiary issues that do not affect the agency’s ultimate decision or when the agency lacks authority to decide the issue. And there is another exception of particular relevance here: when APA § 706(2)(F) applies and “the facts are subject to trial de novo by the reviewing court.” In particular, in explicating the ordinary remand rule and how it is “the proper course, except in rare circumstances,” the Supreme Court has noted that “[t]he reviewing court is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclusions based on such an inquiry.” Logically, then, if the reviewing court is empowered to conduct a trial de novo, the court is not required to remand (though it retains discretion to do so) because de novo review allows the court to take the unusual step of substituting its judgment for that of the agency.

In light of these principles, it becomes clear that the Tax Court need not remand when it conducts a trial de novo. As explained in Part II.A, the Tax Court conducts a trial de novo of an IRS tax deficiency determination in any proceeding in which the underlying deficiency determination is challenged. (That said, as discussed in Part III, in some circumstances policy considerations may weigh in favor of the Tax Court exercising its discretion to remand even some de novo redeterminations to the IRS.) But when the trial de novo provisions of APA § 706(2)(F) do not apply, the Tax Court should adhere to the ordinary remand rule.

In other words, as Les notes in his post, the Tax Court seems to have gotten the outcome right (that Chenery does not apply in deficiency actions in Tax Court), but that’s not because the APA does not apply. That’s the result you get after applying the APA.

In fact, the Tax Court actually did apply the APA in Ax, although it stopped short of acknowledging that it is a reviewing court for purposes of the APA. In particular, the Court relied on APA § 703, which describes the form and venue of judicial review of an agency action, to support the position that it is not bound by APA § 706 in deficiency actions. Section 703 provides that the appropriate form of judicial review of an agency action is “the special statutory review proceeding relevant to the subject matter in a court specified by statute,” or, if none, “any applicable form of legal action.” The Court reasoned that because IRC § 6213 and other sections mentioned by Les describe a “special statutory review proceeding,” APA § 706, which provides procedural defaults, does not apply to redeterminations of deficiency. (As discussed above and as we flesh out more fully in our paper, our position is that APA § 706 does apply to deficiency actions, but that deficiency actions are “trial de novo” proceedings under APA § 706(2)(F), and thus Chenery’s limitations do not apply.)

Notably, although the Court mentions ODwyer’soverly broad holding that the Tax Court is not subject to the APA, its reference to the greying case is almost a throwaway in light of the Court’s APA analysis. The Court takes pains to note (at 18) that its decision to look beyond the IRS’s notice of deficiency “does not violate administrative law principles or conventional standards of judicial review.” It is not clear what the court means by “conventional standards of judicial review,” but its later discussion of Mayo indicates that it is working within the framework provided by the APA (albeit within an APA-provided exception to the default provisions on judicial review). There, the Court notes (at 19) that Mayo did not consign judicial review of IRS actions to a “single one-size-fits-all paradigm for standard and scope of review,” but rather preserved (indeed, in our view, mandated) the application of APA § 703 (the Court cites § 704 here, but it is clearly a typographical error).

In its conclusion, the Court carefully notes (at 20) that its decision “in a deficiency case” is not at odds with either Chenery or APA § 706. The Court’s limitation of its reasoning to deficiency cases suggests that the Court may be rethinking the role of the APA in its review of IRS decision-making. Although the Court’s position on the issue of deficiency is entrenched, there is plenty in the law to suggest that its stance is not in error, and while Ax reads like an anti-APA decision at first blush, the Court’s careful use of APA § 703 in relation to § 706 perhaps foreshadows a different result for petitions related to matters other than deficiency. In short, nothing in Ax precludes the Court from moving away from exceptionalism and toward normalization with its sister courts though full-fledged adoption of the APA provisions on judicial review.



Kuretski, the Tax Court, and the Administrative Procedure Act

Today we welcome back Professors Stephanie Hoffer (Ohio State) & Christopher J. Walker (Ohio State). Professor Hoffer and Walker previously wrote a two-part post in Procedurally Taxing on their important law review article The Death of Tax Court Exceptionalism (forthcoming Minnesota Law Review), considering the relationship of the APA to the Tax Court. In this post, Professors Walker and Hoffer analyze the recent Kuretski case and respond to Pat Smith’s Sunday’s op-ed and Professor Kristin Hickman’s Monday’s op-ed that appeared in TaxProf. Les

Friday’s decision in Kuretski v. Commissioner is perhaps the first major opinion penned by Judge Sri Srinivasan—a recent Obama appointee considered by many to be on the short list for the Supreme Court. In a well-written opinion, the D.C. Circuit rejects a constitutional challenge to the President’s removal power of judges on the United States Tax Court. To reach this conclusion, the court has to grapple with the Tax Court’s puzzling position in the modern administrative state, concluding that the Tax Court is not an Article III (judicial branch) court but a court established under Article I (legislative branch) that actually exercises Article II (executive branch) powers. Or as Judge Srinivasan writes (at 20) for the court:

 We have explained that Tax Court judges do not exercise the ‘judicial power of the United States’ pursuant to Article III. We have also explained that Congress’s establishment of the Tax Court as an Article I legislative court did not transfer the Tax Court to the Legislative Branch. It follows that the Tax Court exercises its authority as part of the Executive Branch.

No doubt many tax and administrative law professors will weigh in on the constitutional issues (early coverage here, here, and here). Here, however, we focus on Kuretski’s impact on the relationship between the Tax Court and the Administrative Procedure Act (“APA”). Patrick Smith, for instance, worries that Kuretski could open the door for the argument that “APA judicial review provisions simply do not apply in Tax Court proceedings.” But we agree with the contrary position reached by Kristin Hickman (Minnesota) and write separately to show our math for this conclusion.


At the outset, it is important to underscore that Smith’s worry is already a reality. As we explain in a forthcoming paper, the Tax Court has declared that “[t]he APA has never governed proceedings in the Court (or in the Board of Tax Appeals).” In other words, the Tax Court refuses to apply the APA’s default standard (abuse of discretion) and scope (administrative record) of review. Instead, it considers the default in both contexts to be de novo, and only departs from de novo review when it determines that the Internal Revenue Code suggests more deferential review.

This approach contradicts the text of the APA. As we explain in Part II of our paper, the APA establishes the default standards for judicial review of federal agency action. The APA defines “agency” as “each authority of the Government of the United States, whether or not it is within or subject to review by another agency, but does not include” among other entities Congress and “the courts of the United States” (5 U.S.C. § 701(b)(1)).   The APA judicial review standards apply to any “reviewing court” of agency action (5 U.S.C. § 706). The IRS, an executive agency within the Treasury Department, is plainly an “agency” for purposes of the APA. And while the Tax Court used to be an agency before the enactment of the APA, as of 1969 it is a “court of record” “established[] under article I of the Constitution of the United States” (26 U.S.C. § 7441). For purposes of the APA, it is thus “a court of the United States” (5 U.S.C. § 702; accord 5 U.S.C. § 701(b)(1)) and, for its review of IRS agency actions, a “reviewing court” subject to the APA’s judicial review provisions (5 U.S.C. § 706).

Although the statutory language appears plain, an argument could be advanced that only Article III courts—not Article I courts—can be “reviewing courts” for purposes of the APA. After all, the Constitution vests “judicial power” in life-tenured Article III judges, not term-limited Article I judges. The text of the APA, however, makes no distinction between Article I and Article III courts, and the APA governs other Article I courts—including the Court of Federal Claims—when they review agency action.

The Supreme Court ‘s decision in Freytag is illustrative. There, the Court rejected an Appointments Clause challenge to the Tax Court Chief Judge’s ability to appoint special trial tax judges. The Appointments Clause allows Congress to vest appointment powers of such inferior officers in one of three entities: “in the President alone, in the Courts of Law, or in the Heads of Departments” (U.S. Const., Art. II, § 2, cl. 2). The parties in Freytag advanced competing interpretations: the Tax Court is an executive department where the Chief Judge as Department Head has power to appoint inferior officers or, alternatively, neither an executive department nor a court and thus constitutionally forbidden from appointing inferior officers. The Freytag Court rejected both positions and instead held that the Tax Court is a “Court[] of Law” under the Appointments Clause. Importantly, the Court noted that “[t]he text of the Clause does not limit the ‘Courts of Law’ to those courts established under Article III of the Constitution” and that “[t]he Tax Court exercises judicial, rather than executive, legislative, or administrative, power.”

Similarly, although Kuretski’s conclusion (at 20) that the Tax Court “exercises its authority as part of the Executive Branch” may be in tension with Freytag, it should have no bearing on the APA’s definitions of “agency” and “reviewing court.” Indeed, Kuretski’s reasoning suggests as much (at 20-21): “[W]e conclude that the Tax Court’s status as a ‘Court of Law’—and its exercise of ‘judicial power’—for Appointments Clause purposes under Freytag casts no doubt on the constitutionality of the President’s authority to remove Tax Court judges.” As a matter of statutory interpretation, Congress can define “court” differently for APA purposes than the Constitution does for appointment or removal purposes. “After all,” as Hickman points out, “if the Affordable Care Act penalty can be a tax for constitutional purposes and yet not a tax under § 7421(a) of the Internal Revenue Code (see NFIB v. Sebelius), then the Tax Court surely can bear varying labels for different purposes as well.”

If there were any lingering doubts about the impact of Kuretski on the Tax Court’s relationship to the APA, Judge Srinivasan puts them to rest—albeit in dicta—near the end of the opinion. Citing a district court decision that held that the Tax Court is a “court of the United States” and not an “agency” for purposes of the APA, he notes (at 26) that “Congress, in establishing those entities [the Tax Court and the Court of Appeals for the Armed Forces] as a ‘court’ rather than an ‘agency,’ perhaps also exempted them from statutes that apply solely to executive ‘agencies.’”

The Somewhat Counterintuitive Policy Case Against Tax Court Exceptionalism

Today’s guest post is the second in a two-part series by Ohio State law professors Stephanie Hoffer and Christopher Walker.  These posts are based on their paper The Death of Tax Court Exceptionalism, which is forthcoming in the Minnesota Law Review. My welcome and the initial post is available here.

The policy issues that Professors Hoffer and Walker raise fundamental issues concerning the Tax Court’s institutional relationship with the IRS. The main argument, that a less deferential scope and standard of review may in fact contribute to greater individual protections, is similar to an argument I made in a series of articles I wrote for the Houston Law Review, Tax Notes and the Community Tax Law Report, where I criticize the Tax Court’s approach to CDP review:

The Tax Court’s approach…is arguably taxpayer friendly, as the consideration of evidence not before the IRS enabled the Tax Court to reach a conclusion different from the IRS’s. This in turn reflects the Tax Court’s historical concern with providing itself with an opportunity to determine a correct tax liability, notwithstanding any agency practices prior to a tax’s assessment…. Yet, a failure to abide by the APA’s general approach toward reviewing only material before an agency (called the “On the Record” rule in administrative law) creates some risk that the IRS will take less care with its procedures at the hearing-level. For example, the On the Record rule creates incentives for the agency to conduct adequate procedures and provide sufficient explanations, so that a reviewing court will be able to perform its task of considering what an agency has decided, and the decision’s rationale. Courts following the On the Record rule may conclude that the agency has acted improperly, through a failure to consider relevant material or explain actions rationally, which should result in a remand and hopefully corrective agency practices. Often, better agency practice initially, compelled by the searching light of judicial review into what the agency did, provides more meaningful taxpayer protections than the possibility of more searching review.

Professors Hoffer and Walker expand and improve my points that I made and bring into sharper focus the issue’s policy implications. – Les

In the first post discussing our paper The Death of Tax Court Exceptionalism, we introduced the legal case against Tax Court exceptionalism and why the Tax Court should be bound by the judicial-review provisions of the Administrative Procedure Act (“APA”).  The legal case should encourage the Tax Court to reverse course and consider itself bound by the APA’s judicial-review provisions—just like every other court that reviews federal agency action.  But the policy case reinforces the legal case and suggests additional reasons why the Tax Court should embrace the APA and traditional administrative law principles.

At the outset it is important to frame this policy discussion against the backdrop of the Tax Court’s likely concerns about deferring to IRS determinations.  Consistency and equity are among the most important policy goals in tax administration as well as in the modern administrative state more generally.  At first blush, the Tax Court’s use of less deferential review standards would seem to advance these goals because more searching judicial review of IRS actions allows the court to correct errors that would otherwise go uncorrected when reviewing on the administrative record and/or for abuse of discretion.


Indeed, the Tax Court’s concerns may be heightened in the context of less sophisticated taxpayers who attempt to navigate the system without representation.  The Tax Court’s current de novo approach may appear to best protect the unrepresented taxpayer.  In contrast, by confining review to abuse of discretion and prohibiting consideration of evidence outside of the administrative record, the APA limits a court’s ability to grant relief when it feels such relief may be merited.  Moreover, by following traditional administrative law doctrines, the Tax Court may be required to remand cases to the IRS when it finds error instead of just granting the relief outright.  The Tax Court may be reluctant to adhere to this ordinary remand rule—indeed, the Tax Court currently does not remand matters except in narrow circumstances—when it believes the taxpayer is entitled to relief and remand would unduly delay or, worse, preclude relief because the taxpayer would get lost in the process on remand.

Despite the common-sense appeal of more searching review, in Part III of our paper we advance a novel and somewhat counterintuitive argument:  the APA’s default regime is actually more effective at addressing these concerns by allowing the Tax Court to have a more systemic effect on IRS decision-making.  In other words, the policy objectives of consistency, efficiency, and equity (as well as leveraging agency expertise) are better advanced if the Tax Court only considers evidence in the administrative record and reviews for abuse of discretion to determine whether the IRS has engaged in rational decision-making.  In the event the facts in the record or the reasons contained in the IRS’s underlying ruling are found lacking, the Tax Court should identify those errors and remand to the IRS for reconsideration in light of those errors.

Why would this more deferential approach to judicial review actually be better for consistent, efficient, and equitable tax administration?  Because the status quo provides little comfort for the vast majority of claimants who do not bring the agency’s determination to the Tax Court and therefore receive no judicial review.  The Tax Court has no power to correct mistakes made in these cases, and if one assumes that the IRS has a similarly high error rate in unreviewed cases (and many unreviewed cases involve less sophisticated taxpayers), its incorrect assessments of income and ability to pay directly affect the equitable distribution of the cost of federal government.  By forcing the agency to improve its decision-making process—including better development of the administrative record and more well-reasoned agency rulings—the Tax Court can have a more profound effect on IRS processes and outcomes.

By abandoning tax exceptionalism, the Tax Court also can take advantage of the wealth of judicial experience in other administrative law contexts.  As detailed in Part III.B of our paper, courts have developed judicial doctrines and practices in other administrative law contexts to have a greater system-wide effect on agency decision-making.  For instance, as one of us uncovered in an empirical study on judicial review of immigration adjudications, courts have developed a number of tools that help alleviate the policy considerations against deferential review of agency action by enhancing their dialogue with agencies on remand.  These tools include: requesting notice of the agency’s decision on remand; retaining jurisdiction of the petition; setting a timeline for remand; providing hypothetical solutions; certifying issues for remand; obtaining concessions from the government at argument or otherwise during judicial review; and suggesting the transfer of the matter to another agency adjudicator.

By using these tools and developing more of its own, the Tax Court can begin a richer dialogue with the IRS—a dialogue aimed at not only improving the IRS’s procedures and decision-making in the case remanded but also in the agency overall.  Such dialogue is critical to improving the treatment of less sophisticated taxpayers—many of whom, unrepresented, do not even seek judicial review of the IRS’s adverse determinations.  That the vast majority of unrepresented taxpayers never seek judicial review of adverse decisions should encourage the Tax Court to engage in a richer dialogue with the IRS via the ordinary remand rule and these dialogue-enhancing tools in order to have a more systemic effect on the quality of administrative adjudication that takes place at the IRS.  It’s time as a policy matter for the Tax Court to abandon tax exceptionalism and embrace administrative law.


The Death of Tax Exceptionalism’s Next Victim: The United States Tax Court

Today’s guest post is the first in a two-part series by Stephanie Hoffer and Christopher Walker, who are an Associate Professor and Assistant Professor, respectively, at The Ohio State University Moritz College of Law.  These posts are based on their paper The Death of Tax Court Exceptionalism, which is forthcoming in the Minnesota Law Review.  In these posts and more fully in their paper, Professors Hoffer and Walker make the legal and policy case for why the United States Tax Court should reject tax exceptionalism and consider itself bound by the Administrative Procedure Act’s judicial review provisions.  This paper adds to the growing scholarly and judicial criticism of tax exceptionalism. 

The article is the most comprehensive work to date situating the Tax Court as governed by the APA.  What contributes to making their paper insightful is that they practice what they preach:  by combining the insights of a tax law expert (Hoffer) with an administrative law generalist (Walker), they more fully draw out the legal and policy reasons for why the Tax Court should follow general administrative law principles.  In particular, their policy argument—i.e., that the more deferential judicial-review standards of the APA will allow the Tax Court to have a greater system-wide effect on IRS tax determination and collection processes—should provoke an important discussion in both tax and administrative law more generally.  Post 2 in this series will address the policy issues; the first post summarizes the legal issues. As this paper is a working draft, comments on the paper  to the authors directly via email are particularly welcome.– Les

Tax exceptionalism—the perception that tax law is so different from the rest of the regulatory state such that general administrative law principles do not apply—is a trending topic among commentators and courts.  In February, for example, the Duke Law Journal hosted a symposium entitled Taking Administrative Law to Tax, with contributions from Ellen Aprill (Loyola-LA), Bryan Camp (Texas Tech), Kristin Hickman (Minnesota), Steve Johnson (Florida State), Leandra Lederman (Indiana-Bloomington), and Larry Zelenak (Duke).  [Video is available here, paper abstracts are here, and the issue should be available here in May[LB Note: Keith was a commentator on Professor Lederman’s paper at the conference.]

And tax exceptionalism is dying, with two well-publicized fatalities in 2011.  First, in Mayo Foundation v. United States, the Supreme Court refused to apply a less deferential standard of review to the Treasury Department’s interpretation of the tax code.  The Mayo Court indicated it was “not inclined to carve out an approach to administrative review good for tax law only,” finding “no reason why review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as review of other regulations.”  Second, in Cohen v. United States, the D.C. Circuit held en banc that the judicial-review provisions of the Administrative Procedure Act (“APA”) apply to a form of IRS guidance known as a notice.  The D.C. Circuit remarked that “[t]he IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal Government—from suit under the APA.”  To be sure, “[t]here may be good policy reasons to exempt IRS action from judicial review [under the APA].  Revenue protection is one.  But Congress has not made that call.  And we are in no position to usurp that choice . . . .”

In The Death of Tax Court Exceptionalism, we call for the demise of another instance of tax exceptionalism:  the United States Tax Court’s longstanding view that it is not governed by the judicial review provisions of the APA.  In this post we present a snapshot of the legal case against Tax Court exceptionalism that is more fully developed in Parts I and II of our paper.  In a subsequent post we explore the policy implications of the Tax Court discarding tax exceptionalism and embracing general administrative law.


The Tax Court has declared that “[t]he APA has never governed proceedings in the Court (or in the Board of Tax Appeals).”  In other words, the Tax Court refuses to apply the APA’s default standard (abuse of discretion) and scope (confined to the administrative record) of review provisions.  Instead, the Tax Court considers the default in both contexts to be de novo, and only departs from de novo review when it determines that the Internal Revenue Code suggests a more deferential review standard.(As we explain in Part I of our paper, the Tax Court’s misguided view of tax exceptionalism may be largely a product of its unique history—including that Congress converted it from an agency to a court (in 1969) after the enactment of the APA (in 1946)—and the post-1969 expansion of its jurisdiction to adjudicate tax-related disputes.)

This approach contradicts general administrative law principles that every other federal court applies when reviewing agency actions.  As we explain in Part II of our paper, the APA establishes the default standards for judicial review of all federal agency action.  The IRS, an executive agency within the Treasury Department, is plainly an “agency” for purposes of the APA (5 U.S.C. § 701(b)(1)).  And while the Tax Court used to be an agency before the enactment of the APA, as of 1969 it is an “[A]rticle I . . . court of record” (26 U.S.C. § 7441).  For purposes of the APA, it is thus “a court of the United States” (5 U.S.C. § 702) and, for its review of IRS agency actions, a “reviewing court” subject to the APA’s judicial-review provisions (5 U.S.C. § 706).

That the APA governs the Tax Court does not mean the standard of review is always abuse of discretion or the scope of review is always confined to the administrative record.  Instead, these are the default standards, and the inquiry becomes whether Congress has overridden them.  Indeed, “[r]ecognizing the importance of maintaining a uniform approach to judicial review of administrative action,” the Supreme Court has instructed reviewing courts to “apply the APA’s court/agency review standards in the absence of an [statutory] exception.”  To depart from the APA default, the agency’s governing statute must suggest “more than a possibility of a [different] standard, and indeed more than even a bare preponderance of evidence”; the exception “must be clear.”

To illustrate how the Tax Court should conduct its inquiry into whether the APA default standards apply, we focus on three types of IRS actions reviewed by the Tax Court.  Check out Part II.B of our paper if you’re interested in that analysis.  In a nutshell, by starting with the APA, it becomes clearer which IRS actions are subject to the APA defaults (e.g., innocent spouse and collection due process) and which may not be (i.e., tax deficiency) based on congressional override of the APA defaults in the Internal Revenue Code.

Whether the APA’s judicial-review provisions apply to the Tax Court “is of more than passing interest.  It goes to the heart of the place of the Tax Court in our administrative system,” explained Judge Bybee last year in a dissent from a Ninth Circuit opinion that embraced Tax Court exceptionalism.  Now that the supersized Ninth Circuit has joined the Tax Court’s side of the split—with four circuits on the other side and the Eleventh Circuit somewhere in between—it is likely only a matter of time before the Supreme Court intervenes to declare the death of Tax Court exceptionalism.