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.
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.