The APA: The Other Taxpayer Bill of Rights

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The Taxpayer First Act (TFA) provides that the Tax Court apply a de novo standard of review of a section 6015 determination of the IRS based on (1) “the administrative record established at the time of the determination” and (2) “any additional newly discovered or previously unavailable evidence”.  In today’s guest post practitioner Steve Milgrom advances a novel argument, that the TFA’s changes to Section 6015 open the door to the possibility that IRS innocent spouse hearings should be subject to the formal adjudication rules under the APA. Steve’s provocative post raises the soon to be very important problem of ensuring that parties requesting relief from joint and several liability are entitled to present relevant evidence that may be difficult or impossible to present administratively. While I am skeptical of the solution that Steve proposes, it is likely that at a minimum the Tax Court will be wrestling with the terms “newly discovered” or “previously unavailable” in fashioning broad exceptions that will allow the Tax Court to evaluate difficult cases that often implicate circumstances (like abuse) that may not be fully developed via centralized correspondence-based determinations that are the hallmarks of the current regime under Section 6015. Les

Unlike other Federal government agencies that routinely hold trial like hearings on the record, the IRS stopped doing so back in the 1920’s.  In the case of §6015 innocent spouse determinations, this may be about to change. 

The road to this change in IRS procedure begins with a bill of rights.  No, not that Bill of Rights, the first ten amendments to the US Constitution (although even this Bill of Rights may come to play a critical role).  I’m not even referring to the Taxpayer Bill of Rights, Code §7803(a)(3).  Here I refer to the bill of rights Congress passed in 1946 to protect us against the Federal government:

[A] bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated in one way or another by agencies of the Federal Government.  S.Doc. No. 248, at 298.

The 1946 bill of rights is the Administrative Procedure Act (APA), which is found at 5 U.S.C §551-§706. While the Taxpayer Bill of Rights has not gotten much traction in the courts, the APA is a significant restraint on Federal administrative agencies.

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Before I delve into the mysteries of the APA keep in mind that, like all statutes, standing atop the APA is the U.S. Constitution and its Bill of Rights.  Whether or not the APA applies to agency action, compliance with the Due Process Clause of the 5th Amendment to the Constitution is also required.    PBGC v. LTV Corp., 496 U.S. 633, 655 (1990).  See also, Wong Yang Sung v. McGrath, 339 U.S. 33, at 49 (1950) (The constitutional requirement of procedural due process of law derives from the same source as Congress’ power to legislate and, where applicable, permeates every valid enactment of that body.)

Another preliminary matter is APA §559, dealing with the effect of subsequent statutes on the APA.  §559 states that a “[s]ubsequent statute may not be held to modify” the APA “except to the extent that it does so expressly.”  Faced with the prospect of having to comply with the APA’s formal procedural requirements the IRS might argue that the recent amendment to Code §6015 that I discuss below expressly modified the APA.  Arguments that tax law provisions are express modifications of the APA have gotten traction when made in connection with the judicial review of IRS proceedings.  See Kasper v. Commissioner, 150 TC 8 (2018).  However, these cases do not deal with how the agency itself must proceed and the change to §6015 doesn’t modify the APA in any way.  §6015 states that the procedures for the IRS to make a determination are to be prescribed by the Secretary of the Treasury.    Clearly the procedures prescribed by Treasury have to comply with the APA.  Mayo Foundation for Medical Education v. U.S., 131 S.Ct. 704 (2011).  

The APA covers a lot of ground.  It sets forth rules for agency rule making, agency adjudications, and for judicial review of agency proceedings.  To understand the APA one must first study the definitions.  “Rule making” is defined as an agency’s process for formulating, amending, or repealing a rule.  An “adjudication” is any agency process for the formulation of an order.  An “order” is a final disposition of an agency in a matter other than rule making.  APA §§551(5), (6), and (7).  Basically, adjudications are the things that agencies do other than rule making.  

Another important distinction made by the APA is between what are known as formal vs. informal agency proceedings, both in the context of rule making and adjudications.  The formal vs. informal dichotomy determines which set of procedural requirements apply to agency action.  Both rule making and adjudications are allowed to proceed informally unless the statute governing the agency activity requires it to hold a hearing on the record.  In the tax world, the statute governing agency activity is the Internal Revenue Code (Code).  If the statute calls for a hearing on the record, then the formal procedural requirements of the APA must be following by the agency.  Formal rule making is governed by §§556 and 557.  Formal adjudications are covered in §§554, 556, and 557.  Informal rule making and informal adjudications are covered by §553 and §555, respectively.

Agency adjudication can still avoid being subject to the formal procedural requirements of the APA based upon six specific exemptions, one of which is relevant to this discussion.  APA §554(a)(1) provides that any matter “subject to a subsequent trial of the law and the facts de novo in a court” is exempt from the formal procedural requirements of the APA.  Note that this is not an exemption from the APA itself, only from the formal rules. It is this exemption that has historically allowed the IRS to proceed, in APA parlance, informally.

The exception of matters subject to a subsequent trial of the law and facts de novo in any court exempts such matters as the tax functions of the Bureau of Internal Revenue (which are triable de novo in the Tax Court).  S. Comm. On the Judiciary, 79th Cong., 1st Sess., Administrative Procedure Act.  (emphasis in original).

Last year, in the Taxpayer First Act (TFA), Congress rewrote the rules applicable to the Tax Court’s determination of the availability of innocent spouse relief.  See Taxpayer First Act, Pub. L. No. 116-25, §1203, adding Code §6015(e)(7).  While §6015(e)(7) retains the rule that the Court’s review of an IRS determination is de novo, it is now to be based on the administrative record.  No more trial of the facts de novo.  The exemption provided by APA §554(a)(1) no longer applies.  Does this change mean that the IRS must now comply with the formal procedural requirements of the APA when making an innocent spouse determination? Only if the Code requires the adjudication “to be determined on the record after opportunity for an agency hearing …” See APA §554(a) prefatory language.

The Code says nothing about the IRS holding a hearing when it makes an innocent spouse determination. Might we find the hearing requirement elsewhere?  US v. Florida East Coast Railway Company, 410 U.S. 224, 245 (1973), deals with agency rule making.  However, the language of the APA for adjudications is the same.  In both rule making and adjudications the triggering language is identical, for the formal rules to apply the APA states that the operative statute must require agency action “on the record after opportunity for an agency hearing.”   In Florida East Coast Railway Company the Supreme Court had this to say about these key terms:

… the actual words ‘on the record’ and ‘after … hearing’ used in §553 were not words of art, and that other statutory language having the same meaning could trigger the provisions of §§556 and 557 in rulemaking proceedings. Id, at 238.  (emphasis added)

Other courts have confirmed that there are no magic words. 

[W]hether the formal adjudicatory hearing provisions of the APA apply to specific administrative processes does not rest on the presence or absence of the magical phrase “on the record.”  Marathon Oil Co. v. Environmental Protection Agency, 564 F.2d 1253, 1263 (9th Cir. 1977).

Courts often rely upon the Attorney General’s Manual on the Administrative Procedure Act (1947) in interpreting the APA.  See Vermont Yankee Nuclear Power Corp v. Natural Resources Defense Council, Inc., 435 U.S. 519, 546 (1978).  The AG Manual gives examples of statutes that require formal adjudications where the governing statute requires a hearing but says nothing about it being on the record:

[W]hile the … Act does not expressly require orders … to be made “on the record”, such a requirement is clearly implied in the provision for judicial review of these orders … Other statutes authorizing agency action which is clearly adjudicatory in nature … specifically require the agency to hold a hearing but contain no provision expressly requiring decision “on the record”.

The examples in the AG’s Manual deal with statutes that require a hearing but make no reference to its being “on the record.”  Is there any less of an implication when the missing language is reversed, when the statute calls for judicial review of an administrative record but makes no reference to the agency holding a hearing?  

Due process requires every agency adjudication to involve some type of hearing.  Even where there is no “adjudication required by statute,” the APA’s formal procedures have been imposed based upon the hearing requirement of the due process clause.  Wong Yang Sung v. McGrath, 339 US 33 (1950).  The APA provision stating that it is only applicable to hearings “required by statute” exempts agency hearings that are conducted by a lesser authority than a statute, such as by regulation or rule, not hearings that are held out of compulsion, either by statute or constitutional requirement.  Wong Yang Sung, at 50.  So when the Supreme Court referred to “other statutory language having the same meaning” in Florida East Coast Railway Company, to be consistent with Wong Yang Sung it would have been clearer to say “other statutory or constitutional language having the same meaning.”  

Now that §6015(e)(7) requires the Tax Court to perform its review of an IRS innocent spouse determination based upon the administrative record, the IRS must make its determination “on the record.”  While §6015 leaves it to the IRS to establish procedures for making its determinations, as the Attorney General said some 70 years ago, a requirement that an agency act on the record is “clearly implied in the provision for judicial review.”  §6015(e)(7) is just such a provision for judicial review and here you don’t have to search for an “implied” requirement.  The requirement for an administrative record is explicit.

Did Congress intend to force the IRS to hold formal hearings on the record when making a §6015 determination?  While the number of words used to impose the requirement are few, they are unique, this is the only place where the Code uses the phrase “administrative record.”  By adopting a new approach to Tax Court procedure, using a phrase that comes from the world of administrative law, it does seem that this change in judicial review should also change the agency level procedure applicable to innocent spouse determinations.  

Having decided to limit the Tax Court to reviewing the administrative record, maybe Congress was familiar with Wilson v Commissioner, 705 F.3d 980 (9th Cir. 2013).  In Wilson, the 9th Circuit rejected the IRS’s argument that the Tax Court should be restricted to a review of the administrative record in a §6015(f) case.  Wilson rejected what Congress has now made the law.  The rationale of the 9th Circuit explains why it is so important that the IRS be required to follow the formal procedural requirements of the APA in §6015 cases.  The Wilson decision is based in large part on the fact that the pre-TFA process used by the IRS for making a §6015(f) determination did not result in a sufficient record for the Tax Court to review:

There is no formal administrative procedure for a contested case at which the taxpayer may present her case before an administrative law judge.  At no time during the process is the taxpayer afforded the right to conduct discovery, present live testimony under oath, subpoena witnesses for trial, or conduct cross-examination. … [I]t is before the Tax Court that the taxpayer has the vehicle to conduct discovery … subpoena witnesses and documents … and submit evidence at trial.  Wilson, at 990.

The 9th Circuit continued its explanation of the importance of trial like proceedings:

The ability to supplement the administrative record is particularly important in equitable relief cases, which require a fact-intensive inquiry of sensitive issues that may not come to light during the administrate phase of review.  The threshold requirements for innocent spouse relief may present a complicated and contradictory dilemma for the taxpayer.  The innocent spouse must show that he or she is ignorant of the spouse’s tax misdeeds, yet must marshal documentary support to prove it.  The taxpayer often has limited or no access to critical records.  The innocent taxpayer who has been misled by a spouse often may not understand the full extent or scope of the erring spouse’s misdeeds.  Compounding these difficulties is an administrative system where the only opportunity to present a case is through telephonic interviews with an agent in a remote location.  Wilson, at 991.

Since the Tax Court is no longer permitted to decide the facts de novo, the administrative record which the Tax Court reviews must be created by the IRS using the formal procedural requirement of the APA, allowing for discovery, testimony under oath, cross-examination of witnesses, and the many other procedures that are designed to lead to a full and fair determination of the facts.

The last time Congress set up an agency of the Executive branch that conducted the sort of hearings that the APA requires for formal adjudications was 1924.  That agency was named the Board of Tax Appeals (BTA).  In 1969 Congress moved the functions of the BTA out of an administrative agency and placed them in the Judicial branch, in a court known as the United States Tax Court.   Harold Dubroff and Brant J. Hellwig, The United States Tax Court, an Historical Analysis, 49 (2nd ed. 2014).  When the activities of the BTA were moved to the Tax Court, the job of holding formal hearings to determine the facts of a case likewise moved to the judicial branch of our government.  While the 1924 Act that created the BTA did not provide for any direct appellate review of its decisions, the decisions could be collaterally attacked in a suit for a refund where the findings of the BTA were prima facie evidence.  In 1926 the law was amended to permit review of BTA decisions in the Court of Appeals, where review was limited to questions of law.  Why return to a system of agency level factual determinations followed by judicial review of the agency record? The IRS is constantly underfunded.  The Tax Court is fully capable of hearing the facts of §6015 cases de novo.  What can possibly be gained by forcing the IRS to build a whole new infrastructure just for 6015 cases? 

How might the IRS implement this new requirement?  Currently, requests for §6015 relief are handled by a special office in the IRS, known as CCISO.  There is no need for the operations of this office to change.  When Congress changed the §6015 judicial review provisions it also established a new office within the IRS, known as the Internal Revenue Service Independent Office of Appeals.  This office is required to be fair and impartial to both the government and the taxpayer.  While I don’t know what was in the mind of the drafters of the TFA but it seems like this new office was specifically created to, among other things, handle the task of complying with the APA formal procedural hearing requirements. 

The IRS has long argued that the Tax Court’s review of innocent spouse determinations should be restricted to the administrative record.  Since the argument was not based upon a statutory requirement, had the Tax Court agreed with this proposition it would not have triggered the APA’s formal procedural requirements at the agency level.  While the IRS lost in Tax Court, it prevailed in some Courts of Appeal, but not others.  Congress stepped in to resolve the circuit split by adopting the position advocated by the IRS.  There is now a statute that requires judicial review based upon the administrative record, the operative requirement for application of the formal procedural requirements of the APA.  I am reminded of Marty Ginsberg’s maxim of Moses’ rod:

Every stick crafted to beat on the head of a taxpayer will metamorphose sooner or later into a large green snake and bite the commissioner on the hind part.  Ginsburg, Making Tax Law Through the Judicial Process, 70 ABA J. 74, 76 (1984).

Comments

  1. Lavar Taylor says

    Thanks very much for writing this. Aside from APA issues, the potential due process problems lurking in this area are significant. We submitted an amicus brief in the Wilson case. I highly recommend reading all briefs filed in that case.

    I also recommend a careful read of the dissent in Wilson. To me it is downright scary that there are appellate judges who are willing to turn such a blind eye to the concept of doing justice for litigants.

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