Wednesday, July 13, 2011
The D.C. Circuit’s recent en banc decision in Cohen v. United States, No. 08-5088, in some ways represents a significant statement regarding the availability of judicial review for Administrative Procedure Act (APA) procedural challenges in the tax context. At a minimum, the court’s decision embraces the Supreme Court’s recent rejection of tax exceptionalism in Mayo Foundation for Medical Educ. & Research v. United States, 131 S.Ct. 704 (2011). Nevertheless, the decision’s practical implications for APA procedural challenges against Treasury and IRS actions are substantially less clear and potentially minimal.
By way of background, the appellants’ claim at this stage of litigation is that the IRS violated the APA when it promulgated refund procedures for the old telephone excise tax in Notice 2006-50 without notice and comment. (The appellants consider the refund procedure provided by Notice 2006-50 to be inadequate; they contend that the notice and comment process is the appropriate mechanism for addressing the alleged inadequacies.) The merits of the appellants’ APA procedural claim were not before the D.C. Circuit, however, as the district court had dismissed the case for lack of jurisdiction. In addressing that issue, the D.C. Circuit majority reached several conclusions regarding the proper interpretation of the APA and the Internal Revenue Code (IRC).
First, the court held that APA § 702 waives sovereign immunity for APA procedural challenges in the tax context, just as it does in other regulatory areas; there is no tax exception from the APA. “The IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal Government—from suit under the APA.” (Slip at 10.) This conclusion is not so surprising given the Supreme Court’s admonition in Mayo that, absent clear justification, judicial review in tax cases should not deviate from administrative law norms.
Next, the court held that Internal Revenue Code § 7421(a), also known as the Anti-Injunction Act, does not bar judicial review of the appellants’ APA procedural claim. Citing and quoting extensively from Hibbs v. Winn, 542 U.S. 88 (2004), the court rejected the IRS’s broad construction of § 7421(a) in favor of a narrower and more textualist approach. Section 7421(a) generally bars suits (other than statutory refund and deficiency actions) that seek to restrain “the assessment or collection of any tax.” According to the court, this phrase does not refer to a “’single mechanism’ that ultimately determines the amount of revenue the Treasury retains” and is not “synonymous with the entire plan of taxation.” Instead, “assessment” and “collection” are defined terms in the Internal Revenue Code; “assessment” represents “the trigger for levy and collection efforts” and that “collection” is “the actual imposition of tax against a plaintiff.” The appellants’ APA procedural claim does not concern the assessment or collection of taxes because “[t]he IRS previously assessed and collected the excise tax at issue.” Rather, the court perceived this suit as concerning the procedures under which the IRS will refund taxes that it has already collected. The Supreme Court has never addressed the relationship between § 7421(a) and APA procedural challenges but for several decades has interpreted the limitation on judicial review posed by § 7421(a) quite broadly. The Court’s decision in Hibbs, on which the D.C. Circuit in Cohen relied heavily, concerned a different statute concerning state taxation, 28 U.S.C. § 1341, although the language of that provision strongly resembles that of IRC § 7421(a). Hence, the D.C. Circuit’s interpretation of § 7421(a) narrowly to allow even some APA procedural claims is arguably quite bold.
The Declaratory Judgment Act, 28 U.S.C. § 2201(a), contains additional, arguably broader, language limiting the courts’ jurisdiction in tax cases. The panel in Cohen was divided over whether and to what extent the Declaratory Judgment Act ought to be construed as a separate and broader limitation on judicial review of tax cases. Consistent with the panel majority and with other circuit courts, however, the en banc court in Cohen held that the Declaratory Judgment Act is to be interpreted coterminously with the Anti-Injunction Act and not as a separate limitation on judicial review.
While the government argued that interpreting § 7421(a) and the Declaratory Judgment Act in this way would open the floodgates for APA challenges against Treasury and IRS actions, those provisions are not the only potential limitations on judicial review of agency action, whether in the tax context or otherwise. The majority and dissenting opinions considered several. Particularly where (as here) a specific statute provides its own legal mechanisms for seeking judicial review, APA §§ 703 and 704 limit the availability of judicial review under the APA to cases in which the challenging parties otherwise lack an adequate legal remedy. The dissenting judges in Cohen contended that IRC § 7422 statutory refund actions offered the appellants an adequate legal remedy. The majority disagreed on the ground the appellants’ APA procedural challenge seeks equitable relief rather than a tax refund (even if a refund is their ultimate goal), and § 7422 does not offer that remedy. Both opinions additionally discuss the doctrines of ripeness and exhaustion at some length, while standing and finality limitations make brief appearances as well. In analyzing these different barriers to judicial review, the Cohen majority drew its conclusions very narrowly. Indeed, the court labeled the case before it as sui generis and either assumed or stated outright that judicial review of many if not most APA procedural challenges to Treasury and IRS actions will be limited by one or more of these other statutory and doctrinal obstacles. Hence, while the appellants’ APA claim may not be wholly unique in its justiciability, it is not at all clear just how many others will be able to run this gauntlet of judicial review limitations. The vast majority of APA procedural challenges will be confined to statutory refund and deficiency actions.
One last point of interest, however, concerns the court’s statement regarding the finality of Notice 2006-50. In discussing the justiciability of the appellants’ APA claim, the court reinforced the panel’s determination that Notice 2006-50 represents final agency action. The IRS does not employ APA notice and comment rulemaking in issuing notices (or revenue rulings or revenue procedures), presumably taking the position that these pronouncements are exempt from such requirements as interpretative rules, policy statements, or procedural rules. General administrative law doctrine surrounding these exemptions from notice and comment is notoriously murky but overlaps substantially with the jurisprudence surrounding the finality requirement. The holding that Notice 2006-50 is final does not automatically mean that the IRS should have used notice and comment in developing that pronouncement, but a contrary conclusion may be difficult under current doctrine. If such is the case for Notice 2006-50, then the same is likely true of other notices, revenue rulings, and revenue procedures, meaning that many such documents may be susceptible to invalidation on APA procedural grounds. Given that the Cohen case really concerns the timing of and mechanisms for seeking judicial review rather than its availability under any circumstances, the court’s conclusion that Notice 2006-50 represents final agency action may ultimately be the most significant aspect of this case vis a vis future litigation.
Of course, Cohen represents the opinion of only one circuit court. Nevertheless, many circuits follow the D.C. Circuit’s lead on administrative law matters. Cohen was decided en banc in a lengthy and considered opinion after full vetting of the issues, potentially enhancing its persuasiveness. The government may ask the Supreme Court to consider the matter, but a grant of certiorari seems less certain in this case than in, for example, the Intermountain/overstated basis line of tax cases.