Following up on yesterday's post on the D.C. Circuit's remarkable opinion in Cohen v. Commissioner, No. 08-5088 (D.C. Cir. Aug. 7, 2009): Kristin E. Hickman (Minnesota), who is cited four times in the opinion (and whom the dissent calls "the leading academic on this issue), has agreed to share her thoughts on the decision with TaxProf Blog readers:
D.C. Circuit Delivers a Doozy:
The D.C. Circuit’s decision Friday in the Cohen case is a surprise, and I say this as someone who generally, though with some reservation, supports the outcome. As I have written previously, and as Judge Kavanaugh writing in dissent observes, the courts have been quite consistent over the last forty years in interpreting the Tax Anti-Injunction Act and the Declaratory Judgment Act broadly to preclude virtually all judicial review of tax cases except for refund and deficiency actions as provided in the Internal Revenue Code. Only a few of these cases have involved Administrative Procedure Act procedural challenges, but courts considering the question generally have declined to make an exception from the TAIA and the DJA for such claims. As I have written elsewhere, the Supreme Court has never explicitly addressed the question whether the TAIA and the DJA bar judicial review of APA procedural challenges outside the confines of refund and deficiency actions, and there are reasonable textual and policy arguments for reading the TAIA and the DJA sufficiently narrowly to allow pre-enforcement APA procedural challenges against Treasury regulations. I think the same arguments can be made with respect to IRS rulings as well, and the Cohen majority essentially chose to follow this path. Still, the policy and the mood of the jurisprudence has been decidedly against such review for several decades, hence my surprise at the D.C. Circuit’s decision to allow such a challenge to go forward in Cohen.
That said, it is not precisely clear how broadly the Cohen majority intends its opinion to sweep. Language sprinkled throughout in the court’s opinion suggests that the majority views Cohen as an outlier. For example, the court is quite adamant in declaring the case at bar as a post-enforcement action. They do this in relation to their ripeness analysis, however, rather than in connection with their interpretation of the TAIA and the DJA. This detail strikes me as important. I consider the TAIA and the DJA the bigger jurisprudential obstacle to pre-enforcement judicial review of APA procedural challenges; though the Cohen court does not rely on it, the Supreme Court in Abbott Labs v. Gardener established a strong presumption in favor of pre-enforcement judicial review of challenges to agency regulations, particularly when those regulations place regulated parties in a position of choosing between compliance or potential penalties, which is the case with respect to many Treasury regulations and IRS rulings. It seems to me that the Cohen court’s reading of the TAIA and the DJA would allow pre-enforcement challenges as well as the case at bar (assuming that action in Cohen is in fact properly characterized as post-enforcement).
While the D.C. Circuit’s interpretation of the TAIA and the DJA alone is a dramatic outcome, it is not the only significant holding in Cohen. The government has consistently maintained that most Treasury regulations are interpretative rules exempt from APA notice-and-comment requirements. Not surprisingly, the government’s position regarding IRS revenue rulings, revenue procedures, and notices is the same. Even members of the tax community who disagree with the former conclusion generally fall in line with the latter position. I have argued elsewhere that there is a more-than-plausible case to be made that all Treasury regulations and also many revenue rulings, revenue procedures, and notices are in fact legislative rules subject to APA procedural requirements. The D.C. Circuit in Cohen did not directly tackle this question, but rather remanded to the district court the question whether Notice 2006-50 violates APA rulemaking requirements. Still, the Cohen majority’s opinion offered analysis that would be difficult to square with a subsequent conclusion that Notice 2006-50 presents an interpretative rule exempt from notice-and-comment rulemaking.
The context in which the panel majority offered this analysis was in addressing the government’s argument that Notice 2006-50 is a nonbinding general statement of policy (which would also be exempt from notice-and-comment rulemaking) and rather than final agency action. In concluding that Notice 2006-50 is final agency action, the Cohen majority declared that the notice is a substantive rule and not a policy statement in relevant part because it affects the legal rights and obligations of taxpayers and reflects the IRS’s intention to bind itself to a particular legal position. The standard for assessing finality is not the same as the standard that the D.C. Circuit employs in evaluating whether a rule is legislative or interpretative, although the finality standard does closely resemble the test that the Fifth Circuit applies in defining a legislative rule. Nevertheless, the D.C. Circuit’s case law regarding the legislative/interpretative distinction asks similar questions, and it seems unlikely to me that the D.C. Circuit would declare Notice 2006-50 to be a substantive rule that binds the IRS and affects the legal rights and obligations of taxpayers and not also conclude that Notice 2006-50 is a legislative rule subject to notice-and-comment rulemaking.
The big question in my mind for now is whether the IRS will petition for rehearing en banc and/or certiorari on these holdings. On the one hand, the D.C. Circuit is only one circuit, and the IRS could just decline to acquiesce and attempt to confine Cohen to its facts as an unusual situation. On the other hand, the other circuits often follow the D.C. Circuit's lead on administrative law issues, the D.C. Circuit’s interpretation of the TAIA and the DJA is aggressive in light of past jurisprudence, and a careful reading shows Cohen to be susceptible to broader reading with substantial consequences for IRS litigation beyond this case.