TAX ANALYSTS AND ADVOCATES,
THOMAS F. FIELD,
Petitioners,
v.
W. MICHAEL BLUMENTHAL,
Secretary of the Treasury of the United States, et al.,
Respondents.
In the Supreme Court of the United States
October Term, 1977
REPLY BRIEF FOR THE PETITIONERS
THOMAS F. FIELD,
Attorney for Petitioners
Suite 204, 1523 L St. N.W.
Washington, D.C. 20005
TABLE OF CONTENTS
ARGUMENT:
I. The IRS now admits that it has misinterpreted the tax law, but it claims the right to continue to do so, free of judicial review
II. The respondents have misapplied the law of standing to the circumstances of this case
CONCLUSION
APPENDIX:
Treasury Department News Release dated January 16, 1978
Internal Revenue Service News Release dated January 16, 1978
Revenue Ruling 78-61
Revenue Ruling 78-62
Revenue Ruling 78-63
REPLY BRIEF FOR THE PETITIONERS
The petition in this case for a writ of certiorari to the Court of Appeals for the District of Columbia Circuit was timely filed, pursuant to an order granting an extension of time, on November 12, 1977. The Respondents' brief in opposition was untimely filed on January 27, 1978. This reply is submitted, pursuant to Rule 24 of this Court, to describe an important intervening development since November 12, 1977, and to respond to arguments first raised in the brief in opposition.
I. THE IRS NOW ADMITS THAT IT HAS MISINTERPRETED THE TAX LAW, BUT IT CLAIMS THE RIGHT TO CONTINUE TO DO SO, FREE OF JUDICIAL REVIEW.
In their brief in opposition (Br. 8), the respondents argue that the scope of the administrative discretion accorded to the Commissioner of Internal Revenue by Section 7805(b) of the Internal Revenue Code “has little to do with this lawsuit challenging the correctness of rulings issued pursuant to the foreign tax credit provision of Section 901 [of the Internal Revenue Code] . . .” Recent events show that this statement is incorrect. Indeed, this suit now focuses squarely on the degree to which Section 7805(b) confers on the Commissioner of Internal Revenue unfettered and unreviewable administrative discretion. A summary of recent events will show why this is so.
On January 16, 1978, the respondents released a set of press announcements and Internal Revenue Service rulings which admit the correctness of the arguments with respect to Section 901 of the Internal Revenue Code that have been advanced by the petitioners in this case. Those announcements and rulings effectively remove from this case any controverted questions relating to Section 901 of the Internal Revenue Code. Without explicitly referring to this case, the respondents have admitted that the petitioners are correct in their arguments regarding Section 901, and that the Internal Revenue Service has heretofore failed to carry out the intent of Congress with respect to that section. Because of their importance, these rulings and press announcements are reprinted as Appenidx A, infra.
Under normal circumstances, the belated admission by the respondents that the petitioners are correct on the merits would largely end this case, except as to past years, for which relief is sought in this suit. However, in an unprecedented1 action, the Commissioner of Internal Revenue, while admitting the incorrectness of his prior interpretation of Section 901, has given the private beneficiaries of his mistake almost a full additional year to benefit from that mistake.2 In addition, the Kuwaiti, Iranian, and Venezuelan rulings that are challenged in this suit remain fully in effect. Accordingly, the injury to the competitive interests of petitioner Field continues unabated, and the injury to the public revenues — which already totals more than $5 billion since this suit was filed — will continue.3
These developments pose even more starkly than before the ultimate question presented by this case: the extent to which Section 7805(b) of the Internal Revenue Code gives the Commissioner of Internal Revenue unfettered and unreviewable administrative discretion to perpetuate admittedly erroneous and illegal administrative rulings that seriously injure competitive relationships and result in massive federal revenue losses.4
This case thus presents for the Court's consideration an extraordinary anomaly in our law relating to the scope of judicial review of administrative decisions. The lower court opinions in this case stand for the general proposition that the decisions of the Commissioner of Internal Revenue are unreviewable by the courts — even when they cause competitive injury and huge revenue losses — so long as the Commissioner gives away federal revenue.
This proposition is contrary to the mainstream of thinking regarding the scope of judicial review of administrative action. Judicial review of agency rules has become the norm, and nonreviewability is the rare exception. Judicial review is widely considered to be a wise antidote to administrative lethargy and the control of administrative agencies by regulated interests; the courts and administrative agencies are viewed as being engaged in a collaborative effort to implement the will of Congress. In interpreting federal statutes, this Court has gone out of its way to find that judicial review has not been precluded or committed to agency discretion.5
There is no reason why the rule should be different in tax cases. Suits such as this call upon the Commissioner of Internal Revenue to collect more revenue, not less, and the strictures of Section 7421 of the Internal Revenue Code are therefore inapplicable. In addition, with the possible exception of military service, the payment of taxes is the most fundamental duty a member of the polity owes to the political community. The maintenance of tax fairness is therefore a proper focus of judicial concern, especially when powerful political interests are able to affect the relevant legislative and administrative processes.
Nor is there anything inherently nonjusticiable about tax controversies. This Court routinely handles federal tax questions and has been the principal federal agency implementing the power granted to Congress by the Commerce Clause to regulate the state taxation of interstate commerce.6
It is necessary, of course, that there be a proper party to bring cases before this Court in an adversary context.
Whether such a party can ever exist — in instances in which the Commissioner of Internal Revenue gives away money in an admittedly improper way — will depend to a substantial degree on the interpretation given to the rules of standing in this case. As things are, the Commissioner of Internal Revenue has arrogated to himself unfettered and unreviewable administrative discretion to interfere with competitive relationships and give away federal revenues without judicial review.
II. THE RESPONDENTS HAVE MISAPPLIED THE LAW OF STANDING TO THE CIRCUMSTANCES OF THIS CASE.
The respondents argue (Br. 7) that the zone of interest test, which was relied on by the Court below to deny standing to petitioner Field, has been “consistently reaffirmed” by this Court. But the cited materials hardly amount to consistent reaffirmation. It is true that the zone of interest test has on occasion been alluded to by this Court since 1970, but it has not been applied, even in those cases in which it was most relevant.7
It is therefore not surprising that most courts and commentators have come to the conclusion that the zone of interest test is dead. As Professor Kenneth Culp Davis has put it in his administrative law treatise, “Probably the most common treatment of the 'zone' test is to pay homage to it verbally but to ignore it in substance.”8 For this reason, the majority opinion in this case in the Court below cries out for guidance, and that guidance will not be forthcoming absent a decision by this Court.
The respondents also argue (Br. 7) that there is no conflict between the decision of the Court below in this case, and the Eighth Circuit's decision in Park View Heights Corp. v. City of Black Jack, 467 F.2d 1208 (1972). This assertion is based on a misreading of the Eighth Circuit's decision. That Court's statement that it would “apply the rationale on standing as recently discussed in Sierra Club v. Morton, [405 U.S. 727]” referred not to the zone test but to the prudential limitations relating to a plaintiff's personal stake in the outcome of a suit, the adversary context, and the ripeness of suits for judicial review.
Moreover, the confusion in the courts below does not stop with the Park View Heights case. The Third Circuit has gone through the motions of applying the zone test, while stating its opposition to it,9 and the Fifth Circuit in a recent standing decision has simply ignored it.10 There is even more confusion about the nature of the “interest” referred to in the zone test, and still more over how statutes are to be construed in administering the test.11 The zone of interest test is therefore very much in need of clarification or decent burial.
The respondents also advance a variety of arguments regarding the injuries suffered by petitioner Field, in an attempt to bring this case within the ambit of this Court's decision in Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26 (1976). Most of these arguments are inapposite, because EKWRO did not involve explicitly pleaded competitive injuries. Indeed, the injuries described in the complaint in this case are far more obvious and direct than the petitioners' injuries that formed the basis for standing in Planned Parenthood of Central Missouri v. Danforth, 428 U.S. 52 (1976). As the more recent precedent, Planned Parenthood is entitled to more weight than EKWRO.
Even more important, however, the factual arguments by the respondents regarding Field's injuries appear to disregard the pleaded facts of this case. For example, the respondents argue (Br. 9) that the price of Field's oil might be affected by price controls, even though the pleadings in this case make it crystal clear that price controls are inapplicable to the production from his well. See the amended complaint, paragraph 4(b). Similarly, the respondents seek to argue (Br. 10) that the price for Pennsylvania grade crude oil is not established by the world market price for oil. This is not the fact, as the complaint makes clear. See the amended complaint, paragraph 18.
Finally, the respondents advance (Br. 10) a generalized argument “that persons whose own taxes are not at issue cannot generally challenge the rulings of the Secretary of the Treasury with respect to third parties.” The Respondents attribute this argument to “this Court,” although it in fact appears only in the concurring opinion of Justice Stewart in the EKWRO case, supra.
It is not at all clear that Justice Stewart who advanced this argument in a somewhat speculative way in his EKWRO opinion, wished it to be expanded so as to open a gaping hole in our established system of judicial review of administrative decisions. See Argument I, supra. Did Justice Stewart really mean to empower the Commissioner of Internal Revenue to forgive, as in this case, more than $3 billion in federal revenue, through a series of admittedly illegal rulings, to the detriment of thousands of domestic oil producers, without any possibility of judicial review? Did he mean to reverse or abandon the decision with respect to competitor standing in International Business Machines Corp. v. United States, 343 F.2d 914 (Ct. Cls. 1965), cert. denied, 382 U.S. 1028 (1966)?
Certiorari should be granted so that this Court can speak on these and the other important questions presented by this case. Certiorari should also be granted to bring to an end the harm that petitioner Field, in common with other domestic oil producers, continues to suffer as a result of what now are admitted to be illegal and erroneous actions by the Commissioner of Internal Revenue.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully submitted,
THOMAS F. FIELD
Counsel for Petitioners
FOOTNOTES
1By its terms, Section 7805(b) confers on the Commissioner of Internal Revenue power to apply changes in IRS rulings and regulations “without retroactive effect.” It does not permit the Commissioner to give prospective effect to an admittedly illegal and erroneous interpretation of the law. It is important, in this connection, to note that the apparently uniform practice of the Service in the past has been to revoke erroneous rulings, with effect from the date of the announcement of the revocation. For example, on March 9, 1977, the Service issued Revenue Ruling 77-85, 1977-1 Cum. Bull. 12, to correct prior rulings which had been issued in error. The new ruling was effective for all investments after March 9, 1977. In contrast, the oil rulings challenged in this case have been allowed to remain in full effect through June 30, 1978, and, in practice, they will be fully in effect until January 1, 1979. Section 7805(b) does not appear to provide any warrant for this degree of prospectivity, and no similar prior instance has been discovered by the petitioners.
2The challenged rulings have been revoked by the Commissioner for “taxable years beginning after June 30, 1978.” However, judicial notice of the public records of the Securities and Exchange Commission will show that substantially all of the major international oil companies operate on a calendar year basis. This is true, for example, of the “seven sisters,” Exxon, Gulf, Mobil, Shell, Socal, Standard of Indiana, and Texaco. Hence, the revocation of the Saudi Arabian and Libyan rulings will not affect them until January 1, 1979, at the earliest. And of course, the Kuwaiti, Iranian, and Venezuelan rulings that are challenged by this suit remain in effect.
3The Treasury Department has recently furnished estimates of the revenue losses attributable to the challenged rulings to the Subcommittee on Commerce, Consumer, and Monetary Affairs of the House Committee on Government Operations. For the periods subsequent to the filing of this suit, the Treasury revenue loss figures are as follows: 1974 — $2,700,000,000; 1975 — $1,700,000,000; 1976 — $1,200, 000,000; 1977 and 1978 — not yet available.
4See footnote 3, supra, for the Treasury Department's estimates of the recent revenue losses attributable to the challenged revenue rulings.
5See, for example, Abbott Laboratories v. Gardner, 387 U.S. 136 (1967) and Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971).
6See, for example, Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450 (1959), and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, rehearing denied, 430 U.S. 976 (1977).
7Planned Parenthood of Central Missouri v. Danforth, 428 U.S. 52 (1976); Eisenstadt v. Baird, 405 U.S. 438 (1972).
8Kenneth Culp Davis, Administrative Law of the Seventies, Supplementing Administrative Law Treatise, June 1976, p. 512.
9Merriam v. Kunzig, 476 F.2d 1233 (C.A. 3)(1973). Significantly, that case stated that a plaintiff should be allowed to defend the public interest in court, provided that he has suffered injury in fact, even if the statutes involved “were designed to protect no zone of interest within which he falls . . .” 459 F.2d 1183 at 1188. On this basis, it appears that the present petitioners would have standing in the Third Circuit.
10Florida v. Weinberger, 492 F.2d 488 (CA. 5)(1974).
11See generally, Kenneth Culp Davis, Administrative Law of the Seventies, Supplementing Administrative Law Treatise, Sec. 22.02-11 June 1976.
END FOOTNOTES