As a number of others have reported, the DC District Court ruled yesterday in Halbig v Sebelius. The case involves the validity of regulations issued that stem from the Affordable Care Act. The statute says that tax credits are available to qualifying citizens who were “enrolled through an Exchange established by the State.” By regulation, Treasury allowed the delivery of tax credits to individuals purchasing health insurance on federally-facilitated exchanges (since a number of states declined to set up state exchanges), and the plaintiffs in this case challenged the regulations’ validity.
The DC District court held that the regulations are valid and “consistent with the text, structure, and purpose of the Affordable Care Act.” I have not fully digested the case but want to offer some brief thoughts on the issues that the case presents under the Administrative Procedure Act(APA). Unlike most federal agencies which face challenges to regulations almost instantly, Treasury typically faces scrutiny on the validity of its guidance in deficiency or in refund proceedings. That is because “the APA permits judicial review of any “[a]gency action made reviewable by statute,” as well as any “final agency action for which there is no other adequate remedy in a court.” 5 U.S.C. § 704 (emphasis added).
As a general matter, in tax cases courts have found that the deficiency and refund routes are adequate remedies. Thus, challenges to adequacy of Treasury regulations (procedural or substantive) are typically shoehorned through normal tax procedure avenues. In this case, the plaintiffs brought a pre-enforcement challenge under the APA. Yet, despite opposition from the government which argued that the de novo review in a refund proceeding was an adequate remedy, the court allowed the challenge and examined the case on the merits. It felt that “the tax refund mechanism is inferior to an APA suit and fails to provide complete relief to these plaintiffs.”
Here is the court’s language (skipping cites) stating why it found the refund mechanism inadequate despite APA Section 704:
- Relegating plaintiffs’ claims to a tax refund action would force plaintiffs to make a choice between purchasing insurance, thereby waiving their claims, or foregoing insurance and incurring the tax penalty, which they will recover much later, and only if they prevail; and
- [Plaintiffs] also will be deprived of the opportunity to obtain prospective certificates of exemption. Such certificates provide a safe harbor to an individual who can establish that he or she likely will meet the requirements of the unaffordability exemption for that tax year; such certificates guarantee that individuals will avoid the tax penalty “notwithstanding any change in an individual’s circumstances,” such as an unexpected increase in income.
The court also apparently relied on the unique aspects of the ACA and the credits’ role in the overall scheme of that legislation, rather than the typical individualized tax dispute arising following promulgation of rules that are connected to more mainstream tax issues. As support, it cited to the Cohen case which allowed under the APA a pre-enforcment challenge to the scheme the IRS set up for refund of the telephone excise tax. A description of Cohen and the unusual mechanism of pre-enforcement challenges to IRS rules can be found in an excellent National Tax Journal article by Professor Ellen Aprill.
Yet, in language that might open the door to other APA challenges to tax guidance, the court also stated that “[a]s in Cohen, plaintiffs here bring a pre-enforcement challenge to a final agency rule, rather than individualized adjudications of tax liability. The dispute before the Court is purely legal and ripe for review. Any administrative challenge would be futile, as the Secretary of the Treasury can be expected to deny plaintiffs’ complaint as contrary to the issued IRS regulations. Abstaining from a decision now would simply kick the can down the road until 2015, after the Secretary of the Treasury reaffirms the view he already has announced in promulgating the Rule.”
Seems to me that people who do not like regulations or other tax guidance for one reason or another might also make similar claims to justify challenging the guidance prior to a refund or deficiency case. The court acknowledges that the APA issue is not easy, noting that “[t]o the extent that this is a close call, the Court relies on the Supreme Court’s directive that the “APA’s review provisions should be given “a ‘hospitable’ interpretation,” as the APA’s underlying purpose is to “remove obstacles to judicial review of agency action.”
No doubt this is not the last we will hear about this case. I anticipate greater scrutiny on the APA and whether existing refund or deficiency procedures provide an adequate remedy. The door is opening up ever so slightly, and litigants unhappy with guidance Treasury issues have new weapons in their arsenal. Just how wide the door is open is not yet clear.