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The Death of Tax Exceptionalism’s Next Victim: The United States Tax Court

Posted on Apr. 17, 2014

Today’s guest post is the first in a two-part series by Stephanie Hoffer and Christopher Walker, who are an Associate Professor and Assistant Professor, respectively, at The Ohio State University Moritz College of Law.  These posts are based on their paper The Death of Tax Court Exceptionalism, which is forthcoming in the Minnesota Law Review.  In these posts and more fully in their paper, Professors Hoffer and Walker make the legal and policy case for why the United States Tax Court should reject tax exceptionalism and consider itself bound by the Administrative Procedure Act’s judicial review provisions.  This paper adds to the growing scholarly and judicial criticism of tax exceptionalism.

The article is the most comprehensive work to date situating the Tax Court as governed by the APA.  What contributes to making their paper insightful is that they practice what they preach:  by combining the insights of a tax law expert (Hoffer) with an administrative law generalist (Walker), they more fully draw out the legal and policy reasons for why the Tax Court should follow general administrative law principles.  In particular, their policy argument—i.e., that the more deferential judicial-review standards of the APA will allow the Tax Court to have a greater system-wide effect on IRS tax determination and collection processes—should provoke an important discussion in both tax and administrative law more generally.  Post 2 in this series will address the policy issues; the first post summarizes the legal issues. As this paper is a working draft, comments on the paper  to the authors directly via email are particularly welcome.– Les

Tax exceptionalism—the perception that tax law is so different from the rest of the regulatory state such that general administrative law principles do not apply—is a trending topic among commentators and courts.  In February, for example, the Duke Law Journal hosted a symposium entitled Taking Administrative Law to Tax, with contributions from Ellen Aprill (Loyola-LA), Bryan Camp (Texas Tech), Kristin Hickman (Minnesota), Steve Johnson (Florida State), Leandra Lederman (Indiana-Bloomington), and Larry Zelenak (Duke).  [Video is available here, paper abstracts are here, and the issue should be available here in May[LB Note: Keith was a commentator on Professor Lederman’s paper at the conference.]

And tax exceptionalism is dying, with two well-publicized fatalities in 2011.  First, in Mayo Foundation v. United States, the Supreme Court refused to apply a less deferential standard of review to the Treasury Department’s interpretation of the tax code.  The Mayo Court indicated it was “not inclined to carve out an approach to administrative review good for tax law only,” finding “no reason why review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as review of other regulations.”  Second, in Cohen v. United States, the D.C. Circuit held en banc that the judicial-review provisions of the Administrative Procedure Act (“APA”) apply to a form of IRS guidance known as a notice.  The D.C. Circuit remarked that “[t]he IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal Government—from suit under the APA.”  To be sure, “[t]here may be good policy reasons to exempt IRS action from judicial review [under the APA].  Revenue protection is one.  But Congress has not made that call.  And we are in no position to usurp that choice . . . .”

In The Death of Tax Court Exceptionalism, we call for the demise of another instance of tax exceptionalism:  the United States Tax Court’s longstanding view that it is not governed by the judicial review provisions of the APA.  In this post we present a snapshot of the legal case against Tax Court exceptionalism that is more fully developed in Parts I and II of our paper.  In a subsequent post we explore the policy implications of the Tax Court discarding tax exceptionalism and embracing general administrative law.

The Tax Court has declared that “[t]he APA has never governed proceedings in the Court (or in the Board of Tax Appeals).”  In other words, the Tax Court refuses to apply the APA’s default standard (abuse of discretion) and scope (confined to the administrative record) of review provisions.  Instead, the Tax Court considers the default in both contexts to be de novo, and only departs from de novo review when it determines that the Internal Revenue Code suggests a more deferential review standard.(As we explain in Part I of our paper, the Tax Court’s misguided view of tax exceptionalism may be largely a product of its unique history—including that Congress converted it from an agency to a court (in 1969) after the enactment of the APA (in 1946)—and the post-1969 expansion of its jurisdiction to adjudicate tax-related disputes.)

This approach contradicts general administrative law principles that every other federal court applies when reviewing agency actions.  As we explain in Part II of our paper, the APA establishes the default standards for judicial review of all federal agency action.  The IRS, an executive agency within the Treasury Department, is plainly an “agency” for purposes of the APA (5 U.S.C. § 701(b)(1)).  And while the Tax Court used to be an agency before the enactment of the APA, as of 1969 it is an “[A]rticle I . . . court of record” (26 U.S.C. § 7441).  For purposes of the APA, it is thus “a court of the United States” (5 U.S.C. § 702) and, for its review of IRS agency actions, a “reviewing court” subject to the APA’s judicial-review provisions (5 U.S.C. § 706).

That the APA governs the Tax Court does not mean the standard of review is always abuse of discretion or the scope of review is always confined to the administrative record.  Instead, these are the default standards, and the inquiry becomes whether Congress has overridden them.  Indeed, “[r]ecognizing the importance of maintaining a uniform approach to judicial review of administrative action,” the Supreme Court has instructed reviewing courts to “apply the APA’s court/agency review standards in the absence of an [statutory] exception.”  To depart from the APA default, the agency’s governing statute must suggest “more than a possibility of a [different] standard, and indeed more than even a bare preponderance of evidence”; the exception “must be clear.”

To illustrate how the Tax Court should conduct its inquiry into whether the APA default standards apply, we focus on three types of IRS actions reviewed by the Tax Court.  Check out Part II.B of our paper if you’re interested in that analysis.  In a nutshell, by starting with the APA, it becomes clearer which IRS actions are subject to the APA defaults (e.g., innocent spouse and collection due process) and which may not be (i.e., tax deficiency) based on congressional override of the APA defaults in the Internal Revenue Code.

Whether the APA’s judicial-review provisions apply to the Tax Court “is of more than passing interest.  It goes to the heart of the place of the Tax Court in our administrative system,” explained Judge Bybee last year in a dissent from a Ninth Circuit opinion that embraced Tax Court exceptionalism.  Now that the supersized Ninth Circuit has joined the Tax Court’s side of the split—with four circuits on the other side and the Eleventh Circuit somewhere in between—it is likely only a matter of time before the Supreme Court intervenes to declare the death of Tax Court exceptionalism.

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