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Storm at SEC Over Appointments Clause Violations Concerning its ALJs and Possible Implications as to Circular 230 ALJs, Part II

Posted on Sep. 4, 2015

Today we continue with part 2 of Carl’s discussion of the ALJ issue happening at the SEC that could have an impact in the tax world. For greater detail on the cases at the SEC, we recommend reading the article by Villanova Graduate Tax adjunct professor Peter Hardy and his colleagues Carolyn Kendall  and Abraham Rein at Post & Schell who have been deeply involved in the SEC cases (readers may recall that Peter and Carolyn wrote a two-part guest post in PT on willfulness in the context of civil FBAR penalties). Keith

In Part I of this post, I described the district court opinions in Duka v. SEC, 2015 U.S. Dist. LEXIS 100999 (S.D.N.Y. Aug. 3, 2015), and Hill v. SEC, 2015 U.S. Dist. LEXIS 74822 (N.D. Ga. Jun. 8, 2015), that held that certain unappointed SEC ALJs were actually inferior officers under the Appointments Clause who needed to be appointed by SEC Commissioners to properly hold enforcement hearings. I also described the very similar FDIC ALJs in the case of Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), where, by contrast, the D.C. Circuit held that such ALJs were not inferior officers under the Appointments Clause and so need not be appointed, but could just be hired by some low-level bureaucrat in the agency. I also mentioned that the Treasury uses ALJs to decide Circular 230 enforcement matters. In this part II of the post, I wanted to compare all of these ALJs to see what impact the Duka and Hill rulings, if upheld, might have on the Treasury ALJs. I also wanted to explore whether there are other statutory or constitutional problems with the appointment (actually, non-appointment) by the Treasury Secretary of such ALJs.

My conclusion is that there is even stronger reason for Treasury ALJs to be held inferior officers and so have to be constitutionally appointed. I suspect, but can’t prove, that there are statutory problems in what the Treasury is doing. But, I also feel it probable (though wouldn’t guarantee it) that the Treasury’s renting of ALJs from other agencies would be held constitutional.

As a preliminary matter, I wanted to warn that, while I know some facts about Treasury ALJs that do Circular 230 litigation, I know others only by word of mouth, and I have not seen important documentation (such as contracts and any purported letters of appointment). So, this post should be taken with more than a grain of salt. Any person wanting to litigate the issues I discuss needs to do some discovery of the Treasury (or possibly do FOIA requests). In my Collection Due Process Appointments Clause case of Tucker v. Commissioner, 135 T.C. 114 (2010), affd. 676 F.3d 1129 (D.C. Cir. 2012), and in Landry, Duka, and Hill, the government itself was forced to provide non-public facts about ALJs and IRS Appeals personnel so that the parties and courts could properly frame the analysis.

One fact that I am pretty sure about, not just from hearsay, is that neither the Treasury Department nor the IRS has appointed any ALJs that are currently sitting. In Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), Justice Breyer, in his dissent, presents a listing of all of the then-appointed ALJs in the federal government. There were 1,584 listed from 28 agencies. The vast majority were in the Social Security Administration. None was in the Treasury or the IRS. See id., at 586 (Breyer, J., dissenting).

This may surprise readers, but it doesn’t surprise me. Unlike most agencies, the IRS thinks itself virtually immune from the Appointments Clause (sound familiar?). In the fiscal year 2014, the IRS employed 91,018 full-time, part-time, and seasonal workers. IRS Data Book, 2014 at Table 31, p. 70. Yet apparently the only people appointed at the IRS are the six public members of the IRS Oversight Board (appointed by the President under IRC § 7802(b)(1)(A)), the single federal employee appointed to that Board (by the President under IRC § 7802(b)(1)(D)), the Commissioner (appointed by the President under IRC § 7803(a)(1)(A)), the Chief Counsel (appointed by the President under IRC § 7803(b)(1)), and the National Taxpayer Advocate (appointed by the Treasury Secretary under IRC § 7803(c)(1)(B)(ii)).

In my view, it is a bit ridiculous to say that no other people at the IRS exercise significant authority on behalf of the government or that the drafters of the Appointments Clause would think so. I am likely joined in my view by at least three current Justices on the Supreme Court. In his Free Enterprise Fund dissent, Justice Breyer (joined by Justices Stevens, Ginsburg, and Sotomayor) provided a listing of 573 Senior Executive Service-level positions “who constitute the upper level management of the independent agencies listed in Appendix A, supra. Each of these officials is, under any definition–including the Court’s–an inferior officer”. 561 U.S. at 556-557. These were merely SES employees (i.e., employees paid above the normal Civil Service General Services levels) at independent agencies, not in regular Executive agencies, such as the Treasury or its sub-unit, the IRS. By contrast, according to the most recent Census Bureau statistics I could find, in 2010, the military had over 200,000 officers in active duty, though it is not clear how many needed to be appointed under the Appointments Clause.  U.S. Census Bureau, Statistical Abstract of the U.S.: 2012 at p. 335, Table 510. The situation of few appointed actors at the IRS may be part of the fallout of what I understood were scandals in the 1950s involving numerous corrupt IRS district directors, who, to that point, had been political appointees. I read that the district directors were then made Civil Service employees. Since 1998, the position of district director no longer exists at the IRS.

Be that as it may, I have been told by a number of former IRS employees over the years (sometimes indirectly through other former IRS employees) that neither the IRS nor Treasury appoints any of its own ALJs to do hearings under Circular 230. Rather, the Treasury contracts with other agencies to rent their ALJs under long-term contracts (contracts that I have never seen). My information is that currently, the Treasury employs rented Department of Agriculture ALJs for Circular 230 hearings. Lavar Taylor tells me that he remembers doing a hearing presided over by an OSHA mining judge, whose ignorance about IRS procedures was exploited by the IRS attorney involved. I also heard a long while ago that Department of Labor ALJs were, at that time, being used for Circular 230 hearings.

I find Treasury’s regular renting of ALJs odd, since 5 U.S.C. § 3105 authorizes the Treasury to appoint its own ALJs (“Each agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title.”) And I assume that the Treasury has a staple diet of its own Circular 230 hearings that would justify its appointing at least one internal ALJ.

The ALJs used in Circular 230 hearings are like most other ALJs as to duties and authority. See 31 CFR §10.70(b), giving the powers to Circular 230 ALJs, including the power to “[m]ake decisions”. If an appeal is taken to the Treasury Secretary, he “or his delegate” (whatever that means) does the review. 31 CFR §10.78(a). The reviewer reviews ALJ legal questions de novo, but the ALJ “will not be reversed unless the appellant establishes that the decision is clearly erroneous in light of the evidence in the record and applicable law.” 31 CFR §10.78(b). This clearly erroneous factual review standard is more like that of the Tax Court regular judges reviewing STJs, rather than the de novo factual review standards of the FDIC and the SEC as to their ALJs. Thus, this makes it far more likely that Circular 230 ALJs are inferior officers for purposes of the Appointments Clause and need to be properly appointed. Indeed, even the Landry court majority might hold that Circular 230 ALJs are inferior officers under its reasoning. Thus, I am not so sure that it matters as to Circular 230 ALJs that Duka and Hill have rejected Landry as a too-narrow reading of who the Supreme Court thinks needs to be appointed under Freytag.

Statutory Problems with Renting ALJs

I have been unable to find statutory authority for one agency to forgo appointing any ALJs, but instead to just regularly rent ALJs from another agency. I doubt such statutory authority exists, as it would doubtless make superfluous 5 U.S.C. § 3344, which provides:  “An agency as defined by section 551 of this title which occasionally or temporarily is insufficiently staffed with administrative law judges appointed under section 3105 of this title may use administrative law judges selected by the Office of Personnel Management from and with the consent of other agencies.” I can’t see how the Treasury could argue that it always uses other agency ALJs because the Treasury is insufficiently staffed by its own ALJs “temporarily” or only “occasionally”. However, there is little case law under section 3344, and none appears to deal with the question I raise.

Constitutional Problems with Renting ALJs

Finally, there is little Supreme Court case law dealing with the issue of whether a person properly appointed to perform the duties of one office needs to be reappointed if asked, as well, to perform the duties of another office that would require an inferior or principal officer under the Appointments Clause. One can argue that the Treasury is asking an ALJ – constitutionally appointed by another agency to perform duties at that agency – to perform a different ALJ duty on completely different subjects at the Treasury. I can see some merit in this argument. After all, would it be right to say that the Secretary of State wouldn’t need to be reappointed to take over, as well, the duties of the Secretary of Defense?

The closest Supreme Court case that is on point to this argument would be Weiss v. United States, 510 U.S. 163, 170 (1994), where the Court wrote that

those serving as military judges [on the Courts of Military Review] must be appointed pursuant to the Appointments Clause. All of the military judges involved in these cases, however, were already commissioned officers when they were assigned to serve as judges, and thus they had already been appointed by the President with the advice and consent of the Senate. The question we must answer, therefore, is whether these officers needed another appointment pursuant to the Appointments Clause before assuming their judicial duties. Petitioners contend that the position of military judge is so different from other positions to which an officer may be assigned that either Congress has, by implication, required a second appointment, or the Appointments Clause, by constitutional command, requires one. We reject both of these arguments. [Id. at 170 (citations omitted)]

The Weiss court discussed and distinguished a case, Shoemaker v. United States, 147 U.S. 282 (1893), that had suggested that any duties that are added to the job of an appointee must be germane to the original duties.  The Supreme Court was not sure there really was such a germaneness requirement, but found any such requirement to have been satisfied in the case because all military officers of high rank are in some way partly involved in the administration of military justice.

In light of Weiss, I would think that anyone trying to argue that Circular 230 ALJs need to be reappointed by the Treasury under the Appointments Clause when borrowed from other agencies would have a tough time. However, given the paucity of Supreme Court authority, I can’t guarantee the outcome of such an argument.

Still, Weiss presupposes that the officer who needs to be appointed to rule as a military judge had already properly been appointed as a military officer. This suggests that anyone wanting to question the proper appointment of a Circular 230 judge borrowed from another agency at least should do some discovery to find evidence that the lending agency properly appointed the ALJ in question. After all, it seems the agencies did not use Appointments Clause procedures to appoint the ALJs in the FDIC or the SEC. This suggests there may be a lot of sloppiness about the appointment of ALJs at other agencies who lend their ALJs to the IRS.

Final Observation

If, as I suspect, a lot of litigation will be generated about whether SEC ALJs are properly appointed, I expect this litigation eventually to spill over to other agencies. Although the Hill and Duka opinions are not directly relevant to the issues I raised in Tucker about Appeal Office personnel being required to be appointed to conduct Collection Due Process hearings, it may be that after some court of appeals opinions are issued outside the D.C. Circuit involving SEC judges, someone may want to consider bringing the Tucker argument up again to another Circuit to try to create a Circuit split.

I made the Appointments Clause argument in Tucker because I felt that both Settlement Officers used in his case – and Settlement Officers used in a number of other CDP cases I had handled – were insufficiently trained for the work they were doing and often did not do a good job. (More recently, I have had better experiences with Settlement Officers.) I assumed that if the Congress passed a law allowing the Treasury Secretary to appoint such individuals as inferior officers, like the OPM-qualified ALJs, the Settlement Officers would be better trained and more independent in their thinking. Perhaps I was naïve. However, in 2009, one high IRS individual in Counsel actually privately wished me luck in wining Tucker. She said the IRS wouldn’t mind appointing and training its Settlement Officers better, so long as I also got the IRS the increased funding to pay for the training and no doubt higher level of compensation that would have to be paid to the appointed personnel.

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