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Tax Court Again Holds APA Does Not Impact Validity of Statutory Notice of Deficiency

Posted on Dec. 22, 2016

One of the main issues in tax procedure over the next few years will be the  relationship of IRS actions with the Administrative Procedure Act. Last week in Taking a Hard Look at Court Review of Treasury Regulations I discussed an article that considered rulemaking in light of 5 USC § 706(2)(A), which empowers a court to invalidate a rule that is “arbitrary” and “capricious.” That issue is front and center in the Altera case involving the validity of regulations under Section 482. That case is currently on appeal in the Ninth Circuit.

A close cousin of the Altera issue is teed up in the context of IRS adjudications in QinetiQ v Commissioner, a case on appeal in the Fourth Circuit. In QinetiQ, well-represented taxpayers are arguing that the IRS’s poorly explained notice of deficiency  should be set aside for its arbitrariness. (for previous PT posts on QinetiQ see here and here).

In QinetiQ the taxpayer is arguing that by violating the APA the notice should lose its validity and IRS would have to issue a properly detailed notice to generate a possible deficiency. A side issue would be whether the SOL on assessment would be tolled while the parties fought over the validity of the original notice, an issue I am certain that IRS and taxpayers would disagree over.

In Ax v Commissioner, the Tax Court has not embraced the position that the APA imposes additional obligations on the IRS’s issuance of stat notices, as we explained in Tax Court Rules that APA and Administrative Law Principles Do Not Bar IRS From Amending Answer and Asserting New Grounds for Deficiency. Professors Stephanie Hoffer and Chris Walker followed up and gave additional context on this issue in A Few More Words on Ax and the Future of Tax Exceptionalism.

Circuit courts will soon be weighing in on this issue. Oral argument in the Fourth Circuit in QinetiQ occurred in late October; for an audio of that interesting argument see here. The argument is rich, with taxpayer counsel framing the issue as one of basic fairness in terms of dealing with the government and DOJ counsel describing the impact of a taxpayer win as potentially “catastrophic.”

Other cases are in the pipeline where taxpayers are making similar arguments. In Soechting v Commissioner taxpayers argued in a summary judgment motion that a shoddy notice of deficiency invalidated the notice under the APA. In an October order, the Tax Court disagreed, relying on Ax. The taxpayers then requested that the Tax Court certify the issue for immediate appeal to a circuit court (presumably the Fifth Circuit, as taxpayers reside in Texas). Under IRC § 7482(a)(2)(A), the Tax Court has the authority to certify an issue in a case for immediate appeal if there “is a substantial ground for a difference of opinion…”

In an order from earlier this week the Tax Court denied that request:

Petitioners’ submissions make it abundantly clear that they disagree with the Court’s position that the issuance of a notice of deficiency is not subject to the Administrative Procedures Act (APA). But this Court has repeatedly adhered to that position in the past, and most recently in Ax v.Commissioner, 146 T.C.__ (April 11, 2016). Petitioners have presented no authority to the contrary. Their reliance upon Altera Corp. v. Commissioner, 145 T.C. 91 (2015) is misplaced as that case addresses the applicability of the APA to the Commissioner’s regulation promulgation authority.

As I have explained previously, taxpayers are swimming upstream on this issue though there is an atmospheric problem with IRS issuing notices that may be wrong on their face or at best failing to explain much about why IRS is proposing a deficiency. Yet taxpayers generally have the right to de novo review of a stat notice. There are other remedies and specific provisions addressing inadequate stat notices, and taxpayers enjoy the right to meaningful prepayment review of IRS actions. While the courts are pushing IRS toward the mainstream of administrative law in some areas I suspect that this is one issue where tax procedure may stay somewhat outside APA norms.

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