Are IRS Defenses Crumbling?

Ryan Lacey:  Hello, and welcome to this Federalist Society webinar. This afternoon, July 21, 2022, we discuss whether IRS defenses are crumbling after a slew of recent court case decisions against them. My name is Ryan Lacey, and I'm an Assistant Director of Practice Groups here at The Federalist Society. As always, please note that all expressions of opinion are those of our experts on today's program.

 

Today we are fortunate to have an excellent panel moderated by Eileen O'Connor, whom I will introduce briefly. Lee O'Connor is the Chairman of the Executive Committee of The Federalist Society's Administrative Law and Regulation Practice Group. For six years, during the administration of the President George W. Bush, she was Assistant Attorney General of the United States, responsible for the Tax Division of the Department of Justice. She's now in private practice with her own firm.

 

After our speakers give their remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can toward the end of today's program. With that, thank you for being with us today.  Lee, the floor is yours.

 

Eileen O'Connor:  Thank you, Ryan. Greetings all. I'm glad you've tuned in to our discussion today. I've been interested in tax policy administration and enforcement my entire professional life, which, at this point, is a very long time. Congress is constantly changing the tax code, sometimes in major, sometimes in minor ways. Often the changes and the reactions of taxpayers and their advisors to them resemble a game of whack-a-mole. The IRS has its work cut out for it in trying to uphold its obligation to administer and enforce these constantly changing and evolving laws.

 

      In just the past few years, challenges to IRS efforts to do so have been increasingly successful. I hope you'll visit my little summary of some of the notable recent cases. It is posted on The Federalist Society blog. To discuss those and related developments today, we're fortunate to have two people who are very knowledgeable about them. In fact, one has been instrumental in the successful challenges to the government's position. The other has been responsible for defending the government in the United States Courts of Appeal.

 

      Our speakers' bios are on The Federalist Society website, so I'll just save discussion time now by mentioning just a few salient points. Our first speaker is Professor Kristin Hickman, Distinguished McKnight University Professor and Harlan Albert Rogers Professor in Law at the University of Minnesota Law School. Professor Hickman's extensive scholarship on administrative law provides the foundation for many of the successful legal challenges to IRS guidance, and it is often cited in judicial opinions, including those we will discuss today.

 

Our other speaker is Gilbert Rothenberg, Adjunct Professor of Law at American University's Washington College of Law and the University of Pennsylvania's Carey Law School. More to the point, for today's discussion, though, is that for 15 years, until his retirement in the fall of 2019, Professor Rothenberg was Chief of the Appellate Section of the United States Department of Justice's Tax Division. It had been my privilege, as head of the tax division, to select Gil to that position upon the retirement of his predecessor.

 

Our discussion is aided today by our interlocutor, Robert Carney, who is Senior Counsel, Caplin & Drysdale, and Adjunct Professor of Law at Georgetown University Law Center. Earlier in his career, Bob was a trial attorney with the DOJ Tax Division, and has been in-house corporate tax counsel.

 

As Ryan said, we'll try to save some time for audience questions. So, as they occur to you during the discussion, please enter your questions in the Q&A and we'll pose them to the speakers later, as time permits. Without further ado, Professor Hickman.

 

Kristin Hickman:  Thank you, Lee. And I want to say thank you to Lee and Bob both, for putting together this program, and The Federalist Society for hosting it and for inviting me to participate. And it's always a delight to engage with Gil on these topics. So I've been tasked with providing just a little bit of background to get us started today, a little bit of background context for purposes of our discussion.

 

      For those of you, perhaps, who aren't as familiar with some of the developments in the area of tax and administrative law, I think it's important to appreciate that for many years there was a lot of question about the extent to which the Administrative Procedure Act applied to Treasury and IRS rules and regulations. That was put to rest, to some extent, in 2011, when the Supreme Court decided a case called Mayo Foundation for Medical Education & Research v. United States, which was a case involving Chevron deference for Treasury regulations, but in which the Supreme Court articulated that it was disinclined to adopt an approach to judicial review good for tax law only, in a passage which suggested greater breadth than simply Chevron deference.

 

Many people have interpreted that portion of the Supreme Court's Mayo Foundation opinion as suggesting that the Supreme Court was disinclined to embrace the concept of tax exceptionalism from general administrative law requirements, practices, and norms. And we were off to the races from there. Before the Mayo Foundation case, you didn't see a lot of Administrative Procedure Act challenges against tax rules and regulations, and you had a certain sense in the tax community, I think, of tax exceptionalism from those requirements.

 

Since the Mayo Foundation case in 2011, we've had a growing collection of cases in which taxpayers and other litigants have challenged Treasury and IRS rules and regulations on a variety of different APA grounds, most notably for failing to adequately follow notice-and-comment rulemaking procedures, properly or at all, and also for failing to satisfy the requirements of the arbitrary and capricious standard under Section 706(2)(A) of the Administrative Procedure Act, and an old Supreme Court case known well in administrative law circles as State Farm.

 

The interaction of tax and administrative law in the jurisprudence has been further complicated by the Anti-Injunction Act, which is a provision in the Internal Revenue Code that limits judicial review of tax cases, oftentimes to an enforcement type of context, raising questions about the availability of pre-enforcement judicial review of tax rules and regulations. That wasn't addressed by the Supreme Court until just last term, in a case called CIC Services, which we will talk about later as well.

 

That's really where we're at today, in terms of background. Our topic today -- I think we have a whole collection of these cases that have been decided in recent months that are worth talking about and digging into a little bit to see, not only about how administrative law is informing Treasury and IRS practices and procedures, but also how these tax cases are starting to raise some interesting issues for the administrative law context as well. With that, I'm going to turn it over to Gil to kick us off with our first pair of cases, the Hewitt and Oakbrook Land Holdings cases. Gil?

 

Gilbert Rothenberg:  Well, thank you, Kristin. And for a little bit of additional background -- and Kristin mentioned that, for a long time, tax attorneys said, "Well, we're special, and tax law is special." And the interesting thing is that Kristin talked about Mayo, the Supreme Court case in which the opinion by Justice Roberts basically said, "We don't think there is tax exceptionalism when it comes to administrative law." Actually, the government was leading the charge in that case, because there used to be a Supreme Court case that says, well, you measure tax regulations under this, like, six- or seven-part test. And what it basically did was it kind of limited what IRS could do with changing circumstances.

 

      So the government started to litigate cases in which the government said, "Now, wait a minute. These six factors that used to be from a case called National Muffler really doesn't apply in the tax area. The case that applies really is Chevron." So it's kind of interesting. This is kind of a -- maybe Kristin would say it's ironic, but the government having advocated — beginning with cases that led to Mayo — that there is no such thing as tax exceptionalism. Well now, it is, as I mentioned, somewhat ironic that the government seems to be losing cases because there is no tax exceptionalism.

 

      So, with that brief background, it does bring me to a pair of cases that were just issued last December and then maybe in the spring, cases called -- Hewitt was the first case out of the Eleventh Circuit, and the second case is Oakbrook, out of the Sixth Circuit. And I'll talk about each of them in turn, but they both appear to present conflicting holdings regarding the Administrative Procedure Act and how that applies to tax cases, but both arise in the tax context of a conservation easement. So, for those who -- what is Gil talking about? What is a conservation easement?

Well, think about if you have a very old building and you think it's an historical facade. Well, you may, in fact, donate what's known as a façade easement, and if it's done properly, you actually can get a tax deduction for it. Also, suppose you own a tract of land and some of it has wetlands or is notable for ecology reasons or whatever, you can make what's known as a conservation easement. And, again, if it's done properly, you can get a tax deduction. So both of the cases I'm going to talk about have to do with -- the context is, are each of these taxpayers entitled to the charitable tax deduction they claimed, for the value they claim, for the conservation easement?

 

      Now, you might think, okay, well, here's the fight. Are they entitled to the conservation easement? What is the proper value of it? Well, that would be easy. But these cases don't turn on that concept. These cases turn on a procedural concept, that is, are the regulations the IRS issued, with respect to when a conservation easement is or is not deductible, are those regulations valid? And, again, the cases I'm going to talk about don't even go to the level of “Are they substantively valid?” what Kristin referred to as kind of arbitrary or capricious. But, rather, were they promulgated in the proper way? So, again, if they weren't promulgated in the proper way, then some courts can say, "Well, okay. Well, they're invalid for improper procedure." Not that they're invalid under Chevron, an issue that will maybe be decided down the road.

 

      Okay, so let's talk about the first case. First case was Hewitt again, and in particular -- and, again, I'm going to try not to get into the weeds, because only tax geeks like the weeds. But it has to do with, okay, you've made a conservation easement. And, again, in order to have a deduction for a conservation easement, it has to be forever. Okay, well, that seems pretty straightforward. But, no, it's not straightforward. What happens if the easement is terminated? How can an easement be terminated? Well, there could be a court decision, or maybe there's a -- suppose you have a conservation easement over wetlands and then it was determined that this was a superfund site and you had to drain the wetlands and so, therefore, it didn't serve the conservation purpose. So there are various ways in which a conservation easement can be extinguished.

 

      So then the question is, okay, if that happens, what happens to the property? Let's say the property ends up being sold and there are proceeds to be distributed. Who gets what? Presumably, the charitable donee of the conservation easement will be entitled to something, and the owner of the underlying property will be entitled to something. So, again, you get into who's entitled to what if the conservation easement is extinguished. Okay, well, the tax statute kind of goes into it in a very kind of broad context. It says, well, the conservation easement has to be -- the magic words are "in perpetuity," which I've described earlier as "forever."

 

Okay, but it's not forever if the conservation easement is extinguished. So then, not to get too far in the weeds, well, what if, after the conservation easement was granted, the owner put improvements on the property, built a building, or whatever, on the part of the property that maybe he or she or it was entitled to. Well, what happens when the conservation easement goes away? Can the property owner subtract from the proceeds, or maybe add to the proceeds, the value of the improvement he or she made on the property? So you say, "Well, wait a minute, when I granted the easement, there was not this improvement. Now, I put the improvement on." Who gets the benefit of that?

 

So, again, that's kind of the underlying context, and the particular deed involved in Hewitt and the deed involved in Oakbrook didn't carve out an exception for those improvements. And the IRS's regulation basically says, "I'm sorry, but those improvements don't just go back to the owner, rather, there is a proportionality rule, and both the owner and the charitable donee can share in the entire value of the property, including the improvements."

 

So that leads us, then, to the lawsuit. IRS denied the conservation easement. A lot of times IRS denies a conservation easement, because IRS thinks it's overvalued or other reasons. Well, in this case, I can't even remember whether IRS challenged the valuation, but, for our purposes, IRS said the charitable donation was not forever. Why was it not forever? Because, under the Treasury regulations, the owner can't get back all of the money for improvements. It has to be shared. And this particular owner, Hewitt, did not do that, therefore, no, charitable deduction is ineffective.

 

The Hewitt's challenged it and they raised a number of arguments. Well, one of their arguments was, "Excuse me, the regulation that said we can't do it was improperly promulgated." Why was it improperly promulgated? Well, during the ratification process in the regs, notice-and-comment, and so forth, the IRS had not sufficiently responded to a particular -- to a series of comments that were made by some of the people who wanted to have a stake, and whether the reg was -- should be promulgated the way it was proposed. So, again, this is between the proposed reg and the final reg.

 

      All right, so, now, how does the court deal with it? Well, the court in Hewitt, the Eleventh Circuit case issued last December, basically said, "This regulation that IRS issued is not valid because the IRS did not sufficiently respond to a particular comment that was -- or series of comments made by several conservation groups that complained about the regulation dealing with who gets money from improvements." And the court of appeal, the Eleventh Circuit said, "Well, okay, we consider the comment" — this was by the New York Land Conservatory — "that this was a significant comment." It challenged the reg. IRS, in its preamble to the final reg, simply said, "The comments, we haven't discussed. We've considered them, but it doesn't change our mind." And the Eleventh Circuit said, "Well, I'm sorry. That was a significant comment, and because IRS did not respond to it, the regulation is invalid, from a procedural standpoint."

 

      Now, the government's argument was, A, it wasn't a significant comment. And the government made several arguments, but that was, ultimately, how the case was decided. So now the government lost in the Eleventh Circuit. Cert time expired. The government did not seek cert. Now, as I mentioned to a reporter who asked about this, that's not unusual. Why? Because Hewitt was the first case in which -- does the IRS have to respond to certain comments during the -- in the preamble? Is that, or is that not, fatal to the validity of the reg? It was the First Court of Appeals decision. Well, as most of you probably know, the Supreme Court, a lot of times, does not take cases — certainly in the tax context, but in other contexts — unless there's a [inaudible 00:19:22] conflict. So there was no conflict at that time. Cert time expired.

 

Okay, now, at the same time, there was a case pending in the tax court that made its way to the Sixth Circuit, called Oakbrook. Oakbrook presented basically the same issue. There were some differences, which I'll get to, if you're not already bored. But what I'll get to the point is that the same argument was made by the Oakbrook litigant. And, again, it had to do with the "in perpetuity" of the conservation easement. And Oakbrook basically fractured the tax court. I can't remember exactly, but there were majority opinions, concurring opinions, dissenting opinions. And the question was, okay, is this regulation valid? Did the IRS sufficiently respond to comments?

 

      The government made a lot of the same arguments in Oakbrook to the Sixth Circuit that it made to the Eleventh Circuit in Hewitt. This time, however, the government prevailed. It was a 2-1 decision, in terms of validity of the Treasury reg, but it was a unanimous decision, 3-0, in favor of the government as to the issue of, "Is Oakbrook entitled to the deduction?" The concurring opinion agreed with Hewitt on the procedural point, but did not agree that the taxpayer wins on a substantive point.

 

      So, what did Oakbrook think of the Hewitt argument that -- well, there was a particular comment made by New York Land Conservatory, "IRS didn't respond. Doesn't that matter?" And the court in Hewitt -- I'm sorry, the court in Oakbrook said, "Well, no." And it's interesting as to why the court said no. It disagreed with Hewitt, because it said, "The comment," — again, the particular comment everybody was focusing on said IRS, what you're proposing, that is, if there's an improvement made to the property, that the charity and the owner have to kind of share in that improvement — they said, "That's unfair. It's bad policy. It will inhibit conservation easements. Congress, presumably, did not want to inhibit conservation easements, and so it's bad policy and you should drop that. In the final reg, you should drop that requirement."

 

      Now, the Oakbrook opinion, the judges in majority said, "Okay, the comment had to do -- particularly took aim at, this is a bad policy." But what the comment did not take aim at was the statutory requirement of being in perpetuity. So the court of appeals in Oakbrook said, "Okay, if you're not addressing the statutory term "in perpetuity" and you're just arguing about good or bad policy, that is not a significant comment, in our opinion, and, therefore, that doesn't mean the Treasury regulation is invalid.

 

      Okay, so, again, different views on that same issue. So now the next question might be, "Oh, well, now, maybe we have conflicting views. Is the Supreme Court going to take up this issue? And if it does, maybe that will be another Administrative Procedure Act ruling by the Supreme Court." Well, not so fast. Why? In Oakbrook, the taxpayer did seek rehearing, and that, of course, basically puts on hold any cert time running. That was just denied earlier this month, July 6. What that means, is — August, September, October — okay, cert time does not even run until early October. So will the taxpayer in Oakbrook seek cert? I don't know. No one knows. I guess the Oakbrook client knows, and maybe they're still thinking about it. But suppose they do go for cert. What would the IRS, what the government do?

 

For those of you who are not familiar with kind of how the government operates in situations like this, and especially in a tax context, is if there is what I refer to as a direct conflict on a tax issue between the courts of appeals, and if a taxpayer goes for cert, the government will, in appropriate instances, actually acquiesce in that cert petition and will tell the Supreme Court, "Yeah, there's a conflict. You ought to take up the case and make a decision." It's unknown whether the government will do this in Oakbrook. And one thing I want to point out is that the concurring opinion in Oakbrook has a sentence that says the deed involved in Oakbrook was not exactly the same as the deed, the conservation deed, that was at issue in Hewitt.

 

So will that make a difference? Does that make a difference? Certainly, the APA issue, there is pretty much of a disagreement. The Oakbrook opinion says, "We don't agree with Hewitt on this point." So, again, that's a matter that only time will tell. So that's kind of a thumbnail sketch of where Oakbrook and Hewitt are. For those of you who don't wonder, "Well, what about Hewitt? The government didn't seek cert, so what's it doing with Hewitt? Hewitt was remanded back to the tax court. What I can tell you is that it's ongoing in the tax court, and further briefing has been set for the end of August. So the last notification I received is that I think it's due August 29. So we'll have to see what the government's position is going to be on August 29 in Hewitt.

 

Now, can we think about anything else — before, again, I turn this back to Kristin — can we think about anything else that's doing in this area of APA and conservation easement? Well, I will tell you that just yesterday the Supreme Court filed a brief in the Ninth Circuit in a case called 901 South Broadway Limited, and this also presents a conservation easement case. It also presents an in-perpetuity issue, and I'll just kind of read you one or two sentences from the government's brief to kind of get you an idea of what is the government still arguing. And, again, I'm not there anymore, so I'll tell you what the current people at the tax division are arguing.

 

So let me just read these sentences. This is taken right from the government's brief that was filed yesterday. "The APA does not require agencies to respond to every comment that criticizes a regulatory rule, no matter how fundamental, in terms of broad goals identified in committee reports. Such an interpretation of the APA conflicts with the Ninth Circuit's recognition that the lack of a response to a comment violates the APA only if it evinces a failure to consider the relevant factors." So, again, to put this into context, presumably, the government takes the view that unless a comment is directed to a relevant point, that would be relevant to, "Does this conflict with the statute?" not, "Is this good policy?"

 

Then the government would say, "Well, that's not a significant comment. Failure to respond to it will not invalidate the reg." Now, Kristin, I can't remember if you filed amicus briefs in either of these cases, so maybe you can -- okay. Kristin often files amicus briefs in cases I used to handle. And for those of you who might think that Kristin and I are always on the opposite ends of the spectrum, no, there was one instance in which Kristin filed an amicus brief in support of the position I was advocating for the government. So, again, thank you for that, Kristin, that one time.

 

Kristin Hickman:  That one time being the Mayo Foundation.

 

Gilbert Rothenberg:  Yes, it was. I --

 

Kristin Hickman:  We were actually on the same side. Let me just make a couple of observations about Hewitt and Oakbrook. I know we've got some other cases we want to talk about too. But one thing that I think is important for tax people to recognize — and then APA, general administrative law people might find a little bit surprising — is that the set of regulations that were at issue here were issued by the IRS in 1986. That's really -- having a set of regulations being challenged on APA procedural grounds that are that old is actually relatively unusual. It's something that's going to happen, I think, a lot in the tax context, because of the Anti-Injunction Act that I mentioned earlier and that we may have time to talk about later.

 

But to give you an idea of Treasury and IRS practice back then, as summarized by the tax court in Oakbrook, in this instance you had more than 700 pages of comments from 90 organizations and individuals that the IRS and Treasury — in the preamble to the final regulations — summarized, basically, by highlighting seven major groups of comments from among those received, over a two-page summary of comments, and then a blanket statement from the Treasury department that it had considered all of the comments, including those not specifically highlighted. And part of the argument that Treasury and the IRS advanced in Hewitt and in Oakbrook was that that blanket statement of considering all comments should be adequate to satisfy the requirements of the APA.

 

Section 553 of the APA, as interpreted by the courts, requires agencies to address all significant comments. Gil's absolutely right, you don't have to address all comments. But you do have to address all significant comments in the preamble to your final regulations. And what we're really arguing about here is whether and to what extent the comments that were highlighted in this particular set of cases, whether they were significant, with the Sixth Circuit concluding that to be significant, a comment has to engage the specific goal that the agency is trying to accomplish, and needs to propose alternatives -- I guess it's an and/or, they're not really specific in this regard -- but that the comment or the person raising it, making the comments, needs to propose alternatives to accomplish the particular goal that the agency's trying to accomplish.

 

Meanwhile, the comments that are at issue in this litigation from the New York Landmarks Conservancy were broader-based. They focused on the Congressional goals, with respect to conservation easements more generally, and talked about the particular regulation, the in-perpetuity regulation that Gil was talking about, as chilling donations and penalizing donors and creating windfalls for donees. And, also, they spoke about Congressional goals, as expressed in the legislative history. So it's true, they weren't specific to the in-perpetuity requirement, in terms of defining the specific definition and proposing an alternative to the definition that Treasury was proposing.

 

But they, nevertheless, were addressed to the concerns of Congress, with respect to conservation easements more generally. The Hewitt court, the Eleventh Circuit, said that these comments challenged a fundamental premise of the regulations by demonstrating how they would lead to inequitable results that were inconsistent with the statute and would defer further contributions -- or deter further contributions. And then they talked about how the comment was specific to and cast doubt on the reasonableness of the regulation, in light of one of Congress's committee reports, which, according to Treasury, were reflected in the final regulations, whereas the Sixth Circuit said that the comments didn't engage with the perpetuity requirement and whether the rule served Treasury's expressed end, or whether there were alternative proposals that might accomplish the same goal.

 

The Sixth Circuit's approach to significance, I will suggest, is very narrow and somewhat esoteric. We don't have a lot of case law about what makes a comment significant. The requirement — the interpretation of the APA that requires agencies to respond to significant comments — has been around since the late 1970s and early 1980s. It's been embraced by most, if not all of the circuits, explicitly, in case law, with the result that most agencies basically take a fairly prophylactic approach of responding to virtually any comment that's coherent.

 

They think of significance in terms of coherence. And that, I think, is the approach to significance that has been embraced by the Eleventh Circuit. The Sixth Circuit's requirement that the comment address precisely what the agency is seeking to accomplish with the regulation in question and not looking more broadly is not only very narrow, but is not particularly consistent, I don't think, with the way that courts, in general, but, more importantly, agencies, have interpreted the significance requirement in the past.

 

Gilbert Rothenberg:  Well, let me ask you a question in this regard.

 

Kristin Hickman:  Yeah.

 

Gilbert Rothenberg:  I want to go to the 30,000-foot level.

 

Kristin Hickman:  Yeah.

 

Gilbert Rothenberg:  These were tax cases --

Kristin Hickman:  Yeah.

 

Gilbert Rothenberg:  -- involving whether somebody was or not entitled to their tax deduction, and then resolution might depend on was a comment significant or not.

 

Kristin Hickman:  Yeah.

 

Gilbert Rothenberg:  Okay, is this good from a legal point of view? Is this good from a societal point of view? I mean, to some extent, what taxpayers are doing is they're using the APA like a hammer? And if you think the APA is a hammer, everything looks like a nail. So, again, if I were still at IRS, I would say, "Let's have a fair fight. You either are or are not entitled to the tax deduction. Okay, let's fight over that, instead of fighting over, gee, was that comment significant, or was it not?" So what I'm worried about is is this going to devolve into those esoteric questions, as opposed to let's get to the real issue involved. So I'm worried about that.

 

Kristin Hickman:  Well, except for the fact, Gil, that the Treasury and IRS interpretation of the statutory perpetuity requirement is precisely what we're arguing about. I mean, admittedly, the concurring judge in the Sixth Circuit said, "Irrespective of the regulation, I would decide against the taxpayer." That's one judge. It's hard to know whether other judges would agree in that regard. And there are other potential approaches to the in-perpetuity requirement from the statute. And we're never really had an opportunity before now -- at least not pre-Mayo foundation, I guess, or I don't know exactly, I'm not a conservation easement expert.

 

But we haven't at least examined whether when Treasury adopted the in-perpetuity requirement whether -- or, not the in-perpetuity requirement, but its interpretation of the in-perpetuity requirement -- whether that actually was a good -- good for society, good for accomplishing the goals of conservation easements -- whether that was a good or the best interpretation of the statute that they could have adopted. I mean, that's part of the --

 

Gilbert Rothenberg:  So then, why don't we just go right to Chevron?

 

Kristin Hickman:  Well, because it's not just about the validity of the interpretation as a statutory matter, as a matter of statutory interpretation. It's also about -- to the extent that Treasury and the IRS had discretion, whether they exercised that discretion reasonably. I mean, fundamentally, the comments that were raised in this instance were that this particular regulation was going to chill donations, was going to result in a windfall for donees, was going to end up hurting donors, and hence the chilling of the donations. And I don't know if anybody's studied empirically whether or not that actually happened. Frankly, I'm agnostic on the point, myself. And I will concede also, I don't like the idea that we're going back and we're re-examining 1986 regulations. But --

 

Robert Carney:  Never mind. Excuse me, I didn't mean to interrupt you.

 

Kristin Hickman:  But, because of things like the Anti-Injunction Act, and because of the fact that this is a brave new world for us, with respect to tax and administrative law, this set of arguments is available. So, consequently, of course litigants are going to raise it. And while you can question whether it makes sense to re-examine tax practices from the 1980s, to the extent that those tax practices haven't fully evolved since then, I don't think that Treasury necessarily these days only issues a two-page response to 700 pages of comments. But there are ongoing questions about whether, and to what extent, Treasury does adequately respond to comments.

 

I think it does make sense to take seriously these sorts of claims, irrespective of when the regulations came about, particularly when the APA requirement in question was as well-developed as it was, with respect to the requirement that we respond to significant comments, as far back as 1986. You go back to 1960s regs, and Administrative Procedure Act understandings were different. But by 1986 it was pretty well-established that agencies needed to respond to significant comments, and Treasury didn't. And whether or not this is the best interpretation of the statute — from both a statutory interpretation perspective, but also from a policy perspective — is something we ought to be able to argue about.

 

But let me make one last point here, and that's with respect to the fact that, you say this, well, this is just one tax case and these are old tax regs and we really ought to just look at whether or not this particular conservation easement complied with them. It's a good reg. Well, the way the courts are now disagreeing about the significance question, I will say, extends far beyond this one tax case. What it means for a comment to be significant -- and if the Sixth Circuit is right in its very narrow interpretation of significance, that not only impacts how the IRS responds to comments in its regulations, but it involves every other agency too, that, at least up to now, has been following a much broader conception of what it means for a comment to be significant.

 

So I think we need to think about this, not just in terms of tax administration, but also in terms of administrative law, more generally, not just with respect to this one set of regulations from 1986, but with respect to regulatory practices going forward.

 

Eileen O'Connor:  Thanks so much. I think there are several cases that we wanted to discuss today. Those were two of them. Kristin, I think you were going to discuss CIC, and Mann. I'm hoping that we have a little time to talk about Liberty Global.

 

Kristin Hickman:  Sure. Let me try to be really brief in describing what's going on in Mann Construction and CIC Services. Both of these cases concern the reportable transaction regime of Section 6707(a) of the Internal Revenue Code, and how the IRS uses notices, subregulatory guidance documents that don't go through notice-and-comment rulemaking, to impose reporting obligations on taxpayers and their advisors, with respect to transactions that the IRS decides that it's concerned about. The Sixth Circuit, again, decided a case called Mann Construction. And then, after Mann Construction was decided, the Eastern District of Tennessee decided the merits in CIC Services on remand from the Supreme Court.

 

Both of these cases, both Mann Construction and CIC Services, concern the reliance of the reportable transaction regime on IRS notices. Mann Construction addressed IRS Notice 2007-83, concerning cash-value life insurance policy arrangements. CIC Services involved IRS Notice 2016-66, regarding micro-captive insurance transactions as reportable transactions. And in both of these cases, the taxpayers — or CIC Services was a material advisor — challenged the validity of the notices in question for lacking notice-and-comment rulemaking procedures.

 

Now, Mann Construction was a refund action, with the taxpayers seeking a refund of penalties assessed and paid under Section 6707A. CIC Services is a pre-enforcement case. And last May, in CIC Services, the Supreme Court held that the Anti-Injunction Act did not require material advisors to decline to report and suffer penalties before they could challenge the validity of an IRS notice on APA-based grounds. They effectively -- the Justices said that CIC Services could challenge the notice in question on a pre-enforcement basis, and remanded the case for consideration on the merits.

 

Now, in Mann Construction -- only days before the Supreme Court decided CIC Services, a federal district court in Michigan granted summary judgment to the government in Mann Construction, holding that Congress, in Section 6707A defined reportable transactions by reference to Treasury regulations, that, in turn, allowed the IRS to identify listed transactions by notice, by regulation, or by other form of published guidance. And the district court said, thereby, Congress had authorized the IRS to forego notice-and-comment. A three-judge panel of the Sixth Circuit reversed that decision with Chief Judge Jeffrey Sutton writing the opinion.

 

The panel held unanimously that Section 6707A does not create an exception from APA notice-and-comment rulemaking requirements for reportable transactions. The panel made clear that the notice, in this instance, was a legislative rule, generally subject to notice-and-comment rulemaking procedures under the APA, rather than an exempt interpretive rule. And, as the panel then observed, legislative rules have the force and effect of law, while interpretive rules do not, and they said that Notice 2007-83 carried that legal force because it imposed a new reporting obligation on taxpayers, as well as civil and criminal penalties upon those who failed to comply, and because the notice exercised an express and binding delegation of rulemaking power.

 

The Sixth Circuit then said that even though Congress doesn't need to use magical passwords, the cross-reference that was contained in Section 6707A to that earlier IRS regulation was insufficiently explicit to demonstrate Congressional intent to exempt rules and regulations for APA procedural requirements. The Sixth Circuit also rejected an argument that Congressional inaction regarding the IRS's long-standing practice of relying on notices, in connection with the reportable transaction regime, represented the ratification thereof. So the Sixth Circuit then set aside IRS Notice 2007-83 for its lack of notice-and-comment rulemaking procedures, in violation of the APA.

 

So, shortly after the Sixth Circuit issued its opinion in Mann Construction, the federal district court in Tennessee issued an opinion in CIC Services, on remand from the Supreme Court, applying the Mann Construction decision to the notice that was at issue regarding micro-captive insurance transactions in CIC Services. So, even though the government endeavored to distinguish the different reportable transactions notices at issue in the two cases, the CIC Services court rejected that argument, and found that the Sixth Circuit's reasoning in Mann Construction applied equally to the micro-captive insurance transactions notice, which it then also said was invalid for lacking notice-and-comment rulemaking procedures.

 

The district court further found that the micro-captive insurance transactions notice was arbitrary and capricious, under the APA, for failing to include relevant data and facts supporting the IRS's decision to designate micro-captive arrangements as reportable transactions, and then also rejected a request from the government that it remand the notice for further procedures without vacating the notice first.

 

      My own view is that the Sixth Circuit is absolutely correct in concluding that the IRS's reportable transaction notices generally are legislative rules that need to go through notice-and-comment rulemaking, unless Treasury and the IRS can validly claim the good cause exception for foregoing those procedures. Good cause is the issue in the Liberty Global case. I've argued for a long time in my scholarly writing that, particularly, this subset of IRS notices are susceptible to challenge under the APA.

 

The micro-captive insurance transactions notice, I think, was particularly problematic, because the IRS conceded in the notice that some micro-captive insurance transactions are legitimate, and that it wasn't sure which transactions were good, and which transactions were a problem, so it was using the reportable transactions regime to conduct a fishing expedition for information at the expense of material advisors like CIC Services, who had to comply with the third-party reporting requirement. Now, I'm sure the IRS is probably right that a fair number of micro-captive insurance transactions are suspect.

 

But, if the IRS is going to impose a financial burden on a private party, the APA requires the IRS either to use notice-and-comment rulemaking procedures and do a better job of justifying its actions, or the APA requires the IRS to explain why the good cause exemption applies for foregoing those procedures. I'm sure Gil disagrees with me dramatically on this case.

 

Gilbert Rothenberg:  No, I wouldn't classify, I'd just disagree. But for those of you, again, keeping score, the CIC Services remand to the district court, the time for the government to file a notice of appeal, doesn't expire until, I think, August 1. So, again, jury's out on whether the government will appeal the CIC Services to the Sixth Circuit. So I just point that out so everybody will be clear on that. And, generally, yes, I generally do disagree with Kristen on most of the APA matters.

 

But, yes, that gives you a sense on -- stuff is still percolating in the courts. I'm not quite sure how all this is going to shake out. As I mentioned earlier, is the Supreme Court going to weigh in or not? It's unclear at this point. But we've talked about conservation easements, we talked about reportable transactions. What about an issue that may come up outside of the tax area? What if an agency issues a temporary regulation? And a temporary regulation was at issue in this fifth case we're going to talk about called Liberty Global. And Liberty Global was a -- again, a district court, I think, out of Colorado. And it basically had to do with, as I mentioned, a temporary reg.

 

Now, the new rules for the Internal Revenue Service for temporary regs are under the Internal Revenue Code. The IRS cannot issue a temporary reg, unless, at the same time, it issues a proposed regulation, which then permits notice-and-comment. And, secondly, the temporary reg can only be valid for three years. So clearly the district court in Liberty Global invalidated the temporary reg. Why? Because it basically said, well, the government -- there was a problem. It had to do with the effective date of a couple of statutes, and IRS was very worried that taxpayers were going to exploit this timing difference and generate millions, if not billions of dollars of what IRS said were improper tax deductions or tax exclusions.

 

So the government quickly issues a temporary reg, saying, "Okay, you can't do this, and we'll issue the final reg when the time comes." So the district court said, "Well, government, even if you only learned about this problem with seven months to go before a particular filing deadline, that was still sufficient time for you issue a regular reg using notice-and-comment. Government, you didn't do that, so it's invalid." Now, I don't know how many people out there do administrative law, but when have you ever seen the government propose a reg under notice-and-comment, wait for comments, write the preamble in detail, like Kristin wants you to do, all within seven months? Okay, it's not happening.

 

So what do I think? I think the district court in Liberty Global simply didn't sufficiently understand the process. I mentioned in another panel that I said the opinion is breathtaking in its ignorance of how long it takes to issue a Treasure reg. So--

 

Robert Carney:  Do you think temporary regs are basically dead because of that ruling? In other words, they won't be practically able to do it anymore?

 

Gilbert Rothenberg:  Yes, I do think that's a very significant risk. I don't think that that would be good from a policy point of view. I don't even think that's good from a legal point of view. So what's the status of Liberty Global? Of course, I looked into this also. There are still issues pending in the district court, so there's no final decision yet in Liberty Global, because one issue that's come up is, I think the government says, "Well, another issue is whether or not this complies with economic substance doctrine." So that remains to be litigated. So, again, I don't know what the ultimate result of Liberty Global will be, but whenever a final decision is issued, I'd be on the lookout for whether or not the government's going to appeal that.

 

Kristin Hickman:  So let me make a couple of comments here. First off, Gil, I think you're absolutely wrong that agencies are incapable of putting out final regulations within seven months of issuing a notice of proposed rulemaking. I think that happens more often than you realize. I think it's a matter of priority, and it's a matter of how many resources you want to throw at the reg in question. We see instances when agencies act very quickly when they feel the need to.

 

Part of the context, in this instance, we were dealing with temporary regulations under Section 245A that were adopted in response to the Tax Cuts and Jobs Act. Treasury had lots of regs to get out during the period, with respect to the Tax Cuts and Jobs Act, in a fairly short period of time. They were trying to put out a lot of regulations within 18 months of enactment of the Tax Cuts and Jobs Act, for purposes of taking advantage of the 18-day window for being able to back-date those regulations to the date of enactment. And they just ran out of time, because the 245A regs were not as high on the priority list as some other regs. And the fact of the matter is that they -- the reason that they put out temporary regulations was to try to basically get these regs --

 

Gilbert Rothenberg:  Do you want my hammer Kristin? Here, here's my hammer. You can use this.

 

Eileen O'Connor:  Mallet, that's a mallet.

 

Gilbert Rothenberg:  I know, but I call it a hammer.

 

Kristin Hickman:  I mean, look, I'm simply saying, Gil, I actually think Liberty Global -- or in the Liberty Global case, I actually think Treasury, if there's a reason for appeal, it's because I think Treasury has a better argument for the good cause exception than the district court in this case was willing to concede. The problem wasn't just you didn't go through notice-and-comment rulemaking. Treasury actually, in this instance, for the first time ever, or at least first time ever that I'm aware of, put a lot of paragraphs into describing why it felt like it had good cause for postponing notice-and-comment.

 

I've written elsewhere, in the Columbia Journal of Tax Law or something — I can't remember the precise name of the journal, but it's on my SSRN page — I actually said, you know, of the four reasons Treasury gave for having good cause, I thought one of them was pretty plausible. The district court, in this instance, disagreed. I think it's entirely possible that the Tenth Circuit might conclude that, in fact, Treasury did adequately justify issuing temporary regulations in this instance. And I continue to believe that Treasury does have instances in which -- particularly in the context of reportable transactions, but, potentially, in other cases too, like this one, where Treasury may be able, validly, to claim good cause, and I don't think temporary regulations are necessarily dead.

 

But I also think if Treasury really wanted to get the regulations out in seven months they could have done it. But they had a lot of different things they were trying to accomplish, and so they very wisely, like many agencies do, chose to allocate their resources according to their priorities. That's a decision agencies have to make every day. There are lots of regulations agencies want to put out quickly, and they have to decide how many resources to throw at this regulation instead of that regulation.

 

Where there's a will there's a way. And you can't penalize taxpayers for agencies' non-compliance with the APA, simply because the agency decides to allocate its resources differently than it needed to do if it wanted to get out the regulations in the time allotted, in order to accomplish putting them out within the 18-month window of enactment of the Tax Cuts and Jobs Act.

 

Eileen O'Connor:  Thank you so much. We are running toward the very end of the hour. I want to thank the audience. We have some interesting questions and comments. Someone has asked about actions on decisions. The Internal Revenue Service, when it loses a case, publishes, at some point, an action on decision, which, of course, we call an AOD, saying that it's going to acquiesce or not, in the decision. So, as Gil said, there is still plenty of time for next steps to be taken in the cases that we've talked about today.

 

We talked a little bit about temporary regulations, and that's something that the IRS has been doing for years. I don't know whether other agencies do, but it creates guidance for people who need to comply with the law before the IRS has had the time or input to actually figure out what they're actually going to finally do. So the temporary regulations, as Gil said, are probably not going to be happening too much in the future. Chevron -- one comment asked about Chevron, whether some of these cases reflect the fact that the Supreme Court seems to be letting Chevron wither on the vine. That may be true.

 

Kristin Hickman:  I don't think so.

 

Eileen O'Connor:  You don't think Chevron's going to wither?

 

Kristin Hickman:  No. I don't think that these cases really reflect anything about Chevron, in addition to the fact that I think that Chevron is still alive and well in the circuit courts.

 

Eileen O'Connor:  Bob, we've taken up most of the time already, but do you have a word or two you'd like to add, or a question?

 

Robert Carney:  Well, I think the one thing that I though was also very potentially interesting -- we talked quite a bit about the easement cases, and a recent case out of the Northern District of Ohio, GBX Associates, dealing with the so-called nationwide vacatur, in terms of the APA, which many of the people on the call might be aware of. The language refers to setting it aside if there is a violation of the APA. And I know the government actually conceded the APA issue eventually, but asked it to apply only to that case, and the court was disinclined. But I believe that is still going on, and just if anybody -- Gil, maybe you -- do have an idea on what DOJ might be doing with the national vacatur.

 

Gilbert Rothenberg:  Well, I know there's a lot of folks out there who think an individual district court should not have the ability to issue a nationwide injunction in all kinds of areas, not just tax law. But one point that Kristin mentioned about good cause -- as much as I might disagree with Kristin, the one thing that I think really is good government is IRS has adopted a formal policy that says, "If we are going to issue a temporary reg, we will explain why we think there is good cause." That, I think, is good government. And, again, back in the 60s, the IRS didn't do that.

 

Kristin Hickman:  No, they didn't do that back in the 90s or the 2000s, either.

 

Eileen O'Connor:  IRS has a tough job.

 

Kristin Hickman:  They do.

 

Eileen O'Connor:  Congress doesn’t make it any easier with all -- not only the frequent and constant changes, but one of the cases that Gil talked about, the temporary regulation that was intended to close a loophole inadvertently created by the lawmakers. And, in that one case, the IRS was faced with losing $110 million, in that one case. And, as we said, between Congress and the IRS and the taxpayers and their representatives, it is a constant game of whack-a-mole. With the conservation easements, you have Congress wanting to encourage conservation easements, which is someone who owns a property, saying, "I promise never to develop it, and if I did, it would be worth $10 million. But since I promise never to develop it, it's only going to be worth $5 million, so I'm going to deduct that $5 million."

 

And then, of course, you have whole industries arising to create appraisals coming up with that $10 and that $5 million, which may or may not be reliable numbers. And the IRS has to constantly be on the move to try and keep track of that. And the reportable transactions you were talking about, those are what very well may have been illegal tax shelters. And when I was at the Department of Justice, I always objected to objecting to transactions, because the objectionable thing is that they result in a tax return that understates taxable income, and, therefore, understates and underpays tax. And that's what the problem is. It's not the transaction. It's the fact that taxes are being evaded through these transactions. And IRS is trying to get people to let them know, "There's something in my return you might want to take a close look at," which, of course, is a big challenge. In any event --

Kristin Hickman:  The IRS has a really hard job, and we ought to give them full credit for doing a very hard job. But they expect us to comply with the laws that apply to us.

 

Eileen O'Connor:  Oh, yeah.

 

Kristin Hickman:  So we have a right to expect them to comply with the laws that apply to them.

 

Eileen O'Connor:  Absolutely. And, Kristin, you've done an amazing job. I regret today we did not get around to talking about the legislative versus interpretive guidance, which you have so clearly laid out the groundwork for decisions on that basis. But thank you so much to our speakers today. Ryan, toss it back to you.

 

Ryan Lacey:  Well, thank you so much, Lee. And on behalf of The Federalist Society, I would like to thank our panel for the benefit of their valuable time and expertise today. And I want to thank our audience for joining us and participating. We welcome listener feedback by email at [email protected]. And, as always, keep an eye on our website and your emails for announcements about upcoming webinars and other programming. Thank you all for joining us today. We are adjourned.