The Changing Environment for APA Challenges to Tax Regulations

Administrative Law Practice Group Teleforum

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Until recently, the Internal Revenue Service and Treasury Department typically issued regulations involving the tax law with scant compliance with the familiar procedural requirements of administrative law for primarily three reasons.  First, because tax law was considered “exceptional;” second, the agencies believed that their rules and regulations were exempt from the requirements of the APA and related statutes; and third, the “Anti-Injunction Act,” 26 U.S.C. § 7421(a), was thought to drastically limit judicial jurisdiction over taxpayer challenges to the validity of tax regulatory actions.  Over the past decade, tax agency practices have been under attack and taxpayers have been pursuing their challenges to the procedural validity of tax regulations in the courts, notwithstanding the consistent opposition of the Government.  Our speakers have been at the center of those challenges and will discuss several very recent cases highlighting the changing environment for APA challenges to tax regulations. 


Kristin Hickman is a Distinguished McKnight University Professor and the Harlan Albert Rogers Professor in Law at the University of Minnesota Law School, who has published several of the seminal law review articles on this topic. 

Stuart Bassin is a veteran litigator of tax cases and serves as the taxpayers’ counsel in one of the most prominent pending cases in this area.  He was previously a trial attorney with the Tax Division of the U.S. Department of Justice. 

Moderator: Robert Carney is a Senior Counsel at Caplin & Drysdale, Chartered, in Washington, D.C., specializing in tax controversy and tax litigation.  He also was previously a trial attorney with the Tax Division of the U.S. Department of Justice.

Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Administrative Law and Regulation Practice Group, was recorded on April 3, 2020 during a live teleforum conference call held exclusively for Federalist Society members.


Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic: “The Changing Environment for APA Challenges to Tax Regulations.” My name is Micah Wallen and I am the Assistant Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today's call.


      Today, we are fortunate to have with us our moderator, Professor Bob Carney, who is Senior Counsel at Caplin, Drysdale, and Chartered in Washington, D.C., specializing in Tax Controversy and Tax Litigation. He also was previously a trial attorney with the Tax Division in the U.S. Department of Justice and is also an Adjunct Professor at Georgetown Law.


      We also have Stuart Bassin, who a veteran litigator of tax cases and serves as the taxpayers' counsel in one of the most prominent pending cases in this area. He was also previously, a senior litigation counsel and trial attorney with the Tax Division of the United States Department of Justice. And he is also a partner at an AM 100 law firm.


      We also have Professor Kristin Hickman, who is a distinguished McKnight University professor and the Harlan Albert Rogers Professor in Law at the University of Minnesota Law School, who has published several of the seminal law review articles on this topic. She has also co-authored the Administrative Law Treatise with Dick Pierce and served as a Special Advisor to Administrator of OIRA from 2018 to 2019.


      After our speakers give their opening remarks, we will then go to an audience Q&A. Thank you all for sharing with us today. Bob, the floor is yours.


Robert Carney:  Thank you, Micah. Today, as indicated, we're going to talk about the challenges, legal challenges to the validity of tax regulations, as opposed to non-tax regulations, which many might have thought should be the same. And today, it actually is. But historically, there was a concept known in the tax profession known as tax exceptionalism, which was a view upheld by many courts that there was a different standard of review for tax regulations, as opposed to non-tax regulations.


      And that led to a more general view that the Administrative Procedure Act procedural requirements didn't apply to tax regulations. The government, in arguing cases, reinforced that view by arguing the Anti-Injunction Act, Section 7421 of Title 26 United States Code, that is the tax title. The government viewed that as a bar to any pre-enforcement suit challenging tax regulations. That is any challenge that was not in the context of a litigation involving a specific taxpayer.


      There's very little development of the law in this area until the Supreme Court's decision in a case called Mayo Foundation back in 2011. And then there's been much more development thereafter. Mayo is generally viewed as the death of tax exceptionalism. It was actually -- although it was a tax refund suit that did not involve pre-enforcement challenge to tax regulations, as we're going to talk about today. So there was no Anti-Injunction Act issue. But the case brought tax regulations under the same rules as non-tax regulations. So the result is now -- and indeed, in that case, Mayo, I might add just tangentially, the Supreme Court noted that it had wavered and fluctuated between the tests of National Muffler and Chevron, and cited a number of cases where they had applied interchangeably one of the other, sometimes without citing one or the other.


      So the Supreme Court recognized this needed some straightening out. And that's what they did in the Mayo case. However, now we have the Administrative Procedure Act and the implications of that, and how that bears upon all litigation involving validity of tax regulations. Again, the government strongly opposes any challenges to tax regulations before an actual case involving a specific taxpayer, and the regulations involved in that case. And those challenges are generally based upon the Anti-Injunction Act, which I just mentioned a few minutes ago.


      The recent case in the District Court for the District of Columbia, Silver v. Internal Revenue Service, et. al, involved a pre-enforcement challenge to tax regulations, and that was handled, as was mentioned earlier, by Stu Bassin, who will also be discussing that at length in a few minutes. The case, I'll just quickly say, the Silver case, raises issues under the Anti-Injunction Act and the Administrative Procedure Act, challenge regulations governing the so-called Transition Tax that was enacted under the Tax Cuts and Jobs Act in 2017 and focusing on the government's failure to comply with the Administrative Procedure Act and the Regulatory Flexibility Act. 


      The government, as might be expected, filed a motion to dismiss in that case, claiming the court lacked jurisdiction because of the Anti-Injunction Act. That position was rejected by the district court, and the case is now proceeding to the merits of the Administrative Procedure Act and the Regulatory Flexibility Act Challenge. So today, the presentation will simply focus on the Anti-Injunction Act issues and the issues involving the Administrative Procedure Act and Regulatory Flexibility Act. And we'll discuss Silver, specifically, and other cases involving pre-enforcement challenges to tax regulations.


      So with that, I will turn it over to Professor Hickman for further discussion of the Anti-Injunction Act and these other cases.


Prof. Kristin Hickman:  Thanks, Bob. I appreciate it. And thank you all from The Federalist Society for allowing us to talk about these topics today. For some of us, these are really exciting.


      Stu and I agreed that we were going to sort of take turns talking about, first, the Anti-Injunction Act and then the Regulatory Flexibility Act. To introduce the Anti-Injunction Act issue, let me just point out that textually, the Anti-Injunction Act provides that no suit, for the purpose of restraining the assessment or collection of any tax, shall be maintained in any court, except as the Internal Revenue Code otherwise allows.


      That brief bit of language is more complicated than it seems. It has a lot of terms that requires some definition. Assessment and collection are defined terms within the Internal Revenue Code. Assessment is covered by Chapter 63 of the Code, which is actually entitled Assessment, and consists of several provisions.


      But essentially, assessment is the function of the IRS recording each taxpayers liability on the government's books. Although, there's a lot more detail to it than that, obviously. Collection, in turn, is covered by Chapter 64 of the Internal Revenue Code, which is helpfully entitled Collection, and again includes a number of provisions governing the physical process of actually going out and collecting taxes that have been assessed.


      Occasionally, you will find a case asserting that a particular penalty is not a tax for purposes of the Anti-Injunction Act. But courts generally have interpreted the concept of taxes for purposes of the Anti-Injunction Act pretty broadly, as including not only the actual tax -- your actual tax liability, but also penalties and interest. One word that isn't defined in the Code, and that the courts have spent less time trying to define, is the word restraining, as it is used in the Anti-Injunction Act. What does it mean to restrain the assessment and collection of taxes? Does restraining mean to stop assessment and collection outright, when they are temporarily imminent or approximate? Or does it extend to any action that might make assessment and collection more challenging to accomplish at some future time?


      Most tax cases arise, either when somebody pays taxes and sues for a refund. Or when the IRS issues a Notice of Deficiency. And the Code authorizes taxpayers to pursue judicial review of Deficiency Notices in the United States Tax Court. And then the federal law just generally allows refund suits as well. Both refund actions and deficiency actions are expressly authorized in the Internal Revenue Code. So the Anti-Injunction Act is not an issue in those contexts.


      Now, I should note for this audience, that outside the tax context, pre-enforcement judicial review of agency regulations is the norm under the Administrative Procedure Act and has been since the Supreme Court's 1967 decision in Abbott Labs v. Gardner. The question is whether the Anti-Injunction Act represents a tax-specific exception from that general administrative law norm when it comes to pre-enforcement judicial review of Treasury and IRS regulations and rulings. In other words, cases brought that aren't deficiency or refund actions, outside that enforcement context.


      To me, anyway, whether we allow pre-enforcement judicial review in the tax context, or whether the Anti-Injunction Act cuts off that pre-enforcement review comes down to the meaning of the word, restraining. Whether it means to stop assessment or collection outright, when they are temporarily imminent, or at least proximate. Or whether the Anti-Injunction Act extends more broadly in the sense of allowing a broader -- whether it cuts off any judicial review of any case that might lead to assessment, or any agency action that might lead to assessment or collection at some future time down the road.


      The IRS's position, historically, has been more or less that even if a case simply relates to tax, then the Anti-Injunction Act applies. At least, that is the articulation of their interpretation of the Anti-Injunction Act that they have advanced in some of the case law. I will note that there have been cases brought against the IRS or the Treasury Department with respect to tax regulatory actions where they haven't asserted the Anti-Injunction Act. Not very many of them but I'll give you one example, is the Bullock case, which as to do with exempt organizations, and reporting in that context. And I've wondered what the rationale is by Treasury and the IRS, or the Department of Justice and the IRS, I should say, when it comes to asserting the Anti-Injunction Act in some cases, but not others. They haven't really explained that anywhere, other than litigation briefs, and those don't say why they don't claim the Anti-Injunction Act in some cases, even though they do in others.


      Anyway, the Supreme Court has never had the opportunity to consider the relationship between the Anti-Injunction Act and the Administrative Procedure Act. When it comes to APA based pre-enforcement judicial review of treasury and IRS regulations and rulings. In a case called Direct Marketing Association v. Brohl, a couple of years ago, the Supreme Court decided that the Tax Injunction Act of 28 U.S.C. § 1341 barred a pre-enforcement challenge to Colorado State third-party reporting regulations.


      This is important because the Tax Injunction Act, which applies to challenges against states, was modeled on the Anti-Injunction Act of Section 7421 of the Internal Revenue Code, uses similar wording to the Anti-Injunction Act, and the Supreme Court, in the past, has recognized that relationship and concluded that the two statutes should be construed similarly.  So if you follow that line of cases, that would seem to suggest, well, if we're going to allow pre-enforcement challenges to at least some tax regulations brought against states, then we ought to similarly allow pre-enforcement challenges against federal regulations, at least sometimes. Notwithstanding the Anti-Injunction Act. But that's not necessarily the direction that the circuit courts have gone thus far.


      Now, I will point out as well, that over the past 60 years or so, the Supreme Court, while it's never taken up the question of the relationship between the Anti-Injunction Act and the Administrative Procedure Act, the Court has taken a number of Anti-Injunction Act cases and talked about the meaning of the Anti-Injunction Act, generally.  The problem being that the cases that the Court has addressed concerning the Anti-Injunction Act are best described as highly unique and very different from one another. And perhaps, not surprisingly, as a result, the Court's application, and analysis of the Anti-Injunction Act in those cases, has been highly variable and inconsistent. Sometimes it interprets the Anti-Injunction Act broadly. Sometimes it interprets the Anti-Injunction Act narrowly. To be blunt, at last as an analytical matter, you can't find a consistent analytical through line with respect to these cases.


      The Supreme Court's Anti-Injunction Act jurisprudence over the last 60 years is just a mess. A cynic might say that the Court applies the Anti-Injunction Act when it wants to avoid a tax case and construes the Anti-Injunction Act narrowly to allow judicial review when it wants to get to the merits. Less cynically, I think the problem is simply that the Court lacks an overarching theory of the Anti-Injunction Act. The briefing that has been provided has not provided that overarching theory. And given a very unusual set of cases in which to evaluate the meaning of the Anti-Injunction Act, the Court's analysis is correspondingly pretty ad-hoc.


      So when we consider APA based pre-enforcement challenges to Treasury and IRS regulations and rulings, again the question really comes down to whether we should ignore the Administrative Procedure Act, Abbott Labs v. Gardner, and Direct Marketing Association v. Brohl, and read the Anti-Injunction Act as a tax specific exception from the general administrative law norm of pre-enforcement judicial review.


      To me, anyway, again that question comes down to the meaning of the word, restraining. And again, the IRS's position, historically, has been, so long as a case relates to tax and might lead to some sort of assessment and collection of taxes or penalties down the road, then the Anti-Injunction Act cuts off pre-enforcement judicial review.


      Two relatively recent cases worth noting. One is the Florida Bankers case out of the D.C. Circuit, which was decided in 2015. And the other is the CIC Services case, in the Sixth Circuit, for which a cert petition is now pending. Neither of these cases involves regulations governing the calculation of anybody's tax liability, at all. Both involve reporting requirements.


      The Florida Bankers case involved a challenge to regulations that expanded the requirements for third-party reporting by banks regarding interest income earned by their non-U.S. customers. The CIC Services case concerns a challenge to an IRS Notice declaring Section 831(b) micro-captive transactions as reportable transactions that have to be reported to the IRS under Section 6011. Although no tax derives directly from the Treasury in IRS pronouncements in these cases, failure to report can lead to penalties for non-compliance, which are assessed and collected like taxes. And that's been the hook for concluding that the Anti-Injunction Act applies.


      In the Florida Bankers case, then-Judge Brett Kavanaugh wrote for the majority of a panel and concluded that the Anti-Injunction Act barred pre-enforcement judicial review of the bank reporting regulations, effectively telling the banks that they would just have to violate the law, pay the resulting penalty, and then sue for a refund. Meanwhile, Judge Karen LeCraft Henderson wrote a strong dissent accusing the D.C. Circuit panel of ignoring its own earlier Anti-Injunction Act precedence.


      In the CIC Services case, which has been very interesting to follow, the taxpayer challenged the IRS Notice in question for its lack of notice-and-comment rulemaking. First, we had a split panel, with Judge Eric Clay writing for the majority and following the reasoning of the Florida Bankers case. And concluding that the Anti-Injunction Act barred judicial review of the taxpayers claim that the IRS should have used notice-and-comment rulemaking in deciding that micro-transactions are reportable transactions. Judge Clay all but ignored the APA and distinguished Direct Marketing Association v. Brohl on the grounds that the language in the Tax Injunction Act is slightly different from that of the Anti-Injunction Act.


      Judge John Nalbandian penned a vigorous dissenting opinion asserting the importance of the Administrative Procedure Act, arguing that the Anti-Injunction Act should not be read as cutting off pre-enforcement judicial review in the tax context. When the taxpayer sought en banc review in CIC Services, the Sixth Circuit judges divided nine to seven in denying that petition. With Judge Clay pending a rather angry concurring opinion accusing the dissenters of trying to undermine the regulatory state. Judge Amul Thapar wrote a dissenting opinion for himself and six of his colleagues in which he, like Judge Nalbandian, argued for a more expansive reading of the Anti-Injunction Act that would allow for pre-enforcement judicial review.


      Most interesting was the concurring opinion written by Judge Jeff Sutton, in which he agreed with the dissenters that the original meaning for the Anti-Injunction Act would allow for pre-enforcement judicial review. And he called upon the Supreme Court to take up the question. But he said that he thought that existing judicial opinions adequately vetted the issue. And the Sixth Circuit really wouldn't add anything by taking the case en banc. So that's where we stand today.


      One last thing that I want to point out, with respect to this issue, is the fact that the Anti-Injunction Act dates back to 1867 and the Civil War income tax. There's not a lot of, what you would call, traditional legislative history explaining what Congress was trying to accomplish with the Anti-Injunction Act. And it's difficult in the space of a few minutes on a teleforum to go through 150 years of historical analysis of the Anti-Injunction Act in conjunction with tax administration surrounding the assessment and collection functions.


      But I will point out that in a Virginia Law Review article in 2017, I did all of that historical analysis and what I will point out, is that if you go back to 1867 and look at how tax administration worked at the time the Anti-Injunction Act was adopted, and then you roll tax administration practices forward 150 years, as well as rolling forward the language of the Anti-Injunction Act and how it has been modified and moved around the Internal Revenue Code over time, it's pretty easy to recognize that there's a very good argument, textually and historically, that the Anti-Injunction Act should be read much more narrowly, to only apply when assessment and collection are more imminent or temporarily proximate. 


      In other words, when you have a case that is broad simultaneously with the enforcement context, or in anticipation of actual enforcement being imminent, rather than in the pre-enforcement context, like we're talking about here. With that, I want to turn it over to Stu to talk about the Silver case.


Robert Carney:  Yeah, thanks Kristin. Yeah, Stu's now going to pick up the Silver case, which really takes head on the conflict between the APA and the Anti-Injunction Act and the Regulatory Flexibility Act. Go ahead Stu.


Stuart Bassin:  Thank you. Professor Hickman in her article is extremely thorough and rather convincing. I'd also mention that she has filed a very thorough amicus brief on the cert question in the Supreme Court that is part of, oh, something like 15 or so briefs that the Court has before it on the question of whether to grant cert.


      That gets me to Silver. And first, I want to start of with a little bit about the challenged regulations. The underlying regulations were part of the 2017 Tax Act, which radically changed the system of international taxation. As relevant here, what that Act did, was it imposed a new -- it's called “Transition Tax” upon United States shareholders of controlled foreign corporation. That can mean Apple's ownership of a subsidiary in Ireland. And it could also mean a U.S. citizen ex-pat who is running a business overseas.


      I use the example of the ex-pat who has opened up a pizza parlor in Milan. He is covered by the same statute. Overall, this Transition Tax is hugely important in the tax law because it is raising a lot of the money that would otherwise be not taxed under the new law.


      Well, it turns out that the statute describing the Transition Tax is about 265 words long. And most of which dealt with a nuance involving foreign tax credits. But when the IRS got around to writing regulations, there's about 100 pages of fine print in the Federal Register of those regulations. Those regulations are what is under attack in Silver.


      We should talk a little bit about the way tax disputes arise. You have, let's say, three or four steps in the process. You have a taxpayer files a return, and then sometime after that, the IRS audits that return and says, you owe more money. And that works its way through the judicial system. Then an assessment is made on the books and records, and the IRS goes out and collects that assessment of tax due.


      The government has invoked the Anti-Injunction Act in Silver because the taxpayer has brought suit on something that, eventually, might end up in a tax liability. But what the taxpayer is really talking about is, from the beginning, you, the agency, did not follow the required procedures to issue your regulations.


      The government has brought a motion to dismiss under the Anti-Injunction Act, contending that the Act reached the claim being brought by the taxpayer because, at least indirectly, a ruling invalidating the regulations would interfere with collection and assessment of taxes. And that issue came down to one of construing that difficult statutory language of the Act. The government relied upon the Florida Bankers decision. And we relied, primarily, upon the Direct Marketing decision, which says the Supreme Court said that you don't have a restraint of assessment and collection when you are so early in the process of taxes being imposed.


      The trial court in Silver rejected the Anti-Injunction Act, and basically said, the IRS envisions a world in which no challenge to its actions is ever outside the closed loop of its taxing authority. And the Court came back and said that the language is not that broad, and that assessment and collection is not synonymous with the entire plan of taxation, but rather more narrowly construed.


      There are a couple observations I want to make here. First of which is that the government's desired result is that nothing pre-audit can ever be litigated because of the Anti-Injunction Act. That position has been soundly rejected by just about every court that gets near the issue. The second observation I'd make is that, government position of preventing litigation of the Administrative Procedure Act claim here doesn't make a lot of sense. Typically an audit or deficiency proceeding, which is what they would want us to bring, is designed to address the substance of a reg as applied to a particular taxpayer. The Silver claim does not really address the substance of the reg. It addresses the procedure in which the reg, itself, was promulgated. And that claim would be identical for many different taxpayers. And it really doesn't depend upon what is in Mr. Silver's tax return.


      The final point that I find very interesting, it is very hard to reconcile Direct Marketing and CIC Services. You cannot reconcile through Direct Marketing with the decisions in Florida Bankers and CIC Services without a lot of juggling. Professor Hickman made the point that Florida Bankers was an opinion written by, now, Justice Kavanaugh. What is interesting about it is, he was sitting on the D.C. Circuit. And about three years earlier, there was another Anti-Injunction Act case that was before the D.C. Circuit. It was called Cohen that went en banc, and the court ultimately ruled in favor of the narrow construction of the Anti-Injunction Act, basically following Direct Marketing. That decision was divided 7-3. Justice Kavanaugh was one of the three. And then when it comes back to Florida Bankers, he wrote, essentially, the dissent from the Cohen case now as an opinion of the Court. I don't even know what that means from a precedential standpoint, but we can all think about what the law would be if and when this case gets to the D.C. Circuit.


      Kristin or Bob, do you have anything else to say about the Anti-Injunction Act at this point?


Kristin Hickman:  I don't have anything to add, in particular. I will note that I agree with you, that the D.C. Circuit has been inconsistent over time. There also have been personnel changes on the D.C. Circuit between when Cohen was decided, which was back around, I want to say, 2012 or so and by the time we got to Florida Bankers, which may have something to do -- I can't remember whether, in Florida Bankers, they tried to take it en banc or not.  I know they petitioned for cert and it was denied. But at the time, you didn't have quite so many amicus briefs. And you also didn't have quite so much lower court precedent trying to interpret the Anti-Injunction Act. So perhaps CIC Services will have better luck.


Stuart Bassin:  Yeah, I agree.


Robert Carney:  The only thing I might add, Stu, is the Chamber of Commerce v. United States case that we didn’t mention was the one, maybe, bright light, where in the district court, Chamber of Commerce was able to defeat the validity of some regulations, so-called anti-inversion regulations and the government had filed an appeal on that.  And then dismissed their own appeal. So that's one sitting out there, perhaps, that's also worth mentioning.


Stuart Bassin:  Right.


Kristin Hickman:  Yeah, Chamber of Commerce is an interesting one because much more akin to Silver, it involved a procedural challenge to regs that ultimately might have led to tax and opposed to merely penalties for non-reporting. And Fifth Circuit's usually a fairly friendly circuit for these kinds of issues. It was interesting when the case even got to the point, I think, where it was argued in front of the Fifth Circuit, but then the government finalized the regulations and withdrew its appeal, and so the Fifth Circuit dismissed it without ever issuing an opinion. Should we move on to regs next?


Stuart Bassin:  Yeah, let's go on to that. The Silver case is now going to go on to the merits of the case. And the claim brought by the taxpayers is that we have a violation of the Administrative Procedure Act and its younger cousins, the Regulatory Flexibility Act, and the Paperwork Reduction Act. The core of the claim, here, is the Regulatory Flexibility Act. Historically, that was something that tax lawyers never looked at. And when my client first mentioned the Regulatory Flexibility Act to me, I was interested, and I went and actually pulled up the statute. And what I found is, there's some useful things that we should know about Regulatory Flexibility Act.


      First, it requires agencies to create a regulatory flexibility analysis, which addresses alternatives to the proposed regulations designed to reduce the burden on small businesses. The idea is that Joe's pizza parlor in Milan has a hard time dealing with a hundred pages of regulations written in excruciating detail and can we find a shortcut there. I've learned that Regulatory Flexibility Act analysis and process is something that is routinely done by other agencies where they discuss alternatives and decide whether or not they would adopt them. I've never seen one done in the context of a tax case. And, in fact, Professor Hickman and others have pointed out that the Treasury Department and the IRS almost never have done a Regulatory Flexibility Act analysis.


      What they have done, instead, is relied upon an exception in the Regulatory Flexibility Act, which says you do not have to do the analysis. If the secretary certifies that there is no significant economic impact on a substantial business as small entities, and also provides a statement providing a factual basis for that statement and certification.


      The IRS has, traditionally, issued those certifications by the secretary without any factual analysis and it's actually a piece of boilerplate that is in the standard IRS rules, or Internal Procedures for developing the regulation. What is interesting about the Regulatory Flexibility Act is that it has its own private right of action. A taxpayer or any affected individual can obtain judicial review of non-compliance with the Regulatory Flexibility Act, including specifically, the certification by the secretary. The statute of limitations for bringing such an action is one year from the date the regulation is promulgated. And the court has authority to order the agency to take corrective action, including remanding the rule to the agency, and deferring enforcement against small entities until the agency prepares the property Regulatory Flexibility Act analysis.


      I'm going to pass it over, the comparable language in the Paperwork Reduction Act, and also note that there's a backdoor into the Administrative Procedure Act because compliance with the required procedures for promulgating a regulation is a reason for invalidating a reg under the Administrative Procedure Act.


      What we have here, in Silver, and what we're going to be litigating later this year is a case where there was no Regulatory Flexibility Analysis done. We have a naked certification that there is no significant impact on a substantial number of small entities. And there is no factual support in the record for that statement. We know that, historically, that's what Treasury and the IRS did. So the taxpayer in Silver is seeking the relief and the remedies under the Private Right of Action, including setting aside the regulation, and deferring enforcement against small entities until such time as the agency prepares a compliant Regulatory Flexibility analysis.


      I mentioned the Silver case is working its way through the court. Yesterday, the government filed the "Administrative Record" that it relied upon in issuing the regulations. We're still going through it. It looks like it is a bare-bones disclosure of what the administrative record, I would think, ought to be. But we are contemplating summary judgment briefing starting next month on the Regulatory Flexibility Act with the idea being that there will be a decision by the end of the year.


      With that, I'm going to turn things back to Kristin.


Kristin Hickman:  So, regarding the Regulatory Flexibility Act, this is a fascinating case to me and something of a new area, I think, at least as far as my awareness goes. I've got a couple of points that I think are related to one another.


      First, let me say that as far as I'm aware, the Silver case is pretty unique, certainly, in that it's the first case I'm aware of in which a taxpayer has, at least, gotten this far even with respect to a challenge to regulations on a pre-enforcement basis under the Regulatory Flexibility Act. No doubt, at least in part, because of the Anti-Injunction Act issue. That may have discouraged people from bringing cases to begin with.


      That said, I'll concede that I didn't realize that the Regulatory Flexibility Act contained its own private right of action until Stu brought it to my attention with respect to the Silver case. I think one of the things that makes the Silver case unique is the fact that the challenge was filed within the one-year limitations period imposed by the Regulatory Flexibility Act. And it's worth watching what happens in the Silver case. Because if the decision stands, Silver wins on the merits and the Regulatory Flexibility Act challenge is sustained, then that potentially opens up an avenue for challenging, not only tax regulations, but arguably regulations issued by any agency, so long as those challenges are brought within the Regulatory Flexibility Act's one-year limitation period.


      I don't have any special insight on the adequacy or completeness of the Regulatory Flexibility Act analysis offered, typically, by other agencies. But Stu is right that at least Treasury and the IRS historically have not offered very much in the way of very much in the way of Regulatory Flexibility Act analysis and the preambles to their tax regulations. I was thinking back, since OIRA is now supervising, or reviewing tax regulatory actions, and reviewing tax regulations, which it's been doing since April of 2018, I know that there was a lot of focus on cost-benefit analysis and how Treasury went about doing that. I know there was a lot of focus in OIRA on Paperwork Reduction Act analysis and how Treasure and IRS were doing that. I can't really recall whether or not OIRA was focusing particularly on the extend of the analysis offered by the Treasury Department under the Regulatory Flexibility Act. It's going to be curious to see that interaction going forward, not just with respect to the Silver case, but whether what happens in court, in turn, generates changes, in terms of Treasure and IRS regulatory practices, and OIRA review thereof.


      One other thing I will mention is that, where I have seen Regulatory Flexibility Act challenges brought in the past has been a little bit different. What I've seen has been cases in which challenging parties have argued that the agency's Regulatory Flexibility Act analysis is inadequate, and thus, arbitrary and capricious under the Administrative Procedure Act. And the interpretation of the arbitrary-and-capricious standard by Motor Vehicle Manufacturers Association v. State Farm Mutual Auto Insurance by the Supreme Court in 1983. That State Farm standard, remember, requires agencies contemporaneously to justify their actions. So far, when regulated parties have challenged agency actions for the inadequacy of their Regulatory Flexibility Act analysis, through the lens of State Farm, the courts have not been tremendously sympathetic. Some circuits have adopted a standard whereby so long as an agency demonstrates a reasonable, good faith effort to carry out the mandate of the Regulatory Flexibility Act, well then that's adequate to satisfy the State Farm requirement. And that's a very deferential approach to reviewing these sorts of claims.


      The Fifth Circuit, in a case called Elanco Communications in 2000, adopted that approach. You've also got cases -- a case from the Ninth Circuit called Ranchers Cattlemen Action Legal Fund v. The Department of Agriculture in 2005. The D.C. Circuit had a case called National Telephone Cooperative Association in 2009. All of these cases, and others, have taken a fairly deferential approach to Regulatory Flexibility Act challenges, when they've been brought through the lens of State Farm. Now one of the reasons why I assume that some challengers are bringing these claims under a State Farm lens is, perhaps, the challenges were brought outside the one-year Regulatory Flexibility Act limitations period.


      State Farm challenges, by comparison, have a six-year statute of limitations under 28 U.S.C. § 2401. And so it may well be that the challenges were brought outside the Regulatory Flexibility Act limitations period, but within that six-year general limitations period for State Farm challenges. So State Farm represented the lens by which challenging parties were able to sort of take on these Regulatory Flexibility Act claims. And maybe that's one of the reasons the courts have been so deferential to date.


      But in any event, that's a little bit of background. There's more on that topic, as well, in the Administrative Law Treatise. We've got an entire sub-chapter on Regulatory Flexibility Act challenges and the State Farm doctrine.


      In any event, I think we're ready for questions, unless Stuart or Bob has something.


Robert Carney:  Yes, thanks Kristin, I think that -- No. I think the final point is the fact that it's so interesting. You had the one-year statute, the different statutes under the APA and the Regulatory Flexibility Act. And if the IRS really asserted the Anti-Injunction Act vigorously, so you can never bring a pre-enforcement challenge, by definition those statutes would often have expired by the time the tax litigation could be commenced. With that, Micah, I think we can open up the lines for questioning.


Micah Wallen:  All right. Let's go ahead and open up the floor for audience questions. We'll now go to our first question.


Tim Harker:  Well, yes. My name is Tim Harker. Just a question, two questions, really. What does the history of the APA say about this? Did Congress intend to carve out a special exception for the tax code? Secondly, I don't understand, because I'm not a tax lawyer, I do all I can to pay my taxes. What is gained by the Regulatory Flexibility Act, other than just throwing another temporary roadblock? I do have environmental law experience and APA cranked it out, wrote exceptions to the discussion to the Regulatory Flexibility Act, which are routinely rubber-stamped by the courts. There are really not any serious grounds for challenging regulations, but then again, EPA does go through the APA. So those are my two thoughts and questions.


Kristin Hickman:  So if you don't mind my taking that first question, at least. Thanks for the questions. With respect to the legislative history of the Administrative Procedure Act, Section 701 of the Administrative Procedure Act does recognize that other statutes may preclude judicial review. And there is a single line in the legislative history, House Committee Report, I believe, with respect to the Administrative Procedure Act, that mentioned the Anti-Injunction Act. Now, importantly, that line doesn’t tell you anything about how the courts interpret the Anti-Injunction Act.


      My recollection is, back in 1946, number one, the courts were a little bit more liberal with respect to their interpretation of the Anti-Injunction Act than they are today. But number two, tax administration looked quite a bit different back in 1946 than it does now. And so, as part of that historical roll forward of the assessment and collection functions and how we think about the interaction of the Anti-Injunction Act with those provisions. I think it's entirely possible to reach a conclusion. On the one hand, the Anti-Injunction Act would cut off some APA based challenges as you get closer to the assessment and collection context. And yet, simultaneously not cut off pre-enforcement judicial review of treasury regulations and IRS rulings in the Abbott Labs sense of the term.


      Putting too much weight on that one line of legislative history, the House Committee Report strikes me as a very thin basis for claiming in support for the IRS's interpretation of the Anti-Injunction Act as an exception from the Administrative Procedure Act. I imagine Stu has things to say about the Regulatory Flexibility Act question, and after he has his answer, I may jump in, as well. But, Stu, do you want to take that one?


Stuart Bassin:  Yeah. I think it's important in this context to understand why APA and RFA cases in the tax area have not been appearing. And there are two things going on. One is this notion of tax exceptionalism that my teachers beat into my head for 30 years. And Mayo in 2011 eliminated that.


      The second thing that was going on, is that back in 1983, there was an agreement between OMB and the Secretary of Treasury which said that OIRA would not review tax regulations. So as a result, OIRA, which is the internal enforcement agency for the administration in determining whether or not people are issuing regulations in the right way, gets stepped aside. In 2018, I believe, Treasury and OMB modified that agreement and said OIRA's going to start reviewing Treasury regulations for compliance with APA and these related statutes. That's going to be interesting because there is a ton of regulatory guidance that is in the pipeline construing 2017 Tax Act, and we haven't seen, yet, whether the change is going to change the way in which Treasury and IRS issue regulations.


Kristin Hickman:  Let me make one other point with respect to the Regulatory Flexibility Act question that was raised. In terms of, what does Regulatory Flexibility Act analysis add, except another roadblock for agency regulatory action. Sure, requiring an agency to engage in a robust Regulatory Flexibility analysis takes time and resources. No question about it. It is, yet, another obligation that is imposed upon agencies when they regulate.


      On the other hand, it's an obligation that's been imposed by Congress. You might disagree with the notion of the significance or the important of Regulatory Flexibility Act analysis. But Congress asked agencies to do it when they regulate. If you think that Regulatory Flexibility Act analysis isn't worth doing, then the party to go to, to complain about it, is Congress. Not the courts and saying, well agencies shouldn't have to comply with the law. At least that's the way I look at it.


      Now, I think that there are good policy reasons for requiring agencies to contemplate the burden that their regulations will impose on small businesses. That's obviously a policy point that can be debated at a legislative level.


Tim Harker:  I was looking at it more from the taxpayer’s standpoint. What does he gain other than some additional time? As opposed to the APA, which gives the broad community the opportunity to comment on the wisdom of the particular regulation.


Kristin Hickman:  Sure. Well, keep in mind with tax regulations, you're not just talking about regulations that would impose tax liabilities. But you're talking about reporting requirements. These days, we run a lot of social welfare and regulatory police through the Internal Revenue Code. Everything from the Affordable Care Act to Pension Regulation, Exempt Organization Regulation, the IRS is one of the biggest Exempt Organization regulators that's out there. All kinds of different things get run through the tax laws with the result that, a lot of Treasury and IRS regulations, in fact a fairly substantial plurality of them, actually have nothing to do with the IRS's traditional revenue raising function. And instead, are much more akin to the kinds of regulations you deal with under other agencies, where contemplating the impact on small businesses of compliance actually is a very worthwhile endeavor, arguably.


      I've got another law review article in Duke Law Journal from 2014 that breaks down the kinds of regulations the Treasury issues, if anybody's interested.


Stuart Bassin:  I would, I think, two points here. The first is that the fundamental problem faced by my client in Silver and a whole lot of small businesses out there is that there is a very high compliance burden imposed upon them by the many, many pages of regulations that IRS has issued in the transition tax area. And what the Regulatory Flexibility Act was designed to do was to say, for a small business, we don't need to go through all the hoops that we would put Apple or Amazon through. And in fact, the transition tax was drafted with the very large multinationals in mind. And you can see lots of examples in the statute and regulations where they were addressing the concerns of big multinationals.


      What we're saying here is, if they thought about the concerns of small business, and there were plenty of small business comments submitted, there would have been modifications of the regulations that would have cut through a lot of that and allowed small businessmen to comply with the statute without hiring a Big Four accounting firm to guide them through it.


Micah Wallen:  All right. We have another question in the queue. We'll move to that next caller.


Ed Froelich:  Hi everyone. It's Ed Froelich at Morrison Foerster. Thank you for a very informative panel. My question, and I just want to pick up on a point that was made about the six-year statute of limitations for APA claims, can you tell us briefly what that is. And then, also, can you speak to the event in the Altera, the second go-around. As I understand, there was supplemental briefing on that issue, which ended up, I think, having both parties sort of on the same side. And I wonder if you could just speak to that and the reason for that?


Kristin Hickman:  Sure. Sure. Absolutely. First thing let me just point out, if you're curious about the standard six-year limitation period of 28 U.S.C. § 2401, again, the Administrative Law Treatise has an entire chapter on statutes of limitations for judicial review in the administrative law context. So lots and lots of cases there. In the couple of minutes that we have left, let me just say that, while subject to equitable tolling, while not necessarily applicable until you have final and ripe agency action, that general six-year limitations period applies to cutoff APA procedural and process challenges under doctrines like State Farm, unless they're brought within that six-year limitation period. 


      Now, in the Altera case, which was a post-enforcement case, the question came up about whether or not the party’s State Farm challenge was cutoff by that six-year limitations period. And as I recall, the answer at oral argument, at the panel stage, and in the briefing at the en banc stage, the general consensus was that, because of the Anti-Injunction Act and assumptions regarding the proper interpretation of the Anti-Injunction Act, because the Anti-Injunction Act was cutting off judicial review until that post-enforcement period, that the Anti-Injunction Act acted to toll or not trigger, if you will -- not allow to be triggered that general statute of limitations of 28 U.S.C. § 2401. 


      If you interpret the Anti-Injunction Act that way, or the way the IRS interprets it, then I think you have to reach that conclusion. Of course, to the extent that the Anti-Injunction Act wasn't at issue in the Ninth Circuit with the Altera case, we didn't get any sort of answer in that regard. But it's an interesting interaction, there's no question about it that just -- we have no jurisprudence on whatsoever. All we can do is theorize about how all of it works together.


Stuart Bassin:  Can I just add something very quickly. Tax controversies take a long time to develop. I would guess that Altera didn't end up in court until 10 years after the original tax return was filed. So if the six-year statue of limitations prevents Altera from raising the issue during the audit enforcement phase of attacks controversy, and if the Anti-Injunction Act precludes raising the challenge earlier, then what you're saying is, for many taxpayers, there's no way to raise APA type issues in the tax context. That can't be right.


Kristin Hickman:  Right. So that's why I think it's got to be one or the other. It can't be both.


Micah Wallen:  All right. We have no other questions in the queue, and we've come to the end of our time for today. Did anybody have any last remarks they'd like to share before I close this out?


Robert Carney:  I don't think so. I think it's basically the question that we're going to continue to deal with is does the Anti-Injunction Act retain some degree of tax exceptionalism after Mayo case of 2011. I guess we'll see.


Micah Wallen:  All right. Well, on behalf of The Federalist Society, I'd like to thank all of our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.


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