Of Interest

Commentary from Professor Hickman, as it occurs to her

CIC Services, LLC v. IRS: Another Blow to Tax Exceptionalism

In 2011, in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court unanimously (with Justice Kagan abstaining) told the tax community that it was not inclined to carve out an approach to administrative review good for tax law only,” thereby signaling to Treasury and the IRS that they ought to clean up their act respecting their compliance with general administrative law requirements, doctrines, and norms. Over the past ten years, the courts, the Government Accountability Office, and the Office of Information and Regulatory Affairs have slowly but surely prodded Treasury and the IRS in that direction. With its decision this week in CIC Services, LLC v. IRS, the Supreme Court has said to Treasury and the IRS — again unanimously — “yes, we really mean it.”

The CIC Services case concerned the scope of the Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a), and its implications for pre-enforcement judicial review of Treasury and IRS rules and regulations. Since its 1967 decision in Abbott Labs v. Gardner, the Court has interpreted the Administrative Procedure Act (APA) as adopting a presumption in favor of pre-enforcement judicial review of agency rules and regulations generally. By comparison, the AIA precludes lawsuits brought for the purpose of restraining the assessment or collection of any tax except as otherwise authorized by the Internal Revenue Code. The effect of the provision generally is to defer judicial review of tax cases to post-enforcement refund and deficiency actions, and thus to require individuals or entities seeking to challenge the validity of a Treasury or IRS rule or regulation to pay the tax and seek a refund.”

In this case, CIC Services brought a pre-enforcement lawsuit challenging the validity of IRS Notice 2016-66, claiming that the Notice violated the APA for its lack of notice-and-comment rulemaking procedures and reasoned decisionmaking. The Notice imposed a third-party reporting requirement on tax advisers like CIC Services who facilitate certain micro-captive insurance transactions, requiring CIC Services to collect and report information about its clients’ transactions. But the Notice did not impose a direct tax liability on CIC Services except for potential tax penalties in the event that CIC Services declined to comply with the Notice. Instead, CIC Services would have to decline to comply with the reporting requirement in an effort to trigger a tax penalty, which it could then pay and seek to recover. At least in theory (as came up repeatedly in the litigation), pursuing that course of action could open CIC Services to criminal prosecution in addition to civil tax penalties. Throughout the litigation, CIC Services rejected the idea of deliberately violating the Notice to obtain post-enforcement relief. Accordingly, the question for the Court was whether the pre-enforcement APA challenge brought by CIC Services against IRS Notice 2016-66 was for the purpose of restraining the assessment or collection of taxes, and thus barred by the AIA.

A divided Sixth Circuit had held that the AIA precluded judicial review of CIC Services’ APA claim. In an earlier case, Florida Bankers Ass’n v. U.S. Department of the Treasury, a divided D.C. Circuit panel had reached the same conclusion regarding a different third-party reporting regulation, with then-Judge Kavanaugh writing the majority opinion. In CIC Services, the Supreme Court unanimously decided otherwise, holding that suit before it was not brought for the purpose of restraining the assessment and collection of taxes, and thus that the AIA did not apply. Writing for the Court, Justice Kagan crafted a very careful opinion that avoided grand pronouncements and instead emphasized the facts and circumstances of the particular third-party reporting requirements at stake in that case. At the same time, however, Justice Kagan managed to avoid putting the Court in too tight of a box with respect to future cases, and she drew lines and sent signals that could allow a future Court the flexibility to expand the range of Treasury and IRS rules and regulations eligible for pre-enforcement judicial review without running afoul of the CIC Services decision.

First, Justice Kagan characterized the purpose of CIC Services’ challenge to IRS Notice 2016-66 by looking to the remedy sought — here, setting aside the Notice, enjoining its enforcement, and declaring it unlawful — rather than the eventual “downstream” effect of avoiding a future tax penalty. Declaratory and injunctive relief of the sort requested by CIC Services is the standard remedy under the APA when agency pronouncements are procedurally invalid or arbitrary and capricious for lack of reasoned decisionmaking. In a footnote, Justice Kagan noted the government’s concession that a pre-enforcement challenge to Environmental Protection Agency (EPA) regulations governing the resale of diesel fuel and enforced partly through a tax penalty would not be precluded by the AIA. She then rejected the idea that the AIA should apply merely because the IRS rather than the EPA administers a regulatory mandate.

Justice Kagan also emphasized three conditions as demonstrating that the purpose of CIC Services’ suit was not for the purpose of restraining the assessment and collection of taxes: (1) that IRS Notice 2016-66 “inflict[ed] costs separate and apart from the statutory tax penalty”; (2) that “the Notice’s reporting rule and the statutory tax penalty are several steps removed from each other”; and (3) that “violation of the Notice is punishable not only by a tax, but by separate criminal penalties,” with emphasis on the fact that the only way that CIC Services could challenge the Notice otherwise was to disobey its mandate in order to trigger a tax penalty. It may be tempting to turn the listed conditions into a three-part test for avoiding the AIA, but that does not appear to have been Justice Kagan’s intent. Although the three listed conditions are clearly sufficient to overcome the AIA, Justice Kagan never said that all three conditions are necessary to achieve that goal.

Instead, the critical dividing line drawn by Justice Kagan’s opinion is between regulatory taxes “designed mainly to influence private conduct, rather than raise revenue” versus regulatory mandates backed by tax penalties, where the rule being challenged imposes “a separate legal mandate” where “the tax appears on the scene … only to sanction that mandate’s violation.” Like revenue-raising taxes, regulatory taxes fall within the AIA’s scope. After the CIC Services decision, regulatory mandates backed by tax penalties do not. Third-party reporting requirements like those at issue in CIC Services are the obvious example of a regulatory mandate, given the circumstances of the case itself, but they are not the only regulatory mandates backed by tax penalties contained in the Internal Revenue Code. And see again that footnote regarding EPA regulations governing the resale of diesel fuel and enforced partly through a tax penalty. Drawing the line between regulatory taxes and regulatory mandates backed by tax penalties may not always be as simple as it was with the third-party reporting requirements in CIC Services. The Internal Revenue Code often uses “tax” and “penalty” as synonymous terms. Justice Kagan’s three conditions certainly helped in making that distinction here. But in other cases, the Court might decide that two of the three conditions or a different combination of conditions are sufficient to reach the same conclusions — i.e., that a particular requirement is a regulatory mandate backed by a tax penalty rather than a regulatory tax, or that pre-enforcement judicial review of a Treasury or IRS rule or regulation is appropriate.

Justices Sotomayor and Kavanaugh joined Justice Kagan’s opinion for the Court but also wrote separate concurring opinions to emphasize particular points. Justice Sotomayor’s principal focus was to distinguish between tax advisers like CIC Services and taxpayers facing similar reporting requirements and suggest that “the analysis may be different” for the latter. Maybe she is right, although even if Justice Sotomayor would be inclined to analyze a case involving a reporting obligation imposed on a taxpayer differently, she wrote for herself alone in this opinion, and Justice Kagan’s opinion did not limit its analysis in this way. Moreover, Justice Sotomayor’s discussion of tax advisers versus taxpayers seemed limited to reporting requirements and said nothing about other types of regulatory mandates.

Meanwhile, Justice Kavanaugh wrote separately to discuss the implications of the Court’s decision for the Court’s 1974 decisions in Alexander v. “Americans United” Inc. and Bob Jones University v. Simon, and to defend the lower courts’ prior reliance on those decisions in interpreting the AIA. In Americans United and Bob Jones, the Court held that IRS decisions to revoke the tax-exempt status of a nonprofit organization and a university were unreviewable under the AIA, and in doing so characterized the AIA’s scope in very broad terms. Congress shortly thereafter amended the Internal Revenue Code to make similar IRS revocations of tax-exempt status judicially reviewable. Given the swift congressional rejection of the holdings of those cases, one wonders whether lower courts ought to have taken the Court’s sweeping rhetoric quite so seriously. Regardless, as a D.C. Circuit judge, Justice Kavanaugh interpreted the AIA as more or less an absolute bar against judicial review in tax cases except through the avenues specifically authorized in the Internal Revenue Code. In those opinions, he cited Americans United and Bob Jones, although he also relied on other arguments. Justice Kavanaugh was not alone in reading the AIA more broadly as a lower court judge. Citing particularly his Florida Bankers opinion, a majority of the Sixth Circuit in the CIC Services litigation read the AIA similarly. Regardless, Justice Kavanaugh now concurs that the AIA’s text should be read more narrowly to allow pre-enforcement review of at least some — and perhaps even many — Treasury and IRS rules and regulations.

The litigation over the validity of IRS Notice 2016-66 is not over. The case merely returns to federal district court for consideration of the merits of CIC Services’ APA claims. Meanwhile, the Court’s decision in CIC Services almost certainly will lead to additional pre-enforcement challenges to Treasury and IRS rules and regulations under the APA, and further judicial scrutiny of Treasury and IRS administrative practices. Proponents of tax exceptionalism undoubtedly will try to limit the reach of the CIC Services decision to third-party information reporting requirements, or tax advisers, or instances in which criminal prosecution has been threatened. Justice Kagan’s opinion imposes none of those limitations expressly and additionally contains several hints that the Court may favor narrowing the AIA further to permit pre-enforcement judicial review of a broader array of Treasury and IRS rules and regulations under the APA. Regardless, the trend against tax exceptionalism continues — decisively!

Cross-posted at Yale Journal on Regulation’s Notice & Comment Blog.

The Anti-Injunction Act, and Missing the Forest for the Trees

* This post co-authored with Gerald Kerska.

Most people who follow cases and scholarship at the intersection of tax and administrative law are aware that the Supreme Court has granted certiorari in CIC Services, LLC v. Internal Revenue Service to consider whether the Internal Revenue Code’s Anti-Injunction Act, 26 U.S.C. § 7421(a), precludes pre-enforcement judicial review of Treasury and IRS rules and regulations under the Administrative Procedure Act. In 2017, we published an Article on this issue in the Virginia Law Review, and one of us (Hickman) filed petition-stage and merits-stage amicus briefs supporting the Petitioners in the CIC Services case based on that Article. Our argument in favor of pre-enforcement judicial review is a statutory one, based on the Anti-Injunction Act’s broad textual context as part of a statutory tax assessment and collection process from the time of its adoption in 1867 to today.

An amicus brief supporting the Respondents, filed by Prof. Bryan Camp, relies heavily on a small error we made in labeling provisions of the 1860s revenue acts in questioning our analysis. Specifically, we labeled the Anti-Injunction Act as an amendment to an 1862 collection provision, rather than as an amendment to an 1866 post-collection administrative exhaustion provision. We do not think the mislabeling matters for our analysis, which is more broadly structural and not dependent on any one provision beyond the Anti-Injunction Act itself. But we acknowledge the mistake and thank Prof. Camp for bringing it to our attention. Still, for those who might be following these ground-level details of Anti-Injunction Act interpretation, we thought it might be useful to untangle the details of this complicated bit of legal arcana and resolve any confusion about our argument.

Playing In the Trees

The 1860s was a time of great change in American tax administration, with the imposition of extensive “internal” taxes to finance the Civil War — including the nation’s first income tax as well as a tax on land, an inheritance tax, a gross receipts tax on businesses, excise taxes, license fees, and stamp duties. Congress passed several significant revenue acts over the course of that decade and into the 1870s.

The Act of Aug. 5, 1861, ch. 45, 12 Stat. 292 (the 1861 Act) adopted the land tax and an initial, very rudimentary income tax, but raised little revenue. The more comprehensive Act of July 1, 1862, ch. 119, 12 Stat. 432 (the 1982 Act) introduced the fuller panoply of internal taxes (including a somewhat more sophisticated income tax) and also established a system for administering and collecting those taxes (including a Commissioner of Internal Revenue and assessment and collection functions to be performed by a bevy of assessors, assistant assessors, and collectors assigned to individual districts). Congress enacted the Anti-Injunction Act as part of the Act of March 2, 1867, ch. 169, 14 Stat. 471 (the 1867 Act) to support that system of tax administration.

In our Article (and, correspondingly, in Hickman’s amicus briefs), we discussed at length the system of tax administration established in the 1860s, and particularly the assessment and collection functions at its core, as the origin of contemporary tax administrative provisions and practices. The various revenue acts of the 1860s were not codified; sometimes one revenue act more or less entirely replaced the previous one; and by 1867, the 1862 Act had been repealed and replaced by the Act of June 30, 1864, 13 Stat. 223 (the 1864 Act), as amended by the Act of July 13, 1866, ch. 184, 14 Stat. 98 (the 1866 Act). To be even more precise:

  • As we described in our Article , several provisions of the 1862 Act addressed the assessment and collection process, including § 19 governing key aspects of the collection function.
  • The 1864 Act formally repealed and replaced the 1862 Act and, in doing so, renumbered and modified slightly the assessment and collection provisions. What had been § 19 of the 1862 Act, describing key aspects of the collection function, became § 28. Despite that and other section shifts, only minor details of the assessment and collection functions changed. The assessment and collection process of 1864 was substantially similar to that of 1862.
  • The 1866 Act amended the 1864 Act “and Acts amendatory thereof” (none relevant here). Many of the “amendments” replaced entire provisions of the 1864 Act. For example, § 9 of the 1866 Act amended the aforementioned § 28 (pertaining to collection) of the 1864 Act in this manner. Meanwhile, § 19 of the 1866 Act added a new administrative exhaustion provision for post-collection refunds. (This provision would soon become the home of the Anti-Injunction Act.) Again, however, the amendments of 1866 did not change the assessment and collection process significantly.
  • The 1867 Act then amended “existing Laws relating to Internal Revenue,” including both the 1864 Act and the 1866 Act. Section 10 of the 1867 Act adopted the Anti-Injunction Act by “adding” the phrase “And no suit for the purpose of restraining the assessment or collection of tax shall be maintained in any court” to § 19 of “the act amendatory to the act entitled ‘An act to provide internal revenue to support the government, to pay interest on the public debt, and for other purposes,’ approved June thirty, eighteen hundred and sixty-four, approved July thirteen, eighteen hundred and sixty-six.” Still, assessment and collection after 1867 remained substantially similar to the 1862 version of that process.

In writing our article, we reviewed all of this legislation. In reviewing the various revenue acts and interpreting the Anti-Injunction Act’s proper scope, our focus was on understanding the assessment and collection process for internal taxes in the 1860s, and then confirming that those functions did not change materially through that period (and for several decades thereafter).

Seeing the Forest

Building from that analysis, our Article addresses the interpretive question whether the word “restrain” in the Anti-Injunction Act covers lawsuits that stop tax assessment and collection when they are imminent, or whether the Anti-Injunction Act stops lawsuits that merely make those functions more challenging to accomplish in the future. Put another way, does the Anti-Injunction Act block any lawsuit that might affect assessment and collection at some unidentified future time, or does it mean something narrower?

As we documented in the Article, the relevant terms of the Anti-Injunction Act itself have not changed since the 1860s. As a result, the core language of the Anti-Injunction Act means today what it did in 1867. The best way to interpret the Anti-Injunction Act’s meaning and scope in 2020 is by looking at the assessment and collection functions to which the Anti-Injunction Act refers as they existed in 1867, textually and practically in relation to one another, and comparing those functions to their contemporary analogues.

Thus, in Part III of the Article, we proposed an interpretation of “restrain” based on the Anti-Injunction Act’s broad textual context and the structure of the assessment and collection process in 1867 as compared with contemporary tax administration. We laid out how an aggrieved taxpayer in the years immediately prior to 1867 might have filed suit to challenge his or her tax liability in three scenarios: (1) after a tax return was filed or became due but before the assessors posted proposed assessments; (2) after assessors posted proposed assessments but before those assessments were finalized; and (3) after assessments were finalized but before collection. The Article further elaborates these scenarios. But we concluded from the overall structure of the system of assessment and collection established in the 1860s revenue acts that any suit seeking to enjoin the assessment and collection of taxes would necessarily have involved engagement — whether in a pre- or post-assessment posture — between the Government and a specific taxpayer over that taxpayer’s immediate and particularized tax liability. This encompasses the pre-assessment audits and investigations by assistant assessors that are central to Prof. Camp’s critique of our argument. As we discuss in our Article, those pre-assessment investigations by assistant assessors were conducted in the first of those three time periods — i.e., after a tax return became due — either in auditing particular returns that were filed or in evaluating whether specific taxpayers who failed to file should have done so.

For its part, Congress in 1867 did not need to devote extensive legislative history to explaining the Anti-Injunction Act’s meaning because, by embedding the Anti-Injunction Act in the midst of the several provisions detailing the assessment and collection process (and particularly among the collection provisions), Congress conveyed its understanding and intent that the Anti-Injunction Act would operate in a manner temporally proximate to those functions. In context, a reasonable reader would have understood “restrain” to mean lawsuits challenging the Government’s application of the revenue acts to a specific taxpayer’s particular facts and circumstances.

Nothing in this argument turns on whether the Anti-Injunction Act amended the 1862 § 19 collection provision or the 1866 § 19 administrative exhaustion requirement for post-collection refund actions. The interpretation we suggested in our Article was not limited to the commencement of actual collection efforts but rather was defined by a broader scope of engagement of revenue authorities with particular taxpayers to investigate as well as assess and collect particular liabilities, whether or not a return had been filed or a liability had been assessed. Our emphasis on particularized engagements between taxpayers and revenue officials deliberately included the audits and investigations between assistant assessors and individual taxpayers that occurred in the period immediately prior to assessment. And because we based our argument on the entirety of the assessment and collection process — including pre-assessment audits and investigations — our mislabeling of the Anti-Injunction Act as an amendment to the 1862 § 19 collection provision, rather than as an amendment to the 1866 § 19 administrative exhaustion provision, makes little difference to our conclusion that the Anti-Injunction Act’s scope is limited to IRS actions temporally proximate to the enforcement process and does not bar pre-enforcement judicial review of Treasury and IRS rules and regulations under the Administrative Procedure Act.

To be sure, we relied on the Anti-Injunction Act’s placement in the 1862 Act’s § 19 collection provision in observing that the Anti-Injunction Act facilitated revenue collection post-assessment, as it continues to do today. But that observation did not factor into Part III of the Article, where we interpreted the Anti-Injunction Act based on its textual and historical context. Hickman’s briefs before the Court do not deviate from this understanding of the Anti-Injunction Act as described in our Article.

One final note from Hickman alone:

In a footnote, Prof. Camp pointed to another “error” of my petition-stage amicus brief describing the Anti-Injunction Act as “support[ing] the administration of a short-lived income tax” as opposed to “a massive system of mostly internal excise taxation” with the income tax raising only a small amount of revenue comparatively. Now Prof. Camp really is splitting hairs. Both my merits-stage amicus brief, and the Article with Gerald Kerska from which both briefs draw, specify the fuller array of internal taxes imposed in the 1860s. Regardless, Congress employed the same assessment and collection process for most if not all of those taxes, both before and after the Civil War income tax was repealed, and the Anti-Injunction Act supported that process. As a matter of terminology, everyone knows what an income tax is, whereas internal taxation is a technical term of art with which few outside the tax field are familiar. With a tight word limit and a complicated history to describe, I took a small rhetorical short cut in the petition-stage brief that was still correct and made no difference in the argument anyway. It was not an error, and to suggest otherwise was misleading.

Did Little Sisters of the Poor just gut APA rulemaking procedures?

For many Supreme Court watchers, the decision in Little Sisters of the Poor v. Pennsylvania was about a contraceptive mandate. As I noted in a prior post, however, for some of us, the case was about interim-final rulemaking and the procedures for agency rulemaking imposed by the Administrative Procedure Act (APA). At least at first blush, Justice Thomas’s opinion for the Court turns APA notice-and-comment rulemaking procedures into a pro forma exercise of procedural box-checking that will allow agencies to curtail meaningful public participation in the agency rulemaking process. Agency rulemaking will be much easier to accomplish, but the resulting regulations will be poorer in quality and thus less effective.

APA § 553(b) and (c) generally contemplate that, when the government wants to adopt legally-binding regulations, it must (1) issue a notice of proposed rulemaking (NOPR) that contains certain information, most specifically the legal authority for and general content of the proposed rule; (2) “[a]fter notice,” offer the interested public “an opportunity to participate in the rule making through submission of written data, views, or arguments”; and (3) “[a]fter consideration of the relevant matter presented” issue the final rules accompanied by a “concise general statement of their basis and purpose,” known more colloquially as the preamble. APA § 553(b) contains a limited “good cause” exemption from these requirements. Although the text does not say so explicitly, the import is obvious: as a default proposition, legally-binding legislative rules should be adopted only after notice and opportunity for public participation, not before.

The Little Sisters case concerned legally-binding interim-final regulations (IFRs) that the federal government adopted without first giving the public an opportunity to submit comments. The government asked for comments in conjunction with the IFRs, and it arguably took those comments into account when it replaced the IFRs with final-final regulations, but the final-final regulations did not make many changes. At least prior to today’s decision, many scholars (and the Administrative Conference of the United States) perceived this sort of post-promulgation notice and comment process, absent a valid statutory exemption, to be contrary to the text of APA § 553 by putting the opportunity for public participation after rather than before the agency adopts legally-binding regulations. Although APA § 553 does not say explicitly that notice and legally-binding regulations cannot occur in the same document, the APA’s text does signal an assumption of “notice first, binding regulations later” through its ordering of the different procedural steps (complete with repeated use of the word “after”), and for good reasons.

As the D.C. Circuit has observed repeatedly, the goals of notice-and-comment rulemaking procedures are “to reintroduce public participation and fairness to affected parties after governmental authority has been delegated to unrepresentative agencies and to assure that the agency will have before it the facts and information relevant to a particular administrative problem, as well as suggestions for alternative solutions.” American Hosp. Ass’n v. Bowen, 834 F.2d 1037, 1044 (1987) (internal citations, quotation marks, and brackets omitted). As a practical matter, it is well understood that, the further that agencies go down the road of the rulemaking process, the more committed they are to the regulations they have drafted, and the less likely they are to make changes in response to comments received. Consequently, the assumption and concern is that parties who might otherwise be interested in commenting will see a request for post-promulgation comments as insincere, designed to placate potential reviewing courts, so those parties will be discouraged from participating. I am not aware of any empirical studies that say so, but anecdotally through observation and conversations with agency officials and regulated parties alike, this has been my experience.

In Little Sisters, the government justified its action in a couple of ways that were more particularized to the case at bar. First, the government claimed that the Affordable Care Act specifically authorized the use of interim-final rules — which it did, unlike most statutes. Second, the government claimed good cause for foregoing pre-promulgation notice and comment, which may or may not have been the case (the Third Circuit did not think so), but which APA § 553(b) recognizes as a potential statutory exemption. Justice Thomas’s opinion for the Court completely ignored the first of these arguments and, regarding the second, declared in a footnote that addressing the government’s good cause claim was unnecessary given the Court’s broader conclusions regarding the procedural validity of interim-final rulemaking.

Indeed, sweeping much more broadly, Justice Thomas’s opinion for the Court is pretty close to a full-throated endorsement of interim-final rulemaking (i.e., binding rules first and last) as procedurally equivalent to the more standard notice-and-comment rulemaking process (i.e., notice only first and binding rules later). He reduced the challengers’ complaint to being about the labels of the IFRs rather than their relative timing and binding effect.

Respondents point to the fact that the 2018 final rules were preceded by a document entitled “Interim Final Rules with Request for Comments,” not a document entitled “General Notice of Proposed Rulemaking.” They claim that since this was insufficient to satisfy § 553(b)’s requirement, the final rules were procedurally invalid. Respondents are incorrect. Formal labels aside, the rules contained all of the elements of a notice of proposed rulemaking as required by the APA.

The APA requires that the notice of proposed rulemaking contain “reference to the legal authority under which the rule is proposed” and “either the terms or substance of the proposed rule or a description of the subjects and issues involved.” § 553(b)(2)-(3). The request for comments in the 2017 IFRs readily satisfies these requirements. That request detailed the Departments’ view that they had legal authority under the ACA to promulgate both exemptions, as well as authority under RFRA to promulgate the religious exemption. And respondents do not — and cannot — argue that the IFRs failed to air the relevant issues with sufficient detail for respondents to understand the Departments’ position. Thus, the APA notice requirements were satisfied.

Slip. op. at 22-23.

Justice Thomas next turned to the harmless error rule contained in the APA’s judicial review provisions. But rather than merely finding the agency’s use of IFRs in this case to be harmless error, he declared the use of IFRs more or less categorically to be nonprejudicial so long as they are sufficiently thorough in their explanation of the agency’s thinking.

Even assuming that the APA required an agency to publish a document entitled “notice of proposed rulemaking” when the agency moves from an IFR to a final rule, there as no “prejudicial error” here. § 706. We have previously noted that the rule of prejudicial error is treated as an “administrative law … harmless error rule.” Here, the Departments issued an IFR that explained its position in fulsome detail and “provide[d] the public with an opportunity to comment on whether [the] regulations … should be made permanent or subject to modification.” … “The object [of notice and comment], in short, is one of fair notice,” and respondents certainly had such notice here.

Slip op. at 23 (internal citations omitted and emphasis added).

Together these paragraphs suggest that two things: (1) so long as the agency at some point in the rulemaking process provides the information required by APA § 553(b) and includes language inviting public comments, the order in which the steps outlined in APA § 553(b) and (c) occur is unimportant; and (2) the Court sees the principal function of APA rulemaking procedures as facilitating communication from the agency to the public regarding what the agency is thinking, with little or no regard for the importance of communication in the other direction. Justice Kagan’s concurring opinion also recognizes that the government must explain itself sufficiently to satisfy the reasoned decisionmaking requirements of the Supreme Court’s 1983 State Farm decision — but again, that communication is from the agency to the public about what the agency is thinking, rather than the other way around. In short, notice to the public is all that really matters; communications from the public to the agency (i.e., public participation), and the resulting benefits to agency expertise and the rulemaking process more generally are left out of the analysis.

A vision of agency rulemaking procedures that focuses principally on notice to the public rather than collaboration and engagement with the public would be more efficient. As the lower courts have construed the APA over the past fifty years, notice-and-comment rulemaking has become procedurally cumbersome and time-consuming. Agencies often have regarded the APA’s procedural requirements as obstacles to accomplishing what they regard as worthy regulatory goals. But efficient is not necessarily the same thing as effective, and it is worth thinking for just a few moments about why the courts interpreted the APA to make notice-and-comment rulemaking so complicated in the first place.

When the APA was adopted, agencies did not adopt many legally-binding regulations. When they did, the general understanding was that they were required to use formal rulemaking procedures contained in APA §§ 556 and 557, which are cross-referenced in APA § 553, and which contemplate live witness testimony in open hearings as well as written submissions, cross-examination of those witnesses, and a transcript of the proceedings to generate a record supporting the rule. Given that understanding, extensive interpretation of APA § 553(b) and (c) to flesh out the requirements of a written hearing process simply was not required. NOPRs and preambles under APA § 553 could be (and were) quite skimpy because APA §§ 556 and 557 did all the procedural heavy lifting.

The Supreme Court did away with formal rulemaking for almost all agencies in 1973 in United States v. Florida East Coast Railway Co., right around the same time that the incidence of agency rulemaking dramatically expanded. Formal rulemaking was notoriously burdensome and inefficient; informal notice-and-comment rulemaking was perceived by many to be a more efficient alternative. But without the record that formal rulemaking produced, how could courts ensure that agencies were taking public participation seriously and not acting arbitrarily? They interpreted APA § 553(b) and (c) as requiring agencies to do things like disclosing the data on which the agency relied as part of the NOPR, not changing the final regulations so drastically as to make public participation meaningless, and responding to all significant comments received in the preamble to the final rule. In the aforementioned State Farm decision, the Supreme Court also interpreted APA § 706(2)(A) as requiring agencies contemporaneously to explain and justify their regulatory choices in their regulatory preambles.

None of these requirements (including the demands of State Farm) are spelled out explicitly in the APA’s text. But although the Court’s 1978 Vermont Yankee decision counsels against imposing procedural burdens not contemplated by the APA’s text, the APA’s textual silence also should not be taken too literally. Enacted in a much less textualist era (1946), the APA’s text occasionally offers specific details but also uses undefined, open-ended, and ambiguous terms that necessitate interpreting the words in their larger context as well as construing them to give them legal content and effect. (Larry Solum helpfully explains construction versus interpretation here and here.) For example, what does it mean to “give interested persons an opportunity to participate in the rule making through the submission of written data, views or arguments,” as APA § 553(c) requires? Arguably notice and an opportunity for participation means something more than merely saying “send in your comments” after the rules are in place, but how much more, and in what ways? The APA on its face is not explicit. Thus, unfortunately, the bare terms of APA § 553(b) and (c) are susceptible of the Court’s hyperliteralist interpretation in Little Sisters. But textualist methodology anticipates reading a statute’s words not in isolation but rather in context, and expects courts not to parse statutory text so closely as to render it a mere nullity.

And with its decision in Little Sisters, the Court has come pretty close to, if not writing APA § 553(b) and (c) out of the statute completely, then at least minimizing those provisions to the point of irrelevancy in most instances. Under the reasoning of Little Sisters, even without a claim of good cause, an agency can issue legally-binding IFRs that include the requisite citations to legal authority and invite public comments, then wait and see what happens. If someone challenges the IFRs as procedurally invalid, then the agency can hurry up and issue final-final regulations with a preamble that responds to comments received, if any, without making changes, and the Court likely will say “good enough” so long as the agency otherwise is thorough enough in communicating its own thoughts. But if no one bothers to challenge the IFRs, then the agency can just leave them on the books as-is without further action. Since most agency regulations go unchallenged in court (for many reasons unrelated to their compliance with the APA), most agency regulations can now be issued in legally-binding form without needing to engage with the public at all. And when regulations are challenged, State Farm is the only real protection left against agency arbitrariness.

Most agency regulation drafters are dedicated public servants who pursue rulemaking based on a genuine desire to accomplish what they perceive as good and desirable policy goals. Leaving aside good faith disagreements over what those policy goals ought to be, agency regulation drafters are not omniscient. Agency officials will concede that, often, they need the public’s input to fill gaps in their own knowledge. And on some occasions, agency regulation drafters simply don’t know what they don’t know. Public participation in the rulemaking process enhances agency expertise and improves the quality of agency regulations. The Court’s analysis in Little Sisters downgrades the statutory relevance of engagement and collaboration between agency officials and the public and, consequently, devalues and undermines public participation as a part of agency rulemaking. We likely will get more agency regulations faster, but in the end, we may not like the cost.

Cross-posted at Yale Journal on Regulation’s Notice & Comment Blog.

Correcting the Record: Taxes, Penalties, and the Anti-Injunction Act

As a professor, I talk with reporters often. I consider it part of my job, and I like doing it. But occasionally mistakes happen. This week, in reporting about the Supreme Court’s grant of certiorari in CIC Services v. IRS, a reporter misattributed to me an argument that wasn’t mine and with which I disagree. The reporter quickly and graciously admitted error and has fixed the article. But I want to address the argument at stake in a blog post, to be clear about where I stand. I have never argued and do not believe that whether the Anti-Injunction Act bars pre-enforcement judicial review of tax regulatory actions turns on a finding that penalties under the Internal Revenue Code are not taxes as the Anti-Injunction Act uses that term. My arguments for reading the Anti-Injunction Act to allow pre-enforcement judicial review of tax regulatory actions under the Administrative Procedure Act are entirely different and do not depend at all on a distinction between taxes and penalties.

The Anti-Injunction Act, 26 U.S.C. s. 7421(a), provides that, except as provided elsewhere in the Internal Revenue Code, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” CIC Services and other cases challenging rules and regulations that impose reporting requirements do not directly concern the computation of anyone’s tax liability. And, at first blush, it might seem reasonable to argue that the penalties that the Code imposes for noncompliance with reporting requirements are not taxes, and thus challenges to those reporting requirements cannot be limited by the Anti-Injunction Act. After all, in NFIB v. Sebelius, the Supreme Court decided that the Anti-Injunction Act did not apply because the “shared responsibility payments” at issue were penalties rather than taxes.

As with many arguments that seem sensible at first, however, just a little digging uncovers substantial weaknesses. Drawing a distinction between taxes and penalties in the Internal Revenue Code has always been tricky. Congress has often used “additions to the tax” and “penalty” more or less interchangeably in imposing civil penalties across various Code provisions, and Congress’s choice of label has not always been outcome determinative before the Supreme Court. For those who are interested in learning more about the history of the tax/penalty distinction and the Anti-Injunction Act, Jerry Kerska and I wrote about it at some length and with extensive footnotes here.

But whether penalties are taxes for Anti-Injunction Act purposes, while perhaps not entirely irrelevant, nevertheless does not decide the question about pre-enforcement judicial review that is before the Court in CIC Services. Whatever one chooses to label the exaction for noncompliance with IRS Notice 2016-66 or other pronouncements like it, as I see things, the issue before the Court is whether pre-enforcement judicial review under the Administrative Procedure Act restrains that exaction’s assessment and collection. My answer, grounded in statutory text, history, and purpose, is no, pre-enforcement review doesn’t do that.

The Anti-Injunction Act was adopted in 1867 as part of a comprehensive statutory scheme for administering the Civil War income tax, with “assessment” and “collection” as functions defined in some detail by the early revenue laws and, later, within the Internal Revenue Code. Proper interpretation of the Anti-Injunction Act requires an understanding of the history of the assessment and collection functions, and tax administration more generally, as they have evolved over the past 150 years, as well as the events that prompted Congress to adopt the Anti-Injunction Act in the first instance and how they compare with contemporary circumstances. In the same article, Jerry Kerska and I painstakingly track the text, history, and purpose of the Anti-Injunction Act as part of the early revenue laws, the Internal Revenue Code, and the system of tax administration they established to demonstrate that Congress intended the word “restraining” in the Anti-Injunction Act to reflect a greater temporal proximity to actual enforcement efforts than one typically sees with pre-enforcement challenges under the Administrative Procedure Act. We also explain how our reading of the Anti-Injunction Act reconciles it with the Administrative Procedure Act and the Supreme Court’s decisions in Abbott Labs v. Gardner and Direct Marketing Ass’n v. Brohl, rather than placing the Anti-Injunction Act at odds with them. My amicus briefs before the Sixth Circuit and the Supreme Court on this issue have made these same arguments.

In law and in academia, people are known for their ideas and arguments. Those who have read my academic work and amicus briefs are familiar with my ideas and arguments regarding Anti-Injunction Act interpretation, but not everyone reads those sources. The Internet being what it is, errors in news articles tend to stick around, despite best efforts to correct them. Hopefully this post will help in this instance.

County of Maui & Chevron Waiver — Let’s Not Get Carried Away

The Supreme Court’s decision in County of Maui v. Hawaii Wildlife Fund has prompted a flurry of discussion on Twitter and elsewhere about whether Justice Breyer’s majority opinion in the case adopted the position that the government can waive or forfeit eligibility for Chevron deference by failing to argue for it, and thus overturned the D.C. Circuit’s rejection of Chevron waiver last year in Guedes v. Bureau of Alcohol, Tobacco, Firearms & Explosives. Chevron waiver is a topic of some debate these days. The D.C. Circuit has addressed the issue most prominently and extensively, in Guedes and elsewhere. The Tenth Circuit endorsed it just last week in Hays Medical Center v. Azar, arguably in dicta, but also arguably establishing a circuit split with the D.C. Circuit. Law reviews at Harvard, Stanford, and Chicago all published short notes or essays last year discussing the issue. I have given the issue its own subsection in the Administrative Law Treatise. In my view, however, it would be premature to claim that the Supreme Court has embraced the Chevron waiver argument.

County of Maui is not the first time the Chevron waiver question has arisen in a Supreme Court opinion. Just last month, Justice Gorsuch rather overtly signaled his support for Chevron waiver in a statement respecting the Supreme Court’s denial of certiorari in Guedes. I discussed that statement in another blog post. Justice Gorsuch’s treatment of the issue in Guedes was unequivocal but brief, and he wrote for himself alone.

Justice Breyer’s reference in County of Maui, though on behalf of five Justices, was much less clear — a mere observation that the Solicitor General had not asked for Chevron deference. But the EPA “Interpretive Statement” at issue would not have been eligible for Chevron deference in any event, as Justice Breyer seems to have recognized by citing Mead and Skidmore:

"Neither the Solicitor General nor any party has asked us to give what the Court has referred to as Chevron deference to EPA's interpretation of the statute.  See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984).  Even so, we often pay particular attention to any agency's views in light of the agency's expertise in a given area, its knowledge gained through practical experience, and its familiarity with the interpretive demands of administrative need.  See United States v. Mead Corp., 533 U.S. 218, 234-235 (2001); Skidmore v. Swift & Co., 323 U.S. 134, 139-140 (1944).  But here, as we have explained, to follow EPA's reading would open a loophole allowing easy evasion of the statutory provision's basic purposes.  Such an interpretation is neither persuasive nor reasonable."

As I have documented elsewhere, Justice Breyer has always held a fairly idiosyncratic view of Chevron and Skidmore as a single standard, with Chevron‘s emphasis on the exercise of delegated power merely adding another factor to be considered in deciding whether or not to defer. For that matter, minor disagreements regarding Chevron‘s operation and scope abound among the Justices. Because Chevron, Skidmore, and Mead are “meta-standards,” the Justices may disagree over how these standards work or even which to apply but still agree to accept or reject an agency’s particular statutory interpretation in a given case. Whereas commentators may analyze and critique every snippet of Supreme Court rhetoric, the Justices seem more willing to let minor disagreements over dicta go unremarked, rather than write separately over every questionable turn of phrase. For this reason alone, one should always be leery of overreading an ambiguous turn of phrase about Chevron in a single Supreme Court opinion.

Moreover, none of the briefing before the Court mentioned the Chevron waiver concept. Neither the Petitioners nor the Solicitor General as amicus said anything at all about deference doctrine. The Respondents said only that, as mere “guidance,” the EPA’s Interpretive Statement was “not an exercise of congressionally delegated authority to fill an interpretive gap in the statute” and thus “was not entitled to deference under Chevron” in light of Mead. Given the complete lack of briefing on Chevron waiver in this case, the mere observation that the Solicitor General did not ask for Chevron deference in a case where it wasn’t available anyway is pretty slim evidence that the Court has suddenly embraced a new requirement that the government actively argue in favor Chevron deference before its interpretations will be Chevron-eligible.

Indeed, the idea of Chevron waiver itself seems to have emerged initially more from inartful judicial rhetoric and inadequately-reasoned analytical leaps than from deliberate arguments. Consider the experience of the D.C. Circuit, which seems to be where the doctrine originated, and which to date has made the most definitive statement on the subject. In Peter Pan Bus Lines v. Federal Motor Carrier Safety Admin. (2006), the D.C. Circuit declined to evaluate the reasonableness of an agency regulation under Chevron step two after the agency had contemporaneously justified its decision in the regulation’s preamble by declaring the statute unambiguous. Separately, in Intercollegiate Broadcasting System v. Copyright Royalty Board (2009), which had nothing to do with agency statutory interpretation or Chevron, the D.C. Circuit noted “the axiom” that nonjurisidictional issues may be waived. Several years later, in Lubow v. Department of State (2015), after observing that the challenging party had accepted without argument that Chevron applied, the D.C. Circuit cited Intercollegiate and Peter Pan in suggesting that Chevron is nonjurisdictional and that “a party can forfeit an argument against deference by failing to raise it.” Finally, in Neustar, Inc. v. FCC (2017), the D.C. Circuit cited Lubow in holding that the FCC had waived any entitlement to Chevron deference by not expressly advocating for it. The FCC in Neustar had cited Chevron and recited its two steps as the relevant standard of review, but the court deemed that “nominal[] reference[]” inadequate. The court offered little reasoning, however, beyond a parenthetical to the Lubow citation — “Chevron deference is not jurisdictional and can be forfeited” — even though Lubow involved a challenger failing to raise an objection to Chevron deference, rather than a government failure to claim Chevron deference.

Almost immediately — perhaps having realized it had made a significant doctrinal statement with little supportive reasoning — the D.C. Circuit walked back its Neustar holding regarding Chevron waiver. In SoundExchange v. Copyright Royalty Board (2018), and then in the aforementioned Guedes decision (2019), the D.C. Circuit discussed Neustar and Chevron waiver at great length and expressly rejected the proposition that the government can waive Chevron deference by failing to argue for it adequately in a legal brief. First, in SoundExchange, the court noted that the government did not claim Chevron deference because it did not frame the case as involving statutory interpretation at all. Nevertheless, the court insisted that its opinion in Neustar “did not indicate a ‘magic words’ requirement for Chevron deference”; what mattered was whether the agency, in the action being challenged, clearly “exercis[ed] its lawmaking authority.” The SoundExchange court then contended that “Chevron is a standard of judicial review, not of agency action” and that “we can apply Chevron deference to the agency’s interpretation even if there is no invocation of Chevron in the briefing in our court.”

In Guedes, the D.C. Circuit went even further in repudiating Chevron waiver. The court first distinguished waiver from forfeiture: “A waived claim or defense is one that a party has knowingly and intelligently relinquished; a forfeited plea is one that a party has merely failed to preserve.” The court described SoundExchange as holding “that an agency’s lawyers cannot forfeit the applicability of Chevron deference” except by failing to exercise delegated power as described in Mead. The Guedes court then went on to hold the same with respect to Chevron waiver. The court’s analysis was extensive — too long to cover fully in an already-overlong blog post. The general gist of the court’s reasoning, however, was that Chevron is “a doctrine about statutory meaning” akin to a canon of construction, advising “how courts should construe a statute” when that statute is ambiguous and Congress has given an agency responsibility to utilize its expertise to fill statutory gaps. Just as courts “give no mind to a litigant’s failure to invoke interpretive canons such as expressio unius or constitutional avoidance,” it is up to courts rather than litigants to decide whether Chevron applies. The court also made the point that Chevron is rooted in “the expertise of the agency, not its lawyers” — in other words, that courts defer to the exercise of agency expertise in the first instance, not to the litigation strategies pursued by agency lawyers later on.

The Tenth Circuit’s opinion last week in Hays Medical Center v. Azar, which arguably established a circuit split with the D.C. Circuit, more closely resembled the D.C. Circuit’s Neustar opinion than either SoundExchange or Guedes in the depth of its analysis of the Chevron waiver issue. The merits of Hays Medical Center concerned whether HHS’s methodology for calculating Medicare reimbursements is arbitrary and capricious under APA s. 706(2)(A) and State Farm. Apparently, in its Hays Medical Center brief, the government attempted briefly to recast the argument as concerning Chevron rather than State Farm. The Tenth Circuit in Hays Medical Center rejected this reframing in a long footnote, saying that the government’s arguments about “reasonableness” were “relevant” for both State Farm and Chevron. The court then proceeded to analyze the agency’s regulation under State Farm. But the footnote went on to contend that the government’s “perfunctory and fleeting invocation of Chevron waives [its] argument for Chevron deference.” The court cited the D.C. Circuit’s Neustar decision for this proposition, but did not acknowledge that court’s more recent and more extensive analysis rejecting Chevron waiver in SoundExchange and Guedes. The Tenth Circuit’s footnote is arguably dicta, and one wonders if the Tenth Circuit would reach the same conclusion if forced to confront the Chevron waiver question squarely. Given that footnote, however, one anticipates the Tenth Circuit will have the opportunity to do just that in the not-so-distant future.

In summary, despite somewhat hazy and under-theorized origins, the Chevron waiver issue seems to have legs. Although the D.C. Circuit has now repudiated Chevron waiver, its flirtation with the idea means that arguments for and against the doctrine are multiplying. The Supreme Court may find it necessary eventually to take up the Chevron waiver question. Justice Gorsuch appears to be receptive to it. Maybe Justice Breyer is as well, although I do not think that Justices Gorsuch and Breyer view judicial deference doctrine very similarly. Still, given the robustness with which the issue is being explored in the circuit courts, along with the realities of the Supreme Court’s often-ephemeral Chevron musings, contentions that a single paragraph — really, a single sentence — in Justice Breyer’s County of Maui opinion adopted Chevron waiver and overruled the D.C. Circuit’s rejection of the same in Guedes seem vastly overblown.

Cross-posted at Yale Journal on Regulation’s Notice & Comment Blog.

More Posts