The Environmental Protection Agency (“EPA”) has long struggled with the politicization and abuse of its Freedom of Information Act (“FOIA”) processes. Indeed, as Cause of Action Institute (“CoA Institute”) has repeatedly argued, the agency has a “terrible track record for anti-transparency behavior”—from the weaponization of fee waivers and the use of undisclosed “alias” e-mail accounts, to the failure to preserve text messages and the creation of special “awareness review” procedures for politically sensitive FOIA requests. Yet the EPA’s rather poor reputation plunged even further in late June 2019, when the agency published an unexpected direct final rule implementing various changes to its FOIA regulations. Learn More
03/12/2019
IRS Gives Nod to Its Regulatory Noncompliance, Doesn’t Address Real Issues
The Internal Revenue Service (“IRS”) is notorious for flouting regulatory procedures that are designed both to legitimize the administrative state’s exercise of lawmaking power and to constrain the worst abuses of that authority through information gathering tools and judicial review. One reason the IRS is able to avoid the traditional regulatory process is because the Anti-Injunction Act prevents most lawsuits that would invalidate rules that the IRS promulgates outside that process.
Last week, the IRS acknowledged some of those shortcomings in a policy statement announcing changes to the way it rolls out new rules. These changes are on top of last year’s revocation of a decades-old exemption from White House pre-publication review and approval.
The Administrative Procedure Act (“APA”) has different processes for legislative and interpretative rules, i.e., rules that create new legal obligations on private parties and those that purportedly don’t. The IRS has long maintained that nearly all its rules are interpretative and thus exempt from the APA and notice-and-comment regime. This is a dubious claim, at best. Notwithstanding this self-bestowed exemption, the IRS magnanimously still puts its supposedly interpretative rules out for notice and comment. But it does so without following all of the required procedures, which it justifies by claiming that any process it is following is voluntary anyway, so it can follow which procedures it wants to. In its policy statement, the IRS confirmed that it “will continue to adhere to [its] longstanding practice of using the notice-and-comment process for interpretive tax rules.”
IRS Won’t Seek Deference
An issue that has plagued the IRS is the use of subregulatory guidance to explain the IRS’s view on how it will apply statutes and regulations; these guidance documents often come in the form of revenue rulings, revenue procedures, notices, and announcements. Although these documents are supposed to be interpretative and explanatory, in many cases they create new legal obligations and are thus actually legislative in nature.
For example, the IRS used a subregulatory mechanism to announce new “transactions of interest” that captive insurance companies must report to the IRS or face a penalty and enforcement. This is a classic case of a new law that affects private parties that was slipped through in a policy document, without notice and comment, and which should be invalidated on those grounds.
The IRS now seems to be conceding the issue broadly, although not with regard to the example above, and announced in its policy statement that:
When proper limits are observed, subregulatory guidance can provide taxpayers the certainty required to make informed decisions about their tax obligations. Such guidance cannot and should not, however, be used to modify existing legislative rules or create new legislative rules. The Treasury Department and the IRS will adhere to these limits and will not argue that subregulatory guidance has the force and effect of law. In litigation before the U.S. Tax Court, as a matter of policy, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997) or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance.
This is a positive development, but it remains to be seen whether IRS attorneys really will abide by the constraint when faced with a rule that they’re trying to save in court. Further, the policy only applies in “litigation before the U.S. Tax Court,” and so will not apply when challenges are brought to federal district court, as many procedural challenges to rulemaking are. Another limitation of the statement appears to be that the IRS is only forswearing seeking deference to interpretations of subregulatory tax guidance and not other rules that litigants might dispute the IRS has violated, such as the APA or the Regulatory Flexibility Act, which the IRS claims does not apply to nearly all of its rules.
“Good Cause”
One of the APA procedures the IRS sidesteps is providing “good cause” for when interim final rules become immediately effective upon publication. Treasury and the IRS have decided to now “commit to include a statement of good cause when issuing any future temporary regulations under the Internal Revenue Code.” This is a good, if minor, change and adherence to general practice used elsewhere in the government.
The biggest issue plaguing the IRS’s compliance with procedural rules that constrain the agency is the Anti-Injunction Act, which prevents many challenges that would clean up the IRS’s lack of compliance. Unless and until there is a shift in judicial interpretation of that provision or Congress exempts Title 5 challenges to IRS rules, we will continue to see the IRS operate outside the bounds of standard administrative practice. The IRS’s recent policy statement does nothing to change that.
James Valvo is counsel and senior policy advisor at Cause of Action Institute.
03/13/2018
IRS Seeks to Halt Fifth Circuit Appeal of Controversial Inversion Rule, Submits Final Rule for White House OMB Review
In January, Cause of Action Institute released a report highlighting IRS exemptions from various regulatory oversight mechanisms. This report kicked off a flurry of activity, and Treasury and OMB are now in talks about whether and how the IRS should continue to be functionally exempt from White House review of IRS rulemakings. A recent development in a closely watched Fifth Circuit case challenging an Obama-era rulemaking on inversions shows the effort may be bearing fruit.
In April 2016, the Obama Administration issued a controversial rule attempting to block inversions, a business reorganization technique designed to provide relief from high U.S. corporate taxes. The IRS made this rule by issuing a Notice and publishing a proposed rule in the Federal Register. Because IRS rules are effective from the date of the Notice, the agency was in no hurry to complete the Administrative Procedure Act (“APA”) rulemaking process that it had begun with the proposed rule and request for comment. The Obama Administration ended without the rule ever being finalized but the Notice continued to be in effect.
The Chamber of Commerce sued the IRS over the inversion rule, claiming that the agency failed to comply with APA rulemaking procedures and that the substantive rule was in excess of its statutory authority. The IRS tried to use the Anti-Injunction Act (“AIA”) to block the suit, as it often does. But, in October 2017, a district court in Texas ruled that the AIA did not deny the court jurisdiction over the case and that the IRS did indeed violate the APA. The court than invalidated the temporary rule. The IRS promptly appealed to the Fifth Circuit.
IRS Moves to Stay Appeal of Inversion Rule Decision
But, in a twist, last week the IRS moved the appellate court to stay the proceedings because it was restarting the long-dormant APA process and finalizing the underlying rule. In its motion seeking a stay (or a 45-day extension), counsel for the IRS wrote that it needs “to reevaluate whether [the IRS] should proceed with th[e] appeal[.]” The IRS also told the Fifth Circuit that:
Having completed notice and comment, Treasury and the IRS plan to finalize the proposed regulation. That process is nearly complete. A draft of the final regulation has been prepared, and it has been submitted to the Office of Management and Budget for review. The final regulation would replace the temporary regulation that is at issue in this case, which will be removed.
Accordingly, we respectfully request that briefing of this case be stayed until a final regulation is published in the Federal Register, during which time the Government will evaluate whether it should proceed with this appeal or dismiss it.
This is an interesting development. The inversion rule remains controversial and whether it is still necessary, following the recent changes to the corporate tax rate, is an open question. But it now appears that Treasury and IRS are rethinking whether it is wise to press the government’s current disadvantage on the AIA and APA compliance in the Fifth Circuit. This case could provide a clear circuit split with the D.C. Circuit (following Florida Bankers, which held the AIA blocked pre-enforcement review in APA challenges to IRS rules) on the proper application of the AIA. So we may be seeing a strategic retreat by the IRS trying to limit the damage from its earlier loss in the district court. But it is good to see that the agency is involving OMB in this finalization process.
We’ll have to wait to see what OMB says about the rule, whether the IRS does indeed finalize the rule, what form that final inversion rule will take, whether the Fifth Circuit grants the stay, and, ultimately, whether the IRS will back out of this appeal. Stay tuned.
Update: The Fifth Circuit did not act on the stay motion before the deadline for the IRS to file its opening brief, which it timely did on March 16.
Update 2: On March 22, the Fifth Circuit denied the stay motion and the case is proceeding.
James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute. He is the principal author of Evading Oversight. You can follow him on Twitter @JamesValvo.
09/7/2017
CoA Institute Urges Removal of Anti-Transparency Provisions in Senate Bill
On August 16, 2017, Cause of Action Institute (“CoA Institute”) joined other government transparency advocates in sending a letter to Senator John Cornyn objecting to the inclusion of provisions that exempt the implementation of the Building America’s Trust Act [1] (“the Act”) from the requirements of the Administrative Procedure Act (“APA”) and the Paperwork Reduction Act.
In particular, Section 702 of the Building America’s Trust Act specifically exempts any agency actions implementing the Act from “publication in the Federal Register[.]” This exclusion will deprive the American people from learning when provisions of the Act are implemented by federal agencies. This unfortunate provision runs directly counter to the APA’s publication requirement which serves as an essential hallmark of administrative law and promotes transparent and accountable government. Americans’ input into the rulemaking process should not be so easily cast aside. Section 702 relies on the need to ease “the expeditious implementation of this Act” as the justification for the APA exemption. But the APA already allows agencies to exempt rules from publication if good cause is shown.[2] To ensure a transparent and accountable government, agencies implementing the Act should have to demonstrate their good cause for avoiding the APA’s requirements instead of receiving a rubberstamp on binding regulations.
CoA Institute believes that Section 702 should be removed from the Building America’s Trust Act because the APA already contains a good cause exemption that should satisfy the Act’s policy goals without adding new exemptions from the APA’s procedures.
Travis Millsaps is counsel at Cause of Action Institute.
[1] Building America’s Trust Act, S. 1757, 115th Cong. (2017).
[2] 5 U.S.C. § 553.
02/26/2016
Florida Bankers Association: The Supreme Court Must Check IRS Abuse of Discretion
Today, Cause of Action Institute submitted an amicus brief to the U.S. Supreme Court urging it to grant a petition for certiorari to review the D.C. Circuit’s decision in Florida Bankers Association v. Department of the Treasury. The Court should take the case to ensure that IRS rules are subject to the proper judicial review, a much-needed check on the agency’s rulemaking discretion.
In August 2015, the D.C. Circuit ruled that the Anti-Injunction Act shielded the IRS rule at issue from judicial review. The Act requires taxpayers to pay taxes first and sue later for a refund if they believe a particular rule is infirm. The rationale behind this rule is to protect government’s ability to generate a consistent stream of revenue without litigation slowing down that process. However, the rule at issue in Florida Bankers was simply a reporting requirement and the penalty attached to it is designed to ensure compliance, not generate revenue. Nonetheless, the IRS argued, and the majority of the divided D.C. Circuit panel agreed, that the Act applied to challenges to the reporting requirement as well. This argument directly conflicts with a unanimous Supreme Court decision from last term, Direct Marketing Association v. Brohl.
Cause of Action Institute’s amicus brief brought a unique perspective to the question. We revealed that although judicial review is an important part of constraining agency discretion, it comes at the end of a long rulemaking process and is especially important when an agency, such as the IRS, routinely defies established oversight procedures. The IRS is notorious for skirting numerous rulemaking procedures that help ensure both accountable and higher-quality rulemaking.
The IRS, for example, evades Executive Order 12,866, which requires agencies to submit significant rules to the White House Office of Information and Regulatory Affairs for pre-publication review. As Cause of Action Institute informed the Court in its brief, “Over the past ten years, the IRS has submitted only eight rules to OIRA for regulatory review and deemed only one of those rules significant. Those eight rules are less than one percent of the final rules the IRS published in the Federal Register over the same period.”
In addition to evading pre-publication review, the IRS also flouts the Administrative Procedure Act’s rulemaking requirements. Cause of Action Institute relied on University of Minnesota Law School Professor Kristin Hickman’s empirical research to show the Court that in “almost ninety-three percent of the cases she surveyed over a three-year period, ‘Treasury claimed explicitly that the rulemaking requirements of APA section 553(b) did not apply.’”
Effective and accountable agency rulemaking requires robust judicial review of agency authority, the process followed in promulgating rules, and the record upon which the rulemaking is based. Overextension of the Anti-Injunction Act undermines these important principles, and the Supreme Court should grant certiorari and reverse the D.C. Circuit.
Click here to read the amicus brief in its entirely.