Does Chenery Apply to Tax Court Review of IRS Actions?
Over at Procedurally Taxing last week, my colleague Stephanie Hoffer and I weighed in on a fascinating new decision out of the Tax Court that held that Chenery does not apply to preclude the IRS from making arguments in the judicial tax deficiency action that the IRS did not make at the agency level.
The short version of our answer is that the Administrative Procedure Act (APA) and administrative law doctrines apply to the Tax Court’s review of IRS actions. At the same time, however, the Tax Court is correct in concluding that Chenery does not apply to tax deficiency actions because they are trials de novo as contemplated by Section 706 of the APA.
To provide the longer answer, I’m crossposting below our Procedurally Taxing post entitled A Few More Words on Ax and the Future of Tax Court Exceptionalism:
As Les notes in his great write-up, the Tax Court reached the right outcome in this week’s Ax decision. We write here to add just a few words about Chenery and the Court’s use of § 703 (but not § 706) of the Administrative Procedure Act (“APA”).
In The Death of Tax Court Exceptionalism, 99 Minn. L. Rev. 221 (2014), we don’t tackle the part ofChenery raised by the petitioners in Ax—that agency reasons must have been raised at the agency decision-making level and not for the first time in court. But we do tackle another core principle from the Chenery decisions: the ordinary remand rule. That is, when a court concludes that an agency’s decision is erroneous, the ordinary rule is to remand to the agency to consider the issue anew (as opposed to the court deciding the issue itself).
These two Chenery principles are intertwined, and the analysis used to determine whether one applies in a given situation is arguably the same for either. Here’s what we had to say about the remand rule and deficiency actions (at 266-67, footnotes omitted):
This [ordinary remand rule] does not mean, however, that the Tax Court must remand every erroneous IRS determination to the IRS for reconsideration. As the ordinary remand rule suggests, it is the “ordinary” rule subject to exceptions for “rare circumstances.” These rare circumstances include when there are minor errors as to subsidiary issues that do not affect the agency’s ultimate decision or when the agency lacks authority to decide the issue. And there is another exception of particular relevance here: when APA § 706(2)(F) applies and “the facts are subject to trial de novo by the reviewing court.” In particular, in explicating the ordinary remand rule and how it is “the proper course, except in rare circumstances,” the Supreme Court has noted that “[t]he reviewing court is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclusions based on such an inquiry.” Logically, then, if the reviewing court is empowered to conduct a trial de novo, the court is not required to remand (though it retains discretion to do so) because de novo review allows the court to take the unusual step of substituting its judgment for that of the agency.
In light of these principles, it becomes clear that the Tax Court need not remand when it conducts a trial de novo. As explained in Part II.A, the Tax Court conducts a trial de novo of an IRS tax deficiency determination in any proceeding in which the underlying deficiency determination is challenged. (That said, as discussed in Part III, in some circumstances policy considerations may weigh in favor of the Tax Court exercising its discretion to remand even some de novo redeterminations to the IRS.) But when the trial de novo provisions of APA § 706(2)(F) do not apply, the Tax Court should adhere to the ordinary remand rule.
In other words, as Les notes in his post, the Tax Court seems to have gotten the outcome right (that Chenery does not apply in deficiency actions in Tax Court), but that’s not because the APA does not apply. That’s the result you get after applying the APA.
In fact, the Tax Court actually did apply the APA in Ax, although it stopped short of acknowledging that it is a reviewing court for purposes of the APA. In particular, the Court relied on APA § 703, which describes the form and venue of judicial review of an agency action, to support the position that it is not bound by APA § 706 in deficiency actions. Section 703 provides that the appropriate form of judicial review of an agency action is “the special statutory review proceeding relevant to the subject matter in a court specified by statute,” or, if none, “any applicable form of legal action.” The Court reasoned that because IRC § 6213 and other sections mentioned by Les describe a “special statutory review proceeding,” APA § 706, which provides procedural defaults, does not apply to redeterminations of deficiency. (As discussed above and as we flesh out more fully in our paper, our position is that APA § 706 does apply to deficiency actions, but that deficiency actions are “trial de novo” proceedings under APA § 706(2)(F), and thus Chenery’s limitations do not apply.)
Notably, although the Court mentions O’Dwyer’s overly broad holding that the Tax Court is not subject to the APA, its reference to the greying case is almost a throwaway in light of the Court’s APA analysis. The Court takes pains to note (at 18) that its decision to look beyond the IRS’s notice of deficiency “does not violate administrative law principles or conventional standards of judicial review.” It is not clear what the court means by “conventional standards of judicial review,” but its later discussion of Mayo indicates that it is working within the framework provided by the APA (albeit within an APA-provided exception to the default provisions on judicial review). There, the Court notes (at 19) that Mayo did not consign judicial review of IRS actions to a “single one-size-fits-all paradigm for standard and scope of review,” but rather preserved (indeed, in our view, mandated) the application of APA § 703 (the Court cites § 704 here, but it is clearly a typographical error).
In its conclusion, the Court carefully notes (at 20) that its decision “in a deficiency case” is not at odds with either Chenery or APA § 706. The Court’s limitation of its reasoning to deficiency cases suggests that the Court may be rethinking the role of the APA in its review of IRS decision-making. Although the Court’s position on the issue of deficiency is entrenched, there is plenty in the law to suggest that its stance is not in error, and while Ax reads like an anti-APA decision at first blush, the Court’s careful use of APA § 703 in relation to § 706 perhaps foreshadows a different result for petitions related to matters other than deficiency. In short, nothing in Ax precludes the Court from moving away from exceptionalism and toward normalization with its sister courts though full-fledged adoption of the APA provisions on judicial review.