Here is part 2 of a two part post by frequent guest blogger Carl Smith on last week’s important decision on the location of the Tax Court within our constitutional framework. Keith
This is part two of a post on the Tax Court’s recent opinion in Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017), where the Tax Court disagreed with the D.C. Circuit’s reasoning in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), but came to the same result. In this part of the post, I explain the reactions of Congress to the Kuretski D.C. Circuit opinion and the reaction of Florida attorney Joe DiRuzzo, who decided to raise the Kuretski Presidential removal power issue in a number of his pending Tax Court cases, including Battat. Then, I set out in detail the Tax Court’s reasoning in Battat.
The D.C. Circuit’s opinion in Kuretski was issued in June 2014. On November 26, 2014, the Kuretskis filed a petition for certiorari, arguing that the D.C. Circuit had misapplied the Supreme Court’s holding in Freytag v. Commissioner, 501 U.S. 868 (1991).
Florida tax attorney Joseph A. DiRuzzo, III and other lawyers at the firm at which he works, Fuerst Ittleman David & Joseph, PL, read the Kuretski cert. petition and thought the constitutional argument in it had merit. On their own (not with my prodding), they decided to borrow the argument from the cert. petition and include it as an argument in some Tax Court cases that their firm had pending at the pretrial stage. There were motions on other issues already pending in some of those cases. The cases were both deficiency and Collection Due Process cases. The taxpayers lived in a number of Circuits around the country. Joe did not count on the Supreme Court granting cert. in Kuretski without a Circuit split. (He was right.) The lawyers hoped that the Tax Court would issue a ruling disagreeing with the D.C. Circuit and that courts of appeals outside D.C. would also disagree with the D.C. Circuit – leading to a grant of cert. in one of these cases.
The first case in which Joe and his firm raised the Kuretski removal power issue was a Collection Due Process case named Elmes v. Commissioner, Tax Court Docket No. 24872-14L, where, on December 19, 2014, Joe and his firm filed a “Motion to Disqualify & Motion to Declare 26 U.S.C. § 7443(f) Unconstitutional”. The motions in Elmes prayed that “this Court . . . declare 26 U.S.C. § 7443(f) unconstitutional and disqualify all the judges of the Tax Court until such time as § 7443(f)’s constitutional infirmity is cured”.
Over the next few weeks, Joe and his firm filed similar motions in about a dozen other cases. By filing each motion pretrial, they hoped to avoid getting a ruling that the motion was filed too late in the case for the Tax Court to have to address it – the kind of ruling Judge Wherry had issued to the Kuretskis in an unpublished order.
On May 18, 2015, the Supreme Court denied cert. in Kuretski.
On September 1, 2015, the Chief Judge assigned the Battat case to Judge Colvin.
The Tax Court was annoyed enough with the D.C. Circuit’s calling the Tax Court still an Executive Branch entity that, before any judge ruled on any of Joe’s firm’s motions, the Tax Court asked for, and obtained from Congress (in December 2015), an amendment to section 7441 that added the following sentence (which the legislative history said was to clarify the status of the Tax Court in light of Kuretski): “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.”
Battat and Thompson Rulings
More than two years after Joe and his firm began filing these section 7443(f) motions, the Tax Court ruled on two of them on February 2, 2017, in Battat and Thompson v. Commissioner, 148 T.C. No. 3.
Thompson is a deficiency-jurisdiction opinion by Judge Wherry that primarily addresses a motion that Joe and his firm filed concerning the constitutionality of the penalty at section 6662A under the Eighth Amendment’s Excessive Fines Clause. In the opinion, Judge Wherry denies the section 6662A motion and also denies the section 7443(f) motion. For the latter ruling, he merely cites to the court’s simultaneous opinion in Battat. Thus, Battat is currently the only Tax Court opinion that gives reasoning for the rulings on the section 7443(f) motions.
The Thompsons resided in California when they filed their Tax Court petition, so an appeal of their case would go to the Ninth Circuit. The Battats, whose case is also a deficiency case, resided in Florida when they filed their petition, so an appeal of their case would go to the Eleventh Circuit. Thompson involves income tax deficiencies and penalties for the tax years 2003-2007 of nearly $400,000, in aggregate. Battat involves income tax deficiencies and penalties for 2008 exceeding $2 million, in aggregate. So, there is enough at stake in the cases to justify the costs of appeals. Hereafter, I will ignore Thompson (which may be the subject of someone else’s post on the section 6662A issue).
Battat is an oddly-written 45-page opinion. Since there are no facts in dispute, the opinion is divided into the usual Background and Discussion sections. However, in the Background section, Judge Colvin gives a running commentary on the significance of the recited background and takes issue frequently with the Kuretski opinion on a number of points. One might normally expect these disagreements to be raised in the Discussion section. With apologies to Judge Colvin, I will summarize the Battat case in an order that makes more sense to me for a summary.
The Discussion section of Battat begins with Judge Colvin observing that all Tax Court judges are potentially affected by the ruling in the case. There is a judicial rule of necessity that provides that when all possible judges have a conflict (such as in cases deciding their salary issues), since it is necessary that some judge decide the case, any judge may decide the case. Therefore, Judge Colvin rules that he may decide the case. Interestingly, the opinion does not discuss a suggestion by the taxpayers that a district court judge (who would have no conflict) be assigned over to the Tax Court to decide the Battat motion.
In the Discussion part of his opinion, Judge Colvin then notes that the Tax Court is one of those “public rights” courts where all litigation involves suits between citizens and the sovereign. The Supreme Court has held that, since, at common law, such suits need not have been heard by regular court judges, it is acceptable for Congress to assign public rights cases to special tribunals, either to Article I courts or Executive agencies. Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S.50, 67-70 (1982) (involving bankruptcy courts). Thus, the Tax Court is constitutional.
In the Background section of the opinion, Judge Colvin laid out much of the history of the Tax Court and its judges. There, Judge Colvin interpreted Freytag v. Commissioner, 501 U.S. 868 (1991), to hold that the Tax Court is not a part of the Executive Branch. This reading is contrary to the reading of the D.C. Circuit in Kuretski, which held that the Tax Court is still in the Executive Branch, notwithstanding the 1969 amendment to section 7441. Judge Colvin wrote:
[I]n the 1969 Act Congress deleted the designation of the Tax Court as an “independent agency in the Executive Branch of the Government”. The only amendment needed if Congress had intended to establish the Tax Court as an Article I court located in the executive branch would have been deletion of the words “as an independent agency”. If only those words had been deleted, section 7441 would have said the Tax Court “shall be continued * * * in the Executive Branch of the Government”. But that is not what Congress did. Congress also deleted from section 7441 the words “in the Executive Branch of the Government”. That additional change would have been superfluous if Congress had intended for the Tax Court to remain within the executive branch.
Slip op. at 10.
Judge Colvin also buttressed his holding that the Tax Court was not in the Executive Branch by citing the 2015 amendment to section 7441 and a number of amendments to the Internal Revenue Code since 2006 that align the Tax Court’s functioning more closely with that of Article III courts.
Judge Colvin took issue with the D.C. Circuit in Kuretski’s comparing the Tax Court, for location purposes, to the Article I Court of Appeals for the Armed Forces:
10 U.S.C. sec. 946 (2012) requires judges of the Court of Appeals for the Armed Forces to meet annually with the Judge Advocates General and two members of the public appointed by the Secretary of Defense to “survey the operation” of the military justice system. Edmond [v. United States], 520 U.S. [651] at 664 n.2 [(1997)]. This contrasts with the Tax Court, which “exercises judicial power to the exclusion of any other function”, Freytag v. Commissioner, 501 U.S. at 891, and which has no statutory mandate to survey the operation of the IRS or any of its offices. These statutory differences led the Supreme Court to conclude that the Tax Court is independent of the executive branch and the Court of Military Appeals for the Armed Forces is within the executive branch.
Slip op. at 17 (footnote omitted).
Judge Colvin also took issue with Kuretski’s comparing the Tax Court to other Executive Branch agencies:
[I]ndependent executive branch agencies perform substantial nonadjudicatory functions, e.g., rulemaking, while the Tax Court “exercises judicial power to the exclusion of any other function.” Freytag v. Commissioner, 501 U.S. at 891.In considering the relationship between independent executive branch agencies and other executive branch agencies, the Court of Appeals in Kuretski v. Commissioner, 755 F.3d at 944, said that Congress may allow independent executive branch agencies “a measure of independence from other executive actors”. Presumably, “a measure of independence” means less than total independence. If the Tax Court were in the executive branch, the relevant “other executive actor” would be the IRS. Surely any taxpayer would find it repugnant if the Tax Court, which by congressional design is the Federal court which decides the most taxpayer disputes with the IRS, has only some nebulous “measure of independence” from the IRS.
Slip op. at 30-31 (footnote omitted).
One gets the impression that the Tax Court was more concerned to issue an opinion declaring its independence from the Executive Branch than worrying about the specific removal power at issue in the case. But, interestingly, Judge Colvin refuses to hold in which other Branch the Tax Court might be located. It is unnecessary to his analysis, since all he felt he needed to discuss was case law, like Bowsher v. Synar, 478 U.S. 714 (1986), holding that interbranch removal powers were problematic under the separation of powers. Once the Tax Court is not located in the Executive Branch, an interbranch removal power is at issue in the case, not the less problematic intrabranch removal power that Kuretski addressed.
Judge Colvin noted that the Supreme Court has held that not all interbranch removal powers are unconstitutional under Bowsher. Judge Colvin highlighted the opinion in Mistretta v. United States, 488 U.S. 361 (1989). Mistretta involved the seven-member U.S. Sentencing Commission – the commission that drafts the sentencing guidelines. Congress placed the Sentencing Commission in Article III and peopled it with at least three Article III judges, the Attorney General, and others appointed by the President. The President held for cause removal power over its members similar to that in section 7443(f), which meant that he could remove an Article III judge from the Article III Sentencing Commission. This posed the potential interbranch Bowsher violation. But, the Supreme Court held there was no violation of the separation of powers because the activities of the Sentencing Commission were not core functions of the Judicial Branch, but rather Executive functions. Removing a judge from the Commission would not interfere with the judge’s core judicial functions.
In Battat, Judge Colvin extended Mistretta’s teaching as follows:
Presidential authority to remove Tax Court Judges for cause does not violate separation of powers principles. We so conclude because, even though Congress has assigned to the Tax Court a portion of the judicial power of the United States, Freytag v. Commissioner, 501 U.S. at 890, the portion of that power assigned to the Tax Court includes only public law disputes and does not include matters which are reserved by the Constitution to Article III courts.
Slip op. at 43.
Like the D.C. Circuit, the Tax Court in Battat did not discuss at all the fact that Article III judges of the Federal Circuit are permitted to remove for cause Article I Court of Federal Claims judges. I continue to wonder how two similar Article I courts can have different removal actors in different Branches.
Observations
I agree heartily with what Judge Colvin says in Battat right up to the point of his discussion of Misretta, but I think his holding extending Mistretta, with all due respect, is not defensible. Indeed, note that he cites no other court opinion (or even a law review article) to support his holding that removing a Tax Court judge for what is his core function (not a side administrative function, as in Mistretta) is permissible. I don’t think it logically follows that because the removal power only affects public rights court cases, there is no problem. That seems to reintroduce the idea (rejected in Freytag) that the Tax Court doesn’t exercise the “real” Judicial Power of the United States, which is held only by Article III judges. Query: Under Judge Colvin’s theory, could Congress constitutionally pass a law that says that Article III judges can decide public rights cases, such as tax refund cases, and that the President is free to remove them from those cases for cause? That would certainly bother me greatly, but would seem allowed under Judge Colvin’s theory. However, maybe he is right. Further litigation in the courts of appeals, and possibly, eventually, the Supreme Court, will give the answer.
Note: The day after the Battat opinion, Judge Jacobs denied similar section 7443(f) motions made by Joe DiRuzzo and his firm in three other of their cases, Elmes v. Commissioner, Docket No. 22003-11; Lewis Teffau v. Commissioner, Docket No. 27904-10; and Linda Teffau v. Commissioner, Docket No. 27905-10. The Elmes case docket in this note is not the Elmes CDP case docket mentioned above. Elmes lives in the Eleventh Circuit. The Teffaus live in the Fourth Circuit. These cases appear to involve the U.S. taxation of people apparently claiming to be residents of the U.S.V.I., possibly similar to the issues litigated by the firm in the case of Cooper v. Commissioner, T,C, Memo. 2015-72.