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The Somewhat Counterintuitive Policy Case Against Tax Court Exceptionalism

Posted on Apr. 22, 2014

Today’s guest post is the second in a two-part series by Ohio State law professors Stephanie Hoffer and Christopher Walker.  These posts are based on their paper The Death of Tax Court Exceptionalism, which is forthcoming in the Minnesota Law Review. My welcome and the initial post is available here.

The policy issues that Professors Hoffer and Walker raise fundamental issues concerning the Tax Court’s institutional relationship with the IRS. The main argument, that a less deferential scope and standard of review may in fact contribute to greater individual protections, is similar to an argument I made in a series of articles I wrote for the Houston Law Review, Tax Notes and the Community Tax Law Report, where I criticize the Tax Court’s approach to CDP review:

The Tax Court’s approach…is arguably taxpayer friendly, as the consideration of evidence not before the IRS enabled the Tax Court to reach a conclusion different from the IRS’s. This in turn reflects the Tax Court’s historical concern with providing itself with an opportunity to determine a correct tax liability, notwithstanding any agency practices prior to a tax’s assessment…. Yet, a failure to abide by the APA’s general approach toward reviewing only material before an agency (called the “On the Record” rule in administrative law) creates some risk that the IRS will take less care with its procedures at the hearing-level. For example, the On the Record rule creates incentives for the agency to conduct adequate procedures and provide sufficient explanations, so that a reviewing court will be able to perform its task of considering what an agency has decided, and the decision’s rationale. Courts following the On the Record rule may conclude that the agency has acted improperly, through a failure to consider relevant material or explain actions rationally, which should result in a remand and hopefully corrective agency practices. Often, better agency practice initially, compelled by the searching light of judicial review into what the agency did, provides more meaningful taxpayer protections than the possibility of more searching review.

Professors Hoffer and Walker expand and improve my points that I made and bring into sharper focus the issue’s policy implications. – Les

In the first post discussing our paper The Death of Tax Court Exceptionalism, we introduced the legal case against Tax Court exceptionalism and why the Tax Court should be bound by the judicial-review provisions of the Administrative Procedure Act (“APA”).  The legal case should encourage the Tax Court to reverse course and consider itself bound by the APA’s judicial-review provisions—just like every other court that reviews federal agency action.  But the policy case reinforces the legal case and suggests additional reasons why the Tax Court should embrace the APA and traditional administrative law principles.

At the outset it is important to frame this policy discussion against the backdrop of the Tax Court’s likely concerns about deferring to IRS determinations.  Consistency and equity are among the most important policy goals in tax administration as well as in the modern administrative state more generally.  At first blush, the Tax Court’s use of less deferential review standards would seem to advance these goals because more searching judicial review of IRS actions allows the court to correct errors that would otherwise go uncorrected when reviewing on the administrative record and/or for abuse of discretion.

Indeed, the Tax Court’s concerns may be heightened in the context of less sophisticated taxpayers who attempt to navigate the system without representation.  The Tax Court’s current de novo approach may appear to best protect the unrepresented taxpayer.  In contrast, by confining review to abuse of discretion and prohibiting consideration of evidence outside of the administrative record, the APA limits a court’s ability to grant relief when it feels such relief may be merited.  Moreover, by following traditional administrative law doctrines, the Tax Court may be required to remand cases to the IRS when it finds error instead of just granting the relief outright.  The Tax Court may be reluctant to adhere to this ordinary remand rule—indeed, the Tax Court currently does not remand matters except in narrow circumstances—when it believes the taxpayer is entitled to relief and remand would unduly delay or, worse, preclude relief because the taxpayer would get lost in the process on remand.

Despite the common-sense appeal of more searching review, in Part III of our paper we advance a novel and somewhat counterintuitive argument:  the APA’s default regime is actually more effective at addressing these concerns by allowing the Tax Court to have a more systemic effect on IRS decision-making.  In other words, the policy objectives of consistency, efficiency, and equity (as well as leveraging agency expertise) are better advanced if the Tax Court only considers evidence in the administrative record and reviews for abuse of discretion to determine whether the IRS has engaged in rational decision-making.  In the event the facts in the record or the reasons contained in the IRS’s underlying ruling are found lacking, the Tax Court should identify those errors and remand to the IRS for reconsideration in light of those errors.

Why would this more deferential approach to judicial review actually be better for consistent, efficient, and equitable tax administration?  Because the status quo provides little comfort for the vast majority of claimants who do not bring the agency’s determination to the Tax Court and therefore receive no judicial review.  The Tax Court has no power to correct mistakes made in these cases, and if one assumes that the IRS has a similarly high error rate in unreviewed cases (and many unreviewed cases involve less sophisticated taxpayers), its incorrect assessments of income and ability to pay directly affect the equitable distribution of the cost of federal government.  By forcing the agency to improve its decision-making process—including better development of the administrative record and more well-reasoned agency rulings—the Tax Court can have a more profound effect on IRS processes and outcomes.

By abandoning tax exceptionalism, the Tax Court also can take advantage of the wealth of judicial experience in other administrative law contexts.  As detailed in Part III.B of our paper, courts have developed judicial doctrines and practices in other administrative law contexts to have a greater system-wide effect on agency decision-making.  For instance, as one of us uncovered in an empirical study on judicial review of immigration adjudications, courts have developed a number of tools that help alleviate the policy considerations against deferential review of agency action by enhancing their dialogue with agencies on remand.  These tools include: requesting notice of the agency’s decision on remand; retaining jurisdiction of the petition; setting a timeline for remand; providing hypothetical solutions; certifying issues for remand; obtaining concessions from the government at argument or otherwise during judicial review; and suggesting the transfer of the matter to another agency adjudicator.

By using these tools and developing more of its own, the Tax Court can begin a richer dialogue with the IRS—a dialogue aimed at not only improving the IRS’s procedures and decision-making in the case remanded but also in the agency overall.  Such dialogue is critical to improving the treatment of less sophisticated taxpayers—many of whom, unrepresented, do not even seek judicial review of the IRS’s adverse determinations.  That the vast majority of unrepresented taxpayers never seek judicial review of adverse decisions should encourage the Tax Court to engage in a richer dialogue with the IRS via the ordinary remand rule and these dialogue-enhancing tools in order to have a more systemic effect on the quality of administrative adjudication that takes place at the IRS.  It’s time as a policy matter for the Tax Court to abandon tax exceptionalism and embrace administrative law.

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