At the American Bar Association’s annual Administrative Law Conference in December, I had the privilege of moderating a panel entitled Your Agency Is Not That Special: The Decline of Administrative Law Exceptionalism. The panel consisted of leading experts on administrative law exceptionalism from three distinct regulatory fields: Jill Family for immigration, Kristin Hickman for tax, and Melissa Wasserman for patent law. The panel also included Mark Freeman, a senior attorney from the Justice Department’s Civil Appellate Staff, who has briefed and argued a number of important administrative law exceptionalism cases.

As we explained in the panel description, “[a]dministrative law exceptionalism—the misperception that a particular regulatory field is so different from the rest of the regulatory state that general administrative law principles do not apply—has plagued the modern regulatory state. We have seen it front in center in a variety of regulatory contexts from tax and financial regulation to patent law and immigration.”

On the tax front, Professor Hickman and I discussed at some length the Tax Court’s decision in Altera, which is presently on appeal in the Ninth Circuit, as well as the U.S. Chamber of Commerce’s challenge to the IRS’s inversion rule, which is pending in federal district court in Texas. Both of these cases have significant implications for the future of tax exceptionalism, though that is not the purpose of this blog post.

Instead, in this post I’d like to flesh out an observation I made at the ABA AdLaw Conference concerning the stages of exceptionalism. Having spent some time looking at administrative law exceptionalism across regulatory fields, I remarked that, like the stages of grief, there seem to be evolutionary stages of administrative law exceptionalism. First, of course, there is denial. The regulators and attorneys representing the regulated believe their agency is so special that the traditional rules of administrative law do not govern their regulatory field. The last stage, by contrast, is acceptance. As I have explored in the immigration context (and my colleague Stephanie Hoffer and I have explored in the tax context), there are important benefits of abandoning exceptionalism and accepting administrative law.

But what about the stages in between wholesale denial and full acceptance? I am certain someone could articulate multiple intermediate stages (anger? negotiating? depression?), but let me suggest one core stage: opportunism. During this stage, the regulators will embrace the agency discretion that the Administrative Procedure Act and accompanying judicial deference doctrines offer, while opportunistically refusing to follow the other administrative law principles that are designed to ensure that such agency discretion is not exercised in an arbitrary or capricious manner. By contrast, the lawyers representing the regulated will argue for administrative law’s constraints while arguing against agency discretion and the accompanying judicial deference.

I hesitate to return to the example of Altera, as my most recent work on that case has been done as counsel of record for the U.S. Chamber of Commerce as amicus curiae in support of Petitioner-Appellee Altera.* In the Chamber amicus brief, however, we develop this opportunism argument in some detail. This discussion is worth repeating in full (footnotes omitted) here:

For decades, tax law has suffered from what has been coined “tax exceptionalism”—the misperception that tax regulations are not governed by the same long-standing rules of administrative law that generally apply to any federal agency rulemaking. In recent years, however, courts have correctly rejected this “tax myopia.” In the decision below, the Tax Court correctly held that the IRS is bound by the same rules—the APA and related administrative law doctrines—that govern the rest of the federal regulatory state. The Tax Court’s decision here necessarily follows from the text of the APA as well as recent Supreme Court and circuit court precedent rejecting tax exceptionalism.

First and foremost, the APA sets the default rules for all federal “agency” action and judicial review thereof. Under the APA, “agency” is defined to include “each authority of the Government of the United States, whether or not it is within or subject to review by another agency, but does not include,” among other entities, Congress and “the courts of the United States.” 5 U.S.C. § 701(b). The IRS, an executive agency within Treasury, is plainly an “agency” for purposes of the APA. As the Supreme Court has long held, “a reviewing court must apply the APA’s court/agency review standards in the absence of an exception.” Dickinson v. Zurko, 527 U.S. 150, 154 (1999). Congress has provided no such exception to the IRS or Treasury.

To the contrary, in Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44, 55-56 (2011), the Supreme Court refused to apply a different standard of review to a Treasury and IRS interpretation of the tax code than is applied to other federal regulations. In holding that tax regulations can be eligible for deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the unanimous Mayo Foundation Court refused “to carve out an approach to administrative review good for tax law only,” noting that it has “expressly ‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of administrative action.’” Id. at 55 (quoting Dickinson, 527 U.S. at 154). Thus, the Court found “no reason why [judicial] review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as [judicial] review of other regulations.” Mayo Foundation, 562 U.S. at 56.

Similarly, in Cohen v. United States, 650 F.3d 717, 736 (D.C. Cir. 2011) (en banc), the D.C. Circuit held en banc that the APA’s judicial review provisions apply with full force to a form of IRS guidance known as a notice. In reaching this conclusion, the court remarked that “[t]he IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal Government—from suit under the APA.” Id. at 723. The court acknowledged the argument that “[t]here may be good policy reasons to exempt IRS action from judicial review” under the APA. Id. at 736. The D.C. Circuit emphasized, however, that “Congress has not made that call. And we are in no position to usurp that choice . . . .” Id. (citations omitted).

To be sure, the IRS has opportunistically argued for tax exceptionalism in some cases (e.g., Cohen) and for general administrative law in others (e.g., Mayo Foundation). Indeed, Professor Kristin Hickman, one of the leading scholars on the intersection of tax and administrative law, has explained that “the IRS and the Department of Justice have repeatedly pursued a narrow construction of Mayo Foundation.” The unanimous decision of the Tax Court in this case has rightly put an end to such strategic tax exceptionalism.

The Tax Court’s decision is fully consistent with the text of the APA and Internal Revenue Code, as well as the Supreme Court’s guidance in Mayo Foundation and the D.C. Circuit’s decision in Cohen. Indeed, as Professor Hickman has explained, “Altera represents a natural extension of the Supreme Court’s reasoning in the Mayo Foundation case, reflecting the spirit of that decision’s rejection of tax exceptionalism from general administrative law requirements, doctrines, and norms.” Hickman, APA-Based Smackdown, supra.

It is imperative that this Court uphold the Tax Court’s core holding that the APA applies with full force to IRS rulemaking. Such holding is particularly important after Mayo Foundation. As discussed above, the Mayo Foundation Court accorded Chevron deference to an IRS statutory interpretation because it discerned no reason to create a special administrative law doctrine that applied only to tax. Yet if the IRS is to receive the benefit of Chevron deference, it is doubly important that the IRS also be bound by the administrative law constraints that accompany binding agency rulemaking. The IRS has at times attempted to reap administrative law’s benefits of agency discretion—such as Chevron deference—while avoiding its constraints—such as the APA’s full notice-and-comment rulemaking requirements, judicial review under the APA’s arbitrary and capricious standard, and the inability under SEC v. Chenery Corp., 318 U.S. 80, 95 (1943) (Chenery I) to advance new theories and argument in court that were not advanced in the agency action under review.

This case is illustrative. Before the Tax Court, the IRS sought Chevron deference for its statutory interpretation, but disagreed that the regulation at issue is “a legislative rule,” which would subject it to all of the APA’s notice-and-comment rulemaking requirements. ER49.

Similarly, the IRS argued that administrative law’s reasoned decisionmaking requirement, as articulated by the Supreme Court in Motor Vehicle Manufacturers Ass’n v. State Farm Mutual Auto Insurance Company, 463 U.S. 29 (1983), did not apply to this rulemaking, even though the new Treasury regulation departs from the IRS’s prior position without reasoned explanation. ER51. In arguing why the reasoned decisionmaking standard that applies to the rest of the regulatory state should not apply to the IRS, the IRS claimed that “the Supreme Court has never, and [the Tax] Court has rarely, reviewed Treasury regulations under State Farm.” ER55.

Moreover, as detailed at length in Altera’s opening brief (at 38-70), now that the IRS is in court, it has essentially abandoned the stated rationale for the regulation (the arm’s-length standard) and, instead, attempted to defend its rule on a new argument (the commensurate-with-income standard). Apparently the IRS does not feel it should be bound by the Chenery doctrine, which holds that an agency action “can-not be upheld unless the grounds upon which the agency acted in exercising its powers were those upon which its action can be sustained.” Chenery I, 318 U.S. at 95. Nor does the IRS seem to consider itself bound by Supreme Court precedent that an agency must provide reasons in the rule itself for changing its position.

The dangers inherent in the IRS’s tactics should be plain: the IRS wants to take advantage of the agency discretion afforded by judicial deference doctrines that apply to administrative interpretations of law without also being bound by the constraints administrative law imposes on federal agency action in order to ensure an agency’s discretion is not exercised in an arbitrary and capricious manner. The Supreme Court, the D.C. Circuit, and now the Tax Court have rejected any such claims of tax exceptionalism. This Court should send a clear message to the IRS that it must play by the same rules of the road that govern the rest of the federal regulatory state.

To be sure, this type of opportunism is not unique to the context of administrative law exceptionalism; it pervades administrative law more generally. But the dangers of such opportunism are more acute in the exceptionalism context, where courts and litigators are just starting to embrace administrative law in that regulatory context and may not fully appreciate the careful balance administrative law strives to strike between agency discretion and agency procedures (and judicial review standards) aimed at checking arbitrary exercises of agency discretion. Altera strikes me as an apt illustration of the potential dangers of such opportunism.

This post was originally published at The Surly Subgroup as part of the blog’s 2017 Mini-Symposium on Tax Enforcement and Administration.

* I generally try to avoid mixing my academic and of counsel roles when blogging or otherwise engaged in academic work, so the relevant disclaimers and disclosures should apply. I should also note that two groups of tax professors filed terrific amicus briefs in support of the IRS, and those briefs are definitely worth reading (here and here). Importantly, both of those briefs reject tax exceptionalism and instead argue that the IRS action under review is substantially and procedurally proper under the Administrative Procedure Act and Internal Revenue Code.