Tax and Private Client Blog

Is an IRS Rule Invalid for Failure to Comply with The Congressional Review of Agency Rulemaking Act?

By Elizabeth Nelson1

Introduction

Although it was enacted back in 1996, many practitioners are unaware of the potential power of the Congressional Review of Agency Rulemaking Act[1] (“CRA,”) to overturn any federal agency “rules.”  The CRA provides that if certain procedures are not followed, a rule cannot "take effect."[2]  

The definition of a "rule" is very broad.   The U.S. Supreme Court has held that any action "for the purpose of promulgating policy-type rules or standards” [3] is rulemaking.[4]  This article will focus on IRS “rules.” Thus, aside from formal regulations, any form of  IRS pronouncement, whether in the form a Notice, a Revenue Ruling, or a Revenue Procedure, can be viewed as a "rule."

The CRA requires the IRS to submit a rule to Congress and to the Comptroller General before a rule takes effect.[5]   A recent Government Accounting Office report states that the IRS issued the majority of its rules without complying with the CRA.[6]   The ability for a taxpayer to invalidate a rule under the CRA goes hand-in-hand with a challenge based on the Administrative Procedure Act, which I previously analyzed.[7]  

The CRA was utilized for the first time to challenge an IRS rule in CIC Services, LLC v. IRS, Case No. 3:17-cv-00110 (E.D. Tenn. Nov. 2, 2017). (“CIC Services”).  CIC Services is the first taxpayer case that applied both the CRA and the Administrative Procedure Act (“APA”) to challenge the validity of an IRS rule.

In CIC Services, filed March 27, 2017, the taxpayer argued that the IRS unlawfully issued Notice 2017-06 without first complying with the mandatory notice-and-comment provisions of the APA[8]; that it is arbitrary and capricious and ultra vires in nature, lacking the reasoned-analysis required by the APA[9]; and cannot “take effect” based on the failure of the IRS to submit the Notice to Congress and the Comptroller General as required by the CRA[10].    

Thus far, no federal court in a tax case has ruled on whether or not the CRA permits judicial review.  The CIC Services court did not rule on the CRA cause of action.  The court solely held that the Anti-Injunction Act precludes pre-enforcement review of Treasury rules. The taxpayer filed an Appeal with the Sixth Circuit, with Appellant brief filed on 4/2/2018.  On Appeal, both sides re-argued the Congressional Review Act issues.  The case was fully argued on 10/19/2018.  We may have a ruling before the end of the year.

A. Congressional Review Act

“Rules can be surprisingly different from the expectations of Congress or the public. Congressional review [of agency rules] gives the public the opportunity to call the attention of politically accountable, elected officials to concerns about new agency rules. If these concerns are serious, Congress can stop the rule.” Id. at S3684.[emphasis added].

The Congressional Review Act provides: “Before a rule can take effect, the Federal agency promulgating such rule shall submit to each House of the Congress and to the Comptroller General a report containing—(i) a copy of the rule; (ii) a concise general statement relating to the rule, including whether it is a major rule; and (iii) the proposed effective date of the rule.” 5 U.S.C. § 801(a)(1)(A). Accordingly, the CRA requires all agencies, including the IRS, to submit every new rule to Congress for review before it can go into effect.

The CRA’s clear mandate is that agencies must submit every new rule to Congress, with clear consequences for failing to do so.  However, IRS agency compliance has been lacking. “Recognizing the scope and severe consequences of noncompliance…the Chairman of the Senate Subcommittee on Regulatory Affairs sent a letter to the Office of Management and Budget expressing concern about the consequences of widespread agency noncompliance.”[11]

B. Intersection of the Administrative Procedure Act And The CRA

The CRA defines “rule” broadly as “the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.” 5 U.S.C. § 551(4); 5 U.S.C. § 804(3)(C), utilizing the same definition as that of the APA.

“Failure to submit a rule under the Congressional Review Act is agency action unlawfully withheld or unreasonable delayed under the APA. 5 U.S.C. § 706.”[12]    If a rule is not submitted to Con­gress in compliance with the CRA, there is no time limit as to when the rule can be challenged.   As one author put it, "Agencies cannot, by acting unlawfully, run out a clock that never started.” [13]

“The APA provides judicial review of agency inaction by persons “suffering legal wrong,” “adversely affected” or “aggrieved” by such inaction. 5 U.S.C. § 702. Pursuant to the APA, a reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions found to be . . . without observance of procedure required by law.” 5 U.S.C. § 706(2)(D).”[14]

“Congress intended that the CRA would apply to every rule … It intended to limit judicial review to only those actions or inactions attributable to the rule-issuing agencyOnly rules that have not been submitted to Congress are now subject to CRA review and repeal.[15] [emphasis added].

C. No Federal Court Has Ruled That The CRA Does Not Apply To IRS Rules.

 Outside of the tax field, the CRA has been raised in published decisions only nine times since 2002.[16]   The few courts that have reviewed such CRA cases have concluded that the CRA does not permit judicial review of such non-tax cases. These courts have analyzed §805 and determined that it unambiguously precludes judicial review of any rule arising under the CRA that is "made by Congress" .[17] “Specifically, they have interpreted §805 broadly while rejecting the argument that it ‘only forecloses review of any ‘determination, finding, action, or omission’ made by Congress.”[18] [emphasis added].

Southern Indiana Gas & Electric Co.is the first case which holds that §805 only precludes judicial review of a “determination, finding, action, or omission under this chapter.” S. Ind. Gas & Elec. Co., United States District Court, S.D. Indiana, Indianapolis Division. October 24, 2002 Not Reported in F.Supp.2d 2002 WL 31427523, at n.5. The court held that “agencies do not make findings and determinations under this chapter,” but Congress does. Id.  “Thus, it is reasonable to conclude that §805 precludes judicial review only of congressional ‘determinations, as the prior version of the rule. Id.’”[19]

The court further stated that if Congress wanted the applicability of the provisions of the CRA to be precluded from judicial review, it would have explicitly said so; however, Congress chose not to do so. Id. at n.6 “Instead, it ‘limited its judicial review preclusion by referring to determinations, findings, actions and omissions made under the CRA [i.e., those made by Congress, not the administrative agencies, because agencies do not make findings and determinations under this chapter].’ Id.” [20] Accordingly, there may be a basis to challenge a rule that is promulgated by the Internal Revenue Service or the Treasury Department under the CRA.

 D. Government Accounting Office Report 2016:  Treasury and OMB

Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance[21]

Even the GAO has issued a report on the failure of the IRS and Treasury to follow the CRA when implementing rules. In 2016, the GAO issued a report entitled: “Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance.”[22]  

The GAO report states that the Chief Counsel Directives Manual (“CCDM”) publishes guidance procedures for the IRS when drafting rules. These procedures are found within the Internal Revenue Manual (“IRM”). The IRM lists detailed policies and procedures for issuing guidance. For example, the IRS and Treasury follow procedures contained in the CCDM and an annual Internal Revenue Bulletin (“IRB”) to identify guidance projects. “Two sections of the CCDM, the Chief Counsel Regulation Handbook and the Chief Counsel Publication Handbook, include more than 150 pages of detailed procedures and instructions for the IRS to follow when drafting and publishing”[23] regulations, revenue rulings and revenue procedures.

The CCDM “explains how the IRS Chief Counsel drafting teams are to notify Congress when publishing final regulations as well as non-regulatory guidance.”[24]The instructions state that revenue rulings and revenue procedures are generally subject to CRA and must be submittedfor congressional review before they can become effective…[and that] all revenue rulings and revenue procedures will be treated as rules that must be reported to… Congress.”[25][emphasis added].

Unfortunately, GAO-16-720 states that “tax regulations…are routinely exempt from E.O. 12866 and CRA analysis and oversight requirements due to Treasury’s and IRS’s views on applicability of these requirements.”[26]

Conclusion

It would appear that the Congressional Review of Agency Rulemaking Act, CRA, is now a valuable strategy, especially when utilized in conjunction with the APA, to determine if an IRS rule is invalid for failure to comply with CRA procedures, and thus, such “rule” should not “take effect.”  


[1] 5 U.S.C. §801(a)(1)(A), et seq.

[2] 5 U.S.C. §801(a)(1)(A) Before a rule can take effect, the Federal agency promulgating such rule shall submit to each House of the Congress and to the Comptroller General.

[3] United States v. Fla. E. Coast Ry. Co., 410 U.S. 224, 245 (1973)

[4] David Burke, Reworking The Revolution: Treasury Rulemaking & Administrative Law, Michigan Journal of Environmental & Administrative Law, Spring, 2018, 7 Mich. J. Envtl. & Admin. L. 353, 366.

[5] 5 U.S.C. §801(a)(1)(A).

[6] Government Accounting Office 16-720, September, 2016.

[7] See, Elizabeth Nelson, Esq, CKR Law, LLP, CCH  Journal of Tax Practice and Procedure, Settling with the IRS in Appeals: The New Importance the APA” (October-November 2017), for raising the issue of whether a regulation is in compliance with the APA.

[8] 5 U.S.C. §553.

[9] 5 U.S.C. §706(2)(A).

[10] Congressional Review of Agency Rulemaking Act (“CRA,” 5 U.S.C. §801(a)(1)(A), et seq.)

[11] Complaint for Declaratory and Injunctive Relief, Kansas Natural Resource Coalition v. United States Department of Interior et al, Case No. 6:18-cv-01114-EFM-GEB (Kansas D.C. April 10, 2018), at 7, “Letter from Senator James Lankford to Director Mick Mulvaney Regarding the Congressional Review Act,” https://pacificlegal.org/wp-content/uploads/2018/04/2017-12-05-Sen-Lankford-to-Director-Mulvaney-re-CRA-Guidance-Documents.pdf. n.6. (“Kansas”).

[12] Kansas at 7.

[13] Larkin, Jr., Paul J., Reawakening the Congressional Review Act, 41 Harv. J.L. & Pub. Pol’y 187 (2018), Harvard Journal of Law & Public Policy- Winter, 2018. [emphasis added].

[14] Id. at 252.

[15] Id. [emphasis added].

[16] Montanans for Multiple Use v. Barbouletos, 568 F.3d 225, 229 (D.C. Cir. 2009); Via Christi Reg’l Med. Ctr. v. Leavitt, 509 F.3d 1259, 1271 n.11 (10th Cir. 2007); United States v. Carlson, No. 12-305 (DSD/LIB), 2013 WL 5125434, at *15 (D. Minn. Sept. 12, 2013); United States v. Ameren Mo., No. 4:11- CV-77 RWS, 2012 WL 2821928, at *3–4 (E.D. Mo. July 10, 2012); Forsyth Mem’l Hosp. v. Sebelius, 667 F. Supp. 2d 143, 150 (D.D.C. 2009); Provena Hosps. v. Sebelius, 662 F. Supp. 2d 140, 154–55 (D.D.C. 2009); New York v. Am. Elec. Power Serv. Corp., Nos. 2:04-CV-1098, 2:05 CV 360, 2006 WL 1331543, at *13–15 (S.D. Ohio Mar. 21, 2006); United States v. Am. Elec. Power Serv. Corp., 218 F. Supp. 2d 931, 949 (S.D. Ohio 2002). S. Ind. Gas & Elec. Co., United States District Court, S.D. Indiana, Indianapolis Division. October 24, 2002 Not Reported in F.Supp.2d 2002 WL 31427523, at n.5.

[17] Cole, Michael J., Interpreting the Congressional Review Act: Why the Courts Should Assert Judicial Review, Narrowly Construe “Substantially the Same,” and Decline to Defer to Agencies Under Chevron, 70 Admin. L. Rev. 53, 65 (2018)

[18]  Id. [emphasis added].

[19] Id. at 67.

[20] Id.

[21] Government Accounting Office 16-720, “GAO-16-720” Regulatory Guidance Processes, September, 2016.

[22] Id.

[23] See CCDM Chief Counsel Regulation Handbook (IRM pt. 32, ch. 1) and Chief Counsel Publication Handbook (IRM pt. 32, ch. 2) available at http://www.irs.gov/irm.

[24] GAO-16-720 Regulatory Guidance Processes, at 29.

[25] Id., at 30.

[26] Id. at 28.