Tinkering with the Tax Court

Assistant Professor Daniel Hemel on a new bill that could affect the constitutional status of the U.S. Tax Court:

The House of Representatives voted 318-109 on Thursday to approve a package of tax breaks that will cost an estimated $680 billion over the next decade. The big-ticket items in the package include permanent extensions of the business research credit and the child tax credit, as well as a two-year delay of the controversial “Cadillac” tax on expensive employer-sponsored health insurance plans. Meanwhile, one provision in the package that has drawn little attention so far could have significant implications for the United States Tax Court. The provision, buried on page 231 of the 233-page bill, puts the 19-member court in a state of constitutional limbo.

The provision is entitled “Clarification Relating to United States Tax Court,” and it amends the Internal Revenue Code to add the following language:

The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.

The provision appears to have been added in response to the D.C. Circuit’s 2014 decision in Kuretski v. Commissioner. That case involved a couple, Peter and Kathleen Kuretski, who went to Tax Court to challenge an IRS levy on their Staten Island home. After the Tax Court ruled against them, the Kuretskis launched an attack on the court’s constitutional structure. The D.C. Circuit summarized the Kuretskis’ core argument as follows:

The Kuretskis now contend that the Tax Court judge may have been biased in favor of the IRS in a manner that infringes the constitutional separation of powers. They point to 26 U.S.C. § 7443(f), which enables the President to remove Tax Court judges on grounds of “inefficiency, neglect of duty, or malfeasance in office.” According to the Kuretskis, Tax Court judges exercise the judicial power of the United States under Article III of the Constitution, and it violates the constitutional separation of powers to subject any person clothed with Article III authority to “interbranch” removal at the hands of the President. The Kuretskis thus ask us to strike down 26 U.S.C. § 7443(f), vacate the Tax Court's decision, and remand their case for re-decision by a Tax Court judge free from the threat of presidential removal and hence free from alleged bias in favor of the Executive Branch.

The D.C. Circuit rejected the Kuretskis’ claim. It assumed, arguendo, that “‘interbranch’ removal of a Tax Court judge would raise a constitutional concern.” But it found “no cause for concern in fact.” According to the D.C. Circuit, the Tax Court “exercises Executive authority as part of the Executive Branch,” and “[p]residential removal of a Tax Court judge thus would constitute an intra—not inter—branch removal.” (No Tax Court judge has ever actually been removed by the President.)

This holding evidently unnerved Senator Orrin Hatch, who chairs the tax writing committee in the upper chamber. Senator Hatch introduced a bill this past April with language identical to the “clarification” found in the extenders package. The accompanying report explained:

The Committee is concerned that statements in Kuretski v. Commissioner may lead the public to question the independence of the Tax Court, especially in relation to the Department of Treasury or the Internal Revenue Service. The Committee wishes to remove any uncertainty caused by Kuretski v. Commissioner, and to ensure that there is no appearance of institutional bias.  

This “clarification” seems to be motivated by entirely noble sentiments. But it has the potential to cause much more confusion than it resolves. If the Tax Court isn’t inside the Executive Branch, then where exactly is it? And if the Hatch provision becomes law, how would a federal court of appeals handle a future challenge to the Tax Court’s constitutional structure?

A few possibilities (with thanks to my colleague Will Baude for helping me think through the permutations):

First, the court of appeals might say that the Tax Court is part of the Legislative Branch. The D.C. Circuit considered this possibility in Kuretski but rejected it. According to the D.C. Circuit, “[t]he Tax Court is in the business of interpreting and applying the internal revenue laws . . . , not in the business of making those laws.” (Some Legislative Branch officials aren’t in the lawmaking business either—for example, the House and Senate Chaplains. Would the court of appeals say that Tax Court judges fall into the same category?)

Second, the court of appeals might say that the Tax Court is part of the Judicial Branch. Yet that possibility raises two immediate red flags. For one, Tax Court judges don’t have life tenure. To be sure, bankruptcy judges don’t have life tenure either, but bankruptcy judges “constitute a unit of the district court”: each district court can decide which cases will be “referred” to bankruptcy judges, and the district court can withdraw the reference at any time. The Tax Court is subject to no such supervision by Article III judges.

Another red flag arises from the fact that Tax Court judges, as the Kuretskis emphasized, are removable by the President for cause. The Supreme Court held in Mistretta v. United States that the President may exercise removal power over Judicial Branch officials under “limited circumstances”: specifically, “Congress may vest in the President the power to remove for good cause an Article III judge from a nonadjudicatory independent agency placed within the Judicial Branch.” Yet Mistretta does not allay the constitutional concern here, because the Tax Court is most certainly “adjudicatory.” That fact doesn’t make it part of the Judicial Branch: as the D.C. Circuit emphasized in Kuretski, Executive Branch agencies can perform adjudicative functions too. But it does suggest that if the Tax Court is part of the Judicial Branch, presidential removal of Tax Court judges raises constitutional questions distinct from Mistretta.

A third possibility is that the court of appeals might say the Tax Court lies off in constitutional no-man’s land, apart from all three branches. The Supreme Court has said that the Constitution “disperses the federal power among the three branches—the Legislative, the Executive, and the Judicial,” but maybe it didn’t really mean that? (Senator Hatch, for his part, wrote in the Washington Post this past March that the Supreme Court should “protect the delicate balance of powers between the three branches of government”; would he now want a federal court to legitimate an adjudicative body that’s in no branch at all?) Perhaps the federal courts should acknowledge that a complex modern state may include governmental bodies that don’t fall neatly into a single branch. But given the formalistic trend in the Supreme Court’s recent separation-of-powers jurisprudence, I find it hard to believe that such an outcome is likely.

A fourth possibility is that the court of appeals might say that the “clarification” in the extenders package is itself a nullity. Congress could, hypothetically, pass a statute saying that the Department of the Treasury “is not an agency of, and shall be independent of, the executive branch”; just because Congress said it wouldn’t make it so. A similar issue arose in Department of Transportation v. Association of American Railroads, a case decided by the Supreme Court this past term. Congress had enacted a statute saying that Amtrak “is not a department, agency, or instrumentality of the United States Government”; the Supreme Court looked at that statute in Association of American Railroads and essentially said it was hogwash. As the Supreme Court put it: “Congressional pronouncements, though instructive as to matters within Congress’ authority to address . . . , are not dispositive of Amtrak’s status as a governmental entity for purposes of separation of powers analysis under the Constitution.” A court might look at the language addressing the Tax Court’s status in the extenders package and say the same thing.

But if the court of appeals does take Congress at its word, then the issue becomes a trickier one. The court might say that an adjudicative body whose members are removable by the President can comfortably lie outside the Executive Branch. Or it might say that if the Tax Court isn’t part of the Executive Branch, then the Tax Court’s structure is constitutionally unsound. If the latter, then presumably the Supreme Court would take up the matter. And at that point, the ultimate outcome is anyone’s guess.

I doubt I’ve thought through all the possibilities. I doubt that members of Congress have either. The hasty addition of the “clarifying” provision to the end-of-year extenders package means that there is little time for lawmakers to debate the measure. Yet it may take courts quite a bit of time to sort through the provision’s potential implications.

And for what? Say the Kuretskis are correct that the Tax Court judge in their case may have been biased in favor of the IRS because he was subject to presidential removal. A congressional declaration that the Tax Court is “independent” of the Executive Branch doesn’t change that: it’s the removal provision that the Kuretskis say is the source of the bias, and the extenders package leaves the removal provision in place. Congress cannot wave a magic wand and make the “appearance of institutional bias” go away. What it can do is create a constitutional quandary for the Tax Court—and an entirely unnecessary one at that.

CNN now reports that the Senate will vote on the extenders package as early as this afternoon. The smart money says that the package will pass. In all likelihood the Tax Court “clarification” will make it into the final version. After that, all bets are off.

[Update (2:12pm CT): The Senate passed the package today by a 65-33 vote. The bill now heads to the desk of President Obama, who says he will sign it.]

Comments

[Leandra Lederman]

The Tax Court faces multiple issues because of its unclear status in the federal government. Ad hoc "clarifying" legislation like this may ward off future Kuretski-type challenges but resolves little, as you point out. Interestingly, the Court of Federal Claims, another Art. I court that hears trial-level federal tax cases, is in the judicial branch "for administrative purposes" (quoting from memory). The Tax Court is not, perhaps because of its pre-1969 agency history. The Tax Court seemingly falls between the cracks of government; the Kuretski problem is just the latest manifestation of that.

[Leandra Lederman]

To be clear, by "Kuretski-type challenges," I meant issues that arise from the Tax Court's unclear status. For example, legislation saying that the Tax Court isn't an agency in the executive branch could help ward off claims under FOIA or other rules applicable to administrative agencies.

[Leandra Lederman]

I've now posted more detailed thoughts on the "clarifying" language over on TaxProf Blog (http://goo.gl/DC8Cvi), in case you're interested!