PDR on Remand to 4th Circuit with Further Confusion of the APA's Legislative / Interpretive Rule Distinction (12/9/20)

In Carlton & Harris Chiropractic Inc. v. PDR Network, LLC, 2020 U.S. App. LEXIS 38073 (4th Cir. 2020), here, the Fourth Circuit punted to the district court the important and potentially contentious issues on remand from PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., 139 S. Ct. 2051 (2019).  I wrote on the Supreme Court’s opinions in PDR previously.  Supreme Court Again Weighs In At the Edges on Legislative and Interpretive Rules (6/23/19; 7/2/19), here.

The Fourth Circuit held, as I reasoned in the blog, that the rule in issue (an FCC Order) was interpretive rather than legislative.  If it were a legislative rule, it would have been required to be promulgated as a regulation with notice and comment and, since it was not so promulgated, the Rule does not fail for that reason.  As an interpretive rule, however, the interpretation in the rule would be subject to Chevron analysis and potential deference if Chevron applied to such subregulatory guidance (Chevron does not) and to potential Skidmore analysis if not Chevron-eligible.

I do note that the Fourth Circuit muddles the analysis of the difference between legislative rules (which must be notice and comment regulations) and interpretive rules (which may, but need not be and usually are not, notice and comment regulations).  As I have noted often in this blog and in an article which I cite and link below, there are two relevant categories of interpretive rules – interpretive rules with notice and comment and interpretive rules without notice and comment.  The latter, in IRS lingo (and much administrative law lingo), are referred to as subregulatory interpretive rules.  Interpretive rules in notice and comment regulations are subject to the Chevron interpretive regime testing whether the interpretation is a reasonable interpretation and, usually, requiring Chevron deference if the interpretation is reasonable.  Although the Supreme Court has suggested that some subregulatory interpretations might be entitled to Chevron deference, I am not aware of any instance in which the Supreme Court or any other court has given Chevron deference to subregulatory interpretations.

Now, I quibble with the following paragraph of the Fourth Circuit’s opinion:

The convenience of having to jump through fewer procedural hoops to issue agency guidance, however, "comes at a price: Interpretive rules 'do not have the force and effect of law and are not accorded that weight in the adjudicatory process.'" Perez, 575 U.S. at 97 (quoting Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 99, 115 S. Ct. 1232, 131 L. Ed. 2d 106 (1995)); see also Batterton v. Francis, 432 U.S. 416, 425 n.9, 97 S. Ct. 2399, 53 L. Ed. 2d 448 (1977) ("[A] court is not required to give effect to an interpretative regulation."). The 2006 FCC Rule is interpretive, and so the district court wasn't bound by it. 

CIC Services Supreme Court Oral Argument (12/3/20)

I have previously written on the Supreme Court’s grant of certiorari in CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh., en banc, denied 936 F.3d 501 (2019), cert. granted 140 S. Ct. 2737 (2020).  See particularly Certiorari Granted in CIC Servs on AIA Application to Pre-enforcement Guidance Challenges (Federal Tax Procedure Blog 5/12/20), here.  The Supreme Court heard oral argument on the case on Tuesday.  

• The oral argument recording is here (Supreme Court) and here (CSpan) 
• The transcript is here (Supreme Court)

I have not had time to fully consider the oral argument, but just wanted in this blog to make some quick observations guided in principal part by a discussion from SCOTUSblog, Blaine Saito (Guest), Argument analysis: Justices struggle to define boundaries of Anti-Injunction Act, here.  After I have had more time late today, I may expand the discussion on this page.  [JAT Note as of 5:45pm, I made some small changes below but, upon reflection, will likely not make additional postings related to the oral argument; there will be ample opportunity to comment when the case is decided with, likely, several opinions.]

Here are my thoughts inspired mostly by the SCOTUSblog offering:

1. My sense is that the key concern is that the Notice set up taxpayers (a generic category to include promoters) for a penalty, perhaps even a criminal penalty, by a notice rather than by regulations rulemaking.  In the familiar legislative / interpretive rulemaking dichotomy, one can argue that the “rule” established by the notice is more like a legislative rule than an interpretive rule because it is not interpreting a statute in imposing a reporting obligation with penalty consequences.  Penalty consequences is sometimes said to be indicative of a legislative rule (although I think the claim is superficial as stated).  My quick search of the transcript does not indicate that the justices mentioned the legislative / interpretive rule dichotomy.

2.  If the notice is legislative rulemaking without the APA required notice and comment required for legislative rules (regulations) then upon subsequent challenge in a penalty proceeding under traditional tax procedure (e.g., a refund proceeding), the notice would fail because of lack of notice and comment and the penalty, presumably, would be held not to apply.  (E.g., see  statement of the Government lawyer (Bond) that "Petitioner's argument at bottom is that it is not required to provide this information because the statute only requires it to submit information covered by regulations." (Transcript pp. 46-47.))  But that is fairly late in the game and, in the meantime, the notice would have had an in terrorem effect and would have caused the incurrence of substantial unnecessary litigation and compliance costs.  So, on that basis, perhaps, a pre-enforcement challenge process – said to be the norm under the APA – should be permitted.  But, as the Government argues, the AIA, § 7421(a), is an exception to that norm.

3. The stated concern about the potential for criminal penalties was addressed by Government counsel, Assistant Solicitor General Jonathan Bond, by filing a good faith letter in lieu of the disclosure required by the Notice.  As reported by SCOTUSblog the discussion was:

Many of the justices were concerned about the potential that a company would open itself to criminal sanctions by failing to comply with the notice. Both Alito and Justice Neil Gorsuch noted that it is incredibly problematic to require someone to face criminal sanctions before asking a court to rule that an agency action was unlawful. In response, Bond remarked that the filing of the good-faith letter would suffice to avoid criminal sanctions. When further pressed by Alito about whether the term “willful” in the tax code should have a different meaning from ordinary willfulness, Bond responded in the affirmative. He noted that most of the court’s precedents do have a heightened definition of “willfulness” in the criminal tax context as opposed to other criminal contexts.

I will further consider the detour on the willful issue later this week, probably on the Federal Tax Crimes Blog (and may cross-post to this Federal Tax Procedure Blog).

4. Justice Breyer did note a potential procedural issue in how the case was brought as a direct challenge rather that by filing a request for regulations rulemaking followed by litigating a denial of the request under perhaps the arbitrary and capricious standard.  CIC's counsel said (Tr. p. 12) that that avenue for challenge was narrower than a direct challenge because of the arbitrary and capricious standard.  For a contrary view, see Andy Grewal, CIC Services and Justice Breyer’s Broken Escape Hatch (Notice & Comment 12/2/20), here.

5. For a deeper dive into the arguments made, the briefs (including amicus briefs) may be reviewed on the Supreme Court's docket, here, or the parallel docket maintained on SCOTUSblog, here.