District Court Holds IRS Tax Shelter Notice Imposing Obligations Invalid as a Legislative Rule Without Notice-and-Comment But Limits Holding to Parties (11/20/22)

In GBX Associates, LLC v. United States (N.D. Ohio Case No. 1:22cv401 Dkt. # 21 Memo. Opinion & Order 11/14/22), CL here and GS here, the Court held consistent with Sixth Circuit (including lower court) opinions that IRS Notice 2017-10, entitled “Listing Notice- Syndicated Conservation Easement Transactions,” was invalid because it was a legislative rule adopted without notice-and-comment.  After reaching that conclusion, the court focused on the APA language in 5 USC § 706(2) that the court “hold unlawful and set aside agency action” found to be “not in accordance with law” or ” without observance of procedure required by law “ The question was whether the scope of the remedy could include not only the plaintiff a material (investment advisor) before the court but universal applying throughout the country to all similarly situated parties.  The relief could either be granted by a universal injunction commanding the IRS not to apply the Notice or by “vacatur” declaring the rule null and void which would cover IRS action against all parties similarly situated not before the court.  The latter is sometimes call universal or nationwide vacatur.

I think the opinion is quite good in discussing the issues.  In a nutshell, the issue is whether an invalid rule (here the Notice requirements) adopted without the notice-and-comment required for legislative rules, making it void ab initio, should allow or require piecemealing the remedy, requiring it to be litigated by various aggrieved persons throughout the country.  The Court said (Slip Op. p. 18, cleaned up):

As noted above, GBX asserts that the Notice 2017-10 should be in vacated in whole (and not just as to GBX itself) because, by its very nature, the “set aside” remedy of vacatur set forth in APA § 706(2) acts against the agency action itself—not the government actor. GBX asserts that, under established case law from the Third, Ninth, and D.C Circuit Courts of Appeals, the “ordinary result” upon a finding of unlawful agency action is that the [agency action] itself is vacated—not that its application to the individual petitioners is proscribed. Defendants strongly disagree, arguing the law on this issue is, in fact, unsettled and “hotly contested.” Defendants emphasize, in particular, that the Sixth Circuit has not expressly ruled on this issue and that at least one district court in this Circuit has rejected GBX’s argument and declined to order universal relief under § 706(2).

The Court in GBX exercised her discretion in concluding (Slip Op. p. 32): "The Court declares that Notice 2017-10 is unlawful and hereby sets that Notice aside as to Plaintiff GBX Associates, LLC only."

This litigant-only or universal application issue is presented in Texas v. United States, 40 F. 4th 205 (5^th Cir. 2022) (per curiam), GS here, a nontax case.  The Fifth Circuit opinion summarized its holding (at 212, emphasis supplied by JAT):

Before the court is the Department of Homeland Security's ("DHS") request to stay the district court's vacatur of a new immigration rule that radically reduces the federal government's detention of those who are statutorily required to be removed post-haste. The district court determined that the rule conflicts with federal statutes, is arbitrary and capricious, and that its promulgation was procedurally invalid. We are inclined to agree. Because DHS fails to make a strong showing of likelihood of success on appeal, the motion for a stay pending appeal is DENIED. We distinguish this case from a recent decision by the Sixth Circuit, authorizing a stay pending appeal, based on differing precedent and the benefit of a complete trial record.

The vacatur was universal vacatur.  The Government petitioned for certiorari; the Supreme Court granted cert (Docket 22-58).  The Supreme Court docket entries are here.  By direction of the Supreme Court in granting cert, the Questions Presented included:

3. Whether 8 U.S.C. 1252(f)(1) prevents the entry of an order to “hold unlawful and set aside” the Guidelines under 5 U.S.C. 706(2).

I infer that the Question Presented is really about the remedy, rather than whether Court can hold an agency rule invalid under § 706(2) for any lack of procedural regularity (including notice-and-comment where required).  At least that is the way the parties seem to have addressed it in the briefs excerpted below.

Section 1252(f) provides in relevant part that no court shall have “jurisdiction or authority to enjoin of restrain” the application of the statute “other than with respect to the application of such provisions to an individual alien against whom proceedings under such part have been initiated.  The question is whether there is a conflict and which prevails.  Of course, § 1252(f) does not mention vacatur, but vacatur has the same practical effect as injunction or restraint (setting aside the issue of the scope, to the parties involved or nationwide).

Here is the excerpt from Summary of Argument in the Government’s brief (here), (pp. 9-10):

III. This Court’s third question presented asks whether 8 U.S.C. 1252(f)(1) prevents an order to “hold unlawful and set aside” agency action under 5 U.S.C. 706(2). The answer depends on the meaning of “set aside,” but the district court’s remedy  here was unauthorized under either interpretation.

The district court read Section 706(2) to authorize universal vacatur of a rule by any district court hearing an APA challenge. Properly interpreted, however,  Section 706(2) merely directs a court to disregard an unlawful agency action in resolving the case before it. That understanding is consistent with fundamental principles of judicial review. A court that “sets aside” an unconstitutional statute, for example, denies effect to the statute but does not nullify it or render it void. Of course, when a court sets aside agency action, as when it sets aside a statute, it may grant relief to the parties before it. But in the absence of a special review  statute, 5 U.S.C. 703 remits courts to traditional party-specific remedies like injunctions and declaratory relief. The district court’s contrary interpretation would transform the APA from a codification of pre-existing principles into a radical departure from them.

Even if Section 706(2) generally authorized vacatur, Section 1252(f)(1) would prohibit that relief in this context. Section 1252(f)(1) generally precludes lower courts from “order[ing] federal officials to take or to refrain from taking actions to enforce, implement, or otherwise carry out the specified statutory provisions.” Garland v. Aleman Gonzalez, 142 S. Ct. 2057, 2065 (2022). That is  precisely what the district court’s vacatur does: It bars DHS from relying on the Guidelines based on the court’s view of how the covered provisions should be implemented. The court concluded that Section 1252(f)(1) is limited to  injunctions. But the statutory text and this Court’s decisions interpreting similar language foreclose that interpretation, which would render Section 1252(f)(1) toothless in many of its core applications.

The full argument is at pp. 39-49.  Recommended reading for those interested in the area.

Here is the excerpt from Summary of Argument in the Respondents' brief (here), p. 12:

III. Finally, section 1252(f)(1) does not bar vacatur of the Final Memorandum—the only relief the district court ordered—for two reasons. First, petitioners’ contention that the APA does not authorize vacatur at all ignores text, context, and decades of practice and precedent. Second, section 1252(f)(1)’s prohibition on orders that “enjoin or restrain” the operation of portions  of the INA does not bar vacatur. Vacatur and injunctive relief are different remedies with different consequences that require different showings. And, as this Court has explained, vacatur is the less drastic remedy. Should this Court disagree, it should enter relief for the States as section 1252(f)(1) expressly allows.

The full argument is at pp. 39-47.  Also recommended reading for those interested in the area.

Finally, here is the opening summary in the Government's reply brief, here (p. 2)

Respondents also cannot justify the district court’s universal vacatur under 5 U.S.C. 706(2). Remedies under the Administrative Procedure Act (APA), 5 U.S.C. 551 et seq., 5 U.S.C. 701 et seq., are instead the province of 5 U.S.C. 703—a provision that respondents fail even to mention. And even if Section 706(2) generally authorized vacatur, 8 U.S.C. 1252(f)(1) barred the court from granting that relief here. Respondents’ assertion that vacatur is not coercive blinks reality and would thwart Congress’s judgment that only this Court should have authority to grant programmatic relief altering the administration of the relevant provisions of the Immigration and Nationality Act (INA), 8 U.S.C. 1101 et seq 

The full argument is in the Reply Brief (pp. 16-23).

I also refer readers to this excellent (and relatively short) article:  John Harrison, Section 706 of the Administrative Procedure Act Does Not Call for Universal Injunctions or Other Universal Remedies, 37 Yale J. on Reg. Bull. 37 (2020), here; see also John Harrison, Guest Post from Professor John Harrison: Vacatur's Missing Pedigree (The Volokh Conspiracy 11/28/22), here.

Added 3:45pm:

1. At Slip Op. 28 n. 13, the Court has this footnote on the Tax Court opinion in Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (11/9/22) (reviewed opinion), TCPamphlet here, TN here and GS here.  (The Court erroneously names the opinion Green Valley Investors LLC v. Branch.):

   n13 The Court notes that the United States Tax Court recently agreed with the Sixth Circuit’s decision in Mann Construction and held that Notice 2017-10 is a legislative rule that was improperly issued by the IRS without notice and comment as required by the APA. See Green Valley Investors LLC v. Branch, 2022 WL 16834499 (U.S. Tax. Ct. Nov. 9, 2022). The Tax Court noted that “[a]lthough this decision and subsequent order are applicable only to petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us.” Id. at fn 22.

The Tax Court has no authority to issue injunctions or vacatur but a commitment to apply the same authority in future cases has much the same practical effect.  For the FTPB blog on Green Valley, see Tax Court in Reviewed Opinion Invalidates Notice Identifying Reportable Transactions (Federal Tax Procedure Blog 11/10/22), here; and for a deeper discussion of Green Valley, see Robert S. Horwitz, The Tax Court Gives a Primer on Listed Transactions while Invalidating the Conservation Easement Listed Transaction Notice (Tax Litigator 11/18/22), here.

2.  In reading John Harrison's article above, I focused on the following footnote (p. 40 n. 14):

  n14 5 U.S.C. § 703 (2018). Provisions of title 5 that derive from the APA are often referred to by the name of that statute, so section 703 is often called section 703 of the APA. That usage is not strictly correct, because title 5 replaced the APA as originally enacted, but it is common and well understood.

I had previously thought that Title 5 was a compilation of the statutes at large rather than "positive law," meaning that the Code was the law rather than a compilation.  See The Report of the Death of the Interpretive Regulation Is an Exaggeration  1 n. 3 (SSRN December 14, 2021), here. I was wrong.  In fact, Title 5 is positive law.  See Office of Law Revision Counsel United States Code here, identifying the positive law Titles (including Title 5) by an asterisk.  So, as Harrison explains in the footnote, the law is Title 5 (which replaced the APA), but by common understanding it is often call the APA (at least the respective portions dealing with the APA and extensions).  On the general difference between USC Titles that are positive law and those that are compilations of the law (generally statutes at large), see the page titled On the Internal Revenue Code (Title 26) and Statutes, here.